Archive for June, 2018

Real World Graduation: Question 36

RealWorldGraduation_Question_36   <– PDF

The 401(k) system was set up such that people could save and invest their money prior to paying taxes, let the money grow over time, then pay the taxes later when they started withdrawing it as early as age 59.5. However, early withdrawals are permitted for certain hardships with no penalty.  Hardships are defined as large medical bills (as long as they do not exceed what can be deducted on your income tax), disability, and the splitting of a 401(k) account due to a divorce.  Otherwise, early withdrawals are penalized at 10% of the withdrawal amount, and all income taxes on the amount withdrawn are due immediately.  Aside from hardship cases, under what circumstances should the average person consider an early withdrawal from their 401(k), even though they have to pay taxes and penalties?

a) To buy a house, or make a down payment on one

b) To buy a car

c) To use the money to invest in the stock market (buying individual securities)

d) To pay for a honeymoon or other vacation

e) Both a) and c) are valid causes

(The answer is on p. 2 of the PDF)

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Real World Graduation: Question 35

RealWorldGraduation_Question_35   <– PDF

What is the source of wealth in the U. S.?

a) The Federal Reserve, because it prints the money.

b) The U. S. Treasury

c) Banks

d) The Stock and Commodities Markets

e) There is no one source of wealth in the U. S.; all of the above together are the source of wealth.

(The answer is on p. 2 of the PDF.)

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Real World Graduation: Question 34

RealWorldGraduation_Question_34  <– PDF

Suppose you are 21 years of age and have $1,000 to invest. Which of the following investment strategies offer the greatest long-term financial benefits?  Assume that the Prime Rate (the interest rate the Federal Reserve charges to the largest banks) is 5.2%.  The banks in turn will lend money at 3 to 10% above the Prime Rate, depending on the credit-worthiness of the applicant.   All of these investment strategies are legal in all 50 states.

a) You lend your $1,000 to an individual who promises to pay you 25% per year ($250 per year) interest on the principal. At the end of 10 years, you will receive $3500, $1000 of which is your original loan, and $2500 is interest on the loan. The average annual return to you on this loan is 25%.

b) You lend your $1000 to a corporation. The corporation agrees to repay you $600 the first year, $400 the second year, and $200 in the third year.  In all, you will receive $2200 over the three years, $1000 of which is the original loan amount, and $1200 is interest.  The average annual return on this loan is 40%.

c) You give your $1000 to a corporation, and they agree to pay you $100 per month (indexed for inflation) for life beginning when you turn age 50. Suppose your current median life expectancy is 57 years (meaning that people your age have a median life span of 57 more years).  This means that half the people now aged 21 will die before they reach 78, and half will live to 78 or longer.  If you fall in the median range for life expectancy, you will collect for 28 years starting on your 50th birthday.  Indexing for inflation means that if inflation of the currency causes the dollar to be only half as valuable as it is now, the corporation will compensate you by paying $200 per month, i.e., you will receive $100 in today’s buying power, not just $100.  Assume that you are now 21 and you expect to live to be 78 (the median life expectancy).  Then, you will receive the equivalent of $33,600 in present-year dollars, all of it in interest.  The average return over the 57 years between now until time of death is 58.9% (although you will collect it only for the last 28 years of your life).

d) Go to the Off-Track Betting Parlor next Tuesday and bet the entire $1000 on horse #3 in the fourth race.

e) Each of the first three options have varying benefits and risk, so it would be wise to split the $1000 among the first three options (not necessarily equally).

(The answer is on p. 2 of the PDF.)

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Real World Graduation: Question 33

RealWorldGraduation_Question_33   <– PDF

“Lobbying” is the term used when a person or organization spends money and energy to influence legislators, administrations, and courts to adopt policies favorable to the person or organization. It has been estimated that a total of about $3 billion was spent by lobbyists in Washington in 2007, mostly in the course of influencing Congress.  Among the groups that have lobbying activities in Washington are finance, insurance, real estate, medical industry, unions, trade associations (such as construction, firemen, police, miners, plumbers, electricians), industrial associations (such as automotive, tobacco), and the various ethnic, civil rights, and conservation activist groups.  The influence of lobbyists has become so pervasive that often it is lobby groups that actually write the legislation that Congress votes on.  Generally, these legislative initiatives involve a change in tax conditions or status, or changes in the amount and type of regulation.  Congress is supposed to be working in the interests of the people, but most legislation is pushed through due to the activity and influence of lobbyists.   In what ways do lobbyists present a problem for the legislative function?

a) Congress opens itself up for legitimate criticism by accepting money, gifts, favors, and travel from lobbyists.

b) There is considerable risk that corporate interests will gain unfair tax advantages because they wrote the legislation for that purpose

c) There is some risk that insufficient regulations will be enacted due to lobbying influence, because the legislation was written by those who will benefit from the change in regulation.

d) There is some risk that unions will engage in unethical activities because they get favorable treatment under the law, which occurs because they wrote the legislation for that purpose.

e) A combination of a) , b), and c).

(The answer is on p. 2 of the PDF.)

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