Exam 4

stats

80 million millennials One fourth of the U.S. population$200 billion in annual buying power ◦Not influenced by advertising ◦Review blogs before purchase ◦Value authenticity (truth) over polish (alternative facts)

FORECLOSURE

Can't pay your mortgage, the creditor will respond with a Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Foreclosures shot up by 81 percent between 2006 -2008 and increased by 225 percent since 2006, according to RealtyTrac, a real estate organization specializing in home foreclosures and bank repossessions.

"CAMELS"

Capital adequacy Asset quality Management Earnings Liquidity Sensitivity to market risk

conglomerate merger

Combines companies with no known prior relationship. Miller-Coors-Terrapin merging with Dyson Vacuum Cleaner. Maybe good idea when cleaning up after a great party!

horizontal merger

Combines direct competitors with same product lines into one new company

product extension merger

Combines firms selling different but related products in the same market Coca Cola merging with Lays Potato Chips

market extension merger

Combines firms selling the same products in different markets Hooters Restaurant taking its market chain oversees and buying up other restaurants and turning them into Hooters.

Role of Banks in the Economy

Facilitate borrowing and lending Facilitate payments Risk management

Calculating Deductions

Two Methods of Deducting: Itemized Deductions - this is where your home owner interest expense is deducted Standard Deductions - typically not for home owners

deductibles

deductibles are amounts policyholders pay before insurance pays

exposures

exposures are sources of risk

Ford: Bailout, No.

The company —the only one of the Big Three not to receive a bailout —feared a collapse of GM and Chrysler at the time would have hurt suppliers and, in turn, Ford itself. Ford Chief Executive Officer Alan R. Mulally also asked Congress for a "credit line" of up to $9 billion in case the economy worsened.

insolvent

The condition in which you owe more money than your assets are worth.

However, when put in an auction, the bank usually sells the home at a price that is much lower than what it is worth. The amount that they receive in this process gets put towards the borrower's loan, but the borrower still has to account for the difference that they owe towards the loan.

The process of auctioning off these houses creates a increase in supply of homes in the market, which will decrease the home prices.

Insurance: Purpose

The purpose of insurance is to provide protection against a financial loss due to factors associated with risk. (自然灾害)

perils

perils are events that case a financial loss

policies

policies are contracts with an insurance provider

Nominal (quoted) rate

the rate of return without adjusting for inflation.

DEFAULT

"Default" essentially means a debtor has not paid a debt which he or she is required to have paid.With most debt (including corporate debt, mortgages and bank loans) a covenant is included in the debt contract which states that the total amount owed becomes immediately payable on the first instance of a default of payment. After the notice of default, there is a reinstatement period where the bank is not yet in foreclosure and has not yet put up for auction by the bank. If the defaulted loan isn't taken care of in a given amount of time, the bank resumes responsibility of the home and is put up for auction. ◦In Athens, auctions happen on the front steps of the court house downtown.

Base price

Cost of car including standard equipment & factory warranty

tangible assets

a physical asset; something you can use, feel, and touch.

Step 1: Awareness and Define Your Financial Goals

•Specifically define and write down your financial goals to reflect your financial and life situation. •Attach a cost to each goal •Set a date for when the money is needed to accomplish the goal.

The Personal Financial Planning Process

•Step 1: Awareness and Setting Financial Goals •Step 2: Creating and Activating Plans •Step 3: Evaluating and Revising Plans: Moving forward

Type: Fixed Rate Mortgage

(FRM) is a mortgage loan where the interest rate on the loan remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float." 15 year 30 year

Reason for Bank Regulation

*Banks must be regulated because* a bank failure can be devastating to depositors. there's a risk of systemic failure: the failure of one bank can make it more likely that other banks will fail. government assistance to a bank can be very costly. *Banks are less stable than other businesses because* bank debts tend to be short-term -many depositors could withdraw their funds with little notice. ◦Remember consumer deposits are "loans" to banks; thus, they pay us interest on these loans the behavior of depositors depends on their confidence that the bank is sound, and this confidence can be easily shaken.

Who works for special interest groups?

*Lobbyists* !!!First and foremost, lobbyists must be adept at the art of persuasion, which is the mainstay of their job. They must figure out how to sway politicians to vote on legislation in a way that favors the interest they represent. This means tailoring appeals to specific individuals as well as to group voting blocs, such as Southerners or pro-choicers.

GM and Chrysler

--Both companies terminated agreements with hundreds of their dealerships and GM discontinued several of its brands as part of bankruptcy proceedings. --Pontiac, Hummer and Saturn... GONE! Ford Motor Company was able to survive without entering bankruptcy partly due to a large line of credit which it obtained from the government in 2009. However, stock was trading at $1.01 per share

Investing

--putting your money into an asset that generates a return -Examples --stocks, bonds, mutual funds, or real estate

Speculating

--putting your money into an asset that the future value, or return, relies on supply and demand -Examples --collectors items, baseball cards

Uninsured motorist

-coverage pays for bodily injury for you and your passengers if the driver causing the accident has no liability coverage.

Medical payments

-covers medical expenses for accidental injury up to the policy limit.

