D363 Personal Finance - Set 1 - Part 2

Correct Answer: Monthly debt payments gross income

The debt-to-income ratio is calculated by dividing monthly debt payments by gross income and multiplying by 100. It shows how much of an individuals income goes toward paying debt.

Correct Answer: Interest rates fluctuate based on an underlying benchmark

Variable-rate loans have interest rates that change over time in relation to an index or benchmark, such as the prime rate, resulting in fluctuating payments.

Correct Answer: It provides funds for large, irregular expenses

A revolving savings fund is used to save for large, non-monthly expenses or to handle occasional deficits due to income fluctuations.

Correct Answer: To identify surplus or deficit situations

A cash flow calendar is used to estimate monthly income and expenses, helping individuals identify potential surpluses or deficits in their budget.

Correct Answer: A method for determining if one relies too heavily on debt

The Continuous Debt Method suggests that if you cannot get completely out of debt every four years, you may be relying too heavily on debt.

Correct Answer: A period of temporary economic decline characterized by reduced trade and industrial activity

A recession is a period of economic decline, typically identified by a fall in GDP for two successive quarters.

Correct Answer: A CD purchased by a brokerage firm in bulk to resell to clients

A brokered CD is bought by a brokerage firm in bulk and resold to customers, often offering higher yields than traditional CDs.

Correct Answer: Higher interest rates

Money market accounts (MMAs) often offer higher interest rates compared to regular savings accounts, but they typically require a higher minimum balance and may limit the number of checks that can be written.

Correct Answer: FV = Present value (1.0 + interest rate)^number of periods

The future value formula is used to determine how much an investment made today will be worth in the future, accounting for interest.

Correct Answer: Funds in the account are tax-deductible and can be used for health expenses

HSAs offer tax advantages where contributions are tax-deductible, and withdrawals for qualified medical expenses are not taxed.

Correct Answer: A limit on how much a variable-rate loan interest can increase over time

An interest rate cap limits how much the interest rate on a variable-rate loan can increase, protecting borrowers from excessive interest rate hikes.

Correct Answer: Investment philosophy

An investment philosophy refers to an investors overall attitude towards risk and return, guiding their decisions on investments.

Correct Answer: Conservative investors prioritize risk avoidance, while aggressive investors seek capital gains with higher risk

Conservative investors focus on minimizing risk and preserving capital, while aggressive investors seek higher returns by taking on more risk.

Correct Answer: Balance sheet

A balance sheet provides a snapshot of an individuals financial condition, listing assets, liabilities, and net worth as of a specific date.

Correct Answer: The point at which an employee earns the right to full ownership of employer contributions

Vesting refers to the process by which an employee earns the right to keep the employers contributions to their retirement account, typically after meeting certain service requirements.

Correct Answer: Keogh plan

The Keogh plan is a tax-deferred retirement account designed for self-employed individuals and small business owners, offering higher contribution limits.

Correct Answer: To cover immediate financial needs due to an emergency

A hardship withdrawal allows an employee to take funds from a 401(k) in cases of severe financial need, such as medical expenses or foreclosure.

Correct Answer: It allows only one IRA-to-IRA rollover per 12-month period

The one-rollover rule limits individuals to one IRA-to-IRA rollover per 12-month period. This helps prevent frequent tax-deferred movements between accounts.

Correct Answer: The funds are transferred from the employers account to another tax-sheltered account without penalty

Portability allows employees to transfer their retirement savings from one employers account to another tax-sheltered account, such as an IRA, without incurring penalties.

Correct Answer: $14,000

The annual exclusion amount allows individuals to give up to $14,000 per year to any number of recipients without incurring gift taxes, reducing the taxable estate.