D363 Student Review Guide

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School

Western Governors University *

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Course

363

Subject

Finance

Date

Jan 9, 2024

Type

pdf

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Uploaded by ProfFog22214

D363 Study Guide Questions Budgeting and Cash Flow List three financial institutions that are not FDIC insured. Annuities, life insurance, and stocks What is a FICO score? What is a good score? A FICO score is a number that is used as a method of evaluating an individuals Creditworthiness. A good score ranges from 670 – 719 in FICO score terms. Match the seven types of depository institutions to their main characteristics Commercial Bank - D Community Bank - B Mutual Savings Bank - E Thrift Institution - G Online Bank - F Savings and Loans - A Credit Union - C A. Focus primarily on savings accounts and issuing loans. Offer rates .1-.2% higher than commercial banks B. Type of commercial bank that focuses on local customers and businesses C. Non-profit institution where members share common bond or background of some kind D. Accepts deposits, makes business loans and offers basic investment products E. Depositors own the institution mutually, accepts deposits and focuses on mortgage and personal loans F. Regulated like any other bank, but can offer higher rates of return without the brick and mortar locations G. Accept deposits and issue personal loans, but does not focus on commercial loans What formula is used to calculate Simple Interest? Simple Interest = Principle x Rate of Interest per year x Time Give three examples of Economic Indicators and what they would tell us Consumption, investment, and international trade are some examples of Economic Indicators that go a bit hand in hand because depending on what the population is consuming (e.g. food, clothing, electronics, etc.) can help determine what people invest in and trade internationally to meet the demands of their consumers. These things help indicate if there is change coming in the economic market. What is more liquid- a Money Market fund or a CD? Why? A Money Markey fund is more liquid because you do not incur early withdrawal fees; are able to withdraw money, use a card associated with the account, or write checks from the account.

Which type of living situation is less expensive over the long term- buying or renting? Why is this true? Buying in the long term is less expensive than renting because when you own, your property can appreciate in value, and after a mortgage is paid off, you only have taxes, insurance, and utilities to pay for on the property. What is an Adjustable-Rate Mortgage? When would it be beneficial for a homeowner? An Adjustable-Rate Mortgage is a mortgage where the interest rate against the burrower fluctuates based on the economy. This would be beneficial to a homeowner because the mortgage can be paid off quicker when the economy is doing well and the interest rates are low. What is the difference between a Money Market Fund, a Money Market Mutual Fund and a Money Market Account? Which one is FDIC insured? A Money Market Mutual Fund is a money market account acquired through investment companies, while a Money Market Fund is acquired through a mutual fund. A Money Market Account is an interest-earning account that offers some check writing privileges and is the only one of the three that is FDIC insured. Insurance What is the difference between speculative risk and pure risk? Speculative risk is voluntary taking on the risk for the chance to have a win or loss, versus pure risk is out of human control and results in a loss. Match the risk mitigation method with its definition: Risk Avoidance - B Risk Retention - E Loss Control - A Risk Transfer - C Risk Reduction - D A. Reduce loss frequency and loss severity B. Eliminate all exposure to risk C. Move the risk to another company D. Lowering risk to acceptable and manageable levels E. Use a deductible to accept a portion of the risk What does cash value in life insurance mean? It means money that is invested and earns interest that can be borrowed against or withdrawn in case of emergency.

What is the difference between health and life insurance? Health insurance is insurance that helps reduce yearly medical expenses you may incur. Life insurance is insurance, that can accumulate liquid assets, cover your final expenses, and pay out a beneficiary in case of an untimely death. What happens at the end of a term life insurance policy? Either your policy ends, leaving you uninsured, or you may be able to transfer your term life insurance policy for a whole life insurance policy. Match the following terms to their definition: A. Deductible C - Where insured and insurance company share the loss B. co-pay A - Initial portion that you must pay before insurance covers costs C. coinsurance B - Certain dollar amount every time you have a specific covered item When would a person need Long Term Care Insurance? In most cases, a person would need Long Term Care insurance later in life, however, unexpected occurrences happen where you can need it sooner. Bob is a telephone line worker. He fell off of a truck last year and can no longer work. What kind of insurance would help cover the loss of his income? Disability income insurance and depending on how severe, then Social Security Disability Income Insurance. What does a liability policy cover when it is connected with Homeowners insurance? It covers what the insured is legally liable for when it comes to another person’s losses that are not an automobile accident or because of your job. Who qualifies for Medicare? People who are 67 or older or who receive Social Security Disability Income and qualify for it. What is the difference between FICA and Medicare? How much is the tax for each? FICA is the tax money that is later used for your Social Security Income, and Medicare is the Medical Insurance the government insurance you become eligible for when you turn 67 or are fully disabled by government standards. The FICA tax is 6.2% up to the maximum yearly earnings, while the Medicare tax is 1.45% on all of the earnings, no cap. How do you become fully insured with Social Security benefits? By working 40 terms, otherwise 10 years worth of working and paying FICA taxes.

