Exam 1

How long does it take to double $5,000 at a compound rate of 12% per year (approx.)?

"Rule-of-72" Approx. Years to Double = 72 / i 72 / 12 = 6 Years [Actual Time is 6.12 Years]

If you invested $1,000 on January 1, 2019 and the money earns 5% interest, how much interest will you have earned by December 31, 2020?

$1,000*5%*2=$100 interest

If you invested $2,000 on January 1, 2019 and the money earns 6% interest, how much interest will you have earned by December 31, 2023?

$2,000*6%*5=$600 interest

i =

(FV/PV) ^1/n - 1 Interest rate per investment period

When using a financial calculator... Money leaving you (such as a lump sum investment or periodic payment) is

When using a financial calculator ... when do you input NEGATIVE

When using a financial calculator... Cash flows coming to you (rental income) are

When using a financial calculator ... when do you input POSITIVE

R =

annual rate of interest

Investments

are assets purchased with the goal of providing additional future income from the asset itself.

Savings

are income not spent on current consumption.

The Great Recession

began in 2007and lasted 18 months, which makes it the longest of any recession since 1929 to 1941.

when do you use PMT key

calculating annuity

Annuities

cash flow that takes place more than once. >cash flow (payment) can be money received by you or leaving you.

Annuity Due

cash flows that take place at the beginning of the period

Ordinary Annuity

cash flows that take place at the end of each period

Inflation is measured by

consumer price index (CPI).

risks or costs when investing

- risk of not getting your money back - risk of inflation - opportunity cost > You have to give up something when you invest (you can't use the money for something else)

business cycle

-Expansion -Peak -Contraction -Trough

A true financial planner should be able to analyze a family's total needs in such areas as:

-investments, taxes, insurance, estate, retirement

Five Fundamental Steps in Financial Planning Process

1)Evaluate your financial condition relative to your education and career choice; 2)Define your financial goals; 3)Develop a plan of action to achieve your goals; 4)Periodically develop and implement spending plans to monitor and control progress toward goals; 5)Review your financial progress and make necessary changes.

FV for Annuity formula

= [(1 + i)^n - 1] * PMT / i

Present value of annuity

= [1 - (1/1 + i)^n] * A / i

How long does it take to double $3,000 at a compound rate of 6% per year (approx.)?

Approx. Years to Double = 72 / i 72 / 6 = 12 Years

The most recognized professional designation for financial planners is the

Certified Financial Planner (CFP®).

Future price formula

Current Price * (1+inflation rate) ^n

Previous price formula

Current Price / (1+inflation rate) ^n

Inflation rate Formula

CurrentPrice−PreviousPrice / PreviousPrice * 100%

Financial security is marked by having high income. True or False

False

Only rich people need financial planning. True or False

False

PV =

FV (1+i) ^−n = FV / (1 + i)^n Present Value (as a lump sum)

Julie Miller wants to know how large of a deposit to make so that the money will grow to $10,000 in 5 years at a discount rate of 10%.

FV = 10,000 n = 5 i = 10 PV = ?? $6,209.21

Julie Miller wants to know how large of a deposit to make so that the money will grow to $45,000 in 10 years at a discount rate of 4.5%.

FV = 45,000 n = 10 i = 4.5 PV = ?? $28,976.75

You invest $100 into your savings account on 1/1/19, On 6/30/19, how much interest will you have earned if the account earns 5% simple interest semi-annually.

I = 100 * 5% * .50 I = $2.50

interest formula

I = PRT

You invested $100 into your savings account on 1/1/19, On 12/31/19, how much interest will you have earned if the account earns 5% compounded semi-annually.

I1= 100.00*.05*.5 = $2.50I2= 102.50 *.05*.5 = $2.56 Total Interest Earned = $5.06

n =

In (FV/PV) / In (1+i) Number of investment periods

A gallon of milk costs $3.50 today. It was priced at $3.00 last year. What is the inflation rate?