Towing insurance

-covers the cost of providing road service

Apartments and other housing

-multi unit developments -rental properties

Georgia Lemon Laws

1 repair attempt in the braking or steering system or 3 repair attempts or 30 calendar days out of service for other problems 1 year or 12,000 miles

Housing Boom: Lead Banks to Offer Additional Risky Mortgage Products

100% financing (meaning no down payment), interest only mortgages (where the person is just paying down the interest and not the principle that was borrowed), adjustable rate mortgages Higher interest rate loans for credit challenged buyers These are fondlyreferred to as "predatory lending practices"

Special Interests: Dietary Supplements

1993: FDA wanted to add regulations Health food stores lobbied Congress 1994: passed Dietary Supplement & Health Education Act, which exempted dietary supplements from most regulation

Right before the market collapsed

2005 was the peak of the subprime boom. At this time, 1 in 5 mortgages was subprime. 20% of mortgages were likely to go bad.

Single Family Dwelling

A housing unit detached from others, own the land, building, and all improvements.

Regulation

An attempt by the government to control the workings of the marketplace.

Bad Mortgage: No income, no job, no assets (NINJA Mortgages)!!

Anyone see a problem with part of your financial portfolio being based on the finances of a NINJA???? Why would a bank do this????

Insurance & Investment Issues： Introduction

Approximately one-half of Americans own stocks through mutual funds and retirement plans.

Causes of the 1980s Crisis: Changes in the Market Environment

As a result of financial innovations in the 1960s and 1970s: ◦banks and S&L's faced more competition from other financial firms (such as mutual funds). ◦new kinds of financial assets made it possible for investors (including banks and S&L's) to take on more risk.

Bankruptcy for Two

Both companies (GM and Chrysler) separately filed for bankruptcy protections: Chrysler on April 30, 2009 General Motors on June 1st, 2009

What can you afford: Housing Affordability Index

Broadly Defined◦The relation of a consumer's housing costs to his/her available resources Median family income divided by annual income needed to buy average house (with 20% down & conventional mortgage)◦National Association of Realtors

Your Rights and Responsibilities

Consumers have the right to choose and receive good insurance and to complain if there are problems. Consumers are responsible for being wise consumers and shopping for good policies, keeping policies updated, understanding their policies, and keeping good insurance records.

Cooperatives

Corporate-owned dwellings in which the residents, as shareholders, own stock representative of the value of their unit. Monthly owner's fee.

Dealer sticker price

Dealer installed options, and dealer markup

How to choose your house

Determine what's most affordable◦Lending standards Your financial history Your ability to pay The appraised value of the home ◦Maximum mortgage ◦The down payment ◦Prequalifying

Disability Income Insurance

Disability income insurance pays benefits to policyholders when they are unable to work. Workman's compensation only covers an employee if he/she becomes disabled from an injury or illness received *while on the job*. Source: Howard, C. and Meltzer, M. (2001). Get Clark Smart. New York: Hyperion.

Banking Act of 1933 (Glass-Steagall Act)

Glass-Steagall allowed commercial banks to sell on-the-run government securities, but prohibited underwriting and brokerage services. It also prohibited real estate and insurance business. But it did protect commercial banks by not allowing other financial intermediaries to offer commercial banking activities.

Gold

Gold is more accessible to the average person because an investor can easily purchase gold bullion (gold in its physical form), from a dealer or, in some cases, from a bank.

In 2006, Consumer Reports reported that all 10 of the cars that it considered to be the 10 best were built by Japanese companies

Honda led the way with: Honda Civic and Honda Ridgeline. Acura, also scored with the Acura TL sedan Toyota included: Toyota Prius and the Toyota Highlander Hybrid, the only two exclusively gasoline-electric hybrid cars among the top picks.

Renters/Tenant's Insurance

If you are renting, you should compare policies that will protect your personal possessions. These may not be covered by the insurance your landlord has on the property. Your parent's property while at your place MAY be covered by their homeowner's insurance...

$34 billion in government loans

In return, the companies promised to fast-track development of energy-efficinet vehicles, and consolidate operations GM and Ford agreed to streamline the number of brands they produced They also won agreements from the UAW union to delay contributions to a health trust fund for retirees and reduce payments to laid-off workers The three COs agreed to work for a $1 a year and sell their corporation jets

Preview

In the U.S., about 7,500 commercial banks serve businesses and consumer's needs. This puts the U.S. in a class by itself. In most other developed nations, only a handful of banks dominate the landscape.

automobile

Is a tangible consumer durable: a good that provides benefits that extend beyond one year.

Subprime/Predatory Mortgage Loans

Loans given to households with poor credit history. They almost always have a higher than average interest rate Subprime market grew from $210 billion in 2001 to $625 billion in 2005 This means banks were offering billions of dollars in loans to folks who likely would not be able to pay the mortgage off.

Cementing the deal

Making your purchase. ◦Negotiate the price. Consumer reports (have this with you) ◦Negotiate your trade in valueKelly Blue book (have this with you) ◦Evaluate financing alternatives. ◦Complete the purchase.

Dow Jones Industrial Average

Measure of average of stock prices of major industries •is a stock market index. It is an index that shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. •the index's performance continues to be influenced by not only corporate and economic reports, but also by domestic and foreign political events such as war and terrorism, as well as by natural disasters that could potentially lead to economic harm. •Since stocks are a piece of ownership in a company, the stock market reflects investors' confidence in the future earnings of all these companies. •Since corporate earnings are dependent on the health of the U.S. economy, the stock market is also an indicator for the U.S. economy itself.

Mergers

Mergers are when 2 or more companies combine into a single company.