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Investments What does the Risk Pyramid tell us? What type of investments are at the top and bottom? A risk pyramid tells us the distinction between low, moderate, and high risk investments. The type of investments that are on the bottom are low risk investments such as cash and money markets; versus the ones on the top are high risk investments such as dividends and derivatives. What does it mean if an investor has a high risk-tolerance? That an investor is willing to endure a large degree of risk for the value of their investment. What type of investments would a person with a Conservative Investment Philosophy likely have in their portfolio? Money Markets, treasuries and bonds. Match the type of risk with the definition of the type of risk investors face: __C__ Liquidity Risk __J__ Market Volatility Risk __I__ Global Investment Risk __G__ Business Cycle Risk __E__ Marketability Risk _D___ Regulatory Risk __B__ Reinvestment Risk __F__ Business Failure Risk __H__ Inflation Risk __A__ Time Horizon Risk A. Your money will not be worth as much in the future as it is today B. A future investment will not have the same return as the current investment C. A security cannot be traded quickly in the market D. Changes in the income tax or legal environment of a particular government E. An asset may not sell near the price that you paid for it F. An investment may fail or result in a total loss G. The longer you hold an investment, the more likely something could go wrong H. Your investment does not perform well because the economy is contracting I. Exposure to challenges in different geographic regions J. Sharp changes in value could be experience due to stock market changes Fill in the blank with mistakes that active investors make:

Carlos is an architect, but he decided to try day trading recently. The stock market has been going up over the last six months, so Carlos thinks he can double his money since the economy looks good and will go up for years to come. What mistake might he be making? Setting unrealistic goals Chen saw some bad press about Ford motor company and she sells the stock right away. She decides to invest in Tesla, but only hold it for a month before they have their annual meeting. She also heard some good news about pharmaceutical companies. She will buy some shares, but sell them before flu season ends. What mistake might she be making? Trading too much Dwayne and Kiesha heard that a recession might be on the way. They take all their money out of the stock market to avoid the downturn. What mistake might they be making? Being loss averse Chad lost some money in Bitcoin and he is frustrated. He decides to take a second mortgage and invest the money to regain some of his losses. What mistake might he be making? Borrowing to invest to recover loss Bob and Wendy are 50 and have never thought about saving for retirement before. They decided they want to retire early at age 55 and they are going to max out their 401(k) contributions for the next five years to reach that goal. What mistake might they making? Setting unrealistic goals Charlene sees that the economy is contracting and her Macy’s stock is going lower and lower. She decides to sell before any more damage is done. As an alternative, she decides to invest in Apple stock because the tech sector has been performing so well this year. What mistake might she be making? Buying high and selling low Vern likes to invest in things that most people have never heard of before. He said he could find the next Microsoft in his holdings. In his current portfolio, he holds junk bonds, small biotech startup firms and cryptocurrency. What risk might he be taking? Taking too much risk What are four sound investment strategies? 1. Buy and hold – buying a stock, bond, or cryptocurrency and holding onto it with hopes it earns you money throughout many years. 2. Portfolio diversification – investing in different forms of investments, e.g., stocks, bonds, cryptocurrency, mutual funds, CDs, 401(k), etc.

