Study guide test 2
Study guide test 2 Finance 101
Popular in Accounting
Popular in Business, management
This 0 page Study Guide was uploaded by rebecca goodrich on Friday January 22, 2016. The Study Guide belongs to Finance 101 at University of Alabama - Tuscaloosa taught by Dr. in Winter 2016. Since its upload, it has received 34 views. For similar materials see Accounting in Business, management at University of Alabama - Tuscaloosa.
Reviews for Study guide test 2
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 01/22/16
Personal finance Review test 2 1 Know about a demand account a b What is a demand account i Usually a checking account Demand Deposit An account held at a financial institution from which funds can be withdrawn on demand by the account holder same as a checking account Put money into account by depositing funds withdraw by writing a check using a debit card or making a cash withdraw Time deposits A saving deposit at a financial institution remains on deposit for a longer time than a demand deposit 2 What would you consider money in a checking account a b Regular Checking is the most common type of checking typically pays no interest Liquid 3 What would you consider liquid a b Cash and near cash resources Assets that are either held in cash or can be readily converted into cash with little or no loss in value Checking accounts savings accounts money market deposit accounts money market mutual funds shortterm investment vehicles certificate of deposit look at exhibit 41 4 Liquidity related to savings checking accounts a People hold cash and other forms of liquid assets such as checking and savings accounts for the convenience that they offer in making purchase transactions meeting normal living expenses and providing a safety net to meet unexpected expenses All depository institutions must clary disclose fees interest rates and terms on both checking and savings accounts 5 Book says about over drafts a b When a check is written for an amount greater than the current account balance the bank can initiate legal proceedings against the account holder Stamps check with insufficient balance 6 Overdraft The result of writing a check for an amount greater than the current account balance 7 Read section in the book on haggling a Franchise dealerships Offer the latest model used cars provide financing and will negotiate on price HAGGLING b Superstores AutoNation CarMaX and similar dealers offer no haggle pricing and a large selection They certify their cars and may offer a limited short term warranty NO HAGGLING 0 Independent used car lots Usually offer older four to siX year old cars and have lower overhead than franchise dealers There are no industry standards so be sure to Check with the Better Business Bureau before buying HAGGLING d Private individuals Generally cost less because there s no dealer overhead may have maintenance records Be sure that the seller holds the title to the car HAGGLING 8 What can you deduct taxwise on mortgages property taxes etc a Deductible The initial amount not covered by an insurance policy and thus the insured responsibility usually determined on a calendar year basis or on a perillness or peraccident basis b You can deduct home mortgage interest if all the following conditions are met You file Form 1040 and itemize deductions on Schedule A Form 1040 c You can deduct both mortgage interest and property taxes when calculating your federal and in most states state income taxes thereby reducing your taxable income and thus your taX liability The only requirement is that you itemize your deductions This taX break is so good that people who have never itemized usually begin doing so after they by their first house d mortgage points i Fees one point equals 1 percent of the amount borrowed charged by lenders at the time they grant a mortgage loan they are related to the lender s supply of loanable funds and the demand for mortgages ii According to IRS rulings the points paid on a mortgage at the time a home is originally purchased are usually considered immediately tax deductible iii Points are not considered immediately tax deductible if they are incurred when re nancing a mortgage in this case the amount paid in points must be written off amortized over the life of the new mortgage loans 9 What is an open account credit a b A form of credit extended to a consumer in advance of any transaction Credit is extended so long as the consumer doesn t exceed the established Credit Limit and makes payments in accordance with the specified terms Open account credit issued by a retail outlet such as a department store or oil company is usually usable only in that establishment or one of its locations Having open account credit is a lot like having your own personal line of credit it is there when you need it It is generally available from 2 sources i Financial institutions issue general purpose credit cards as well as secured and unsecured revolving lines of credit and overdraft protection lines ii Retail stores merchants use it as a way to promote the sales of their products and their principal from of credit is the charge credit card Open account credit obligations current liabilities that represent the balances outstanding against established credit lines Account reconciliation verifying the accuracy of your checking account balance in relation to the bank s records as re ected in the bank