Lemon Laws

Nearly all State Lemon Law Statutes are based on the Federal Magnuson-Moss Warranty Act A vehicle that continues to have a defect that substantially impairs its use, value, or safety. Generally, if the car has been repaired 4 or more times for the same Defect within the Warranty Period and the Defect has not been fixed, the car qualifies as a Lemon.

Insurance Issues: Introduction

One in twelve dollars flowing in the U.S. economy is connected to the insurance industry.

Type: Reverse Mortgage

Pay the home's owner (usually an elderly person) cash in monthly advances or through a line of credit. Convert home equity (the portion you own outright) into cash with no repayment required for as long as the homeowner lives in the home. But......no one lives forever so the homeowner's heirs then must repay the debt on the home...perhaps losing the home altogether.

Invoice price

Price manufacturer charges the dealer Generally, the most important price to know when shopping for a new car ◦The dealer cost may be less than the invoice due to:Rebates, discounts, allowances, incentives ◦Gives you the leverage you need to pay the price you want for your new vehicle

Bank Regulation: Overview

Primary bank regulators in the U.S.: Office of the Comptroller of the Currency (OCC) ◦part of the U.S. Department of the Treasury Federal Reserve System -the U.S. central bank Federal Deposit Insurance Corporation (FDIC) State bank regulators

Monthly Mortgage Payments (PITI)

Principal --what you borrowed Interest --the cost of borrowing Taxes --support of government Insurance --protection of your dwelling and contents Note: T (taxes) & I (insurance) are held in an escrow account....this is an account that they can draw your funds from to pay your taxes and insurance when they come due.

If you can't sell your home: Renting

Rent is payment for the use of a specific property or unit Primary advantage of renting is flexibility

Most recently: October 13, 2014

Shares of Fiat Chrysler began trading on the NYSE under the ticker symbol FCAU. Fiat Chrysler opened at $9 and quickly moved as high as $9.55 before pulling back a bit. Chrysler hasn't been publicly traded in the United States in more than seven years. At that time it was known as DaimlerChrysler. Daimler (DDAIF) agreed to sell Chrysler to private equity firm Cerberus in 2007.

Who is the current Secretary of Agriculture?What state is he from? What position did he hold?

Sonny Perdue Former Governor of Georgia

A time of trouble

The Big Three spent almost $50 million to lobby Congress during the first nine months of 2008.

The Auto Industry Collapse

The auto industry contributes ~3.6%, or $500 billion to total U.S. GDP output. A 30% decline in auto sales translates directly into a 1% decrease in economic output. Therefore, a decline in output results in direct job losses, as well as auto-industry related losses.

Causes of the 1980s Crisis

The banking crisis had many causes, including: ◦changes in the market environment ◦looser regulations that gave S&L's more competitive options As a result, S&L's held more risky assets, resulting in huge loan losses. Since S&L deposits (up to $100,000) were protected by federal deposit insurance, depositors had little incentive to monitor S&L risks. Bank's Troubles By 1984 bank's nonperforming loans (loans on which payments were late) rose to $5.2 billion (over 10% of total loans). May 1984: an electronic "bank run" -depositors withdrew billions of dollars in deposits

Causes of the 1980s Crisis: Changes in Regulation

The banking industry was partially deregulated in the early 1980s: ◦S&L's had mostly been restricted to home mortgage lending before, but now they were allowed to invest in commercial real estate and stocks.

Historical Development of the Banking Industry

The modern commercial banking industry began when the Bank of North America was chartered in Philadelphia in 1782. History had one other significant outcome: Multiple Regulatory Agencies 1.Federal Reserve 2.FDIC3.Office of the Comptroller of the Currency 4.State Banking Authorities

2008

Then came the downturn with the credit crisis In one year's time stock prices drop 30% ◦destroying $3.5 trillion of value What happened? Investors finally realized that there had been excessive optimism The wave turned into one of excessive pessimism

Consumer Protection and Your Car

Warranties "secret warranties" "lemon laws"

National Association of Realtors

When index falls below 100, median family income is less than what is needed to buy a median priced home When index is above 100, median family income is more than what is needed to buy a median priced home ◦Index value of 110 means that a family earning median family income has 110% of income necessary to quality for an 80% loan

Restructuring

With the intent to prevent massive job losses and destabilizing damage to the entire manufacturing sector, the United States and Canadian governments provided unprecedented financial bailout support to allow the companies to restructure their debt via filing for Chapter 11 bankruptcy .

MILLENNIALS (1981-2000s)

Would rather buy a car and lease/rent a house. 71% would rather buy than lease a car. 59% would rent a house rather than buy. 61% admit cannot afford to buy a home. Many still living with parents. Also known as Generation Y

Can a landlord Limit the Number of Occupants

Yes, as long as the landlord is not discriminating on the basis of familial status. ◦Violation of Fair Housing Law Georgia law does not regulate occupancy; however, city and county ordinances may impose occupancy limits

Rate of return =

[(ending value -beginning value) + income] / beginning value

exclusions

exclusions are items not covered

Personal Income Statement

tells where your money comes from and where it has gone

How the Mighty Fall

•On September 15, 2008, the Dow Jones Industrial Average Dropped 500 points, the worst drop since the bottom of the 2001 recession. •U.S. Treasury Secretary Henry Paulson's refusal to bail-out Lehman Brothers threw the markets into a crisis of confidence. That's because financial companies knew they would be forced to eat the losses they sustained from the Subprime Mortgage Crisis.

