Personal Finance Final Exam Study Notes

Personal Finance Final Exam Study Notes

• Interest Rates and Coupon Rates: Coupon rates on bonds are fixed, unaffected by rising interest rates.

• APY Formula: APY = (1 + r/n)ⁿ - 1, where r is the interest rate, and n is the number of compounding periods.

• Compound Interest Formula: A = P(1 + r/n)^nt, where A is the final amount, P is the principal amount, r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years.

• Bank Savings Account Disclosure Requirements: Banks must publicly display APY (annual percentage yield) and any fees associated with savings accounts.

• US Economy Type: The US economy is a market-based system with aspects of a command economy.

• Major Source of US Government Revenue: Individual income taxes are the primary source of revenue for the US government.

• Statutory Law Expenditures: Expenditures mandated by law and regulations are classified as mandatory.

• Debated Budget Expenditures: Expenditures that are subject to debate during the budget process are labeled discretionary.

• Economic Growth Measurement: Gross Domestic Product (GDP) is the primary measure of economic growth, ideally increasing by 2-3% annually.

• Employment Measurement: The unemployment rate, ideally in a range of 3.5-4.5%, is used to assess employment levels.

• Price Stability Measurement: The Consumer Price Index (CPI), ideally increasing by 2%, measures price stability.

• Fiscal Policy Definition: Government interventions in the economy through adjustments to spending and taxation.

• Expansionary Fiscal Policy: Encompasses increasing government spending (new initiatives, stimulus checks) and decreasing taxes.

• Contractionary Fiscal Policy: Involves decreasing government spending (program cuts or freezes) and increasing taxes.

• Federal Reserve's Dual Mandate: Maintaining maximum employment and price stability.

• Board of Governors Membership: The Board of Governors comprises 7 members.

• FOMC Definition: The Federal Open Market Committee is the body responsible for monetary policy, operating through open market operations.

• FOMC Membership: Composed of the 7 members of the Board of Governors, the President of the Federal Reserve Bank of New York, and 4 other regional bank presidents on a rotation.

• Federal Reserve Funding: The Federal Reserve earns interest from government securities.

• FFR Definition: The Federal Funds Rate is the interest rate banks charge each other for short-term loans to meet their reserve requirements. It is set by the FOMC.

• IORB Definition: Interest on Reserve Balances: the interest rate banks earn from the Federal Reserve on funds deposited in their reserve accounts.

• Discount Rate Definition: The interest rate at which the Federal Reserve lends to banks (acting as the lender of last resort). This rate is always above the Federal Funds Rate.

• Monetary Policy Implementation Methods: The Federal Reserve implements monetary policy in three ways: adjusting the IORB, engaging in open market operations (buying/selling bonds), and adjusting the reserve requirement.

• Expansionary Monetary Policy: Implemented by decreasing the IORB, purchasing bonds, and lowering the reserve requirement.

• Contractionary Monetary Policy: Achieved by increasing the IORB, selling bonds, and increasing the reserve requirement.

• Fractional Banking & Money Supply: Fractional banking creates money by lending out a portion of the reserves that are required to be held by banks at the Federal Reserve.

• Six Characteristics of Money: Durability, Portability, Divisibility, Uniformity, Limited Supply, Acceptability.

• Stock Definition: A share of ownership in a company.

• IPO Definition: Initial Public Offering.

• Dow Jones Definition: A stock market index tracking the performance of a selection of publicly listed corporations.

• Small-Cap Company Characteristics: Market capitalization below $2 billion, high growth potential, but higher risk.

• Mid-Cap Company Characteristics: Market capitalization between $2 and $10 billion, moderate growth potential, medium risk.

• Large-Cap Company Characteristics: Market capitalization above $10 billion, established companies, low risk.

• Dividend Yield Formula: Dividend per share / Share price.

• Optimal Dividend Payout Ratio: Typically 35%-50%.

• PE Ratio (Price-to-Earnings): Stock price / Earnings per share.

• Mutual Fund Definition: An investment that pools funds from multiple investors to acquire stocks, bonds, and other securities.

• ETF Definition: Exchange Traded Fund - a type of mutual fund that can be bought and sold through the exchanges, and has fluctuating values.

• Asset Classes: Equities (stocks) and debt (bonds)

• Coupon Payment Definition: Periodic interest payment made to bondholders.

• Average Family College Expenses: $20,000 - $30,000 per year.

• COA Definition: Cost of Attendance

• COA Components: Direct costs (tuition, fees, room and board) and indirect costs (transportation, books, personal expenses).

• Net Price Definition: College cost after deducting grants and scholarships.

• FAFSA Definition: Free Application for Federal Student Aid.

• SAR Definition: Student Aid Report, containing FAFSA data and student information.

• SAI Definition: Student Aid Index, a number calculated by FAFSA to estimate family contribution to college.

• FAFSA Asset Examples: Parent savings accounts, student brokerage accounts, UGMA accounts, high-yield savings accounts, 529 plans for the student.

• 529 Account Options: Change beneficiary, Rollover into Roth IRA, or use funds for student loan repayment.

• 529 Non-Qualified Withdrawal: Leads to taxes and a 10% penalty.

• WUE Definition: Western Undergrad Exchange.

• Federal Direct Unsubsidized Loans (Undergraduate): Based on financial need, no credit checks, co-signer, no annual limits of loan amounts.

• Federal Direct Unsubsidized Loans (Graduate/Professional): No need-based, no credit check, no co-signer, for graduate and professional degrees.

• Federal Direct PLUS Loans: Requires a credit check, available to graduate/professional students and their parents.

• Private Loans: Varying terms, immediate repayment (no grace period), credit check, and a co-signer may be required.

• Standard Repayment Plan: 10 years, fixed monthly payments, generally lower overall cost.

• Graduated Repayment Plan: 10 years, lower initial payments, gradually increasing, with a higher total cost.

• Extended Repayment Plan: 25 years, for loans exceeding $30,000, highest overall cost.

• Income-Driven Repayment Plan: 10-20% of your discretionary income is the payment, 20-25 years.

• Net Pay Formula: Gross pay less deductions.

• I-9 Form: Form used to verify an employee's identity. Completed before work.

• W-2 Form: Form summarizing annual wages and withholding. Prepared by the employer.

• W-4 Form: Form used by the employee to indicate the amount of taxes to be withheld from their income. Completed at the beginning of employment.