statement which is an itemized listing of all transactions in the checking account 10 Be able to distinguish between open account credit and what you spend a b Major types of open account credit include bank credit cards retail charge cards and revolving lines of credit like overdraft protection lines home equity credit lines and unsecured personal lines of credit Many financial institutions issue special types of credit cards such as rewards cards affinity cards or secured credit cards Instead of using only credit cards a growing number of consumers are turning to debit cards which give their users a way to write checks with plastic Credit cards are buy now pay later what you spend is pay now 11 What does book say about credit card fees a b The interest rates on credit cards are higher than any other form of consumer credit The average annual rate of interest charged on bank credit cards was around 1687 in 2012 12 13 14 15 c Many bankcards charge annual fees just for the privilege of being able to use the card Usually around 2540 d Many issuers charge a transaction fee for each nonATM cash advance this fee usually mounts to about 5 per cash advance or 3 of the amount obtained in the transaction whichever is more e Some issuers charge you for not using the credit card Compounding interest when interest earned in each subsequent period is determined by applying the nominal stated rate of interest to the sum of the initial deposit and the interest earned in each prior period Nominal interest rate of interest is 5 The promised rate of interest paid on a savings deposit or charged on a loan Simple interest Interest that is paid only on the initial amount of the deposit Know about Asset management account a Perhaps the best example of a banking service also offered by a non depository financial institution is the M magement account AMA or central asset account The AMA is a comprehensive deposit account that combines checking investing and borrowing activities and is offered primarily by brokerage houses and mutual funds AMAs appeal to investors because they can consolidate most of their financial transactions at one institution and on one account statement b A typical AMA account includes an MMDA with unlimited free checking a or MasterCard debit card use of AT Ms and brokerage and loan accounts Annual fees and account charges e g a per transaction charge for ATM withdrawals vary so it pays to shop around The distinguishing feature of these accounts is that they automatically sweep excess balances for example amounts over 500 into a higherreturn MMMF Money market mutual fund on a daily or weekly basis When the account holder needs funds to purchase securities or cover checks written on the MMDA the funds are transferred back to the MMDA And if the amount of securities purchased or checks presented for payment exceeds the account balance the needed funds are supplied automatically through a loan c Money market mutual fund a mutual fund that pools the funds of many small investors and purchases high return short term marketable securities d Money Market Deposit account A federally insured savings account offered by banks and other depository institutions that competes with money market mutual funds e Although AMAs are an attractive alternative to a traditional bank account they do have some drawbacks For example compared with banks there are fewer branch locations However AMAs are typically affiliated with ATM networks making it easy to withdraw funds Yet ATM transactions are more costly checks can take longer to clear and some bank services may not be offered Moreover AMAs are not covered by deposit insurance although these deposits are protected by the Securities Investor Protection Corporation and the firm s private insurance 16 Know what the book says about how to write a check a check book ledger a booklet provided with a supply of checks used to maintain accurate records of all checking account transactions 0 Consider location 0 Interest rates of the bank offers 0 Application process 1 Ask for basic information name date of birth social security number address phone and place of employment 2 How to write the check 0 Always write the check in ink 0 Include the name of the person being paid the date and the amount of the check written in both numerical and words for accuracy 0 Sign the check the same way as on the signature card you filled out when opening the account 0 The checks purpose on the check is usually provided on the line in the lower left corner helpful for both budgeting and tax purpose 17 What the book says reasons are to and not to lease a vehicle to decided whether it is less costly to lease rather than purchase a car you need to perform a lease versus purchase analysis to compare the total cost of leasing to purchasing a car over equal periods 0 You value purchasing exibility 0 You value the convenience of not having to deal with significant auto repairs 0 Your self employed and can write of your leasing payment as a business expense 18 What does the book say about cooperative departments Cooperative apartment an apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building 0 They pay a monthly assessment in proportion Cover the maintenance taxes and the mortgage on the entire building 19 Why rent verses buy 0 They don t have the funds for a down payment and closing cost 0 They re unsettled in their jobs