Module 2 Practice Exam and Glossary – V14

Term

Definition

Inflation

The general rise of prices over time.

Aggressive Investment Risk

High risk. Examples: Stocks, Futures

Distribution of investment money. Younger investors are encouraged to invest in

riskier options. Older investors are encouraged to have a greater proportion of

Asset allocation

conservative investments so that they are less likely to lose all their money.

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

Bonds

a private business.)

a plan of income and expenses. It shows how much money is coming in and how

budget

much is going out during a set time frame.

Gifts: 9%, Savings: 9%, Housing: 25%, Utilities: 5%, Food: 10%, Transport: 11%,

Budgetary allowances recommendations

Medical/Health: 11%, Personal: 8%, Recreation: 6%, Debts: 6%

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

Certificate of Deposit (CD)

money you want to put aside for a few months or years

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

Common stock

number of shares owned which can rise and fall with company profits.

Calculating interest earned based on original deposited amount plus interest

Compound Interest

already earned

Low investment risk. Examples: Traditional Savings or Checking Account, Certificate

Conservative Investment Risk

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

Credit

borrowed.

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

Credit Cards

requirements, cards are secured or unsecured.

Credit Types

Service Credit, Loans, Installment Credit, Credit Cards

Direct taxes

Like federal income taxes, are paid straight to the government.

Spreading money among multiple accounts when investing. To minimize risk and

Diversification

maximize return.

Payout to stockholders of a portion of company profits, based on number of shares

Dividends

owned

(Federal Deposit Insurance Corporation) insures bank deposits in the United States

FDIC

up to $100,000 for each deposit.

Costs paid regularly and amount does not change or only slightly, like rent

Fixed Costs

payments and car insurance

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

Futures

of money can be earned or lost.

Gross Income

Income BEFORE taxes and fees

How to tell if your investment will earn

money:

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

Indirect taxes

must submit these taxes to the government.

IRAs have a limit to how much money can be deposited. Bank will charge a fee if

Individual Retirement Account (IRA)

money is taken out early. IRAs save money on taxes.

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

Installment Credit

loans.

Fees charged on money borrowed or money gained when loaning money. The rate

Interest

charged for a loan.

Investment risk levels

Conservative – Low Risk, Moderate Risk, Aggressive- High Risk

As each additional quantity of a good or service is consumed, the relative

Law of diminishing marginal utility

satisfaction obtained decreases. Remember that more isn't always better.

Liquid

Easily converted to cash

Loans

This is a way to borrow cash, usually through a bank or credit union.

Moderate Investment Risk

Medium risk. Examples: Bond, Mutual Fund

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

Money Market Account

of money in the account.

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

Mutual Fund

more money but can also potentially lose more.

Net Income

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

Preferred stock

profits.

Progressive

As income increases, the tax rate increase

Progressivity

Does the tax rate rise, lower, or stay the same as your income rises ?

No matter what happens to your income, the tax rate always stays the same (flat

Proportional

tax)

Regressive

As income increases, the tax rate decreases

Secured credit

pay a deposit and can only use card up to that amount

A deposit is paid to receive a service such as utilities. You pay a fee each month

Service Credit

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

Stock Exchange

Exchange is the New York Stock Exchange.

Stocks are shares of ownership in a single company. Stocks make the most money

Stocks

over a long period of time. If the stock company fails, all money invested is lost.

Tax bracket

A term most associated with a progressive tax rate.

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

Traditional Savings or Checking Account

easy to use with debit cards and checks.

Unsecured credit

Does not require initial deposit and creditor sets balance limit

Utility

A person's derived satisfaction from consuming a good.

Variable costs

Amount paid depends on level of consumption, like attending movies or haircuts

Module 2 Practice Exam V14

Who would pay the most as a percentage of income under a regressive tax?

Lawyer earning $110,000 per year

Roofer earning $18,000 per year

Teacher earning $45,000 per year

CEO earning $2.5 million per year

You earn $30,000 per year and the federal tax rate is 10 percent. Your gross income is

$3,000

$17,000

$27,000

$30,000

3.

Look at the graph. What kind of tax does the first half (lowest 20 percent to fourth 20 percent) of the graph illustrate?

Flat

Progressive

Proportional

Regressive

To earn money on your investments, the rate of return must be higher than the

rate of deflation

rate of inflation

interest rate

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?

Bonds, CDs, IRA

Bonds, mutual funds, stocks

Money market account, stocks, futures

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?

Lowest fixed interest rate

Lowest credit limit

No rewards

Unsecured credit

Your expenses exceed your income. You should cut back your

fixed costs

opportunity costs

variable costs

budget

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?

