Module 2 Practice Exam and Glossary V14

Transcription

1 Module 2 Practice Exam and Glossary V14 Term Inflation Aggressive Investment Risk Definition The general rise of prices over time. High risk. Examples: Stocks, Futures Asset allocation Distribution of investment money. Younger investors are encouraged to invest in riskier options. Older investors are encouraged to have a greater proportion of conservative investments so that they are less likely to lose all their money. Bonds budget Purchasing a bond means giving a loan to a company. Bonds require a minimum amount of money to purchase and a minimum length of time to hold on to the bond. T-Bonds are bonds issued by the U.S. Treasury and are safer than corporate bonds. (Loaning money to the government is safer than loaning money to a private business.) a plan of income and expenses. It shows how much money is coming in and how much is going out during a set time frame. Budgetary allowances recommendations Gifts: 9%, Savings: 9%, Housing: 25%, Utilities: 5%, Food: 10%, Transport: 11%, Medical/Health: 11%, Personal: 8%, Recreation: 6%, Debts: 6% Certificate of Deposit (CD) CDs make better money than traditional savings. Bank will charge a fee if money is taken out early. CDs require a minimum amount of money to invest. CDs are safe ways to save money but it is hard to get the money out. CDs are best used for money you want to put aside for a few months or years Common stock Compound Interest Allows investors to vote on various company issues such as its leaders and often offers dividends payout to stockholders of a portion of company profits, based on number of shares owned which can rise and fall with company profits. Calculating interest earned based on original deposited amount plus interest already earned Conservative Investment Risk Credit Low investment risk. Examples: Traditional Savings or Checking Account, Certificate of Deposit (CD), Individual Retirement Account (IRA), Money Market Account Borrowing service that allows you to obtain goods and services now but pay for them later. The business offering the credit charges you interest on the money borrowed. Credit Cards Credit Types Direct taxes These are plastic cards with a magnetic strip issued by stores, banks, and businesses used to purchase goods and services. Depending on the type of deposit requirements, cards are secured or unsecured. Service Credit, Loans, Installment Credit, Credit Cards Like federal income taxes, are paid straight to the government.

2 Diversification Dividends FDIC Fixed Costs Spreading money among multiple accounts when investing. To minimize risk and maximize return. Payout to stockholders of a portion of company profits, based on number of shares owned (Federal Deposit Insurance Corporation) insures bank deposits in the United States up to $100,000 for each deposit. Costs paid regularly and amount does not change or only slightly, like rent payments and car insurance Futures Gross Income How to tell if your investment will earn money: Indirect taxes Futures involve betting on the future price of a common product, like wheat. With Futures a legal commitment is made to buy a certain amount on a certain date for a particular price. Futures are the riskiest of the investments, because large amounts of money can be earned or lost. Income BEFORE taxes and fees To earn money the rate of return must be higher than the rate of inflation. Like sales taxes, are collected when a person pays for a good or service. The seller must submit these taxes to the government. Individual Retirement Account (IRA) IRAs have a limit to how much money can be deposited. Bank will charge a fee if money is taken out early. IRAs save money on taxes. Installment Credit Interest Investment risk levels This type of credit is usually for expensive items. It allows you to purchase a good or service and pay it back in fixed monthly payments. People will get this type of credit to purchase cars, appliances, mortgages (loan for home purchase), and student loans. Fees charged on money borrowed or money gained when loaning money. The rate charged for a loan. Conservative Low Risk, Moderate Risk, Aggressive- High Risk Law of diminishing marginal utility Liquid As each additional quantity of a good or service is consumed, the relative satisfaction obtained decreases. Remember that more isn't always better. Easily converted to cash Loans Moderate Investment Risk This is a way to borrow cash, usually through a bank or credit union. Medium risk. Examples: Bond, Mutual Fund Money Market Account This account will not make much money, but more than traditional savings. Bank will charge a fee if money is taken out early. Bank may require a minimum amount of money in the account.

