Ch 01: Assignment - Understanding Personal Finance

By my reasoning, the account earning __ interest should have the greater future value, assuming the identical amounts of principal, interest rates, and investment periods.

compound

According to Dr. Johnson, an asset's present, or ___, value is the current value of the cash flows that it will pay or receive in the future.

discounted

What is an economic indicator, and what does it do? An economic indicator is __ that:

any economic statistic

Interest

The additional money paid to the lender as compensation for its temporary use.

Account X pays compound interest. Round your answer to two decimal places. Future ValueXF = Present Value × Interest Rate Factor = Present Value × (1 + Interest Rate)n years = $2,000 × (1 + 0.09)3 =

$2.590.058

The Calculation of a Future Value

Future Value = Present Value x Interest Factor

Where is the Economy Going?

Knowing how well the economy is doing and where it is going next is critical to positioning both you and your investments appropriately. This means that knowing what economic indicators are and how to interpret them is critical to achieving your long-term financial goals and objectives.

Financial Literacy

Knowledge of the facts, concepts, principles, and technological tool that are fundamental to being smart about money.

Financial Happiness

The positive resulting form engaging in good financial behaviors. Among the good financial behaviors are paying your bills on time, spending less than you earn and investing for the future, and knowing where your money goes.

How Does Inflation Affect Prices, Purchasing Power, and Interest Rates?

The term inflation describes a steady increase in an economy's general level of prices, as measured by the changing cost of a "market basket" of the goods and services that the typical American household might purchase.

Opportunity Cost

The value of the best alternative not selected in a decision or trade-off.

I think that Sarah would have to deposit __so that she would have the desired $22,500 at the end of three years. Is that what you got when you solved the problem?

$16,905

Account A pays simple interest. Round your answer to two decimal places. Future ValueA = Principal + Interest = Principal + [(Principal × Interest Rate) × Investment Period] = $2,000 + [($2,000 × 8%)× 3 years] =

$2.480.00

Which of the following statements regarding procyclical, countercyclical, and leading economic indicators is correct? Check all that apply.

An example of a procyclical indicator is the number of employees on nonagricultural payrolls. Examples of leading economic indicators are building permits, the weekly first-time claims for unemployment insurance, and factory orders.

Employee Benefit

Compensation received in return for an employee's work effort that does not take the form of wages, salary, commissions, or other cash payments.

Economists recognize two principal types and sources of inflation:

NA

In evaluating a financial planner prior to his or her hiring, what background information would you find helpful? Check all that apply.

Professional and client references and feedback Examples of the work product provided to other clients, including the evaluation criteria used and the plans, reports, and portfolios Work history, including the companies with whom he or she has been associated

Ummm. I think __ is the situation that requires the calculation of a present value. The reason is that the amount to be placed on deposit is both __ and occurs __.

Scenario 1 unknown now, or at the present time

standard of living

The material well-being and peace of mind that individuals and groups desire and seek to attain, to maintain if attained, to preserve if threatened, and to regain if lost.

What is the opposite of inflation, and how does it affect an economy?

The opposite of inflation is deflation, which is a broad, sustained decrease in the prices of goods and services.

Marginal Tax Rate

The term used to describe the tax rate applied to the last dollar of income earned.

Under the ___ arrangement, the client is charged __ fee The advantage of this plan is the fee reduction that results from the purchase of financial products. by the planner, but this is reduced, or offset, by any commissions paid for financial products purchased by the client. The advantage of this plan is the fee reduction that results from the purchase of financial products.

fee-offset an annual or hourly

__ in the supply of money (or credit) that can be used to purchase the products increase product prices.

increase

Also, notice that the present value interest factor __ the reciprocal of the future value interest factor. This means that you don't necessarily need two different interest factor tables for the single cash flow; you can make this using either simply the present value table or the future value table—so long as you use it correctly.

is

An economic indicator is any economic statistic that:

suggests the current and future condition and the future direction of an economy.

Alejandro is currently taking a course in personal finance and has learned the benefits of both starting a savings plan and starting it early. Therefore, he has decided to save $840 per year in an account that pays 5% . He plans to open the account tomorrow and will make deposits at the end of each year, including this year, for the next 15 years. (Note: Round your answer to the nearest whole dollar.) You can use the following table of Future Value Interest Factors: By the end of his investment period, he will have saved __

$18,126

Account X pays compound interest. Round your answer to two decimal places. Future ValueXF = Present Value × Interest Rate Factor = Present Value × (1 + Interest Rate)n years = $2,000 × (1 + 0.08)3 =

$2.519.42

Account A pays simple interest. Round your answer to two decimal places. Future ValueA = Principal + Interest = Principal + [(Principal × Interest Rate) × Investment Period] = $2,000 + [($2,000 × 9%)× 3 years] =

$2.540.00

Difference= FVX−FVA

$39.42

Difference= FVX−FVA

$50.058

Within the month, Isaiah is taking a new job and moving to a city with an outstanding rapid transit system. He intends to sell his car for $7,500 and invest the money by placing it in a savings account. The account will pay 6% per year in compound interest, and he wants to keep the funds on deposit for three years. You can use the following table of Future Value Interest Factors: At the end of his investment period, Isaiah expects to have an accumulated balance of __ in his savings account. (Note: Round your answer to the nearest whole dollar.)