Spend 10 percent on clothing and 10 percent on entertainment

Spend 10 percent on entertainment and 20 percent on clothing

Spend 10 percent on rent and 10 percent on food

Spend 20 percent on food and 5 percent on gas

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?

Proportional

Progressive

Regressive

Divisibility

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?

They are older and close to retirement

They are middle aged thinking about retirement

They are young and starting to invest

They are a conservative investor

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?

Give up and not go to school

Reexamine his fixed and variable expenses

Invest more in stocks hoping he will make a great return on his money

Charge tuition to his credit cards

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?

Traditional Savings Account

Money Market Account

Stock

Mutual Fund

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.

Credit Card

Installment Loan

Service Credit

Borrow from a friend

Based on your knowledge of direct and indirect taxes, identify which would be an example of an indirect tax:

Sales Tax

Income Tax

Estate Tax

Property Tax

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.

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?

Google stock because it is yielding 14.6% percent annually

Certificate of Deposit yielding .75%

Traditional Checking Account yielding .03%

IRA yielding 2.75%

When planning an annual budget, which answer best reflects fixed expenses?

Mortgage, auto loan

Mortgage and annual vacation

Mortgage and utilities

Cell phone bill and auto loan

When balancing a budget, what expenses should be prioritized?

fixed

variable

investments

taxes

How is a young investor’s investment portfolio different from an older investor’s investment portfolio?

stocks, IRA, and mutual funds are preferred by young investors, while CDs, futures and IRAs are preferred by older investors

an older investor might consider long term, high yielding investments, while and young investor might consider short-term returns

older investors have more low risk tolerance than young investors

a young investor might consider long term, high yielding investments, while and older investor might consider short-term returns

What is the main difference between a proportional tax system and a progressive tax system?

there is no difference. Both tax an average amount

proportional taxation results in a flat tax rate for everyone, while a progressive tax system results in more taxation to the rich

proportional tax results in an increase of tax rates by income, while a progressive tax system represents a heavier burden to middle class.

proportional tax results in higher tax rate to the rich, while progressive taxation results in a higher tax rate for the poor

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)

She'kira is taxed 30% of her salary and Chris is taxed 15% of his salary

She’kira is taxed 15% of her salary and Chris is taxed 30% of his salary

She’kira is taxed 15% of her salary and Chris is taxed 15% of his salary

She’kira is taxed $10,000 of her salary and Chris is taxed $10,000 of his salary

You are 62 years old and you plan to retire at 65. Which option shows how to best distribute your money? (2.04)

Mutual Fund, Stocks

Futures, Stocks

Mutual Fund, Certificate of Deposit

Futures, Savings Bonds

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?

$232.50

$12,090

$9,672

$2,418

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?

IRA & Mutual Fund

Mutual Fund & Bonds

CD & Futures

Stocks & Mutual Funds

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?

5230

8650

6750

4570

Sales

Housing

Utilities

Transportation

Entertainment

26. In the budget above, which of the following categories is a variable expense?

Housing

Utilities

Transportation

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?

stock

Savings account

Savings bond

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?

Food

Utilities

Transportation

Rent

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?

Service credit

Loan

Fixed rate credit card

Variable rate credit card

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?

$ 4635.00

$ 5635.00

$ 5453.00

$ 818.00

31.

Which tax plan best represents the Federal Tax system in the United States?

Tax Plan A

Tax Plan B

Tax Plan C

Tax Plan A and B

32.

What type of investor would most likely be using a portfolio that consists of these investments?

a middle aged professor looking to buy a house next year.

