1. EOC Review #5
Personal Finance

2. Appreciate – to increase in value
Depreciate – to decrease in value

3. Types of Bank Accounts
Savings Account – easy to start, low minimum balance, can withdraw money anytime, but very low interest rates
Certificate of Deposit – earns a higher interest rate, but cannot withdraw money for a specified time period

4. Retirement Accounts
401k – retirement savings, set up with deductions from one’s paycheck, often with employer contributions
IRA – self funded tax deductible retirement savings
Pensions – fixed benefit retirement plans, mostly government employees

5. Investments Stocks Bonds Share of ownership in a company
Shareholders earn dividends if their company earns a profit
Mutual Funds are collections of stocks that are managed by professional investors for their clients – way to diversify your investment with less money
Bonds
Buying a bond is really a loan by the bondholder to the issuer of the bond
Countries, Companies and County/City government issue bonds
A low risk bond pays low interest, high risk bonds (junk bonds) pay a high interest rate

6. Risk v. Return High Risk – greater chance of losing money
High risk – stocks and bonds are risky, but most do well in the long run
Low risk – less chance of losing money
Low risk – savings at the bank are low risk and insured, but earn very little

7. Financial Institutions
Banks/Commercial Banks
Pay interest to savers on deposits and loan those deposits to borrowers at a slightly higher interest rate in order to earn a profit
Wide variety of financial services
Credit Union
Non-profit bank owned by its depositors
Pay higher rates on savings, charge less on loans
Fewer services than commercial banks
Finance Companies/Payday Loan Lending
Small loans over the short term
High interest rates and high fees

8. Inflation Unanticipated inflation when saving or borrowing
Hurts: savers, people on a fixed income
Helps: borrowers, governments in debt, workers with a COLA

9. Taxes Progressive – higher earners pay more, income tax
Regressive – lower earners pay more, sales taxes
Proportional – all pay same rate, Social Security & Property tax
Property Tax – tax on land and houses, collected by state and local governments

10. Credit Score/Credit Worthiness
A numerical measure that indicate a borrower’s likely ability to repay a loan
Three “C’s” of Credit
Character (Credit Score) – history of on time repayments
Collateral – assets to provide security for a loan
Capacity to Pay – amount being borrowed compared to borrower's income

11. Interest Simple Interest – rate earned on savings or paid on loans
I = PRT
Compound Interest – earning interest on interest, significant long term earnings from savings
Mortgage – home loans
Difference between 30 year and 15 year mortgage

12. Insurance Terms Premium – cost of insurance
Deductible – amount one must pay before insurance covers a loss
High deductible, low premium and vice-versa
Shared Liability - basic concept of insurance, a few losses are “shared” by other purchasers of insurance, ex – home insurance
Auto Insurance – coverage on one’s auto; Liability only compared to Comprehensive coverage
Disability Insurance – insurance that replaces one’s income if you are unable to work, short term v. long term
Health Insurance – insurance that pays a portion of one’s medical bills
HMO
PPO
Life Insurance – whole life (annuity) or term life

13. Fifteen-year-old Calvin has inherited $3,000 from an aunt
Fifteen-year-old Calvin has inherited $3,000 from an aunt. He wants to invest in an option that has a very low risk but still increases the amount of money. He doesn’t plan to access the money until he attends college in two years. Based on Calvin’s requirements, in which option would he MOST LIKELY invest?
A. precious metals
B. corporate stocks
C. a savings account
D. a certificate of deposit

14. The Correct answer is D. Certificates of deposit have a low risk (FDIC insured) but earn more than a savings account as long as you do not take it out until it is due.

15. A bank charges 6% interest on personal loans and pays 3% interest on individual savings accounts. Why is there a difference in the two amounts of interest?
A. The bank wants to make a profit.
B. The government regulates interest rates.
C. The bank wants to encourage people to save.
D. The government allows a system of credit buying.

16. The correct answer is A. Banks earn a profit by lending money that they collect from depositors.

17. When Jason bought a car and went to register it with the state Department of Motor Vehicles, he needed to show proof of insurance. What kind of insurance did Jason need to have?
A. disability insurance
B. automobile insurance
C. health insurance
D. life insurance

18. The correct answer is B, because it is obvious.

19. Which trait do MOST employers look for when hiring new employees?
A. punctuality
B. a fashionable wardrobe
C. an outgoing personality
D. financial independence

20. The correct answer is A.
Truth.