FI 360 Larkan Chapter 1

After putting your financial plan to work, you should periodically review and revise your plan, especially if you have all of the following, except: Get married Develop your goals Birth of a child Get divorced Spouse returns to school

Develop your goals Explanation: Developing your goals should be accomplished prior to putting your financial plan to work.

If the providers in the financial system dramatically change their behavior by significantly reducing their savings, this has the potential to: Encourage users to borrow less. Shut down all of the commodity markets. Lead to lower interest rates. Lead to higher interest rates. Shut down the financial system.

Lead to higher interest rates. Explanation: A reduction in money supply has the tendency to lead to higher interest rates through the process.

If you borrow $8,000 with an interest rate of 5 percent, to be repaid in five equal yearly payments at the end of the next five years, what would be the amount of each payment?

PMT=PV / PV annuity table factor =$8,000 / 4.329 =$1,848

Using the rule of 72, approximate the following amounts: (a) If the value of land in an area is increasing 6 percent a year, how long will it take for property values to double? (b) If you earn 10 percent on your investments, how long will it take for your money to double? c) At an annual interest rate of 5 percent, how long will it take for your savings to double?

Time period ≈ 72 / Rate (a) 72/6 = 12 years (b) 72/10 = 7.2 years (c) 72/5 = 14.4 years

Using time value of money tables, calculate the following. (a) The future value of $450 six years from now at 7 percent. (b) The future value of $900 saved each year for 10 years at 8 percent. (c) The amount a person would have to deposit today (present value) at an interest rate of 6 percent to have $1,000 five years from now. (d) The amount a person would have to deposit today to be able to take out $600 a year for 10 years from an account earning 8 percent.

(a) FV=PV × FV single sum table factor =$450 × 1.501 =$675.45 (b) FV=PV × FV annuity table factor =$900 × 14.487 =$13,038.30 (c) PV=FV × PV single sum table factor =$1,000 × 0.747 =$747 (d) PV=FV × PV annuity table factor =$600 × 6.710 =$4,026

Financial intermediaries' main goal is to: Encourage users to borrow less. Encourage providers to save less. Provide funds at an interest rate substantially above the market rate. Provide funds at an interest rate substantially below the market rate. Charge an amount that will pay them to operate and charge an adequate interest rate.

Charge an amount that will pay them to operate and charge an adequate interest rate. Explanation: Financial intermediaries have to charge a certain amount to cover their operating costs as well an adequate interest rate in the event that some of the borrows do not repay their loans.

Carla Lopez deposits $3,400 a year into her retirement account. If these funds have an average earning of 9 percent over the 40 years until her retirement, what will be the value of her retirement account?

FV=PMT × FV annuity table factor =$3,400 × 337.882 =$1,148,798.80

Josh Collins plans to buy a house for $210,000. If that real estate is expected to increase in value by 3 percent each year, what will its approximate value be six years from now?

FV=PV × FV single sum table factor =$210,000 × 1.194 =$250,740

The primary goal of the Users in the Financial system is to: Encourage other users to borrow less. Obtain funds for the least cost. Obtain funds at the highest interest rate. Avoid borrowing from the financial intermediaries. Disable the financial system.

Obtain funds for the least cost. Explanation: The users of the financial system want to obtain funds for the least cost, the lower interest rate.

If you desire to have $20,000 for a down payment for a house in five years, what amount would you need to deposit today? Assume that your money will earn 4 percent.

PV=FV × PV single sum table factor =$20,000 × 0.822 =$16,440

Pete Morton is planning to go to graduate school in a program of study that will take three years. Pete wants to have $15,000 available each year for various school and living expenses. If he earns 4 percent on his money, how much must be deposited at the start of his studies to be able to withdraw $15,000 a year for three years?

PV=PMT × PV annuity table factor =$15,000 × 2.775 =$41,625

The first step in the Financial Planning Process is to determine your current financial situation. This includes reviewing all of the following, except: Current Income Amount of Savings Personal Values Amount of Expenses Debts Owed

Personal Values Explanation: Personal values are not part of Determining your current financial situation.

Jamie Lee Jackson, age 24, has recently decided to switch from attending college part-time to full-time in order to pursue her business degree and aims to graduate within the next three years. She has 55 credit hours remaining in order to earn her bachelor's degree, and knows that it will be a challenge to complete her course of study while still working part-time in the bakery department of a local grocery store, where she earns $390 a week. Jamie Lee wants to keep her part-time job at the grocery store as she loves baking and creates very decorative cakes. She dreams of opening her own cupcake café within the next five years. She also realizes that by returning to school full-time she will forgo any free time that she enjoys now socializing with friends. Jamie Lee currently shares a small apartment with a friend and they split all of the associated living expenses, such as rent and utilities, although she would really like to eventually have a place of her own. Her car is still going strong, even though it is seven years old and she has no plans to buy a new one any time soon. She is carrying a balance on her credit card and is making regular monthly payments of $50 with hopes of paying it off within a year. Jamie has also recently taken out a student loan to cover her educational costs and expenses. Jamie Lee also began depositing $1,800 a year in a savings account that earns 2% interest, in hopes of having the $9,000 down payment needed to start the cupcake café two years after graduation. Current Financial Situation: Checking account - $1,250 EF Saving account - $3,100 Car - $4,000 Student loan - $5,400 Credit Card Balance - $400 Gross Annual Salary - $2,125 Net Monthly Salary - $1,560 Based on her personal and household needs and values, use the drop-down menus in each cell below to identify Jamie Lee's short-term financial goals, intermediate and long-term financial goals, and non-monetary goals. Short-Term Monetary Goals 1. Description Amount Needed Months to Achieve Action To Be Taken Priority Intermediate and Long-Term Goals 1. Description Amount Needed Months to Achieve Action To Be Taken Priority Non-Monetary Goals 1. Description Time Frame Action To Be Taken 2. Description Time Frame Action To Be Taken

Short-Term Monetary Goals 1. Description - Pay off cc debt Amount Needed $400 Months to Achieve 9-10 months Action To Be Taken Make monthly payments of $50 Priority High Intermediate and Long-Term Goals 1. Description Save money for down payment on Cupcake Cafe business Amount Needed $9,000 Months to Achieve 60 months Action To Be Taken Make yearly deposits of $1,800 Priority High Non-Monetary Goals 1. Description Obtain a business degree Time Frame 36 months Action To Be Taken Complete degree requirements 2. Description Open Cupcake Cafe Time Frame 60 months Action To Be Taken Save down payment for cupcake business

The "Paralysis of Analysis" means: Spending time laying on the couch for an extended time period. Putting too many plans in action at once. Failing to complete Personal Financial Statements. Spending so much time creating a plan that you never put it into action. Becoming disabled after falling on the ice.

Spending so much time creating a plan that you never put it into action. Explanation: If you develop a plan, you must implement the plan. This means once you have developed a plan, you need to put it into action.