Make a note of answering following questions: Deadline: 17 November 2022

Practice questions Chapter 5: Financial Services: Savings Plans and Payment Accounts (Give a
short answer)

1. What is the relationship between financial services and overall financial planning?
2. What are the major categories of financial services?
3. Why shouldn’t you select financial services only on the basis of monetary factors?
4. How do changing economic conditions affect the use of financial services?
5. What are examples of deposit financial institutions?
6. What factors do consumers usually consider when selecting a financial institution?
7. What are the main types of savings plans offered by financial institutions?
8. How does a money market account differ from a money market fund?
9. What are the benefits of U.S. savings bonds?
10. When would you prefer a savings plan with high liquidity over one with a high rate of
return?
11. What is the relationship between compounding and the future value of an amount?
12. How do inflation and taxes affect earnings on savings?
13. What factors are commonly considered when selecting a checking account?
14. Are checking accounts that earn interest preferable to regular checking accounts? Why or
why not?

Practice questions Chapter 6: Financial Services: Introduction to Consumer credit (Give a short
answer)

1. What is consumer credit?

2. Why is consumer credit important to our economy?
3. What are the uses and misuses of credit?
4. What are the advantages and disadvantages of credit?
5. What are the two main types of consumer credit?
6. What is a debit card?
7. What is a home equity loan?
8. What are the general rules for measuring credit capacity?
9. What can happen if you cosign a loan?
10. What can you do to build and maintain your credit rating?
11. What is the Fair Credit Reporting Act?
12. How do you correct erroneous information in your credit file?
13. What are your legal remedies if a credit reporting agency engages in unfair reporting
practices?
14. What is the Equal Credit Opportunity Act?
15. What are the five Cs of credit?
16. What can you do if your credit application is denied?

Numerical problems: Chapter 5

1. Calculating the Cost of ATM Fees: If a person has ATM fees each month of $16 for 7 years,
what would be the total cost of those banking fees?
2. Determining an Annual Interest Rate: A payday loan company charges 4.25 percent interest
for a two-week period. What is the annual interest rate?
 3. Computing CD Interest: A certificate of deposit will often result in a penalty for withdrawing
funds before the maturity date. If the penalty involves two months of interest, what would
be the amount for early withdrawal on a $20,000, 4 percent CD?
4. Computing Future Value: What would be the value of a savings account started with $1,200,
earning 3 percent (compounded annually) after 10 years?
5. Calculating Present Value: Brenda Young desires to have $20,000 eight years from now for
her daughter’s college fund. If she will earn 4 percent (compounded annually) on her money,
what amount should she deposit now? Use the present value of a single amount calculation.
6. Computing Future Value of Annual Deposits: What amount would you have if you
deposited $2,500 a year for 30 years at 8 percent (compounded annually)?
7. Comparing Taxable and Tax-Free Yields: With a 28 percent marginal tax rate, would a tax-
free yield of 7 percent or a taxable yield of 9.5 percent give you a better return on your
savings? Why?
8. Computing APY. What would be the annual percentage yield for a savings account that
earned $56 in interest on $800 over the past 365 days?
9. Calculating Opportunity Cost. What is the annual opportunity cost of a checking account
that requires a $300 minimum balance to avoid service charges? Assume an interest rate of
3 percent.
10. Computing Checking Account Balance: Based on the following information, determine the
true balance in your checking account. (See the related Financial Literacy Calculations
feature.)

Balance in your check book: $356

Balance on bank statement: $472
Service charge and other fees: $15
Interest earned on the account: $4
Total of outstanding checks: $187
Deposits in transit: $60

11. Comparing Costs of Checking Accounts:

What would be the net annual cost of the following checking accounts?
a. Monthly fee, $3.75; processing fee, $0.25 per check; checks written, an average of 22 a
month.
b. Interest earnings of 6 percent with a $500 minimum balance; average monthly balance,
$600; monthly service charge of $15 for falling below the minimum balance, which occurs
three times a year (no interest earned in these months).

Numerical problems: Chapter 6

ST 1: Current approximate value of Joshua’s home is about $180,000. He still has a $100,000 balance
on his mortgage. His bank has agreed to let him borrow 80 percent of the value of his home. What is
the maximum home equity line of credit available to Josh?

