Fin2100 Final Exam Questions with All
Correct Answers Graded A+.
Inflation risk - Answer Rising prices, lost buying power
Caused by overheated economy or supply shortages, easy money policies
Lowers corporate profits, bad for stocks, good for commodities (gold)
FED will increase interest rates to cool economy
Deflation risk - Answer Falling prices, discourages borrowing and spending, sending a bad
economy even lower
The "Real Return" on Investments - Answer Your "real return" equals the after tax return
minus inflation rate
Low Inflation High Inflation
Pre-tax return 12% 16%
Tax rate @ 25% ( 3%) ( 4%)
After tax return 9% 12%
Less: inflation ( 3%) (10%)
Real return 6% 2%
Interest-rate risk - Answer Effects cost of borrowing and rate of return
Personal risk - Answer Health, safety, or costs
Liquidity risk - Answer Higher return may mean less liquidity
Simple interest - Answer Principal x Rate x Times equals interest
$100 x 6% x 1 (1 year)
$100 x .06 x 1 = $6.00 interest
Simple interest = (P x R x T)
Rule of 72 - Answer Divide 72 by the annual rate of return on your investments to
approximate the number of years it takes to double your money
At 5%, it takes 72/5 = 14.4 years
At 10% it takes 72/10 = 7.2 years
At 15% it takes 72/15 = 4.8 years
,Goal setting guidelines - Answer Goals should be:
Specific: know what your goals are to create a plan
Measurable: with a specific amount
Action-oriented: identify the personal financial activities
Realistic: utilizing your income and life situation
Time-based: identify the time frame to achieve the goal
Pre-tax benefit * - Answer times (1 - Tax rate) = After tax benefit
After-tax benefit* - Answer Divided by (1-tax rate) = Pre-tax benefit value
Pre-tax benefits - Answer Benefits provided by your employer that are subject to payroll and
income taxes such as
Salaries
Bonus
Company car
after-tax benefit - Answer Benefits provided by your employer that are not subject to payroll
and income taxes such as
Company paid parking
On-site health facilities
Free air travel for flight attendants
Company portion of health care costs
401K problem - Answer Assume you make $60,000 per year ($5,000/month) and save
monthly in a 401-K plan. You save 5% and the employer matches 3%. How much will you have in
the plan after 35 years assuming a 10% return?
End mode
Pmt/yr = 12
Pmt = -400 (5,000 times (5% + 3%))
Int = 10
N = 420 (35 x 12)
Solve for FV = 1,518,655.22
, Assets - Answer what you own, items with monetary value
Current or liquid assets*
Cash
Savings/money market accts.
Investments (stocks and bonds)
in taxable accts.
Illiquid assets - Answer Real estate/homes
Automobiles
Personal possessions (jewelry)
Retirement investment accounts
Creating and Implementing a Budget - Answer Assessing your current situation
Measure your current financial position
Determine your needs and life situation
Planning your financial direction
Setting financial goals
Creating budget allocations
Budget amount for an emergency fund, periodic expenses and financial goals
Budget set amounts that you are obligated to pay
Budget estimated amounts that are to be spent for various household and living expenses
Ratios - Answer Net worth = Total assets - total liabilities
Debt ratio = Liabilities/net worth
Liquidity ratio = Liquid assets/monthly expenses
Debt payments ratio = Monthly credit pmts/take home pay
Savings ratio = Monthly savings/gross monthly pay
5 types of taxes - Answer *Taxes on purchases
Sales tax & excise tax (regressive)
*Taxes on property
Real estate tax
Personal property tax
*Taxes on wealth
Federal estate and gift taxes
Correct Answers Graded A+.
Inflation risk - Answer Rising prices, lost buying power
Caused by overheated economy or supply shortages, easy money policies
Lowers corporate profits, bad for stocks, good for commodities (gold)
FED will increase interest rates to cool economy
Deflation risk - Answer Falling prices, discourages borrowing and spending, sending a bad
economy even lower
The "Real Return" on Investments - Answer Your "real return" equals the after tax return
minus inflation rate
Low Inflation High Inflation
Pre-tax return 12% 16%
Tax rate @ 25% ( 3%) ( 4%)
After tax return 9% 12%
Less: inflation ( 3%) (10%)
Real return 6% 2%
Interest-rate risk - Answer Effects cost of borrowing and rate of return
Personal risk - Answer Health, safety, or costs
Liquidity risk - Answer Higher return may mean less liquidity
Simple interest - Answer Principal x Rate x Times equals interest
$100 x 6% x 1 (1 year)
$100 x .06 x 1 = $6.00 interest
Simple interest = (P x R x T)
Rule of 72 - Answer Divide 72 by the annual rate of return on your investments to
approximate the number of years it takes to double your money
At 5%, it takes 72/5 = 14.4 years
At 10% it takes 72/10 = 7.2 years
At 15% it takes 72/15 = 4.8 years
,Goal setting guidelines - Answer Goals should be:
Specific: know what your goals are to create a plan
Measurable: with a specific amount
Action-oriented: identify the personal financial activities
Realistic: utilizing your income and life situation
Time-based: identify the time frame to achieve the goal
Pre-tax benefit * - Answer times (1 - Tax rate) = After tax benefit
After-tax benefit* - Answer Divided by (1-tax rate) = Pre-tax benefit value
Pre-tax benefits - Answer Benefits provided by your employer that are subject to payroll and
income taxes such as
Salaries
Bonus
Company car
after-tax benefit - Answer Benefits provided by your employer that are not subject to payroll
and income taxes such as
Company paid parking
On-site health facilities
Free air travel for flight attendants
Company portion of health care costs
401K problem - Answer Assume you make $60,000 per year ($5,000/month) and save
monthly in a 401-K plan. You save 5% and the employer matches 3%. How much will you have in
the plan after 35 years assuming a 10% return?
End mode
Pmt/yr = 12
Pmt = -400 (5,000 times (5% + 3%))
Int = 10
N = 420 (35 x 12)
Solve for FV = 1,518,655.22
, Assets - Answer what you own, items with monetary value
Current or liquid assets*
Cash
Savings/money market accts.
Investments (stocks and bonds)
in taxable accts.
Illiquid assets - Answer Real estate/homes
Automobiles
Personal possessions (jewelry)
Retirement investment accounts
Creating and Implementing a Budget - Answer Assessing your current situation
Measure your current financial position
Determine your needs and life situation
Planning your financial direction
Setting financial goals
Creating budget allocations
Budget amount for an emergency fund, periodic expenses and financial goals
Budget set amounts that you are obligated to pay
Budget estimated amounts that are to be spent for various household and living expenses
Ratios - Answer Net worth = Total assets - total liabilities
Debt ratio = Liabilities/net worth
Liquidity ratio = Liquid assets/monthly expenses
Debt payments ratio = Monthly credit pmts/take home pay
Savings ratio = Monthly savings/gross monthly pay
5 types of taxes - Answer *Taxes on purchases
Sales tax & excise tax (regressive)
*Taxes on property
Real estate tax
Personal property tax
*Taxes on wealth
Federal estate and gift taxes
