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Exam 2

by: Peyton Goodwin

Exam 2 53329 - FIN 108 - 007

Peyton Goodwin

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These notes cover some materials that will be on exam 2
Pers Finan Mgt
Harry Edward Gallatin
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This 4 page Study Guide was uploaded by Peyton Goodwin on Tuesday October 4, 2016. The Study Guide belongs to 53329 - FIN 108 - 007 at Indiana State University taught by Harry Edward Gallatin in Fall 2016. Since its upload, it has received 290 views. For similar materials see Pers Finan Mgt in Finance at Indiana State University.

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Date Created: 10/04/16
Personal Finance Exam 2 Chapters 4, 6, 8, 9 Chapter 4: • Federal tax system is administered by the Internal Revenue Service (IRS) • Taxes are paid in several ways – At the time of a transaction – Through payroll withholding – By making estimated quarterly payments • Tax year for federal income tax ends on Dec. 31 with taxes filed by April 15 – Earned Income: Earned income represents salary or wages – FICA (Federal Insurance Contribution Act): Taxes paid to fund the Social Security System and Medicare – Medicare: a government health insurance program that covers people over age 65 and provides payments to health care providers in the case of illness • Social Security and Medicare Taxes – Your employer matches the amount that is withheld from your wages • Taxpayers must specify a filing status for their tax return because different rates are associated with each status. – Single – Married filing jointly – Married filing separately – Head of household – Qualifying widow(er) with dependent child • Gross income: all reportable income from any source, including salary, interest income, dividend income, and capital gains received during the tax year – Wages and Salaries—including bonuses, but excluding contributions to an employee sponsored retirement account – Interest income: interest earned from investments or loans to other individuals – Dividend income: income received in the form of dividends paid on stocks or mutual funds – Capital gain: income earned when an asset is sold at a higher price than was paid for it • Short-term capital gain: a gain on assets that were held less than 12 months • Long-term capital gain: a gain on assets that were held for 12 months or longer • Standard deduction: a fixed amount that can be deducted from adjusted gross income to determine taxable income – Not affected by income – Affected by filing status and age – Adjusted by the IRS each year to keep pace with inflation Chapter 6 • Money management: a series of decisions made over a short-term period regarding cash inflows and outflows • Liquidity: your ability to cover any cash deficiencies that you may experience – Related to your personal cash flow statement – Using credit cards for liquidity • Interest rate usually high • Maintaining adequate liquid assets allows you to avoid using credit cards and paying high finance charges – Adequate return • Try to achieve highest possible returns on short-term investments • Checking Account – Very liquid investment – Overdraft protection: an arrangement that protects a customer who writes a check for an amount that exceeds the checking account balance; it is a short-term loan from the depository institution where the checking account is maintained • Saves overdraft fees and bounced checks • Results in high interest rate on borrowed amount • NOW (negotiable order of withdrawal) account: a type of deposit offered by depository institutions that provides checking services and pays interest – Requires a minimum balance, lowering liquidity • Savings deposits pay interest and are slightly less liquid than checking accounts – Automatic transfer feature can help saving • Certificate of Deposit – Retail CDs: certificates of deposit that have small denominations – Return—CDs pay higher interest rates than savings deposits – Liquidity—penalties are imposed for early withdrawal – Choice among CD maturities • Money Market Deposit Account (MMDA): a deposit offered by a depository institution that requires a minimum balance, has no maturity date, pays interest, and allows a limited number of checks to be written each month – Less liquid than checking, but pays a higher interest rate – Many people keep a checking or NOW account for day-to-day and a money market for other funds • Credit risk (or default risk): the risk that a borrower may not repay on a timely basis • Interest rate risk: the risk that the value of an investment could decline as a result of a change in interest rates • Liquidity risk: the potential loss that could occur as a result of converting an investment into cash Chapter 8 Advantages and Disadvantages of credit cards Credit limit- maximum amount of credit allowed – Prestige cards: credit cards, such as gold or platinum cards, issued by a financial institution to individuals who have an exceptional credit standing Chapter 9 • Determining whether a loan is sensible – Periodic payments will be required over time – You are sacrificing future earnings Avoid a loan if your source of income to repay it is questionable • Amortize: to repay the principal of a loan through a series of equal payments • Equity of a home: the market value of a home minus the debt owed on the home


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