Chapters 1 and 3
What is the formula for net worth?
Net worth=assets-liabilities
What is adjusted gross income?
Gross income after certain things are added or reduced.
What is a certificate of deposit?
A savings option that requires you to leave your money on deposit for a set time period.
What is simple interest?
Interest is only calculated on the initial interest.
John is taking out a loan of $4,500. He will be charged 8% simple interest and will repay the loan at the end of one year. How much interest will he pay for the year?
Interest=principal x rate of interest x time
Interest=$4,500 x 0.08 x 1
Interest=$360
What is opportunity cost?
What you give up by making a choice.
What are capital gains?
Profits from the sale of investments.
What should you do when interest rates are falling?
Use long-term savings options and short-term borrowing options.
What is future value?
The amount an investment will grow based on a certain periodic interest rate over a specified number of time periods.
What is the annual percentage rate equation?
APR=(2nI)/(P(N+1))
n=number of payments per year
I=total dollar cost of credit over entire loan period
P=principal (net amount of loan)
N= total number of payments over entire loan period
Bob has $112,000 in liabilities and $78,200 in assets, what is his debt ratio?
Debt ratio=liabilities/assets
Debt ratio=$112,000/$78,200
Debt ratio=1.432
What is the difference between tax-exempt income and tax-deferred income?
Tax-exempt income: income not subject to federal income tax
Tax-deferred income: income that will be taxed at a later date and will not be included in the current gross income
What is the difference between closed-ended credit and open-ended credit?
Closed-ended: single loan with specific term, amount, and purpose. Equal payments.
Open-ended: use when needed, pay charges if not paid in full at due date
Interest accrued on previously earned interest.
What does the Consumer Credit Counseling Service do?
Provides counseling services for those suffering from serious financial problems. Helps people set up realistic plans and budgets. Provides an education about budgeting.
What is the rule of 72?
Used to estimate the effect of inflation. Divide 72 by the annual inflation rate to figure out the number or years required for prices to double.
If you expect your tax rate to be lower next year, what should you do with your income and additional deductions?
Move income into next year and take additional deductions this year.
What are the 5 C’s when applying for credit?
Character, capacity, capital, collateral, and conditions.
What are the variables required for all time value of money calculations?
Value (present, future, payment), time, and interest rate
What is chapter 7 bankruptcy?
Many debts are forgiven, but not all debts are forgiven. Most of your assets are sold. Some assets you can keep. There are certain things you still own, such as child support, educational loans, certain taxes, alimony, etc.
What is the difference between the personal balance sheet and the cash flow statement? What does each entail?
Personal balance sheet is a snapshot of your current financial situation. Contains assets and liabilities. Cash flow statements show your financial situation over a period of time. Contains income and expenses to determine if you have a surplus or deficit.
What are the 5 types of taxes discussed in the chapter? Explain each.
Sales tax: charged on the purchase of goods and services
Excise tax: tax on certain goods (for example gasoline)
Taxes on personal property: real estate property tax and personal property tax (vehicles)
Taxes on wealth: inheritance tax, death tax
Taxes on earnings: income tax, social security, Medicare tax
What is the annual percentage yield for a savings account that earned $73.50 in interest on $2,600 over the past 365 days?
APY=100(interest/principal)
APY=($73.50/$2,600)
APY=2.83%
What is an annuity?
A series of equal payments occurring at equal intervals.
What is chapter 13 bankruptcy?
You pay a portion of your debt over 5 years. You pay a trustee who then pays your debtors.