Question

Can somebody please help me

1. Net Worth is equal to assets minus liabilities. Which event will have the greatest impact (positive or negative) on one's net worth?
A. Go on a vacation that costs $1,500
B. Pay off $4,000 of school loans with cash
C. Buy a new car at market value for $15,000. Car depreciates 20% upon transfer of ownership.
D. Finance a used car at market value for $16,000
E. Inherit $2,000 from a relative

2. Prime lending rates are 1) __________ than subprime lending rates and are commonly offered to people with 2)__________ credit scores.
A. Lower, Higher
B. Higher, Lower
C. Lower, Lower
D. Higher, Higher

3. Assume a home buyer puts 20% down on a $200,000 house and uses a mortgage to borrow the rest. What will the amount of the mortgage be (excluding any closing costs)?
A. $160,000
B. $200,000
C. $180,000
D. $240,000

4. Variable rate loans typically have a 1)_______ interest rate than fixed rate loans because with variable rate loans, the borrower assumes the risk that the interest rate might 2)________.
A. Higher, Decrease
B. Lower, Decrease
C. Higher, Increase
D. Lower, Increase

5. Assume that Jocelyn is comparing two fixed-rate loan options, a 15 year and a 30 year mortgage. Both options have the same interest rate and amount borrowed. The 30 year, when compared to the 15 year loan will have a 1)_____________ monthly payment and a 2)___________ total cost when repayment is completed.
A. Lower, Higher
B. Higher, Higher
C. Lower, Lower
D. Higher, Lower

6. Megan has $500 in short-term savings, $5,000 in her retirement savings account, $500 in credit card debt, and student loan debt of $6,500. Assuming that these are all of Megan's assets and liabilities, what is Megan's net worth?
A. Positive $4,000
B. $0
C. Negative $3,500
D. Positive $5,500
E. Negative $1,500

Answer 1

1) First of all, we have that options B and D do not change the net value. It is important to notice that in B, while 4000$ are paid, they already were a liability since they were a known debt; hence, paying it off does not change your net value. Also, paying for a car 16000$ that has the same value does not change the net worth of your assets; it just transforms one asset (16k $) into another (used car). Now, choice A means a negative change of 1500$ and choice E means a positive change of 2000$. Now, in C, we have that the buyer pays 15000$. But the asset he gains loses 20% of its value. Hence, it lose 20%*15000=3000$. Thus, C denotes the biggest change in net worth, since it yields a loss of 3000$.

2) Prime lending rates are more favorable to customers; it means that the bank assumes a lower risk with its money and thus provides a better interest rate to customers with good credit score. Prime lending rates are lower than subprime, since the lower the rate on a loan, the better for the customer. Also, the higher your credit score, the better; so prime rates are offered to customers with high credit scores.

3) The total cost of the house is 200000$. The person pays 20% of the house upfront. Hence, the buyer pays 20%*200000=40000$ upfront. The rest of the sum needs to be paid through a mortgage. Hence, the mortgage needs to have a value of 200000-40000=160000$; we need to subtract the down payment from the total value of the house.

4) In general, in a society that prospers, there is inflation and thus the value of 1$ diminishes over time; in order to account for this, interest rates on loans also can increase over time. Variable rate loans help with this. They usually have a lower initial interest, but the rate can increase or decrease based on the bank and the general financial circumstances. The lower rate is due to the fact that the customer risks that the rate increases by a lot.

5) These are two different loans, despite having the same lump sum and interest. First, the monthly payment on the 15 (year loan) is higher because when we have a big sum, if we divide it up into 15 years, the pieces are larger than if we divide it into 30 years. The monthly payment will be close to double for the 15 relative to the 30. So why prefer it? The point is that because the bank is valuing a quick return of assets, the total interest you pay is smaller in the case of 15, so the cost of the loan is smaller.

6) Let us see which are assets and which are liabilities. We will need to add all assets and then subtract all liabilities to get the net worth. 500$ in a savings account is an asset. Also, 5000$ for retirement is an asset too. However, 500$ credit card debt is a liability and we will need to subtract it. Finally, 6500$ of student loan debt is also a liability. So, Net Worth=NW is equal to:
NW=500$+5000$-500$-6500$=-1500$. The correct choice is E.