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.

Prepare for your Personal Finance final exam with these concise study notes. Cover essential topics such as interest rates, APY calculations, and the structure of the US economy. Understand key financial principles and government revenue sources to excel in your exam.