a young college student who just inherited money

a young married couple moving to a new town

an older retiree looking to take a tour of the world

Module 2 Practice Exam V14 Answer Key

1. B: Regressive taxes impact lower incomes more than higher incomes. Regressive taxes lessen as income increases. 2. D: Gross income is before taxes are taken out. Net income is after taxes are taken out. 3. B: Progressive – as income increases, so does the tax rate. 4. B: to earn a profit, your interest rate must earn more than the rate of inflation. If the interest rate is less, you are losing purchasing power, thus not making the investment worth it. 5. C: Faisal is willing to accept high and moderate risks and Torie will not take aggressive risks. Stocks and futures are aggressive risks while a money market account is a moderate risk. 6. A: Fixed interest rates are the safest. Credit card 2 has the lowest fixed interest rate. 7. C: Variable costs are ones that change each month; it is best to cut back on the variable costs to balance your budget. Fixed costs cannot be reduced. 8. A: Clothing and entertainment are both variable costs and can be reduced by 5% each. This will allow for 10% to be saved each month. 9. A: they each are paying the same percentage in taxes. They are each paying 10%. Remember in a Proportional tax system no matter how much you make you pay the same amount in taxes 10. C: The younger you are the more aggressive investments your portfolio can handle because you have more time to make up money should something happen to your portfolio. Stocks are considered an aggressive investment and 70% of the portfolio you can infer that this portfolio is a young investor. 11. B: If Andrew can look at the variable expenses each month those that are not consistent like entertainment and gifts he can start cutting back on those things he does not truly need and save money to afford to go back to school. Remember fixed costs are expenses that do not change on a monthly basis such as rent and utilities. 12. C: The subject has many years before they hope to use their investment, they can choose a more aggressive option. 13. B: Since this would be considered a large purchase, installment loan would be the best choice because it allows you to pay back with fixed monthly amount 14. A: Sales tax is not paid directly to the recipient, but is rather paid to the store, who then turns around and provides the tax to the government. 15. C: Samantha is nearing retirement, therefore, needs to reduce risk in her investments. IRAs, CDs, Checking and Savings accounts all are considered low risk. 16. B: A Certificate of Deposit enable you to determine the length at which you want to invest your money and guarantees a certain rate of return at a low risk because it is FDIC insured. 17. A: mortgages and auto loans are normally installment loans with fixed interest rates; therefore, monthly payments will remain constant throughout the lifetime of the loan. 18. A: Fixed expenses cannot be changed without changing contracts (ex: yearly lease) and are part of a budget that cannot be changed. 19. D: Young investors have time to recover losses if they lose money in investments. Older investors do not have time for long term investments or to recover losses if they lose money. 20. B: proportional taxation results in a flat tax rate for everyone, while a progressive tax systems tax more as income increases.

21. (B) In a Regressive tax system. Chris would pay a higher percentage in taxes because his salary is less than She’Kira’s. For example, Chris would pay 30% and She’Kira would pay 15%. 22. (C) Because retirement is so close, you should be conservative in your investing 23. (C): $7.75x30= $232.50, $232.50x52=$12,090, $12,090x.20= $2,418, $12,090- $2,418= $9,672 24. D – Stocks are an aggressive investment and mutual funds are a moderate investment. These two meet Jamie’s wish for investments that could have moderate to high returns. 25. C – To calculate taxes here, you will multiply 45,000 by .15 (15% tax rate). 26. D – A variable expense is an expense that may change each month. Housing, utilities, and transportation are all fixed expenses – they remain the same each month. When making an adjustment to a budget, you will make changes to your variable, not fixed, expenses. 27. D: a stock would be too risky, and bonds usually require some length of purchase or use of the money. Savings accounts usually provide a lower interest rate. Money markets would allow Jose the opportunity to continue to add to his fund, or withdraw without penalty. 28. D: rent is the largest expense an individual should budget for. 29. A: Service credit is required for utilities 30. C: The question is asking about GROSS income, not NET and therefore the tax rate is not an essential part of the question-eliminate that.

To calculate GROSS income you need yearly wages. 1. Multiply hourly rate x hours worked ($7.79 x 20=$155.80). 2. Multiply weekly wages x # of weeks worked ($155.80 x 35=$5453.00) YEARLY wages=GROSS income=$5453.00 NET income if you had been asked would have been $5453.00-15% ($817.95) =$4635.05 GROSS = $5453.00 NET = $4635.05 TAXES = $817.95 TIP: Know what your question is asking before you do any calculations. 31. A: Each system studied in the lesson is represented on this graph. Tax plan A is a progressive system. Tax plan B is a regressive system. Tax plan C is a flat or proportional system.

Proportional Taxes-tax rate is the same for all income levels. Regressive Taxes-tax rate decreases as additional income is earned. Progressive Taxes-tax rate increases as additional income is earned. *In the United States of America we use a Progressive tax plan in which those who earn more assume more responsibility for the costs of the government thus “redistribution of wealth”. 32. B: This portfolio consists of 1 conservative option, the IRA, but mostly moderate -aggressive investments (the bonds, mutual funds and stocks). A person who is looking for risk and a long term investment period is best suited to this portfolio because any losses could mean time to recoup whereas others (such as the middle aged professor, young couple, or older person) who is looking to use their investment in the near future would not want to take such risk.

**A younger person usually is the best suited to take risks and an IRA is a good conservative option as it will grow over time and has tax benefits. This portfolio is well rounded for a long term retirement goal.