# FIN2100

### 147 terms by morgan_sliman

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True

Liquidity

3%

False

True

45%

### You just received a copy of an email from an unknown investment advisor to a client recommending the purchase of a stock. The email appears to have been sent to you by mistake. What is your best course of action?

Do nothing. This is probably a scam. Do not trust the information in this email. Do not believe the advice from the broker.

2.06

### A UCF graduate is getting a masters degree at night. The graduate expects to receive an annual salary of \$6,000 per year more as a result of getting a masters degree. The graduate plans to work for 40 years, so he/she will earn \$240,000 more in their lifetime (\$6,000 x 40 years). What is the present value of a stream of \$6,000 payments for 40 years based on an annual interest rate of 7%? Assume the \$6,000 is paid annually at the END of the year. By the way, if it costs say \$25,000 today to get a masters degree, do you think a graduate degree is a smart economic move if your salary goes up by \$6,000 per year?

\$79,990, yes get the masters degree, the net present value of this decision is \$54,990

\$39,393

\$42,560

\$847,683

\$3,750.00

### A UCF graduate has two job offers. Job 1 pays \$36,500 with a \$4,400 non-taxable benefit, while Job 2 pays \$34,700 and has a \$6,100 non-taxable benefit. What is the PRE-TAX value of each job assuming the graduate is in a 10% marginal tax bracket?

Job 1: \$41,389 Job 2: \$41,478

\$1,570,953.52

15-18%

### Which of the following is TRUE? A. More and more employers are using credit reports as hiring tools. B. Federal law does NOT require applicants to be told if credit histories are being used in the hiring process. C. Federal law requires that job applicants must be told if credit histories are being used in the hiring process. D. It is against the law for employers to use credit reports as hiring tools. E. Answers a and c are true

E. Answers a and c are true

\$45,000

\$70,000

### Ima Knight has budgeted \$300 for food, \$400 for insurance, and \$500 for gifts. Ima's actual expenses were \$200 for food, \$300 for insurance and \$500 for gifts. What is Ima's total budget variance?

A positive \$200 (under budget)

### Assume the following: Assets = \$100,000 Liabilities = \$75,000 Net Worth = \$25,000 Monthly credit payments = \$1,440 Take home pay = \$7,200 What is the debt ratio and debt payments ratio for this individual?

Debt ratio = 3.0
Debt payments ratio = .20

### An example of open end credit is

Revolving check credit

Climate

7

\$0

28.3%

33.3%

43%

### A student borrows \$500 for one year, and is charged \$50 in interest. He/she also pays a fee of \$10 for the loan. What is the total cost of financing and the APR?

\$60 financing cost with a 12% APR

\$833.33

\$7

\$3.75

\$3.00

\$4.50

### If you finance a car with a dealer, most likely you'll pay interest calculated with the "add on interest" or "tack on interest" method (which not surprisingly works to the favor of the dealer). During the life of the loan, interest is paid on the full amount borrowed, even though some principal is paid back each month. A student buys a car as follows: Down payment- \$2,000 Amount financed- \$9,000 Total cost of car- \$11,000 Finance charge- Add on interest @11% per annum over 4 years (48 months) What is the monthly payment and APR of this loan using your HP 10BII?

\$270/month with an APR of 19.2%

249%

Good

6 years

### Using the same information as the last card, assume that the pressure washer had to be replaced every 10 years. So your decision is to rent each year at \$50 per year, or spend \$300 now, which would save you \$50 per year for 10 years. Assume the appropriate discount rate (interest rate or i) is 8%. The same type of analysis used by corporations to evaluate capital investments would also apply to this buy/rent decision. Be sure you are in the right mode. Calculate the present value of a stream of payments of \$50 at the beginning of the year for 10 years at 8% and compare it to the \$300 cost. By doing so you conclude: (Note you could also do an NPV analysis, but be sure you net the initial cash flows for time period 0 i.e. \$300 minus \$50 = \$250 and then use 9 Ns for the 50 payment)

It is better to buy now, with a net savings of \$62.34

### Your favorite cereal (standard 18 oz box) is sold for \$3.78 at your local grocery. The local wholesale club packages two giant 22 oz. boxes of the same cereal (which must be bought together) for \$9.68. The wholesaler list a per package cost of \$4.84 rather than a list a per ounce cost (this is a common tactic used to confuse consumers). Which is the better buy on a per ounce basis?

