BUS 123 Ch 1

future value=$100+($100x0.06x1year)

$106

john has an interest rate of 7.2% on his savings. Using the rule of 72, his money will double in

10 years

if you want $1000 five years from now and you earn 5% on your savings you need to deposit

1000x0.784=$784

if your savings earn 6% your money will double in

12 years

fred has good credit and can borrow at 5%, bob has poor credit and can borrow at 11%. What is the amount of risk premium Bob will pay?

6%

fed

Federal Reserve System

interest rates

The cost of borrowing money

hidden inflation

The cost of necessities (food, gas, health care) may rise at a higher rate than the cost of nonessential items

present value

The current value for a future amount based on a certain interest rate for a certain time period; also referred to as discounting

rule of 72

The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest

principal

amount of the savings

trade-off

an alternative that we sacrifice when we make a decision

risk premium

an expected return in excess of that on risk-free securities

action oriented goal setting

basis for financial activities, i.e. reduce credit card debt

measurable goal setting

by a specific amount, i.e. accumulate $5,000 in savings in three years" is much better than "put money into savings"

for the time value of money table to be used and for an annuity to exist, the deposits must

earn a constant interest rate

what is the most common mistake related to implementing a financial plan?

emotional decision making

specific goal setting

know exactly what your goals are and create a plan designed to achieve them

what are the four situational influences for financial decisions?

marital status, employment situation, age, number and age of household members

opportunity cost

whatever must be given up to obtain some item

Paul needs to have $200 in two years. The interest earned on the account is 4%, compounded annually. How much does he need to invest today?

$185

paul invested $185. The interest earned is 4%, compounded annually. After 2 years paul will have about

$200

financial planning process:

1. Determine current financial situation 2. Develop your financial goals 3. Identify alternative courses of action 4. Evaluate alternatives 5. Create and implement your financial action plan 6. Review and revise the financial plan

an annual inflation rate of 4% means prices will double in

18 years

Consumer Price Index (CPI)

A measure of the average change in prices over time in a fixed "basket" of goods and services

Consumable-product goals

usually occur on a periodic basis and involve items that are used up relatively quickly, such as food, clothing, and entertainment

intangible-purchase goals

relate to personal relationships, health, education, and leisure

three types of financial goals

short-term, long-term and intermediate

short-term goals

achieved within the next year or so, such as saving for vacation or paying off small debts

if deposit $500 per year in an account for six years at 9%, about how much will you have in your account?

$3,762

if you want to take $400 out of an investment account each year for nine years and your money earns an annual rate of 8% you would need to make a current deposit of

$400x6.247=$2,498.80

simon will be receiving $200 per year for the next five years. The interest on the account is 6% compounded annually. What is the present value of this annuity?

$842

Bankruptcy

A legal process to get out of debt when you can no longer make all your required payments

to calculate time value of money for savings, the following items are needed

annual interest rate, principal amount, length of time

sam has an investment of $200 that is expected to earn 10%. How much will his investment be worth at the end of the year if he earns simple interest?

$220

tom needs a new washing machine that costs $400. He decides to save and buy one next year. If inflation is 4% how much will the washing machine cost next year?

$416

Alex has an interest rate of 3.6% on his savings account. Using the rule of 72, his money will double in

20 years

What does the Fed do?

attempts to maintain adequate money supply to encourage consumer spending, business growth and job creation

intermediate goals

2-5 year time frame

inflation

rise in the general level of prices

when determining goal setting guidelines, what three things should you take into account?

saving, spending, investing activities

Which of the following are part of evaluating alternative courses of action in financial planning process?

evaluating risk, considering the consequences of your choices, inflation risk

global economy influences

financial activities

Financial Planning

formalized report summarizing current financial situation, analyzing your needs, and recommending future activities

five methods of calculating time value of money

formula calculation, time value of money tables, financial calculator, spreadsheet software, websites and apps

compounding

future value computations

compounding allows

future value of a deposit to grow faster than it would if interest were paid only on the original deposit

values

ideas and principles that a person considers correct, desirable, and important

time based goals

indicating a time frame for achieving a goal

key factors for most people in making financial decisions include

inflation costs, financial opportunity costs, time value of money

durable-product goals

involve infrequently purchased, expensive items such as appliances, cars, etc (tangible items)

realistic goal setting

involving goals based on income and life situation

future value

is the amount to which current savings will grow based on certain interest rate and a certain time period

which elements collectively create the national economy?

labor force, government, businesses

long-term goals

more than five years off, such as retirement, vacation home purchase, etc

goal setting guidelines (SMART)

Specific Measurable Action-oriented Realistic Time-based

People with poor credit ratings pay

a higher interest rate

hidden inflation results in

a reported inflation rate much lowing than the actual cost-of-living increase

annuity

a series of equal regular deposits

achieving personal financial satisfaction starts with

clear financial goals

economic effects of deflation

consumers cut their spending as they expect prices will go even lower

deflation

decline in prices

according to the text, you should do a complete review of your finances at least

once a year

you should consider the time value of money as an

opportunity cost

two main factors causing money problems for americans

poor planning and weak money management habits; overbuying

determining current situation involves which of the following

preparing personal financial statements, identifying current income, savings, living expenses and debts

Future Value=

present value + interest earned

amount of interest

principal x interest rate x time

a refrigerator is usually considered as a

tangible item

in times of inflation

the buying power of a dollar decreases

time value of money

the increase of an amount of money as result of interest earned

American companies compete with foreign companies for

the spending money of American consumers

adult life cycle

the stages in the family and financial needs of an adult

economics

the study of how wealth is created and distributed

what can be used to determine future value of equal yearly savings deposits

time value of money table

what is the purpose of developing and analyzing financial goals?

to differentiate needs from wants

present value computations or discounting allows

your to determine how much to deposit now to obtain a desired total in the future