Exam 2 Review Questions - PFD

Read Genesis 41:34-36, Proverbs 21:20, and Proverbs 30:24-25. These passages associate what with savings?

Wise people

Read Genesis 41:34-36. This passage says that we should save for what reason? (This is also known as the "Joseph Principle".)

To be prepared for the down years when we don't have as much income

Read Proverbs 21:5, Proverbs 24:27, Proverbs 27:23-24, Ecclesiastes 3:1, Ecclesiastes 11:2, and Isaiah 48:17-18. Which of the following investment principles is NOT found in these verses?

Wait until you die before giving so that you can leave a large fortune behind

What is "investment amnesia"?

Forgetting or rationalizing your investment mistakes

Company A is offering to pay 12% on its corporate bonds. Company B is offering to pay 8% percent on its bonds. Based on this information, which company is more likely to default on paying back the bonds?

Company A

You buy 100 shares of Microsoft stock today at $50 per share. One year from now, Microsoft issues a dividend payment to you of $100 and you sell the stock for $60/share. What rate of return did you earn?

22%

A company stock price was at $213 in May. Four months later in September, the same company stock price was $192. If you had invested $10,000 in that stock, how much return did you have in those four months?

-$1,000 (lost 10%)

Why is it especially risky to buy the stock of a company with a high debt load?

If the company cannot make payments on the debt, the bank may take over and you will lose your investment

Which of the following would NOT be considered "gambling"?

Investing in stock mutual funds on a monthly basis

Which of the following is the proper reference for this statement: "The poor are always ruled over by the rich, so don't borrow and put yourself under their power."?

Proverbs 22:7

Which is NOT given as a common human tendency leading to debt?

Having a low income

Which of these is the best way to improve your credit score?

Pay your bills on time

If you create a $5,000 balance on your credit card with an interest rate of 18% while you are in college, you will pay $1,000 per year in interest. If you keep using the card, and never get the balance below $5,500 for 45 years, what will be your opportunity cost of having created that card debt?

More than $400,000

A payday loan works like this: The store gives you $100 and you give them a check for $120 to be cashed two weeks later. This is an APR of about 500%, and you would end up paying how much interest if you kept doing this every two weeks for a year?

$500

What is a 529 plan?

Tax-deferred savings for education

If you default on your student loan, which is true?

Your credit rating will be damaged

You are under no obligation to repay your student loan if...

you die

What are escrows?

Monthly prepayment of your property taxes and homeowner's insurance

A 30-year home loan at 5% interest will do what?

Will cause you to pay back almost twice the amount of the loan

If you want to buy a home priced at $200,000, how much savings (to avoid PMI) do you need above your emergency and short-term savings fund?

$40,000

What is NOT a potential unexpected cost of living off-campus in an apartment?

Utility bills

Adjustable-rate mortgages...

Almost 60%

What is the opportunity cost of paying $40,000 for a car versus paying $20,000?

About $400,000 if the $20,000 were invested

Why is leasing not a good financial arrangement for the buyer?

The dealer will build a profit on top of the costs of ownership that he covers

Which is NOT a reason that Mason has so little left to spend on food, gas, and other important items.

He eats out too much

In the example in Table 11.1 on page 257, what is Mason's income available for discretionary spending?

$585

How does the envelope system work?

 Put a budgeted amount of cash aside for each category and spend only until it's gone

Which is NOT a way to avoid latte-factor overspending?

Don't track your spending

Why are ATM withdrawals frequently a barrier to reducing spending?

Cash spending is harder to track and control

What is discretionary spending?

Spending that can be changed or adjusted as necessary

When people have a money squeeze (a cash-flow problem) what do they usually cut first?

Giving

Which is NOT true about the need for health insurance in a financial plan?

 It is not a legal requirement.

The highest homeowners' insurance policy protection is for a policy that...

offers full replacement cost coverage

Which is NOT a way to lower your health insurance costs?

Get lower deductibles

What is a health insurance premium?

The monthly fixed amount you pay for coverage whether you use medical care or not

Under the Affordable Care Act, what is the limit on the amount that an insurance company will have to pay for your medical expenses in your lifetime?

No limit

A young adult with a family of four needs life insurance. The family already has a tight budget. What type of insurance should he buy?

Term

A young adult in good health who is the primary provider for a family of four needs approximately how much life insurance?

Almost $1 million

A term life insurance policy...

is for a fixed amount of insurance for a specific period of time

In a family, who should be first priority as far as obtaining life insurance?

The primary provider

Who should get long-term care insurance?

People who have a lot of assets and high income

This year, Mason's taxable income was $24,500. Last year it was $24,000. How much more will Mason owe in taxes this year? (Use the example schedule in Table 14.3 on page 314.)

$75

One of the best things you can do to legally reduce your taxes is to...

keep good records

Which is the IRS form that reports each income source other than salary?

1099

Which organization is responsible for passing tax laws?

Congress

Tax avoidance is NOT which of the following?

Trying to evade paying your tax obligation

Which tax will likely consume about 8% of your income regardless of your salary, at least for the first few years?

Payroll

Which of the following are most likely to serve as executors of an estate?

Close family members

Which of the following is NOT a reason why people procrastinate their wealth transfer decisions?

The legal and financial aspects are simple

What is the least important decision in estate planning?

Picking the right will-writing software

What percent of adults don't have a will?

50%

Investment vs. Savings

Investing: the use of money to earn money for the purpose of accomplishing long-term life goals

• higher returns (hoping to earn a return of your money)

Saving: a plan to set aside a certain amount of your net cash flow to be able to accomplish a short-term goal