BFIN 521-M80
Assignment #3
Personal Finance
Name: ______
1. John is looking to buy a motorcycle, and has the following three financing options:
(a) pay $1,100 today, (b) pay $100 a month for twelve months, or (c) pay $1,200 in one
year. Given no other information, which of the following statements must be true?
A) Option (a) is necessarily the best because it involves the least total payment.
B) Option (b) is necessarily the best because it allows John to pay in convenient
installments.
C) Option (c) is necessarily better than option (a) because, although it is a larger
amount, it allows John to push the payments further into the future.
D) Option (c) is necessarily better than option (b) because, although they both
require the same total payment, payments are due earlier under option (b).
2. Which of the following statements is true about the balance of a single deposit in an
interest earning savings account? (Only one is true.)
A) If the balance doubles after 15 years, it will more than triple after 30 years
because of compound interest.
B) The balance will grow exponentially, but only if the interest rate increases so that
the dollar amount of interest earned increases.
C) The balance will grow exponentially, but only if the interest rate is high enough.
D) The balance will not grow exponentially because multiple deposits are required
to achieve exponential growth.
3. Which of the following is true of the amortization of an installment loan with fixed
monthly payments?
A) The principal portion of the monthly payment decreases over time.
B) The principal portion of the monthly payment increases over time.
C) The interest portion of the monthly payment increases over time.
D) The monthly payment increases over time.
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BFIN 521-M80
Assignment #3
4. Which of the following is true about mortgages?
A) Because adjustable-rate mortgages generally offer a lower APR, they are always
better than fixed-rate mortgages, except when mortgage rates are at historic
lows.
B) If a 15-year and 30-year mortgage have the same APR, the total interest paid on
the 15-year mortgage will be equal to the interest paid during the first 15 years of
the 30-year mortgage, but less than the total interest paid on the 30-year
mortgage.
C) Homeowners should never refinance their mortgage because closing costs are
expensive.
D) The longer a mortgage borrower intends to keep a home, the more likely it
becomes that he or she will benefit from taking points.
5. Assume you are in the 25% tax bracket and you contribute $1,000 of your pre-tax
income to your employer’s traditional 401(k) plan. Your take-home pay will then:
A) Decline by $1,000.
B) Decline by $750.
C) Decline by $250.
D) Remain the same.
6. Which of the following is true about taxes?
A) If the short-term capital gains tax rate was equal to the long-term capital gains
tax rate, there would be no tax benefit from holding stocks over long periods of
time.
B) If a tax payer is in the 25% marginal tax bracket, all of his or her taxable income
is taxed at a rate of 25%.
C) The mortgage interest deduction makes mortgage financing less expensive than
it otherwise would be.
D) If a tax payer has any itemizable deductions, he or she should always forego the
standard deduction and itemize his or her deductions.
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BFIN 521-M80
Assignment #3
7. At the beginning of each year for three years, Anna makes a $150 contribution into a
savings account earning a 2% interest rate. At the end of the third year, what is the
balance in Anna’s account?
Set for BGN
N: 3
I/Y: 2
PV: 0
PMT: -150
CPT
FV
= $468.24
8. Donny has a $5,000 balance on his credit card with an APR of 15%. If he makes
monthly payments of $200, how long will it take him to pay off his credit card?
.15 / 12 = .0125
N = -log(1 – (Ai / P)) / log (1 + i)
N = -log(1 – (5000/200)(.0125)) / log (1 + .0125)
N = -log(1 – (25)(.0125) / log(1.0125)
N = -log(1 - .3125) / log(1.0125)
N = -log(.6875) / log(1.0125)
N = .162727 / .005395
N = 30.16
N = ~ 31 months
9. Alfonso and his fiancé, Regina, are shopping around for a mortgage on the $360,000
house of their dreams. One bank offers them a 30-year mortgage with a 6% APR and
20% down payment. Calculate the monthly payment on this mortgage.