Step 3: Revise Your Plan

•Review your progress.•Match your plan to your goals. •Be prepared to start over if your plan no longer meets your needs. •You suffer a job loss •You win the lottery

Balanced owed = Revolving balance

•Revolving credit: •If you carry a balance from month to month on your credit card then you have a revolving account •Compound interest is calculated on revolving balances

What your neighbor does to you

"Living in an area with multiple foreclosures can result in a 10 percent to 20 percent decrease in property values"

Securitization (证券化)

*Securitization* refers to the transformation of illiquid assets into marketable capital market instruments. Today, almost any type of private debt can be securitized. This includes home mortgages, credit card debt, student loans, car loans, etc.

Federal Deposit Insurance Corporation

*The Federal Deposit Insurance Corporation(FDIC)* is a U.S. government corporation operating as an independent agency created by the U.S. Banking Act of 1933. *purpose was to calm consumers, encourage buying/investing* Current level of protection: *$250,000* for each deposit ownership category in each insured bank.

0.0% financing vs. rebates

*Read the fine print!! You don't usually get both! 0.0% financing may be tied to huge down payment May be "on select models only" Rebates generally go to the dealer & are usually included in the advertised price

Nongovernmental Proconsumer groups

*Enlightened companies and consumer protection* Society of Consumer Affairs Professionals International (SOCAP) is an organization of people who work in business in the area of consumer affairs and customer services. SOCAP began in 1973. SOCAP members are often the consumers voice within a company. *Consumer publications* Consumers Union is a private organization that does product testing and publishes Consumer Reports. The National Consumers League is the oldest consumer organization in the United States and works to provide information to consumers. The Consumer Federation of America is a large national advocacy organization and is often the voice of consumers in the media.

Divorce Planners

*New Breed of Financial Planner* ◦A *certified divorce planner* is a specialist who is trained to focus on who gets the assets in divorces and who works alongside attorneys who handle legal documents and child custody issues.

Federal Home Loan Mortgage Corporation (FHLMC)

*The Federal Home Loan Mortgage Corporation (FHLMC)*, known as *Freddie Mac*, is a public government-sponsored enterprise (GSE), The FHLMC was created in 1970 to expand the secondary market for mortgages. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as a mortgage-backed security to investors on the open market. *Fannie Mae* and *Freddie Mac* do not lend directly to home-purchasers. Instead, Fannie and Freddie are in the business of loan "securitization". They buy loans from smaller local banks; thus the smaller, local banks can/did lend more money to consumers!!!

Federal National Mortgage Association (FNMA)

*The Federal National Mortgage Association(FNMA)* , commonly known as *Fannie Mae*, was founded in 1938. It is a government sponsored enterprise GSE), Became a publicly traded company in 1968. Purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage backed securities (MBS),allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market

Federal Housing Authority

*The United States Housing Authority*, or *USHA*, was created during 1937 within the U.S. Department of the Interior by the Housing Act of 1937 as part of Roosevelt's New Deal It was designed to lend money to the states or communities for low-cost housing construction.

Rental car insurance

-covers the cost of renting a car while your car is being repaired, within limits of the policy.

Renting

A *lease* is legal contract between the tenant and the landlord, specifying the responsibilities and rights of both parties. ◦Identifies the rent amount, security deposit amount and specifications, payment for utility bills, late payment penalties, length of lease, eviction terms, etc. *Landlord* ◦Owner of the rental property. ◦May perform management duties or hire a property manager. *Property manager* -may charge a fee to the landlord to perform the management tasks *Tenant*(renter) ◦The person who rents the property. Renters are generally ◦People who choose not to own a home. ◦People who cannot afford to own a home. *Rent* The cost of using someone else's property.

Secret Warranty

Aka "warranty adjustment" Under these programs, the manufacturer will do free repairs on vehicles with persistent problems, even after the warranty expires, in order to avoid a recall and bad press. To get these.....complain LOUDLY and in writing!!

BONDS

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate Investors who bought MBSs loaned money to Freddie and Frannie(debtors) to buy up more mortgages....... NOTE: BONDS HAVE TO BE REPAID BY THE DEBTOR (in this case F& F)!!

Federal Housing Administration

A federal agency established in 1943 to increase homeownership by providing an insurance program to safeguard the lender against the risk of nonpayment. *The Federal Housing Administration (FHA)*, ◦The goals of this organization are to improve housing standards and conditions, provide an adequate home financing system through insurance of mortgage loans, and to stabilize the mortgage market.

Advantages: Tax Deductible Interest

A home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income by the amount of interest paid on the loan which is secured by their principal residence (or, sometimes, a second home)

Mortgagee

A lender who receives a pledge of property to secure a debt. For both you and the bank: A mortgage is a "stream of cash flows"◦Flows out of your household◦Flows into the mortgage servicer Mortgage originators consist of banks, mortgage bankers and mortgage brokers. The mortgage broker connects the family with the lender. The broker collects commission. The family is then able to buy the house that they went.

In 2008

All auto-related industries and after-market service businesses employed approximately 3.1 million people in the United States. The UAW-negotiated wage was roughly $28 an hour in 2007 "total compensation is the cost of labor to the companies, and for GM it is about $73 per hterm-41our and for Toyota about $48."

Ford: Loan, Yes

Although Ford did not receive money from the $80 billion bailout program, Ford did receive $5.9 billion in government loans in 2009 to retool its manufacturing plants to produce more fuel-efficient cars By February 2009, the situation had worsened such that both GM and Chrysler were faced with imminent bankruptcy and liquidation.

