Personal Finance

Question 1

What is the rule of 72?

Answer 1

72/interest rate = number of years for principle to double.

Question 2

What is the formula for the time value of money as a lump sum?

Answer 2

PV x F (factor from appendix A-1 Chart) = Future Value
Example: $3,300 for 7 years at 4% interest
$3,300 x 1.3159 = $4,342.47

Question 3

What is the formula for the time value of money as a series of payments (annuity)?

Answer 3

PMT x F = Future Value
Example $6,000 for 9 years at 6% interest.
$6,000 x 11.4913 = $68,947.80

Question 4

Name the business cycle phases (Economic Cycle)?

Answer 4

Expansion: rising stock market, production high, unemployment and interest rates and prices are low
Peak: End of Expansion
Contraction: Economy is falling
Trough: End of contraction and beginning of expansion

Question 5

What are economic indicators?

Answer 5

Unemployment rate, GDP and inflation rate. These indicators tell you how well the economy is doing and how it might do in the future.

Question 6

Define GDP

Answer 6

Gross Domestic Product: The nation’s broadest measure of economic health. Reports how much economic activity has occurred within a specific time period.

Question 7

Define Index of Leading Economic Indicators

Answer 7

Composite index, reported monthly. Averages 10 components of growth from different segments of the economy. Very important to investors - as they help predict what the economy will look like in the future.

Question 8

Define Inflation

Answer 8

Steady rise in the general level of prices. Occurs when the supply of money (or credit) rises faster than the supply of goods and services.

Question 9

Define Consumer Price Index

Answer 9

Measurement of inflation in regards to the changes in prices of all goods and services.

Question 10

Define cost-of-living index

Answer 10

Cost of achieving a certain level of utility (or standard of living) in one year relative to the cost of achieving the same level the next year.

Question 11

Define Purchasing Power

Answer 11

Measure of goods and services that one’s income will buy. When pricers rises, purchasing power of the dollar declines.

Question 12

Define Opportunity Cost

Answer 12

Value of the next best alternative that must be forgone. Allows one to address the personal consequences of choices because every decision inevitably involves trade-offs. i.e. - renting vs. buying, new vs. used car, working or borrowing money for college.

Question 13

Define time value of money

Answer 13

Essentially equals interest. Involves 2 concepts. Future Value and Present Value. It adjusts for the fact that dollars to be received or paid out in the future are not equal to those received or paid out today.

Question 14

What is compounding?

Answer 14

The addition of interest to principal, the effect of compounding depends on the frequency with which interest is compounded and the periodic interest rate applied.

Question 15

Define Cafeteria Plan

Answer 15

Type of employee benefit plan where employees choose their benefits from a menu of both taxable and non-taxable sheltered benefits. Employees may pay for some of the benefits with pre-tax dollars.

Question 16

How does a Flexible Spending Account work?

Answer 16

Employee sponsored account that allows employee-paid expenses related to health and dependent care to be paid with pretax dollars. There are limits per year.

Question 17

What is a Health Savings Account?

Answer 17

Intended for people who have a high deductible health care plan. Employees make tax-deductible contributions to a savings account to be used for eligible expenses. The money grows in the account tax free. There are yearly limits.

Question 18

What is a Tax-Sheltered Retirement Plan?

Answer 18

Also known as defined contribution plan which is sponsored by the employer. Includes 401K, 403 (b) and 457 plans.

Question 19

What are the 4 distinct advantages of tax-sheltered retirement plans?

Answer 19

Tax deductible contributions, employer’s matching contributions, employer’s contributions are not counted as income, tax-deferred growth.

Question 20

What is a fiduciary standard?

Answer 20

The financial advisor must always act in the best interest of the client, regardless of how it might affect the advisor.

Question 21

List some organizations for checking the background of financial professionals

Answer 21

FINRA, NAIC, CFB, NAPFA and the SEC

Question 22

Describe the different ways Financial Planners are compensated.

Answer 22

Commission only, Fee-based, Fee-offset- annual/hourly and Fee-only

Question 23

Which arrangement with a financial planner has the best advantage to the client?

Answer 23

Fee only. You are charged a specified fee/hour or 1% of the client’s annual assets. The best advantage is that their advice in unbiased.

Question 24

What is the advantage of a Fee-based financial planner?

Answer 24

Charge up front fee and charge commissions on financial products they sell you. The advantage is that you get unlimited consultations.

Question 25

Name the 3 different investment professionals and their roles

Answer 25

Financial Planners and Brokers: sell investments or insurance
Financial Counselors: Counseling and money management
CPA- Income tax and estate planning

Question 26

What is the value of various employee benefits?

Answer 26

Most of them can be purchased with pre-tax dollars which lowers you taxable income. It could increase your annual income by as much as 30% or more each year.

Question 27

Outline 4 items to consider with a job offer

Answer 27

Compare salary offers, cost of living where each job is located, focus on both net and gross pay and consider the value of employer-paid benefits.

Question 28

Calculate simple interest for $1,000 at 8% for 4 years

Answer 28

$1000 x .08 x 4 = $320 This assumes the interest is withdrawn each year and only the principle stays on deposit for the entire 4 years.

Question 29

What is the Future Value of a Lump Sum $1,000 invested at 8% for 4 years?

Answer 29

FV= Present value of sum of money x 1.0+interest rate

(1,000)(1.08)(1.08)(1.08)(1.08) or $1,000 x 1.365 = $1360.49

Question 30

Why is it important for a client to be aware of the current economic situation and trends?

Answer 30

Success in personal finance depends in part on how well you understand the economic environment. Helps you make good decisions that generate wealth for you.

Question 31

How could you advise a client to prepare for a concern that she may be laid off in about 6 months?

Answer 31

Update resume, networking, understand employment trends, reassess your career, target preferred employers, identify specific job opportunities. Keep track of your job search.

Question 32

How long would it take for an investment of $6,000 at 9% interest to double?

Answer 32

Using rule of 72. 72/9 = 8 years

Question 33

A measure of goods and services that one’s income will buy is?

Answer 33

Purchasing Power

Question 34

What is the type of employee benefit plan where employees choose their benefits from a list of taxable cash and one or more qualified nontaxable plans?

Answer 34

Cafeteria Plan

Question 35

Which statistic measures the value of all goods and services produced by workers and capital located in the US?

Answer 35

Gross Domestic Product

Question 36

What is an Employee-paid, employer sponsored accounts for medical and dependent care paid with pre-tax dollars?

Answer 36

Flexible Spending Account

Question 37

True or False. A high deductible health insurance program can have a health savings account to help with medical expenses.

Answer 37

True

Question 38

Which phase of the business cycle describes where production is low, unemployment is high and retails sales are low?

Answer 38

Recession

Question 39

Which economic indicator is the best for determining where the economy is headed over the next year or so.

Answer 39

Index of leading economic indicators

Question 40

Which measure of cost of living for Americans does the government commonly cite?

Answer 40

Consumer Price Index

Question 41

Income exempt from current taxation but for which taxes will likely be paid at a later date is said to be?

Answer 41

Tax-Sheltered Income