3 Mutual Fund Net Income Preferred stock Progressive Mutual Funds are shares of ownership in a group of companies. Mutual Funds require a minimum amount of money to invest. Mutual Funds can earn significantly more money but can also potentially lose more. Income AFTER taxes and fees. Gross Income - taxes & fees. Does not usually come with voting rights, but does offer fixed dividends, meaning the dividend payout will not change with the company s increased or decreased profits. As income increases, the tax rate increase Progressivity Does the tax rate rise, lower, or stay the same as your income rises? Proportional Regressive Secured credit No matter what happens to your income, the tax rate always stays the same (flat tax) As income increases, the tax rate decreases pay a deposit and can only use card up to that amount Service Credit Stock Exchange A deposit is paid to receive a service such as utilities. You pay a fee each month based on your consumption, such as a water or power bill. Is a giant marketplace where traders buy and sell stocks; the world's largest Stock Exchange is the New York Stock Exchange. Stocks Tax bracket Stocks are shares of ownership in a single company. Stocks make the most money over a long period of time. If the stock company fails, all money invested is lost. A term most associated with a progressive tax rate. Traditional Savings or Checking Account Unsecured credit Utility Conservative risk. These accounts will not make much money. Bank may charge a fee for these accounts. Money can be taken out in cash easily. Checking account is easy to use with debit cards and checks. Does not require initial deposit and creditor sets balance limit A person's derived satisfaction from consuming a good. Variable costs Amount paid depends on level of consumption, like attending movies or haircuts

4 Module 2 Practice Exam V14 1. Who would pay the most as a percentage of income under a regressive tax? A. Lawyer earning $110,000 per year B. Roofer earning $18,000 per year C. Teacher earning $45,000 per year D. CEO earning $2.5 million per year 2. You earn $30,000 per year and the federal tax rate is 10 percent. Your gross income is A. $3,000 B. $17,000 C. $27,000 D. $30, Look at the graph. What kind of tax does the first half (lowest 20 percent to fourth 20 percent) of the graph illustrate? A. Flat B. Progressive C. Proportional D. Regressive

5 4. To earn money on your investments, the rate of return must be higher than the A. rate of deflation B. rate of inflation C. interest rate D. account fees 5. Faisal and Torie each want to make an investment, but they have different needs. Based on the information, which of the following investments are more suitable for Faisal than for Torie? A. Bonds, CDs, IRA B. Bonds, mutual funds, stocks C. Money market account, stocks, futures D. CDs, IRA, money market account 6. The chart above compares credit card offers. What is the most significant benefit offered by Credit Card 2, relative to the other cards? A. Lowest fixed interest rate B. Lowest credit limit C. No rewards D. Unsecured credit 7. Your expenses exceed your income. You should cut back your A. fixed costs B. opportunity costs C. variable costs D. budget

6 8. Zoe would like to be able to save for night courses at the local college. Which of these would be a good way for Zoe to make more money available for savings without dramatically changing her budget? A. Spend 10 percent on clothing and 10 percent on entertainment B. Spend 10 percent on entertainment and 20 percent on clothing C. Spend 10 percent on rent and 10 percent on food D. Spend 20 percent on food and 5 percent on gas 9. Zach, Sarah and Chris are good friends who make different amounts of money each year. Zach makes 40,000 a year, Sarah makes 50,000 a year and Chris makes 60,000. They pay the following taxes each year: Zach pays 4,000, Sarah pays 5,000 and Chris pays 6,000. Which of the following tax systems does this scenario represent? A. Proportional B. Progressive C. Regressive D. Divisibility 10. If you were looking at a portfolio in which 70% was stocks, 10% mutual funds, 5% bonds, 5% IRA, what can you infer about the person portfolio you are looking at? A. They are older and close to retirement B. They are middle aged thinking about retirement C. They are young and starting to invest D. They are a conservative investor

7 11. Andrew wants to go back to school, but has incurred a lot of debt over the last few years. He decides to create a budget and realizes his expenses are higher than his salary. What could he do to balance his budget? A. Give up and not go to school B. Reexamine his fixed and variable expenses C. Invest more in stocks hoping he will make a great return on his money D. Charge tuition to his credit cards 12. Sarah just began her first job. She wants to begin planning for retirement, but knows the earliest she can retire is 40 years. Predict what would be her best choice for an investment? A. Traditional Savings Account B. Money Market Account C. Stock D. Mutual Fund 13. You would like to purchase your first car, but you are $10,000 short. Assess which would be your best option for a credit plan. A. Credit Card B. Installment Loan C. Service Credit D. Borrow from a friend 14. Based on your knowledge of direct and indirect taxes, identify which would be an example of an indirect tax: A. Sales Tax B. Income Tax C. Estate Tax D. Property Tax

8 15. Samantha has had a successful and enjoyable 35 years of teaching at Morrison High School. As her financial advisor, what graph best represents how Samantha should allocate her money? a. b. c. d.

