Personal Finance Questions and Answers 100% Pass

Personal Finance Questions and Answers 100% Pass positive incentive is an economic, legal or institutional measure designed to encourage beneficial activities; ex. exam exemptions for perfect attendance negative incentive mechanisms designed to discourage activities that undesirable; ex. excise taxes or speeding tickets rational decision-making A method for systematically selecting among possible choices that is based on reason and facts; choosing the alternative that has the greatest benefit commercial banks for-profit financial organizations; deal primarily with deposits and loans from individuals, corporations and businesses. interest charged fee paid when you borrow money interest earned fee paid when you loan money; individuals get this when saving $ credit unions cooperative bank, meaning it is privately owned and controlled by its members. Its primary purpose is to provide credit at low rates to its members; technically non-profit; generally offers lower interest rates on loans and higher interest rates on savings return Refers to how much money an investor could potentially earn from an investment; Usually expressed as a percentage; increases with higher risk risk In investing terms, the chance you take that an investment may or may not result in a return; higher usually means more return stocks Shares of ownership in a company. If the company grows in value, then the value of this grows as well; can be risky; all eggs in one basket mutual funds collection of investment vehicles that you can buy as a single package, rather than purchasing individual stocks, bonds, and other investments yourself. Investors purchase shares; manager uses that money to buy the investment vehicles that go in the fund; less risk than single stocks; eggs in several baskets bonds Basically a loan where you're the lender; you loan an amount of money to the organization issuing the instrument at a certain interest rate for a certain period of time. You are paid interest from this loan at regular periods, and then, when the it matures, you get back your initial investment plus any additional interest. Treasury bonds and municipal bonds are specific examples. debt money owed credit agreement between lender and borrower; buyer receives good immediately in exchange for the promise to pay at a later time interest amount of money that a lender charges a borrower in exchange for the use of money simple interest interest paid only on the amount borrowed (principal); the kind of interest you want if you are the borrower compound interest interest paid on both the principal plus the accumulated interest; the kind of interest you want if you are the lender credit score calculated by the major credit bureaus; indicates how risky it is to lend money to this person credit worthiness credit score is used to determine this; how likely a person is to pay back money borrowed insurance method of risk transfer; you pay money to a company to protect your specific assets, if the asset is damaged or destroyed, the company will compensate your for the loss savings income not used for consumption progressive taxes a tax for which the percentage of income paid in taxes increases as income increases; ex. federal income tax regressive taxes a tax for which the percentage of income paid in taxes decreases as income increases; ex. sales tax proportional taxes a tax for which the percentage of income paid in taxes remains the same for all income levels; "flat tax" sales tax a tax on the dollar value of a good or service being sold deductible amount of expenses that must be paid out of pocket before an insurer will cover any expenses asset protection role of insurance; individuals pay to an insurance company to protect their property premium money paid to an insurance company for the protection of insurance investment money used with the expectation of some future return or benefit. payday lenders gives out small loans in return for a portion of an upcoming paycheck title pawn lenders grants loans where borrowers can use their vehicle title as collateral or as security for repayment savings account bank accounts that people put money into and are able to access any time. FDIC insures up to $250,000 Certificate of Deposit savings certificate issued by a bank to a person depositing money for a specific length of time retirement account plan/investing tool used by people to earn and designate funds for retirement savings property tax taxation of the value of real property capacity, character, and collateral 3 C's of credit report collateral something of value a borrower can use to back the loan if they can no longer pay scheduled payments APR (annual percentage rate) yearly rate charged for borrowing or yearly rate earned through an investment fixed rate interest rate is determined when the loan is originated and does not change variable rate interest rate fluctuates over time because it is based on an index that changes periodically insurance policies allow person or business to pay small amount of money to purchase asset protection against possible future financial loss caused by unforeseen event shared liability responsibility of the insurer and the insured auto insurance insurance for your automobile - minimum is liability - pay for vehicles when you are at fault for accident health insurance designed to pay for medical costs disability insurance provides people with income in case they become injured and are unable to work life insurance provides monetary payment when the insure person dies property insurance pays for damages sustained to your real estate and for injuries to others that happen on your property Liquidity the ease with which an asset can be converted into cash Roth IRA A tax-advantaged individual retirement plan; contributions are not tax-deductible; earnings are tax-free 401(k) plan a tax-deferred investment and savings plan that acts as a personal pension fund for employees Tax-advantaged accounts Accounts that allow investors to avoid paying taxes on investment income and capital gains as they earn them. In exchange for these privileges, investors must accept stringent restrictions on when the money can be withdrawn from the account and sometimes on how the money can be used. investment portfolio The collection of investments you personally hold, including stocks, bonds, money market accounts, and savings accounts. ETF (exchange traded fund) like a mutual fund but trades throughout the day like a stock collision insurance This covers the car of the insured person and pays for repairs after an accident or cash compensation if the car can't be repaired. This type of coverage is usually optional liability insurance insurance that provides protection from claims arising from injuries or damage to other people or property comprehensive insurance covers your car for reasons other than a collision, such as theft, fire, vandalism