$360,000 * .20 = $72,000
$360,000 – $72,000 = $288,000
2nd SET: END
N: 360
I/Y: 6
PV: 288,000
CPT
PMT
= $1726.71
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BFIN 521-M80
Assignment #3
10. During 2012, Jason earned $80,000 in income. He is subject to the following
marginal tax rates:
Income
Marginal Tax Rate
from $0 to $8,700
10%
over $8,700 to $35,350
15%
over $35,350 to $85,650
25%
over $85,650 to $178,650
28%
over $178,650 to $388,350
33%
over $388,350
35%
Jason qualifies for a $3,800 personal exemption and may elect to take a $5,950
standard deduction. In 2012, he had $7,000 worth of itemizable deductions. How much
must Jason pay in taxes for 2012?
$80,000 - $3,800 - $7,000 = $69,200
($69,200 - $8,700 = $60,500)
$8,700 * .10 = $870 ------------------------------------
$
($60,500 - $26,650 = $33,850)
$26,650 * .15 = $3,997.50 ----------------------------
$ 3,977.50
$33,850 * .25 = $8,462.50 ----------------------------
$ 8,462.50
2012 TOTAL TAX PAID:
$13,330.00
870.00
11. Which of the following statements is true? (Only one is true.)
A) Real interest rates are always less than nominal interest rates, but never
negative.
B) Real interest rates are occasionally greater than nominal interest rates, and are
necessarily negative when this is the case.
C) If the nominal price of a good increases, the real price of that good will
necessarily increase.
D) The nominal price of a good may decrease even when the real price increases.
12. Which of the following is true about mortgage points?
A)
Taking points is always a bad deal because points require a large initial fee.
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BFIN 521-M80
Assignment #3
B)
Taking points is always a good deal because the lower interest rate with points
implies a lower payment each month.
C)
Taking points is a good deal if the APR drops by 0.5% or more for each point,
because that’s the cut-off where the savings on the monthly payment makes up for the
initial cost.
D)
Taking points is a good deal if the borrower expects to stay in the home for a
long time, because then the monthly savings will add up enough to make up for the
initial fee.
13. All of the following are considered taxable income, except __________.
A) unemployment compensation
B) prize winnings
D) interest earned on municipal bond investments
E) cash dividends on stock investments
14. If your assets increase by $3,562 and your liabilities decrease by $1,582, your net
worth would
A) increase by $3,562.
B) decrease by $1,582.
C) increase by $1,582.
D) increase by $5,144.
E) there is no way to tell--not enough information has been given.
15. Which of the following is an example of a well-stated financial goal as defined in
class?
A) Live in a very expensive neighborhood.
B) Have a secure feeling about the way you spend your money.
C) Be able to retire at age 50 with $250,000 in investments.
D) Own a BMW.
E) Get married and have 2 children by age 30.
16. As a Senior, Jack Smith decides that a new stereo will assist in studying for the 4.0
goal during his senior year. He has found his dream listening machine and only has to
provide a monthly income and expenditures statement to make the deal. He has
learned that you are taking BFIN 421/521 and has asked your help. Using the following
information, determine his monthly cash surplus.
Salary from part-time work
Rent expense
Checking account balance
Value of automobile
Savings account balance
Utilities expense
Car loan outstanding
$ 550/month
$ 350/month
$ 400
$8,000
$1,500
$ 85/month
$4,000
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BFIN 521-M80
Assignment #3
Auto loan payment
Gasoline expenses $
Color television's value
Moped's value
Support from parents
Food expense
$ 250/month
45/month
$ 275
$ 300
$ 500/month
$ 200/month
INCOME
Salary
Support
TOTAL INCOME
$ 550
$ 500
$1050
EXPENSES
Rent
Utilities
Auto Loan
Gasoline
Food
TOTAL EXPENSES
$
$
$
$
$
$
350
85
250
45
200
930
MONTHLY INCOME – MONTHLY EXPENSES = MONTHLY CASH SURPLUS
$ 1,050 - $ 930 = $ 120
Monthly Cash Surplus = $ 120
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