9 16. Mark gets hired at a prestigious law firm right out of law school. In addition, he has been given a generous signing bonus and wants to put it into an account that will yield the highest rate of return while providing him with liquidity within 3 months. He has expressed his concerns of losing his money. What type of investment would be best suited for Mark s financial needs? a. Google stock because it is yielding 14.6% percent annually b. Certificate of Deposit yielding.75% c. Traditional Checking Account yielding.03% d. IRA yielding 2.75% 17. When planning an annual budget, which answer best reflects fixed expenses? a. Mortgage, auto loan b. Mortgage and annual vacation c. Mortgage and utilities d. Cell phone bill and auto loan 18. When balancing a budget, what expenses should be prioritized? A. fixed B. variable C. investments D. taxes 19. How is a young investor s investment portfolio different from an older investor s investment portfolio? A. stocks, IRA, and mutual funds are preferred by young investors, while CDs, futures and IRAs are preferred by older investors B. an older investor might consider long term, high yielding investments, while and young investor might consider short-term returns C. older investors have more low risk tolerance than young investors D. a young investor might consider long term, high yielding investments, while and older investor might consider short-term returns 20. What is the main difference between a proportional tax system and a progressive tax system? A. there is no difference. Both tax an average amount B. proportional taxation results in a flat tax rate for everyone, while a progressive tax system results in more taxation to the rich C. proportional tax results in an increase of tax rates by income, while a progressive tax system represents a heavier burden to middle class. D. proportional tax results in higher tax rate to the rich, while progressive taxation results in a higher tax rate for the poor

10 21. She Kira make $50,000 a year working as a nurse, while Chris makes $35,000 working as Secretary. Which scenario shows the Regressive tax system. (2.03) A. She'kira is taxed 30% of her salary and Chris is taxed 15% of his salary B. She kira is taxed 15% of her salary and Chris is taxed 30% of his salary C. She kira is taxed 15% of her salary and Chris is taxed 15% of his salary D. She kira is taxed $10,000 of her salary and Chris is taxed $10,000 of his salary 22. You are 62 years old and you plan to retire at 65. Which option shows how to best distribute your money? (2.04) A. Mutual Fund, Stocks B. Futures, Stocks C. Mutual Fund, Certificate of Deposit D. Futures, Savings Bonds 23. Justice makes $7.75 per hour working as a part-time car-detailer and he works 30 hours per week. His tax rate is 20 percent. What is Justice s net income after working a full 52 weeks? A. $ B. $12,090 C. $9,672 D. $2, Jamie received an inheritance from her grandmother. She has a moderate to high risk tolerance and would like to invest her money in options with moderate to high return. Which combination of investments would be best for her? a. IRA & Mutual Fund b. Mutual Fund & Bonds c. CD & Futures d. Stocks & Mutual Funds 25. Charles is a plumber who makes 45,000 a year. What would Charles pay in taxes under a proportional tax plan with a 15% tax rate? a b c d. 4570

11 Sales Housing Utilities Transportation Entertainment 26. In the budget above, which of the following categories is a variable expense? a. Housing b. Utilities c. Transportation d. Entertainment 27. Jose has $2,000 that he will use to buy a boat in five months. In the meantime, he would like to invest it to earn more money to use to purchase the boat. Which of these would yield the greatest return in his frame time? a. stock b. Savings account c. Savings bond d. Money market 28. In looking at Raul s monthly budget for living, what conclusion could you draw that the largest area indicates in the pie chart? a. Food b. Utilities c. Transportation d. Rent

12 29. Suzie is in moving into her own apartment. She has saved to afford this expense. She needs to secure her heat, water and electric. What type of credit would she need? a) Service credit b) Loan c) Fixed rate credit card d) Variable rate credit card 30. Meia works a minimum wage job, 7.79$ an hour at a popular retail chain. She works 20 hours each week and her tax rate is 15%. Because of school she only works about 35 weeks out of the year. Which amount is her yearly gross income closest? A: $ B: $ C: $ D: $ Which tax plan best represents the Federal Tax system in the United States? A. Tax Plan A B. Tax Plan B C. Tax Plan C D. Tax Plan A and B

13 32. What type of investor would most likely be using a portfolio that consists of these investments? A. a middle aged professor looking to buy a house next year. B. a young college student who just inherited money C. a young married couple moving to a new town D. an older retiree looking to take a tour of the world