The grocery store's price is 21 cents per ounce, 1 cent better

53 cents

### An advantage of buying a car over leasing a car is:

Buying can be cheaper in the long run and there are no mileage restrictions when buying a car

8.69%

### You are considering the purchase of a hybrid Honda Civic. Assume that you drive 12,000 per year, and will keep the auto for 10 years, at which time the car will have zero trade-in value. Assume the cost of gas is \$2.49/gallon. The "normal" model gets 34 miles per gallon, while the "hybrid" model gets 50 miles per gallon. The hybrid model cost \$21,850 while the normal model costs \$18,260. All other operating costs are the same. You can invest your money at a 6% interest rate (i.e. use a 6% discount rate). Given these assumptions, is it a good economic decision to purchase the hybrid? Hint: Calculate the annual gas cost for each car then take the difference (or savings) per year. Next calculate the PV of the annual savings (END MODE) and compare the gas cost savings in today's dollars to the cost difference for the two vehicles. You could also do a NPV analysis, with the car cost difference being used for cash out time period 0, and the savings entered in the CFj key for ten years.

No, don't buy the hybrid. The PV of the savings is \$2,070 which is less than the cost difference. You need a greater savings to economically justify the purchase of this hybrid (i.e. the NPV is negative).

### You subscribe to XM Radio and pay \$12 at the end of each month (which equates to \$144 per year). You plan to keep this service for the next five years. Assume you have plenty of cash in your emergency reserve fund, which is in a bank account earning 4% interest per annum. XM Radio offers you a deal whereby you can prepay two years worth of service for \$230, payable today. Given these assumptions,

You are better off to prepay XM for the next two years.

### Chrysler recently offered the following deal for a Jeep Commander: \$1,000 cash rebate at closing PLUS 2,400 gallons of gas at \$1.99/gallon over a three year period (or 66.67 gallons per month END for three years). What is the present value of this deal assuming that gas prices will be \$2.99 per gallon over the next three years and using a 6% interest rate?

\$3,192, and if gas prices average more than \$3.00/gallon, then the value of the deal to the buyer will increase

\$2,118,661.44

### A common advantage associated with home ownership is

Appreciation of the house's value over long periods of time

C

### Which of the following monthly payments go to an escrow account? A. Principal B. Interest C. Property taxes D. Homeowners insurance E. Answers c and d are correct

E. Answers c and d are correct

### Bill and Hillary each buy a house and take out a \$100,000 loan. His house is in New York and her house is in Washington D.C. Bill takes out a conventional 30 year fixed rate mortgage, and Hillary opts for a conventional 15 year fixed rate mortgage. Which of the following correctly summarizes how Bill's mortgage is different from Hillary's (all other things being equal)?

Bill's 30 year mortgage has a higher interest rate, lower monthly payments and higher overall interest payments. It builds equity more slowly than Hillary's mortgage

### What is a disadvantage of using an adjustable rate mortgage (ARM) compared to a fixed rate mortgage?

If interest rates rise, ARM interest rates will also increase after the lock in date and your mortgage payments (principal and interest) are not fixed for the term of the loan with an ARM as they are with a fixed rate mortgage.

6.95%

### Assume you receive the following mortgage: Amount borrowed= 175,000 Annual interest rate= 6.5% Term=30 years What is the monthly payment and how much of the payments in year 5 go toward interest?

Monthly payment = \$1,106.12
Interest in year 5 = \$10,738.39

### A homeowner can save \$130.00 per month for the next 15 years by refinancing at a new 4% fixed mortgage rate. What is the present value of the savings that would be used to compare against the current cost of refinancing?

