Personal Finance Exam 1 Chapter 5

review chapter 5 number 1-4
TF: two advantages of carrying cash are that it’s easy to spend and many times you can even recall where you spent it false
TF: one way to think of liquid assets is as a reservoir, with money moving in as wages are received and moving out as living expenses are paid true
TF: Because liquid assets can be turned into cash quickly and with little loss, they have little risk associated with them and therefore provide a low rate of return for the consumer true
TF: liquid assets allow you to cover unplanned expenses without having to interrupt your long term investments or liquidate any tangible assets true
TF: keeping your funds in liquid assets is riskier than keeping them in illiquid assets and therefore investors require a higher expected rate of return on liquid assets false
how do you compare cash management alternatives to determine which is best for you? take tax status into account, compare returns using comparable interest rates, and consider their safety or risk
cash and investments that can be easily converted into cash are termed liquid assets
liquid assets or funds are important to cover unplanned expenses, prevent interrupting long term investments, prevent overdrafts in checking accounts and cover some planned expenses
one way to think of liquid assets is as a reservoir… flow in and out
what characteristics apply to liquid assets they are characterized by low returns, low risk and there is a greater temptation to spend
TF: when you automate your savings, you are less likely to spend those dollars because they never become part of the funds in your checking account true
when college students start saving early, – in an account earning interest, they immediately put their money to work- they can take advantage of the time value of money and achieve their financial goals- by automating their savings, they are less likely to spend money
TF: the deregulation of the 1980’s has allowed brokerage firms to offer traditional banking services and has also let banks offer services formerly found only at investment companies true
what is the name of an investment company that raises funds from investors, pools the money, and invests in stocks or bonds? mutual fund firm
TF: T-bills are extremely safe investments, having been issued by the federal government true
TF: one of the advantages of T-bills is that they are exempt from federal taxes but subject to state income taxes false
what are short-term notes of debt issued by the federal government commonly called? t-bills
a savings alternative that pays a fixed rate of interest while keeping your funds on deposit for a contracted period of time that can range from 30 days to several years is called a certificate of deposit
what is NOT an advantage of a CD as a cash management alternative liquidity
what are the advantages of a CD? wide selection of maturities, convenient to purchase, insured, fixed interest rates
TF: a tax free investment will always have a higher after-tax return than a taxable investment false
TF: when comparing returns on cash management investment alternatives, it is important to make sure that the rates you compare are all on the same tax basis true
You are considering an MMMF. The fund is taxable and pays​ 8.5% interest. If your top federal tax bracket is​ 25% and you live in a state that​ doesn’t impose income​ taxes, what afterminustax return would you realize from this​ investment? 6.38%
You are examining two different MMMFs. Fund A is taxminusexempt and pays​ 5%. Fund B is taxable and pays​ 6%. You live in a state that imposes no income taxes and are in a​ 28% federal tax bracket. At what tax rate would the two funds have identical​ yields? 16.67%
what is the method to use when calculating the after tax return taxable return​ (1 minus marginal tax​ rate) + nontaxable return
suppose that you go to a bank at which you have no account, give the bank cash, and in return obtain a check drawn against that bank which you will use to pay someone else… this is called a cashier’s check
what is the name for an automatic loan made to your checking account whenever your account does not contain enough cash to cover the checks that you have written against it? overdraft protection
Brenda had her bank certify one of her personal checks as being good. which type of check has been issued? certified check
TF: card-blocking occurs when you use a debit card or credit card to check into a hotel or rent a car and the anticipated expenses are blocked- in effect, placing a hold on the money true
Christopher GarciaChristopher just received his checking account statement from his bank. He has a NOW account with free checking that pays​ 0.75% APR on the balance and requires a​ $500 minimum balance. His statement shows that he currently has a balance of​ $3,950. In looking at his statement he notices that his car payment check for​ $400 is still​ outstanding, and that his recently received payroll deposit of​ $3,600 had not posted at the time the statement was created. His normal living expenses average​ $1,500 per month including his car payment. Other than his car​ loan, he rarely writes any checks as he prefers to use his debit card and ATM card for dayminustominusday living expenses. He pays his credit card balance in full every month. Other than his checking account he does not own any investments. He has always dreamed of owning a​ house, and would like to buy one within the next five years. He has access to a​ 401(k) pension plan at work where his employer will match contributions up to​ 6% of his salary. He currently contributes​ 2% of his salary to this plan. (chapter 5 question 34) 520.51
John and Maile JohnsonThe Johnson family is very conservative financially. They have a retirement plan where John works and share a joint checking account at their bank. They keep a lot of money in their checking account to cover shortminusterm needs and emergencies. Both of them want to step up to a higher interest rate than a checking or savings account​ pays, and at the same time stay with their bank.What would be your suggestion for the next account John and Maile should​ open? certificates of deposit and money market deposit account
Which of the following is not an advantage of a CD as a cash management alternative for John and​ Maile? pays money market interest rates

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