ST 2: Audra has a monthly net income of $2,100. She has a house payment of $900 per month, a car
loan with payments of $500 per month, a Visa card with payments of $100 per month, and a credit
card with a local department store with payments of $200 per month. What is Audra’s debt
payment-to-income ratio
ST3: Hannah has determined that her net worth is $60,000. She has also determined that the face
value of her mortgage is $160,000. She has determined that the face value of the rest of her debt is
$30,000. What is Hannah’s debt-to-equity ratio?

Problems:

1. Calculating the Amount for a Home Equity Loan: A few years ago, Michael purchased a
home for $200,000. Today the home is worth $300,000. His remaining mortgage balance is
$100,000. Assuming Michael can borrow up to 80 percent of the market value of his home,
what is the maximum amount he can borrow?
2. Determining the Debt Payments-to-Income Ratio: Louise’s monthly gross income is $2,000.
Her employer withholds $400 in federal, state, and local income taxes and $160 in Social
Security taxes per month. Louise contributes $80 per month for her IRA. Her monthly credit
payments for Visa, MasterCard, and Discover cards are $35, $30, and $20, respectively. Her
monthly payment on an automobile loan is $285. What is Louise’s debt payments-to-income
ratio? Is Louise living within her means? Explain.
3. Calculating the Debt-to-Equity Ratio: Robert owns a $140,000 town house and still has an
unpaid mortgage of $110,000. In addition to his mortgage, he has the following liabilities:
Visa $ 565
MasterCard 480
Discover card 395
Education loan 920
Personal bank loan 800
Auto loan 4,250
Total $7,410 Robert’s net worth (not including his home) is about $21,000. This equity is in
mutual funds, an automobile, a coin collection, furniture, and other personal property. What
is Robert’s debt-to-equity ratio? Has he reached the upper limit of debt obligations? Explain.
4. Calculating the Debt Payments-to-Income Ratio: Kim is trying to decide whether she can
afford a loan she needs in order to go to chiropractic school. Right now, Kim is living at home
and works in a shoe store, earning a gross income of $820 per month. Her employer deducts
$145 for taxes from her monthly pay. Kim also pays $95 on several credit card debts each
month. The loan she needs for chiropractic school will cost an additional $120 per month.
Help Kim make her decision by calculating her debt payments-to-income ratio with and
without the college loan. (Remember the 20 percent rule.)
5. Calculating the Debt Payments-to-Income Ratio: Suppose that your monthly net income is
$2,400. Your monthly debt payments include your student loan payment and a gas credit
card. They total $360. What is your debt payments-to- income ratio?
6. Calculating the Debt Payments-to-Income Ratio: What is your debt payments-to-income
ratio if your debt payments total $684 and your net income is $2,000 per month?
7. Calculating a Safe Credit Limit: Drew’s monthly net income is $4,000. What is the maximum
he should use on debt payments?
8. Credit Reduces Future Income: The disposable income from your part-time job in 2019 was
$12,000. In 2018, you borrowed $500 at 18 percent interest. You repaid your loan with
interest in 2019. How much would you have available for spending in 2019?
9. Analysing the Feasibility of a Loan: Fred has had a student loan, two auto loans, and three
credit cards. He has always made timely payments on all obligations. He has a savings
account of $2,400 and an annual income of $25,000. His current payments for rent,
insurance, and utilities are about $1,100 per month. Fred has accumulated $12,800 in an
individual retirement account. Fred’s loan application asks for $10,000 to start up a small
 restaurant with some friends. Fred will not be an active manager; his partner will run the
restaurant. Will he get the loan? Explain your answer.
10. Analysing a Spending Plan: Carl’s house payment is $1,050 per month and his car payment
is $385 per month. If Carl’s take-home pay is $2,800 per month, what percentage does Carl
spend on his home and car? (take-home pay is salary after he deduction of taxes, benefits,
and voluntary contributions from a pay check)
11. Analysing a Spending Plan: In the above example, what percentage does Carl spend on his
home?
12. Analysing a Spending Plan: In the above example, what percentage does Carl spend on his
car payment?