M2: Cash Management and the Use of Debt

Question 1

Interest rate on the mortgage may change periodically, which will increase or decrease the monthly payment amount.

Answer 1

Adjustable rate mortgage

Question 2

The management of loan principal over time. The blank schedule is structured in such a way that more interest is being paid first, so over time the amount of principal being repaid increases, and the amount of interest being paid decreases.

Answer 2

Amortization

Question 3

What a person owns. blank include cash and cash equivalents, invested blank, and use blank.

Answer 3

Assets

Question 4

An alternative for individuals who have accumulated too much debt and need a “fresh start.” There are two main types, Chapter 7 (liquidation or straight blank) Chapter 13 (the wage earner’s plan). Certain debts cannot be eliminated, including alimony and child support, certain tax claims, and government guaranteed student loans.

Answer 4

Bankruptcy

Question 5

A financial statement listing expected income and expenses for a future period of time, used to keep spending under control.

Answer 5

Budget

Question 6

Physical money, checking, and savings accounts.

Answer 6

Cash

Question 7

Assets that can be quickly converted into cash, with little or no loss of principal. Examples include money market accounts and short-term certificates of deposit (CDs).

Answer 7

Cash equivalents

Question 8

A personal financial statement that lists inflows and expenditures made by a person or family over a stated past period.

Answer 8

Cash flow statement

Question 9

A fixed-income investment available through banks and savings and loan associations. Interest rates and maturities are fixed at the time of purchase. Maturities vary from a few months to a few years, and early redemption may result in the payment of penalties. Because they are issued by banks and savings and loan associations, principal is usually insured through either the FDIC (Federal Deposit Insurance Corporation) for banks, or the NCUA (National Credit Union Administration) for credit unions.

Answer 9

Certificate of deposit (CDs)

Question 10

An asset that serves as security for a debt, such as using a purchased car as blank for an auto loan. If the borrower stops making payments, then the car (i.e., the blank) can be repossessed by the lender.

Answer 10

Collateral

Question 11

Registered with a state and need an established set of bylaws. While C blank profits are kept within the company, the S blank has flow through of income into the owners, similar to a partnership.

Answer 11

Corporations

Question 12

The most common type of consumer credit. An example of open-end credit, and regular payments must be made, and the cardholder is not allowed to exceed a certain given level of credit.

Answer 12

Credit card

Question 13

Will deduct the amount debited from an individual’s bank account when a purchase is made, similar to writing a check.

Answer 13

Debit card

Question 14

The current value of an asset if it were sold by a willing seller to a willing buyer, with both considering their own best interests free of any undue pressure to enter the transaction.

Answer 14

Fair market value (FMV)

Question 15

Money borrowed by an individual or entity resulting in an obligation to repay the amount borrowed plus interest according to a set schedule.

Answer 15

Debt

Question 16

A reserve of cash and/or cash equivalents (i.e., assets that could be quickly converted to cash without loss of principal). Financial planners typically recommend an amount equal to three to six months of fixed and variable expenses.

Answer 16

Emergency fund

Question 17

A score used by the vast majority of lenders to assess the creditworthiness of an individual. The score ranges from 300 (poor) to 850 (excellent).

Answer 17

FICO credit score

Question 18

Monthly payments are fixed at the outset of the loan and remain the same over the term of the loan. typical terms are 15 or 30 years.

Answer 18

Fixed rate mortgage

Question 19

blank (“Ginnie Mae”). blanks are mortgages that are fully backed by the U.S. government.

Answer 19

Government National Mortgage Association (GNMA)

Question 20

This is a reverse mortgage program run by the Federal Housing Administration (FHA). Reverse mortgages enable homeowners over the age of 62 to receive (rather than make) payments. Amounts received must be repaid when the owner leaves the home.

Answer 20

Home Equity Conversion Mortgage (HECM)

Question 21

This is credit line taken out using excess equity in the home as collateral. The blank would be second in line, with the primary mortgage having first rights to the property in the event of a foreclosure.

Answer 21

Home equity line of credit (HELOC)

Question 22

Pertains to the cash flow statement. An blank is the dollars received by an individual during the period considered, such as dollars from salary, dividends, interest, rental income, alimony, child support, and investment redemptions.