FEDERAL FOOD AND DRUG ACT OF 1906

An Act For preventing the manufacture, sale, or transportation of adulterated or misbranded or poisonous or deleterious foods, drugs, medicines, and liquors, and for regulating traffic therein, and for other purposes.

The National Housing Act of 1934

Enacted June 28, 1934, also called the CapehartAct, was part of the New Deal passed during the Great Depression in order to make housing and home mortgages more affordable. It created the *Federal Housing Administration (FHA)*

Type: Adjustable Rate Mortgage

An adjustable rate mortgage, called an ARM for short, is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes. Starts very low, then increases dramatically in a couple of years!!!! Low interest rate now becomes high interest rate; meaning your low mortgage payment now becomes UNAFFORDABLE MORTGAGE PAYMENT!!!

Housing Quality

Does the home still have a warranty? (recall this term from previous chapter) Have you had the home inspected? Get a signed "defect-disclosure" form that describes the condition of the home at purchase....including termites.

DOWN PAYMENT

Down payment: initial cash payment toward purchase of house◦a shift in assets from one form to another (not a cost per se) ◦could have used the down payment for some other purpose Down payment = Price of house * % down A person can withdraw funds from their 401K or IRA retirement accounts without penalty to use for a down payment.

U.S. companies had maintained a steady business with their SUV lines, but sales of domestic SUVs, such as the Ford Explorer, once a stalwart for Ford's total annual sales, fell sharply.

During this time, consumers moved toward smaller, foreign-made SUVs.

Moral Hazard

General insight: agents who are insured will tend to take fewer precautions to avoid the risk they are insured against The insurance provided by central bank and governments gave bankers strong incentives to take more risks To counter this, authorities have to supervise and regulate They did this for most of the post-war period.

Insurance Types

Automobile Insurance Credit insurance Homeowner's insurance and property insurance Health insurance Disability income insurance Life insurance Long-term care insurance

Banks and Financial Products

Banks and brokerage firms offer CDs with a maturity of at least 7 days, with penalties on early withdrawals CDs, a type of time deposit, are usually safe ways to store money from seven days to several years Banks or credit card companies offer *debit cards* and *smart cards* (also *called chip cards or stored value cards*), which may be worth $20 or $50 and can be used for placing phone calls or buying sodas or snacks from vending machines

Why separation important

Banks are at the center of payment system This creates strong links of *complementarity*: when one bank fails, other banks are in trouble Contrast with non-bank firms, e.g. automobile where *substitutability* prevails: when one firm fails this is good news for the others Investment banks can do all the sophisticated asset creation and management they want; butNo funding through commercial banks

Bank Examinations

Banks are visited on a regular schedule by bank examiners from the OCC, the Federal Reserve System, the FDIC, or other agencies. •Bank examiners review the bank's financial statements and its confidential accounts. •The results are summarized in a "CAMELS" rating given to the bank

Monroney sticker price on side window

Base price + manufactured installed options, fuel economy & transportation charge

Culmination

Budget: A forward looking plan for controlling cash inflows and cash outflows. Based on your goals and financial obligations, a budget limits spending in different categories.

The Auto Industry

By 2008, a combination of several years of declining automobile sales and scarce availability of credit led to a more widespread crisis in the US auto industry in 2008 and 2009

vertical merger

Combines supplier and company or customer and company For example: wood cabinet making company with lumber mill

Bank

Commercial banks Savings and loan associations (S&L's) ◦Also sometimes called "thrifts" or "thrift institutions" Credit unions

Advantage: Home Equity Line of Credit

Definition: Equity = [Current market value of a home] minus [Outstanding mortgage balance] EX: $200,000 -$180,000 = $20,000 equity (NOTE: you will likely have to calculate one of these on the final exam) Primary advantage of an equity loan is the tax benefit (Interest paid is usually tax deductible)

Law covering this relationship

Each state has specific laws determining this relationship

Your Income: What determines it

Earnings determine standard of living Education is the key factor in determining income level 70% of wealthy householders finished college

21th Century & the Deregulation of Banking

Erosion of Glass-Steagall (enacted in 1933) ◦Fed, OCC, FDIC allowed banks to engage in underwriting activities, under the Section 20 loophole in the act Gramm-Leach-Bliley Act of 1999◦Legislation to eliminate Glass-Steagall◦States retain insurance regulation, while SEC oversees securities activities ◦Fed still overseas bank holding companies This allowed commercial banks to take on all the activities investment banks had been taking ◦Underwriting and holding of securities (stocks/bonds) Thus banks were allowed to take on same risky activities that they had prior to the Great Depression Lessons of history were forgotten

Department of Justice

Established 1870 works with the FTC in enforcing the Sherman Anti-trust law approves mergers stops price fixing stops monopolies (e.g., Microsoft case)

One concern: Discrimination against potential wanna-be householders:

Fair Housing Act prohibits discrimination on the basis of: ◦Race or Color ◦Religion ◦Sex ◦National Origin ◦Familial Status ◦Disability

Consumer Protection Laws

Federal and state statutes and regulations that promote product safety and prohibit abusive, unfair, and deceptive practices

In crisis

Following dramatic drops in automobile sales throughout 2008, each of the Big Three U.S. automakers: General Motors (GM), Ford Motor Company, and Chrysler, requested emergency loans in order to address impending cash shortages.

