Question 1

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year.
-What is John's total cost of his 5% contribution?

Accepted Answer

The non-profit organization offers a 5% salary contribution and matching 5% when John contributes 5% of his salary. Therefore, John's total contribution would be 10% of his salary, which is $5,600 per year. The non-profit organization contributes 5%, which is $2,800 per year. So, John's total cost of his 5% contribution is $2,800 - $700 (non-profit organization contribution) = $2,100. Therefore, the correct answer is C, which is $700 benefit.

Question 2

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year.
-What is John's effective salary reduction if he is in the 25% tax bracket?

Accepted Answer

John contributes 5% of his salary, which is $2,800. However, this contribution is pre-tax, so the effective reduction in his take-home pay is $2,800 * (1 - 0.25) = $2,100.

Question 3

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year.
-What is the amount of total contribution to his 403b if John contributes 5% of his own money?

Accepted Answer

John contributes 5% of $56,000, which is $2,800. The organization contributes 5% automatically ($2,800) and matches John's 5% contribution with another $2,800. The total contribution is $2,800 (John) + $2,800 (automatic) + $2,800 (matching) = $8,400.

Question 4

The fact that the U.S.government provides deposit insurance to banks creates a form of ___________ which is at least partially offset by requiring banks to hold more capital if they are riskier.

Accepted Answer

The provision of deposit insurance creates moral hazard, which means that banks may take on more risk because they know they are protected by insurance. However, the regulation requiring banks to hold more capital if they are riskier is a way to offset this moral hazard and encourage banks to be more cautious with their investments.

Question 5

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return.
-How much money will Sharon have in her IRA after 6 years?

Accepted Answer

Using the formula for future value of an annuity, we can calculate that Sharon will have $38,578 in her IRA after 6 years:

FV = Pmt x [(1 + r)^n - 1] / r

Where:
- FV = Future Value
- Pmt = Payment amount per period
- r = Rate of return per period
- n = Number of periods

In this case:
- Pmt = $5,000 per year
- r = 10% per year
- n = 6 years

FV = $5,000 x [(1 + 0.10)^6 - 1] / 0.10
FV = $5,000 x (1.10^6 - 1) / 0.10
FV = $5,000 x (1.771561 - 1) / 0.10
FV = $5,000 x 0.771561 / 0.10
FV = $38,578.05

Therefore, the best choice is C ($38,578).

Question 6

Suppose you are a high tax bracket individual and you want to shelter your investment income.The best choice of investment for you to minimize the tax bill is to invest in _________.

Accepted Answer

Municipal bonds are issued by state and local governments and are exempt from federal income tax. This makes them a tax-efficient investment option for high tax bracket individuals looking to minimize their tax bill. Bond portfolios and stocks with high dividend yields may still be subject to taxes on investment income, while stocks with low or zero dividend yields may not provide enough income for an investor in search of tax sheltering.

Question 7

An investor can earn a 6% nominal rate of return but inflation is expected to be 3%.If the individual invests $2,000 per year for 20 years the real future value of their investment is ________.(All investments occur at year end).

Accepted Answer

The answer of An investor can earn a 6% nominal...

Question 8

An investor in the 34% tax bracket would be indifferent between a corporate bond with a before tax yield of 8% and a municipal bond with a yield of _________.

Accepted Answer

The after-tax yield of the corporate bond is 8% * (1 - 0.34) = 5.28%. The investor would be indifferent if the municipal bond, which is tax-free, also yields 5.28%.

Question 9

An individual wants to have $95,000 per year to live on when they retire in 30 years.The individual is planning on living for 20 years after retirement.If the investor can earn 6% during her retirement years and 10% during her working years,how much should she be saving during her working life? (Hint: Treat all calculations as annuities.)

Accepted Answer

The answer of An individual wants to have $95,000 per...

Question 10

An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond.What is his after tax yield?

Accepted Answer

The after-tax yield is calculated by multiplying the bond's yield by (1 - combined tax rate). The combined tax rate is 40% (35% federal + 5% state). So, the after-tax yield is 6.5% * (1 - 0.40) = 3.90%.

Question 11

Currently,the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

Accepted Answer

The maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is $32,000.

Question 12

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return.
-How much money will Sharon have in her IRA when she is ready to retire at age of 62?

Accepted Answer

The answer of Sharon decides to put $5,000 into her...

Question 13

You want to minimize your current tax bill by maximizing your contributions to your _____________.

Accepted Answer

Contributions to a 401k or 403b plan are tax-deferred, meaning the money is not taxed until it is withdrawn from the account. This can reduce your taxable income and potentially lower your tax bill. Additionally, some employers may offer matching contributions to your 401k or 403b plan, which can further increase your retirement savings.

Quiz 21: Taxes,inflation,and Investment Strategy

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year. -What is John's total cost of his 5% contribution?

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year. -What is John's effective salary reduction if he is in the 25% tax bracket?

A non-profit organization offers a 5% salary contribution to John's 403b plan and matching 5% when John contributes 5% of his/her salary. John makes $56,000 a year. -What is the amount of total contribution to his 403b if John contributes 5% of his own money?

The fact that the U.S.government provides deposit insurance to banks creates a form of ___________ which is at least partially offset by requiring banks to hold more capital if they are riskier.

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return. -How much money will Sharon have in her IRA after 6 years?

Suppose you are a high tax bracket individual and you want to shelter your investment income.The best choice of investment for you to minimize the tax bill is to invest in _________.

An investor can earn a 6% nominal rate of return but inflation is expected to be 3%.If the individual invests $2,000 per year for 20 years the real future value of their investment is ________.(All investments occur at year end) .

An investor in the 34% tax bracket would be indifferent between a corporate bond with a before tax yield of 8% and a municipal bond with a yield of _________.

An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond.What is his after tax yield?

Currently,the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

Sharon decides to put $5,000 into her IRA at age of 25. She will continue to invest the same amount for the next 6 years and then stop contributing. Assume 10% annual return. -How much money will Sharon have in her IRA when she is ready to retire at age of 62?

You want to minimize your current tax bill by maximizing your contributions to your _____________.