$8,933

Isaiah's grandfather is pleased that his grandson is learning to save. To further encourage the practice, he has offered to give his grandson a gift of $3,000 per year for each year that Isaiah keeps the proceeds from the sale of his car invested—presumably for the next three years. He has opened a new savings account that will pay a rate of 8% per year. (Note: Round your answer to the nearest whole dollar.) You can use the following table of Future Value Interest Factors: If Isaiah's grandfather makes deposits of $3,000 per year into the new savings account for each of the next three years and the deposits are made at the end of each year, then the new savings account will have a total balance of __ at the end of year three.

$9,739

Which of the following services do financial planners usually provide to their clients? Check all that apply.

Making referrals to outside, more specialized providers of financial services and products Assessing the personal needs, and identifying and prioritizing the financial goals of individuals and families Evaluating the financial condition and performance of individuals and/or families

The commission-only arrangement means that the sole source of income for financial planners and brokers will be the commissions generated by the __. The advantage of the commission-only arrangement to the __ is that, a client only pays for the products purchased; and the other financial services provided by the planner are "free." A disadvantage of this plan, however, is that a planner may be motivated to recommend products that pay him or her the highest commission.

Sale of financial products client

Financial Success

The achievement of financial aspirations that are desired, planned, or attempted financial goals. This should be defined by you and may include having an abundance of money, property, investments, and wealth.

financial responsibility

The concept that you control your own financial destiny and are accountable for avoiding mistakes and taking advantage of opportunities.

Which of the following are examples of economic indicators? Check all that apply.

The economy's unemployment rate The economy's gross domestic product The economy's inflation rate

Time Value of Money

The general method used to compare the value of cash flows occurring across time—by either calculating the future value of cash flows available today or determining today's value of cash flows occurring in the future.

Financial Planner

The general term used to describe a professional who provides financial evaluations and advice and who receives compensation in the form of commissions, fees, or some combination thereof.

Trade-off

The giving up of one thing for another after evaluating each and selecting between them.

Business Cycle

The irregularly occurring pattern of economic activity generally depicted as an undulating wave of expansion, peak, contraction, and trough.

Inflation

This phenomenon is measured by the changing cost over time of a "market basket" of goods and services that a typical household might purchase.

The __ arrangement provides financial planners with both an up-front fee for the financial __ they provide and a commission for the financial __ purchased by a client. The advantage of this arrangement is that, the client has already paid for the planner's time, services, and products. Therefore, all he or she needs to do is to meet and engage with the planner and follow the plan. This is an advantage for the __.

fee-based services products client

In a __ arrangement, the sole source of income for financial planners will be the hourly or annual fees charged for their services. Planners using this arrangement __financial products and therefore are expected to be more __ in their recommendations for financial products. This can be a significant advantage to the __ .

fee-only do not sell impartial client

__ in the cost of the components used to make products, such as labor and materials, __ the total cost of the good or service.

increases, increases

Two things cause the present and future values to be different amounts. First, the __ earned during the investment period causes the future value to be greater than, equal to, or less than the present value. Second, the method used to calculate the interest earned—that is, whether the account pays __ interest—determines the amount by which the future value differs from the present value.

interest rate simple or compound

Uh . . . if the interest rate were zero, then interest would __ earned by __ ; the future value of account A would be __; the future value of account X would be __; and the difference between the two accounts would be __ .

not be either account $2,000.00 $2,000.00 $0.00

Uh . . . if the interest rate were zero, then interest would __ earned by __ ; the future value of account A would be __; the future value of account X would be __; and the difference between the two accounts would be __ .

not be either account $2,000.00 $2,519.42 X $39.42X

The value of countercyclical indicator moves in the__ direction as the economy's condition, whereas the value of a procyclical indicator moves in the __ direction as the economy's condition. In contrast, the value of a __ indicator changes before the economy's condition improves or worsens.

opposite, same, leading

So how much would she have to deposit today to accumulate $22,500 in three years? Or, stated differently, what is the __value of $22,500? (Note: Do not round your intermediate calculations. Round your answer to the nearest whole dollar.)

present

OK, I understand that and I know the amount invested today can be called the__ value of the investment, whereas the amount realized after the passage of "t" period of time is called its__ value. But what causes the present and future values to be different values?

present future

First, remember that the amount invested is usually called __ , and the amount earned during the investment period is called__ . It is important to be able to calculate a future value so that you can know in advance what a given amount of principal will be worth after earning a specified__ rate for a known__ .

principal interest interest rate period of time

This type of inflation, called cost-push inflation, results when the costs of production increase and induces manufacturers to __ their prices to protect their ability to make a profit.

raise

This phenomenon creates a strong expectation in the minds of consumers—who will not purchase unless prices continue to decline. It also: Check all that apply.

reduces corporate sales and profits. AND reduces employment and worker incomes.

That makes sense and I remember Dr. Johnson says that the difference between simple and compound interest is that in the case of __ interest, interest is earned solely on the invested principal, but in the case of __ interest, interest is earned on not only the principal but also previously earned interest.

simple compound

This type of inflation, called demand-pull inflation, results when the supply of goods and services available for purchase is __ than the supply of money (or credit) that can be used to purchase the products.

smaller