Insurance: Insurability

For something to be insurable it must meet the following criteria: •a probability of risk can be established (odds) •a financial loss can be determined (dollar amount) •the event will not affect everyone insured The last qualification explains why natural disasters are often not covered by private insurance companies.

Food, Drug, and Cosmetic Act

Franklin Delano Roosevelt signed the bill on June 25, 1938. Law passed in the wake of a therapeutic disaster in 1937. A Tennessee drug company marketed a form of the new sulfa wonder drug that would appeal to pediatric patients, Elixir Sulfanilamide.However, the solvent in this untested product was a highly toxic chemical analogue of antifreeze.

Magnitude of the Crisis: Bank failure 1980s

From 1980 through 1994, over 2,900 banks and S&L's failed. On average, a bank or S&L failed every 15 days from 1980 to 1994. During this period, about one out of every six banks or S&L's (holding a total of over 20% of the assets of the system) was closed or received government assistance.

November 17, 2010 How to get this point? Auto Industry Employees paychecks... The US automakers also suffered from considerably higher labor costs than their non-unionized counterparts, including salaries, benefits, healthcare, and pensions.

General Motors Co GM.UL pulled off the biggest initial public offering in U.S. history on 11/17/2010 raising $20.1 billion after pricing shares at the top of the proposed range in response to huge investor demand. Became a publicly-traded company again.

General Motors

General Motors filed for Chapter 11 bankruptcy after failing to successfully negotiate deals with bond holders. Bond holders (loan money to GM), were encouraged to turn their bonds into stocks so GM would not have to pay interest on the bonds. They refused.... Stocks would be worth zero after a bankruptcy. General Motors was largely a nationalized institution by then (the U.S. government owning 60% and the Canadian 12.5%), the remaining private stakes mainly being owned by employees

Federal Deposit Insurance Corporation (FDIC)

Government insurance of banks or savings and loans accounts currently up to $250,000 per depositor per bank.

Health Insurance (recall we covered this earlier)

Health insurance is very costly but needed. However, many Americans did not/do not have health insurance. (47 million) Health insurance is very complicated and controversial. Many other countries have nationalized health insurance. The United States has nationalized health insurance for the elderly (*Medicare*) and the very poor (*Medicaid*). Consumers should take advantage of health insurance offered at their workplace. If employer-offered insurance is not available, consumers should carefully compare health insurance plans.

Homeowner's Insurance

Helps pay to repair or rebuild your home and personal possessions due to theft, fire, storm, etc. •Property insurance pays for losses to homes and personal property. •Liability insurance pays for losses from negligence resulting in bodily injury or property damage to others for which the policyholder is responsible.

Unfair Pricing

High Balling ◦A high amount that is offered for your trade in, but this amount is really just added into the price of the new car Low balling ◦Very low price quoted, then the add-ons increase the cost significantly Spray for your leather seats, undercoat for the bottom of the car, GAP insurance......

Expenditures

Housing and transportation are the two largest expenditures for most consumers - Housing and Transportation roughly 50% of your budget ends up going to both of these

Lender guideline #2(back-end ratio)

Housing expenses plus other debts < 36% of gross monthly income Including: mortgage principal & interest (PI) property taxes (T) insurance on home (I) all other debt payments What Can You Afford to Buy? ◦House + Debt Payments should be no more than 36% of your monthly household gross income

Types of Market Failure

Imperfect Competition monopolies Price discrimination Based on age, race, gender Imperfect Information The seller knows more than buyer Inequality

Request for bailout

In December 2008, the Big 3 auto companies asked the government for a $34 billion bailout to avoid bankruptcy. The Big 3 stated that their demise would trigger 3 million layoffs within a year, plunging the economy further into recession. On December 11, the bill failed to pass, losing 52-35 on a Senate procedural vote On December 19, George W. Bush approved the bailout plan, for loans of $17.4 billion to U.S. automakers GM and Chrysler, stating that under present economic conditions, "allowing the U.S. auto industry to collapse is not a responsible course of action." Bush provided $13.4 billion now, with another $4 billion available in February 2009. General Motors would get $9.4 billion, and Chrysler $4 billion.

Bailing out Two

In January 2009, the government used $24.9 billion to bail out two of the Big 3 $17.4 billion for General Motors and Chrysler. $6 billion for GMAC. $1.5 billion for Chrysler Financial.

State Department of Insurance:Their Role in Consumer Protection

Insurance is regulated at the state level. Each state has an Insurance Commissioner. The National Association of Insurance Commissioners (NAIC) and the states have enacted rules and guidelines which sometimes have served to help consumers.

Income tax structure

Income tax: progressive tax meaning that the more you earn the more you pay Tax brackets: income ranges for which the same marginal tax rate applies - 10% - 35% Average tax rate: average amount of every dollar you earned that was paid for federal income taxes Effective marginal tax rate: average amount of every dollar you earned that paid for all local. state, and federal income taxes

Supply and Demand

Increased demand for homes plus a limited supply of available houses likely pushes the price of houses higher!! --A sellers market Limited or no demand for many available houses likely leads to houses selling for very low prices. --A buyers market

Federal Regulatory Agencies

Independent of each other and allegedly the government to some degree. Directors do not change with a change in administration Operating funds come from congress or administration

Advantaage: Property Tax Deduction

Individuals can deduct a portion of the cost of property taxes assessed on the properties they own. The portion depends upon the individual's tax rate.

