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Finance 3300 > Chapter 1 > Flashcards

Chapter 1 Flashcards

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1
Q

Define personal finance planning.

A

The process of managing your money to achieve

personal economic satisfaction.

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2
Q

People in their 20s and 30s should: (2)

A

Start saving regularly and invest long-term; have adequate health and property insurance,
but less life insurance

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3
Q

People in their 40s and 50s should: (4)

A

Max out retirement contributions; Plan for adequate children’s college funds; Use stocks and equity funds for most long-term investments; Have adequate insurance (all six types)

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4
Q

People 50+ should: (5)

A

Not preserve all wealth for others; Not retire too young; Maintain earnings potential; Not put all funds in fixed-income, low risk, low earnings
CDs and bonds; Consider long-term care policy

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5
Q

What is the six-step procedure for financial planning?

A

determine current financial situation; develop your financial goals; identify alternative courses of action; evaluate alternatives; create and implement your financial action plan; review and revise the financial plan

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6
Q

Define opportunity cost.

A

What you give up when you make a choice

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7
Q

What are five types of risk?

A

inflation risk; interest-rate risk; income risk; personal risk; liquidity risk

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8
Q

What is inflation risk?

A

rising prices cause lost buying power

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9
Q

What is interest-rate risk?

A

changing rates affect your costs and earnings

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10
Q

What is income risk?

A

un- or underemployment

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11
Q

What is personal risk?

A

factors creating undesirable situations (e.g. health, safety)

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12
Q

What is liquidity risk?

A

difficulty converting asset to cash without loss in value

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13
Q

Types of financial goals can be influenced by: (2)

A

the time frame in which you want to achieve your goals; the financial need that drives your goals

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14
Q

How long is a short-term goal? Give examples.

A

<1-2 years — vacation, pay small debt

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15
Q

How long is an intermediate goal? Give examples.

A

2-5 years — down payment on car

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16
Q

How long is a long-term goal? Give examples.

A

5+ years — down payment on house, IRA

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17
Q

Give examples of consumer products.

A

food, clothing, entertainment

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18
Q

Give examples of durable products.

A

auto, A/C system, refrigerator

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19
Q

Give examples of intangible products.

A

health, education, leisure, relationships

20
Q

Goals should be (what acronym)?

A

SMART

21
Q

What does SMART stand for?

A

specific, measurable, action-oriented, realistic, time-based

22
Q

What is our central banking system?

A

Federal Reserve System

23
Q

What does the Fed do (4)?

A

influences dollars available for spending in the economy; sets reserve requirements; sets discount rate; buys/sells government securities

24
Q

Define economics.

A

study of how wealth is created and distributed

25
Q

High demand for money results in

A

interest rates going up

26
Q

What is inflation?

A

rise in the general level of prices

27
Q

What is the Rule of 72?

A

determines when something will double

28
Q

Describe consumer spending: (2)

A

total demand for goods and services in the economy; influences employment and income

29
Q

Define money supply.

A

dollars available for spending in our economy

30
Q

Define unemployment.

A

% of people willing and able to work who cannot find employment

31
Q

Define housing starts.

A

of new houses being built

32
Q

Define gross domestic product.

A

total value of all goods and services produced within our borders

33
Q

Define trade balance.

A

exports minus imports

34
Q

Define stock market indexes.

A

(e.g. NYSE, S&P 500, NASDAQ) — relative value of stocks represented by an index

35
Q

Give three examples of personal opportunity costs.

A

time, effort, health

36
Q

Give three examples of financial opportunity costs.

A

interest, liquidity, safety

37
Q

Describe the time value of money.

A

increases in an amount of money as a result of interest earned

38
Q

What three amounts are needed to calculate TVM?

A

principal (how much); interest rate (what rate); time (how long and how frequently)

39
Q

What is the formula to compute simple interest?

A

(principal) * (annual ir) * (time period)

40
Q

What is FV?

A

future value — the amount to which current savings will increase, based on a certain interest rate and a certain time period

41
Q

What is another term for FV?

A

compounding (earning interest on previously-earned interest)

42
Q

What is an annuity?

A

an FV computed for a series of deposits

43
Q

What is present value?

A

the current value of a future amount, based on a certain interest rate and a certain time period

44
Q

What is another term for PV calculations?

A

discounting

45
Q

What is true about the relationship between PV and FV?

A

The PV of the amount you want in the future will always be less than the FV

46
Q

What are 5 methods for computing TVM?

A

formulas; TMV tables; financial calculators; spreadsheet software; TVM websites and apps

47
Q

What is a financial plan? (3)

A

formalized report that 1) summarizes current financial situation; 2) analyzes financial needs; 3) recommends future financial activites

Finance 3300 (15 decks)

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