and family status 0 They don t want the additional responsibilities associated with homeownership 0 They believe they can afford a nicer home later by renting now because housing market conditions or mortgage rates are currently unattractive 0 The economics of renting or buying a place to live depends on three main factors Housing prices and mortgage interest rates 2 Tax writeoffs for homeowners 3 The expected increase or decrease in home value over time p x 20 What is the percentage of your take home pay on your loans mortgage a Size of the monthly loan payment consider the amount of money you have available and the amount of money you can afford to spend along with your basic transportation needs Don t forget to include insurance Your monthly car payments should be no more than 20 of your monthly net income 21 Know what a debit card is book def and paragraph surrounding Debt card Specially coded plastic cards used to transfer funds from a customer s bank account to the recipients account to pay for goods or services Debt card use is increasing because it is convenient both for retailers and consumers Drawback make it easy to overspend 22 What does the book say about the stability of financial institutions a Good or bad today GOOD b Are they rising or falling rising 23 Know about leases a Closedend leases i The most popular form of automobile lease often called a walk away lease because at the end of its term the lessee simply turns in the car assuming the preset mileage limit has not been exceeded and the car hasn t been abused b Open end leases i An automobile lease under which the estimated residual value of the car is used to determine lease payments if the car is actually worth less than this value at the end of the lease the lessee must pay the difference 24 Homeowners interest taxes what you can do about that 25 Loan to loan ratio used to determine the amount of down payment a The maximum percentage of the value of a property that the lender is willing to loan i Federal National Mortgage Association Fannie Mae 1 A company that has programs to help buyers who have limited cash for a down payment and closing costs 26 Equity a The actual ownership interest in a speci c asset or group of assets b Growingequity mortgages Fixedrate mortgage with payments that increase over a speci c period Extra funds are applied to the principal so that the loan is paid off more quickly c Growing mortgages are xedrate mortgages with payments that increase over a speci c period The extra funds are applied to the principal so a conventional 30year loan can be paid off in about 20 years d High borrower greatly reduces the likelihood of default on a mortgage and subsequent loss to the lender 27 What is required about getting a mortgage The key issue regarding mortgage payments is affordability a to obtain a mortgage a borrower must be qualified demonstrate that she has adequate income and an acceptable credit record to make scheduled loan payments reliably b Federal and private mortgage insurers and institutional mortgage investors have certain standards they expect borrowers to meet to reduce the borrower s risk of default c Monthly mortgage payments and total monthly installment loan payments including the monthly mortgage payment and monthly payments on auto furniture and other consumer installment loans relate to monthly amount of borrower gross income 1 Customary ratios for a conventional mortgage stipulate that monthly mortgage payments can t exceed 25 to 30 of the borrower s gross before taxes monthly income and the borrower s total monthly installment loan payments including the mortgage payment can t exceed 33 to 38 of monthly gross income 28 Know pages surrounding an FHA Loan FHA mortgage insurance program that helps people buy homes even when they have very little money available for a down payment and closing costs known insured loans a 225 29 What the book says the difference is between an American Express and a Visa a A visa is bank issued and the American exp 30 There is a fundamental difference between MasterCard and Visa on the one hand and other cards such as American Express and Discover on the other This difference relates to how the money that is cash is paid out to the merchant MC and Visa pay cash to the merchant as soon as the money is realized So for the merchant the sale is technically not a credit sale Amex and Discover on the other hand reimburse the merchant within 30 days or whatever period is agreed upon This means the merchant needs to maintain an accounts receivable for these accounts This might also explain why these cards are not popular with small merchants because of the longer reimbursement time There is a fundamental difference between MasterCard and Visa on the one hand and other cards such as American Express and Discover on the other This difference relates to how the money that is cash is paid out to the merchant MC and Visa pay cash to the merchant as soon as the money is realized So for the merchant the sale is technically not a credit sale Amex and Discover on the other hand reimburse the merchant within 30 days or whatever period is agreed upon This means the merchant needs to maintain an accounts receivable for these accounts This might also explain why these cards are not popular with small merchants because of the longer reimbursement time
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'