Warranty

Is a promise by a manufacturer or dealer that it will repair or replace defects in your car, or that your car will be of a certain quality, for a specified period of time. ◦Express warranty: specific promises about the quality of the automobile ◦Implied warranty: the automobile will work as expected (goes into drive when expected and not reverse)

Exiting Bankruptcy

June 10, 2009 Chrysler emerged owned primarily by the United Auto Workers (UAW) union and by Italian automaker Fiat SPA (10 day bankruptcy). •July 10, 2009 General Motors emerged from bankruptcy as a new company majority owned by the United States Treasury (40 day bankruptcy)

Security Deposit Refund in Georgia

Landlord must return security deposit to tenant within 30 days of termination of the lease Tenant is entitled to inspect premises within 5 business days after termination of occupancy Tenant must sign move-out inspection list or specify in writing any items in dispute

Auto Insurance: Liability

Liability (e.g.,100/300/50) •bodily injury liability protection -pays for damage you cause to someone else e.g.: The 100 denotes $100,000 as the maximum paid to an individual; 300 denotes $300,000 as the maximum paid per accident. property damage liability protection -pays for damage you cause to someone else's car e.g.: The 50 denotes $50,000 as the maximum amount paid for damages to someone else's vehicle.

Auto Insurance

Liability (most states require some liability coverage) •bodily injury liability protection •property damage liability protection •personal injury protection *Collision:* covers if your vehicle collides with another vehicle, flips over, crashes into object, regardless of who caused the crash. If your car is very old and not worth much, you may not want to pay for collision insurance. *Comprehensive:* losses from incidents other than collisions, such as fire, theft, hail, flood.

Mutual Funds

Many consumers purchase mutual funds because it is an affordable way to diversify one's investments. Mutual funds are also liquid -which means that the consumer can sell shares of the mutual fund and obtain money easily, though there may be a fee to pay.

Government Protection

Markets have grown large and more specialized Difficult for consumers to get honest information Consumers are separated from sellers logistically and sometimes ethically

Consumer Unit

Members of a household related by "blood, marriage and adoption" (*this is the definition of a family) or by other legal arrangements; or single persons living alone or sharing a household with others but who is financially independent; or two persons who live together and share expenses. Used interchangeably with household

1. Your Assets: What You Own

Monetary Investment Retirement Plans Real Estate Automobiles and other vehicles Personal property

Lender guideline #1 (front-end ratio)

Monthly housing expenses < 28% of gross monthly income Including:mortgage principal & interest (PI)property taxes (T)insurance on home (I) What can you afford to buy? ◦House Payment should be no more than 28% of your monthly household gross income 30%> means you are house poor (unaffordable burden) Half the working poor spend at least 50 percent of their income on rent, a "critical" burden.

Economic Activity Impact

Mortgage rates are very susceptible to economic activity, just like treasuries and other bonds. For this reason, jobs reports, Consumer Price Index, Gross Domestic Product, Home Sales, Consumer Confidence, and other data on the economic calendar can move mortgage rates significantly. As a rule of thumb, bad economic news brings with it lower mortgage rates, and good economic news forces rates higher.

MBS (mortgage backed securities)

Mortgage-backed securities (MBS) are a type of investment that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities (typically bonds) that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization.

Rental Lease

No 3-DAYgrace period -when you sign it goes into effect (generally) Subleasing ◦Allows the renter to lease the property to another person (GET YOUR NAME OFF)

Amount you pay for lease

No easy formula.... Lease payments are generally less than purchasing payments. Many have large down payments

For example: Black Jack MO.

Olivia Shelltrackand FondrayLoving, don't meet the local definition of "family." Purchased a home in Black Jack, a suburb of St. Louis, with their three children. Because Loving is not the biological father of Shelltrack'soldest child, the city denied the family an occupancy permit for the home that they purchased. The family faced fines of up to $500 every week for living in their home without an approved occupancy permit. American Civil Liberties Union (ACLU) took on their case and won against the city.

Collectibles

One should be cautious when choosing to invest in collectibles (stamps, gold, etc.) unless one truly enjoys the items and is knowledgeable about the items.

Planned Unit Developments (PUDs)

Own home and land it sits on as well as shared ownership of the development Monthly homeowners' fee for maintenance and common expenses

CREDIT, LOANS, AND DEBT

People borrow money through the use of credit and loans. The "buy now, pay later" philosophy is ingrained in American society. Credit can be used for luxury items or for longer-term investments such as educational expenses. Collateral: property used to secure the loan ◦This is what you own at the end of the loan or ◦This is what you lose if you can't pay the loan off Lien◦Legal rights to take and hold property if the person does not pay the debt... For example: your house can have a lien put on it if you are not paying your car off. When the house gets sold, the car loan servicer gets paid before you make any money off the house. The cost of using money is called *interest*. The rate of interest is determined by supply (amount of money lenders are willing to lend) and demand (amount of money borrowers are willing to pay). Interest rates are expressed as percentages (for example, 4 percent per year).

Using a balance sheet to measure your wealth

Personal Balance Sheet: *A statement of your financial position on a given date "the financial polaroid or snap shot" of the PRESENT* Lists your assets and your liabilities

Financial Innovations

Process of deregulation of financial markets coincided with financial innovations These made it possible to repackage assets into different risk classes and to price these risks differently And to sell these: "securitization" In other words...........Mortgage Backed Securities.