Inflation Rate = CurrentPrice−PreviousPrice / PreviousPrice * 100% (3.50 -3.00)/3.00 = 0.1667 * 100% = 16.67%

A movie ticket costs $8.00 today. The same ticket was priced at $6.50 last year. What is the inflation rate?

Inflation Rate = CurrentPrice−PreviousPrice / PreviousPrice * 100% (8.00 -6.50)/6.50 = 0.2308 * 100% = 23.08%

You invested $1,000 into your savings account on 1/1/19. If the account earns 9.5% compounded semi-annually 1) how much interest will you have earned over the 3 year period and (2) what will your total account balance be on 12/31/21?

Interest Earned = $321.08 Beginning Balance = $1,000 Total Account Balance = $1,321.08

Which of the following is NOT an economy indicator A. GDP B. Inflation rate C. Unemployment rate D. Interest rate

Interest rate

If you deposited $2,000 AT THE END OF EACH YEAR into a savings account that earned 7.5% annual interest (compounded annually), how much would you have in the account after five years?

PMT/ annuity = (2,000) i=7.5 n=5 FV=? $11,616.78

You invest $1,500 at the end of each year into a savings account with annual compounding. If the average annual return of the account is 7%, how much will you have in the account after 10 years?

PMT= (1,500) i=7 n=10 FV=?? $20,724.67

FV =

PV (1+i) ^n Future Value

If you deposited $2,000 into a savings account that earned 7.5% annual interest (compounded annually), how much would you have in the account after five years?

PV = (2,000) i = 7.5 n = 5 FV = ?? $2,871.26

You invest $1,500 as a lump sum into a savings account with annual compounding. If the average annual return of the account is 7%, how much will you have in the account after 10 years?

PV = <1,500> n = 10 i = 7 FV = ? ? $2,950.73

P =

Principle sum of money

A bag of chips costs $2.60 today. Its price increases 2% each year. How much will it cost two years later?

The Future Price = Current Price * (1+inflation rate) ^n 2.6 * (1+2%) (1+2%) = $2.71

A gallon of milk costs $3.50 today. Its price increases 5% each year. How much will it cost next year?

The Future Price = Current Price * (1+inflation rate) ^n 3.5 * (1+5%) = $3.68

A seedless watermelon costs $4.50 today. Its price increases 3% each year. How much did it cost last year?

The Future Price = Current Price * (1+inflation rate) ^n 4.5/(1+3%) = $4.37

A seedless watermelon costs $4.50 today. Its price increases 3% each year. How much did it cost two years ago?

The Previous Price = Current Price / (1+inflation rate) ^n 4.5 / [(1+3%)(1+3%)] = $4.24

Financial well-being

a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future, and make choices that allow them to enjoy life.

Personal Finance

a study of personal and family resources considered important in achieving financial success; it involves how people spend, save, protect, and invest their financial resources.

what does time do?

allows you the opportunity to postpone consumption and earn interest

I =

interest earned or interest paid

An economic indicator

is any economic statistic, such as unemployment rate, GDP, or the inflation rate, that suggests how well the economy is doing now and how well it might be doing in the future.

Compound Interest

is interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent).

Simple Interest

is the interest paid (earned) on only the original amount, or principal, borrowed (lent).

Principle

is the original amount invested.

Inflation

is the process by which the cost of goods and services tends to rise over time.

The Great Recession that began in December, 2007 A. lasted 18 months B. lasted 20 weeks C. lasted 5 years D. continues to this day

lasted 18 months

TVM

the cost of money that is borrowed or rent, and it is commonly referred to as interest (most important concept in personal finance)

T =

time period in years

The economic phase with conditions making it easy for consumers to buy homes, cars, and other goods is called A. expansion B. trough C. peak D. contraction

trough

Financial Literacy

your knowledge of facts, concepts, principles, and technological tools that fundamental to being smart about money.

Time Value of Money Problems

■FV = Future Value ■PV = Present Value (as a lump sum) ■n = Number of investment periods ■i = Interest rate per investment period