Answer 22

Inflow

Question 23

Closed-end credit with specific terms and payments. Examples would include home mortgages and auto loans.

Answer 23

Installment credit

Question 24

Refers to an asset category on the statement of financial position. blanks are those that are not for the personal use of the individual/family and that cannot be readily converted to cash without the possibility of loss of principal. These assets include common and preferred stocks, bonds, mutual funds, investment real estate, and vested pension benefits.

Answer 24

Invested asset

Question 25

A contractual agreement under which a person makes monthly payments for the use of property over a set period of time. Examples include leasing an apartment or a car. At the end of the blank term the property reverts back to the owner.

Answer 25

Lease

Question 26

Refers to a section of a statement of financial position, or personal balance sheet. blank are what an individual or family owes at the time of measurement. They are typically listed as the principal balance of a debt amount. Typical blank include a mortgage note balance, an auto loan balance, and the balances on credit cards.

Answer 26

Liabilities

Question 27

An blank is state-registered and combines the advantages of the limited liability of corporations with the flow-through tax treatment of other forms. Members of the blank decide on and file for an IRS tax form of business, commonly a partnership or S corporation, although a sole proprietor could start an blank.

Answer 27

Limited liability companies (LLCs)

Question 28

The ability to convert an asset quickly and easily to cash with little or no loss to principal.

Answer 28

Liquidity

Question 29

A real estate debt instrument where the lender obtains a lien on the property as security for repayment of a loan.

Answer 29

Mortgage

Question 30

An individual’s take-home pay, which is arrived at by taking the gross income amount and subtracting any income taxes and Social Security taxes.

Answer 30

Net income

Question 31

Pertains to the cash flow statement. It is the residual amount after subtracting outflows from inflows. It is the amount that the individual or family has not yet allocated to savings or expenses.

Answer 31

Net inflow

Question 32

The remaining value after liabilities are subtracted from assets. Represents the amount that is owned by the individual or family, unencumbered by debt.

Answer 32

Net worth

Question 33

Expenditure or use of cash.

Answer 33

Outflow

Question 34

A blank must have a business purpose and at least two owners. This form of business should register with the blank’s state. A blank declares profits and losses, and the net profit or loss flows through to the individual partners for income tax purposes and is shown on Schedule K-1.

Answer 34

Partnership

Question 34

The right to use, possess, enjoy, and dispose of property.

Answer 34

Ownership

Question 35

A needs-based federal grant for postsecondary education. Grants, unlike loans, do not have to be repaid.

Answer 35

Pell grants

Question 36

A financial statement listing a client’s assets, liabilities, and net worth as of a specific point (snapshot) in time.

Answer 36

Personal balance sheet/Statement of financial position

Question 37

Financial information that has been organized into a form that is easily read and analyzed. The statement of financial position shows assets, liabilities, and net worth, while the cash flow statement shows inflows and outflows over a specified period in the past.

Answer 37

Personal financial statements

Question 38

All property that is not land or items attached to the land.

Answer 38

Personal property

Question 39

Parent loans to undergraduate students allow parents to borrow for their children’s undergraduate studies.

Answer 39

PLUS loans

Question 40

Land and property that is attached to land (such as homes and buildings). Also referred to as realty.

Answer 40

Real estate property

Question 41

Open-ended credit represented by credit cards or a home equity line of credit (HELOC).

Answer 41

Revolving credit

Question 42

Highly safe and liquid vehicle available through banks, credit unions, and savings and loan associations. Feature low rates of interest compared with other financial vehicles.

Answer 42

Savings account

Question 43

A business form that requires no formal organizational documents or annual registrations, and all profits and losses flow directly through to the owner for income tax purposes.

Answer 43

Sole proprietorship

Question 44

Also called the Consumer Credit Protection Act, it requires full disclosure be made regarding the cost of borrowing, including the annual percentage rate (APR).

Answer 44

Truth in Lending Act

Question 45

Refers to a section on the statement of financial position. A blank is one that is intended primarily for the personal use or enjoyment of the family, such as personal property, a residence, and automobiles.

Answer 45

Use asset