3. Dollar – cost averaging – spreading your investments of stocks upon multiple of stocks and even over a course of a couple of years to not have to invest at high price points. 4. Growth investing – investing in stocks and companies that are growing to get the maximum long-term investment. What is a bull and bear market? How are those different from a market correction? A Bull Market is when securities prices rise 20% or more over time, while a Bear Market does the opposite and securities prices drop 20% or more over time. A market correction is when the price declines over a short period of time by 10% or more to adjust to recent price rising. Does the Real Rate of Return include inflation? Yes What is a junk bond? An investment with a low credit rating and high interest rates trying to attract investors. What is the highest credit rating for a bond? AAA Who issues Treasury Bonds? Department of Treasury Taxes What is the marginal tax rate? How is it different from the average tax rate? The marginal tax rate is the additional tax paid for every additional dollar made as income. It is different from the average tax rate because the average tax rate is total taxes divided by total income. What is the difference between net income and taxable income? Net income is all the income received after all taxes and deductions are taken out. Taxable income is income that is taxed after non-taxable deductions are made. What are the seven steps to calculate a person’s tax liability? 1. Calculate total income 2. Deduct tax relief / exemptions 3. Deduct allowances 4. Calculate tax at the applicable rates 5. Add the amounts of the taxes together 6. Deduct tax reducers 7. Add any additional tax amounts

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What are capital gains and when are they calculated? Capital gains are profits made from the investment held for at least a year. The gains tax rate are either 0%, 15%, or 20%. Circle the following examples that would be a tax deduction: Meal expenses when you go out to eat after work Glasses Donation made to church Real Estate taxes Parking ticket fees Medical premiums paid by your employer Botox treatment Theft loss over 10% of your income charitable mileage mortgage interest Life insurance payment Gambling losses beyond winnings What is the difference between a tax deduction and a tax credit? The difference between the two is that a deduction helps reduce taxes before you calculate, whereas a tax credit is applied after you calculate to decrease what you owe or add to your refund. Name the ten strategies for an individual to reduce tax liability 1. Contribute into a 401(k) 2. Contribute into an IRA 3. Donate to charity 4. Participate in employee – sponsored stock programs 5. Deduct business expenses 6. Open a Health Savings Account 7. Deduct student loan intrest 8. Sell stocks that are not earning income or don’t consistently earn as other stocks 9. Invest in Cash-value Life Insurance 10. Maximize all other deductions, e.g., mortgage, property taxes, medical expenses, etc. Retirement Who has control over investments in a Defined Contribution plan? The company that is setting money aside to invest in the employee's benefits later on/ What is vesting? Ensuring that the participant of a retirement plan can receive full possession of all their earnings and employer contributions.

A pension is an example of what type of retirement plan? A Defied-Benefit Retirement Plan. Fill out the below table using the words “After tax,” “Before tax,” “Taxable,” and “Tax Free”: Traditional IRA Roth IRA When money is contributed Taxable After Tax As money accumulates Tax Free Tax Free After money is taken out Taxable Tax Free What types of retirement plans are good for those who are self-employed? A Roth IRA because the money they put in are from after taxes, it won’t be taxed while it grows and be tax free when you start withdrawing at 59½ . When does a person need to take an RMD? A person needs to be the age of 72, to be able to take an RMD from their retirement plan. When can you withdraw from a retirement account without penalty? 1. When you are 59 ½ 2. When you are 72 3. When you leave a job 4. If you become disabled 5. When rolling over the account into another retirement account Estate Planning What does it mean if a person dies intestate? It means the person died without any kind of will or trust. What is a codicil? A legal way for someone to make minor changes to a will. What happens during the probate process? The deceased's assets pay for probate costs, final expenses, and any outstanding debts the deceased may have had. If any assets are left, it is then distributed to the beneficiaries. What four types of property bypass probate?

1. Have a beneficiary 2. Joint tenancy with right of survivorship 3. Payable-on-death designation 4. Living trust What is the difference between a Revocable and Irrevocable trust? The difference between the two is that a Revocable trust can be changed by the person who forms the trust/will; while an Irrevocable trust cannot be changed once it has gone through the process of being official. How does a Durable Power of Attorney benefit someone? It benefits someone because in case you become incapacitated or cannot make decisions for yourself; you already have someone you trust and can be appointed to make those decisions for you.

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