The present value of the savings is \$17,574.98. If closing costs were less than this amount, refinancing would be a good deal if you remain in the house 15 years

\$242,284

### A situation in which one person is held responsible for the actions of another is:

Vicarious liability

### Renter's property insurance would include coverage for:

Personal belongings

Driving habits

True

True

\$2,500

\$3,200

\$50,000

\$5,000

\$1,054.46

### The cost of long term care, such as a prolong stay at a nursing home, is

generally not covered by Medicare

Medicaid

\$1,080

\$6,370

\$560

\$155

D

36 months

False

### With respect to federal tax law, life insurance proceeds paid to a beneficiary:

Are excluded from taxable income, bur included in the taxable estate (unless a life insurance trust has been established)

### Which life insurance provision ensures that you will not have to forfeit all accrued benefits?

Non-forfeiture clause

\$64,000

\$140,000

\$800,000

Universal life

Whole life

80%

### A parent is evaluating a \$250,000 term life policy vs. a \$250,000 whole life policy. Over the next 25 years, the term policy will cost \$10/month, and build no cash values. The insurance agent informs the parent that the whole life policy will cost \$100 per month, but will build guaranteed cash values of \$75,000 at the end of 25 years. The parent assumes that he/she can invest the \$90 per month difference in a mutual fund and earn 9% per year for the next 25 years. What is the future value of the mutual fund at the end of 25 years assuming end of the period deposits of \$90 per month at a 9% interest rate; and how does it compare to the whole life cash value investment return (ignoring taxes)?

The mutual fund will be worth \$100,900.97, implying that the return on the whole life policy is less than 9%

\$8,400

Government bonds

### Which of the following investments would have the greatest potential for risk?

Options or commodities

### Corporate bonds

Must be legally paid at maturity

\$1,187.50

True

Stocks

False

### Which best describes cash dividends paid by corporations?

Dividends generally come from after-tax earnings of the corporation, and are taxed again when received by an individual at a 15% maximum rate.

\$88.00

### An investor has 360 shares of Walmart, which just declared a 2 for 1 stock split. On the day before the stock split, the shares were trading at \$80 per share. The day after the split,

The investor wil have 720 shares trading at around \$40 per share

### An investor bought 100 shares of JNJ stock for \$28.50 per share plus a commission of \$10. He/she sold the stock after two years for \$38 per share and again paid a commission, this time for \$10. The investor received dividends while holding the stock of \$0.46 per share per quarter (a total of eight quarters). What is the total gain and annual return on this stock?

\$1,298 gain, 20% annual return.

### Refer to the previous card. With respect to the investor's stock transaction assuming all dividends received were "qualifying":

The separate gain on the stock is treated as a long-term capital gain, and both the capital gain and qualifying dividend income are now taxed at lower favorable rates.

7%

1.11%

\$3

20

Treasury bill

Municipal bond

True

### Zero coupon bonds would be best suited for

a 35 year old woman with a high risk tolerance and no need for current income

\$75.50

6.93%

### A \$1,000 bond has an annual 9.5% coupon and trades for \$860. It has 10 years to maturity. What is the current yield and yield to maturity?

11.05% yield with an 11.98% yield to maturity

5-12 years

Increase

### Callable bonds would primarily be associated with which of the below risks?

Reinvestment risk

### You plan to invest \$100 per month in an S&P 500 index fund for the next 40 years, and are trying to decide whether to use an ETF or an open ended mutual fund. Which option would be the most advisable? (assume that the ETF and open ended index mutual fund have the same expense ratio, but the broker will charge you a \$5 commission for each trade, while the mutual fund will not charge you a commission if purchased directly from the mutual fund)

Opening an account with a mutual fund family, then investing in an open ended S&P 500 index mutual fund each month.

