Question

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

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)?
$200,000
$180,000
$240,000
$160,000

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)________.
Higher, Increase
Lower, Decrease
Lower, Increase
Higher, Decrease

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.
Lower, Higher
Higher, Lower
Lower, Lower
Higher, Higher

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?
Negative $3,500
Positive $5,500
Negative $1,500
$0
Positive $4,000

Answer 1

2. Buy a new car at market value for $15,000. Car depreciates 20% upon transfer of ownership.

When the car depreciate 20% upon transfer of ownerships, the value of asset that we received became:

$15,000 x 80% = $ 12,000.

Since we have to pay $15,000 in cash, we experienced a reduction of $3,000 in our net worth.

- Finance a used car at market value for $16,000.

No net worth changed since we spent $16,000 worth of asset (cash) in order to get $16,000 worth of asset (car)

- Pay off $4,000 of school loans with cash

No net worth changed. Reduction of $4,000 in liabilities, but our asset is also reduced by  $ 4,000

- Go on a vacation that costs $1,500

Reduction of $1,500 from out net worth since we do not obtain any asset in return.

3. $160,000

The formula to count the amount of the mortgage = (price of the house - down payment).

Price of the house: $ 200,000

Down payment : $200,000 x 20% = $ 40,000

This mean, the amount of the mortgage would be:

$200,000 - $ 40,000 = $ 160,000

4. Lower, Increase

Variable interest rate can be changed depending the economic condition or a financial factors such as consumer price index.

This mean that from the moment the loan is made, the interest rate could either go higher or lower depending on the market performance. Because of the risk that the borrower had to face, this type of interest rate tend to be cheaper.

5. Lower, Higher

As the duration of loan got higher, the interest rate for that loan would also increase to cover the risk of creditor.

So, if we compare a 30 years loan and a 15 years loan, the payment for the  30 years loan would be lower since it would divided by 30 rather than 15.

But, since shorter loan has lower interest, if we count the total amount that you should pay  for 30 years loan would be higher compared to 15 years loan.

6. Negative $1,500

Net worth is counted by counting total assets - total liabilities.

Megan's asset :

- $ 500 short term saving

- $5,000 retirement saving

Total asset : $ 5,000 + $ 5,00 = $ 5,500

Megan's liabiltiies:

- $ 500 credit card debt

- $ 6,500 student loan debt

Total liabilities : $ 6,500 + $ 500 = $ 7,000

Megan's net worth = $ 5,500 - $ 7,000 = Negative $1,500