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1) Tax-deferred employee benefits are
a)Not subject to federal income tax
b)Not subject to state income tax
c)Taxed at some future time
d)Are taxed at a special rate

2) If you plus $1,000 in a saving account and make no further deposits, what type of calculation could provide you with the value of the account in 20 years?
a)Future value of a single amount
b)Present value of a single amount
c)Present value of a series of deposits
d)Future value of a series of deposits

3) What risk refers to the danger of lost buying power during times of rising prices.

4) Your net worth will NOT be increased by which of the following actions?
a)Increasing your savings from 10% to 15% of your earnings
b)A $100 birthday present from your grandmother
c)Buying a new stereo system and putting the entire amount on your credit card
d)Receiving an inheritance

5) Which of the following would be a core competency commonly associated with successful people?
a)Ability to work well with others in a variety of settings
b)Desire to do tasks better than they have to be done
c)Well developed written and oral communication skills
d)All of the choices are core competencies commonly associated with successful people

6) Retirement planning should take place
a)When you retire
b)Shortly after you retire
c)Well before you retire
d)At any time

7) Which of the following goals would be easiest to measure?
a)Reduce debt payments
b)Save funds for an annual vacation
c)Save $100 a month to create a $4,000 emergency fund
d)Invest for a comfortable retirement

8) Goals with a timeframe of between two and five years are classified as

9) Which of the following could save a smaller proportion of their earnings to achieve the same level of wealth?
a)Social worker
b)School teacher
c)Medicare doctor
d)All would save the same percentage of earnings to reach the same level of wealth

10) Which of the following would not help protect you from unethical or incompetent advice from a financial adviser?
A)Educate yourself on various financial products
B)Asks questions of other clients
C)Rely on the adviser as to when to buy and sell
D)Know your risk tolerance

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Solution Preview

1. c)Taxed at some future time
2. a)Future value of a single amount
3. c)Inflation
4. c)Buying a new stereo system and putting the entire amount on your ...

Solution Summary

The solution simply provides answers to the question. No explanation is provided for the answers. The solution is ideal for students who just want to validate their answers.

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Kim and Dan Bergholt are both government workers. They are considering purchasing a home in the Washington D.C. area for about $280,000. They estimate monthly expenses for utilities at $220, maintenance at $100, property taxes at $380, and home insurance payments at $50. Their only debt consists of car loans requiring a monthly payment of $350.

Kim's gross income is $55,000/year and Dan's is $38,000/year. They have saved about $60,000 in a money market fund on which they earned $5,840 last year. They plan to use most of this for a 20% down payment and closing costs. A lender is offering 30-year variable rate loans with an initial interest rate of 8% given a 20% down payment and closing costs equal to $1,000 plus 3 points.

Before making a purchase offer and applying for this loan, they would like to have some idea whether they might qualify.

Estimate the affordable mortgage and the affordable purchase price for the Bergholts.
Suppose they do qualify; what other factors might they consider before purchasing and taking out a home mortgage?
What future changes might present problems for the Bergholts?
The real estate agent tells the Bergholts that if they don't care to purchase, they might consider renting. The rental option would cost $1,400/month plus utilities estimated at $220 and renter's insurance of $25/month. The Bergholts believe that neither of them is likely to be transferred to another location within the next five years. After that, Dan perceives that he might move out of government service into the private sector. Assuming they remain in the same place for the next five years, the Bergholts would like to know if it is better to buy or rent the home. They expect that the price of housing and rents will rise at an annual rate of 3% over the next five years. They expect to earn an annual rate of 5% on the money market fund. All other prices, including utilities, maintenance, and taxes are expected to increase at a 3% annual rate. After federal, state, and local taxes, they get to keep only 55% of a marginal dollar of earnings.

Estimate whether it is financially more attractive for the Bergholts to rent or to purchase the home over a five-year holding period. (Assuming the contract interest rate of 8%, monthly interest payments over the five-year period would total $87,574.)

Suppose it turns out that they have to relocate after one year. Which is the preferred alternative after one year? (Interest payments over the first year would equal $17,852.)

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