### When you sell shares of a mutual fund, how do you determine the basis of the shares held?

You may use either the specific identification or average cost method

Municipal bond

### Payments made to a fund's shareholders that result from the sales of securities in the fund's portfolio are called

Capital gains distributions (either short term or long term)

18

\$220

\$575 or 57.5%

### Assume the following mutual fund transactions: Year | Invest | Price per share 2007 \$3,000 \$40 2008 \$3,000 \$50 2009 \$3,000 \$60 2010 \$3,000 \$55 How many shares do you now own and what is the average cost per share?

239.5455 shares with an average cost per share of \$50.09

### Direct real estate investments include

Single family dwellings

Equity

### You have net passive activity losses of \$10,000 related to an investment in a real estate partnership. Which statement is true with respect to your federal tax return?

Net passive activity losses are carried forward to future tax returns and available to offset future passive activity gains

### Which of the following is a disadvantage of direct investments in real estate, such as rental property?

The investment can be illiquid

### Gold prices are more likely to rise

During wars or other periods of significant geopolitical uncertainty

\$40,000 and 20%

\$40,000 and 200%

### With respect to Roth IRAs and Traditional IRAs, which statement is true?

Roth IRA contributions are non-deductible, but earnings grow tax free

### Which investment would generally be inappropriate for a 25 year old with a traditional IRA invested for his/her retirement?

A substantial and permanent investment in money market mutual funds

### What important matter should you always assess before changing jobs?

Your current vesting status on the company 401-K plan; Your current vesting status on the company defined benefit pension plan; Your current vesting status on the company stock option plan

### A UCF graduate has a traditional IRA and plans to take the money out prior to age 59 1/2 in order to pay off some accumulating credit card debt. The graduate will pay:

A 10% penalty on the total withdrawn, plus will owe taxes on the amount withdrawn based on his/her marginal tax rate

False

8

### A UCF graduate saves \$300 at the end of each month in a Roth IRA for 40 years (retirement date), earning 9% annually. How much money will be in the account at the end of 40 years, and how long will the money last if the graduate withdraws \$15,000 at the end of each month at the retirement date, assuming the investments continue to earn 9% annually? HINT: Once you calculate the FV of the savings, this will be your PV for the second part of the problem where you solve for n.

Value of account in 40 years = \$1,404,396: Account will run out of money in 162 months

### Calculate the first and second year ANNUAL payment that you could withdraw for a "growing annuity" using the following assumptions: Interest rate= 8% Inflation rate= 4% Remaining life expectancy= 27 years Amount invested at retirement date= \$450,000 First withdrawal taken at the end of the year Hint real rate: ((1 + interest rate) divided by (1 + inflation rate)) - 1

Year 1 = \$27,084 year 2 = 28,167

\$5,120,000

### Trusts can be

Revocable or irrevocable

### What document is generally used to name the guardian of your minor children in the event that both you and your spouse should die?

A last will and testament

### Which type of trust would be used for young adult children, where the deceased parents wish to ensure that the principal of the trust is maintained for a long period of time?

A spendthrift trust

### What happens if you die without a will

The courts will determine how your assets will be distributed based on state law

Name a property guardian in your will;
Name a custodian under the Uniform Transfers to Minors Act;
Set up a trust for each child;
Set up a "pot or family trust" for your children

### Which of the following is true with respect to wills?

If your state allows holographic wills, you don't need witnesses;
You must date and sign the will;
The will must be signed by at least two witnesses (for states that do not allow holographic wills);
In most states, witnesses can not be heirs

True

### If you and your spouse or anyone else own property as ______, each individual is considered to own a proportionate share for tax purposes, and only your share is included in your estate

Tenants in common

### Your father gives you 100 shares of ABC stock on Dec. 31, 2006. He paid \$1,500 for the shares (\$15/share) in 1990 and the stock is now worth \$2,500 as of the date of the gift. On Dec. 31, 2009, you sell the ABC stock for \$4,500 (\$45/share). What is your taxable gain?

A \$3,000 long-term capital gain

Example: