Test 1

Question 1

The function of money

Answer 1

medium of exchange

Question 2

The nature of inflation

Answer 2

causes prices to rise; universal prices increase, the dollar increases

Question 3

The concept of utility

Answer 3

measuring usefulness based on customer satisfaction

Question 4

Factors that affect personal income

Answer 4

education, talents, career, age, gender, location, employer, economy

Question 5

The five steps of the personal financial planning process

Answer 5

(1) current position, (2) set goals, (3) design plan, (4) implement, (5) Re-evaluate

Question 6

Balance Sheet

Answer 6

what do you owe/what to you owe?, statement of net worth = assets - liabilities

Question 7

Statement of cash flow

Answer 7

consists of income and expenditure statement; fixed and variable items; surplus or deficit

Question 8

The phases of the life cycle

Answer 8

(1) Single Adult- plenty of time to recover from mistakes unless you are incapacitated, (2) Young Married- spousal responsibilities; joint decisions; d.i.n.k. (3) Early Parenthood- period of maximum responsibilities; maximum risk to financial unknowns (4) Single Head of Household- widowed or divorced; was rare, now commonplace, (5) Advanced Parenthood- period of max current expenses; food clothes, cars, schooling, (6) Empty Nest- lifting of some responsibilities; changes in priorities; max capacity to save and invest as peak productive years coincide with plunging expenses, (7) Retirement- little time left to adjust your finances; you are stuck with what you have

Question 9

Role of Professionals

Answer 9

Help you make a financial plan that is suitable for your lifestyle.

Question 10

Keown’s Ten Principles

Answer 10

(1) Knowledge is power (2) Nothing happens without a plan (3) The time value of Money (4) Risk vs. Return (5) Taxes Matter (6) Life happens- the importance of liquidity (7) The power of budgeting (8) Protect Yourself and Others (9) You are your worst enemy (10) Just Do It!

Question 11

Common Mistakes

Answer 11

(1) Unwise use of credit (2) Failure to plan (3) Failure to have specific goals (4) Poor budgeting (5) Setting unrealistic goals

Question 12

The value of money

Answer 12

The present value of the future dollar; the future value of the present dollar

Question 13

Amortizing

Answer 13

reduce or extinguish (a debt) by money regularly put aside

Question 14

Annuitizing

Answer 14

to choose to receive a series of payments from an insurance company

Question 15

History of savings

Answer 15

prior to WWII; gold standard, low inflation, no income tax

Question 16

Inflation’s impact on purchasing power

Answer 16

inflation is caused by too much money chasing too few goods. PQ=MV monetarist interpretation; price jolts and the role of the Fed; psychological influences; cause and effect; two manifestations of inflation

Question 17

Nature of risk

Answer 17

measures the likelihood that the actual outcome will differ from the expected outcome; uncertainty as to ultimate yield and return of principal. What types of risk are you willing to incur?
THERE IS NO SUCH THING AS A RISKLESS INVESTMENT

Question 18

Factors affecting savings decisions

Answer 18

Time Horizon, Safety, Interest Rate, Yield, Yield Curve, Annual Percentage Yield (APY), Tax distortions, Convenience, Liquidity, Marketability, Compounding

Question 19

Rule of 72

Answer 19

Determines how long is takes for you money to double when compounding interest:
Rate of compounding * years to double = 72