State Government Protection

Protect consumers with respect to businesses that operate in only one state.Enforce little FTC acts. Consumer protection in most states is through the Attorney General's office, but some states have Offices of Consumer Affairs.

Credit Insurance

Protects a loan or mortgage in the event that a person cannot make his/her payments. A lender may demand it when you take out a mortgage, but this must be explained to you according to FTC regulations. Credit card insurance........pays for charges if you lose or your credit card is stolen or you can't work due to unemployment, illness.... ***not a good idea—expensive and they seldom protect you

Investment Swindles: Multi-level Marketing Plans

Pyramid schemes that require money investments are outlawed in most states. Ponzi schemes are a kind of pyramid scheme promising high returns in a short period of time. Early investors are paid with money received from later investors. Later investors get nothing. The National Consumers League manages a national consumer fraud Website: www.fraud.org/

Truth in Lending Act

Requires financial institution to reveal annual percentage yield/rate, fees charged, information about the loan balance, payment due, total amount charged

Condominiums

Residents have sole ownership of the living space but joint ownership of the land and common areas. Monthly maintenance fee

Bank Products: Savings

Savings provide a safety net and are also helpful for putting together money for future needs such as a down payment on a house. Traditionally, an emergency fund of three to six months of salary set aside as savings is recommended as a financial goal; these funds should be kept in a liquid interest-bearing account such as a money market fund, short-term certificates of deposit (CDs), or a savings account.

Comparing Options for Housing

Single Family Houses ◦free-standing dwellings Cooperatives ◦multi-unit dwellings Condominiums ◦multi-unit dwellingsPlanned unit developments (PUDs) ◦planned development with common land Apartments and other housing ◦multi-unit dwellings

Government Protection & Special Interests

Some consumer protection efforts are hindered when politicians or regulators are influenced by special interest groups.What are special interest groups? Those determined to encourage or prevent changes in public policy without trying to be elected.

Life Insurance: Term vs. other types

Term insurance is more economical than other types because it provides protection only. Whole Life insurance which provides a savings or investment component may not be as beneficial as a separate investment account. Generally term insurance is recommended because it provides more protection for the money.

New Auto Purchase

Take advantage of new car sales, but negotiate the price ◦know the dealer's cost of the vehicle (from invoice) ◦understand the various dealer markups or holdbacks!! ◦be aware of any rebate(s) that may apply Evaluate financing alternatives ◦determine the length of financing ◦shop around to find the best interest rate ◦choose a financing period and rate to give you an affordable monthly payment ◦www.bankrate.com ◦Or use PVA to figure payment

Federal Savings and Loan Deposit Insurance

The *FSLIC* was created as part of the National Housing Act of *1934* to insure deposits in savings and loans a year after the *FDIC* was created to insure deposits in commercial banks. In the *1980s*, Its responsibilities were transferred to the Federal Deposit Insurance Corporation (*FDIC*).

Type: 30-year fixed rate mortgage

The 30-year fixed-rate mortgage is one of the most popular mortgages. The term of the loan is long, you'll pay more $$$ in interest over the life of the loan than you would on a shorter-term mortgage, and you'll build equity more slowly.

US stock market 2006-2008

The Gross Domestic Product (GDP)—measure of US output--increased by only 5% ($650 billion) Yet, the stock market went up by ~ 35%; or in other words: $3.5 trillion was added to the value of US corporations in just one year. What contributed to this......? The answer is: really, nothing◦Fundamentals like corporate productivity growth increased at their normal rate The only reasonable answer is: excessive optimism on the part of consumers ◦Investors were caught by a wave of collective madness

Federal Deposit Insurance Corporation (FDIC)

The U.S. Congress created the Federal Deposit Insurance Corporation (FDIC) in *1933*, after the bank failures in the Great Depression. Today the FDIC guarantees each bank depositor up to a maximum of $250,000.FDIC insurance is funded by a small fee paid by banks based on their deposits.

The Run Up to the 2006 Housing Collapse

The mortgage and credit crisis was caused, in part, by the inability of a large number of home owners to pay their mortgages as their low introductory-rate mortgages (ARMs) increased to much higher interest rates

MBS = Bonds

The most basic types are pass-through participation certificates (BONDS), which entitle the holder to a share of all principal and interest payments made by the mortgage holder. These are basically IOU's. In that, you loan $$ to Freddy and Fannie by buying these mortgages...........they, in turn, will pay you back for these loans with interest!!!

Homeownership Stats

The national homeownership rate is 63.6% One of the major ways homeownership was made available to households/consumer units: ◦New Mortgage Products and credit guidelines opened the market to populations that previously would not have qualified to buy a house

Redlining

The practice of drawing a line around an area that signifies that the area will not receive the same treatment as other areas regarding financing (or insurance and credit). Target areas include low income or crime ridden areas.........if loans are made, they are typically overpriced. So how do folks in these areas ever get out?????

Life Insurance Who needs it

The purpose of life insurance is to replace lost income for anyone who depends on you for financial support. If you have no one dependent upon you, you may not need life insurance. Parents with young children generally have the most need for life insurance. You do not need life insurance for burial purposes. You can have money saved for this purpose, often earning more than you could with any life insurance policy.

Fraud and Scams

There are many insurance scams, and consumers need to be very careful. Victims fall prey to promises of large returns on their money or to stories of how they (or their loved ones) will suffer if they don't have insurance.

Long-Term Care Insurance

This insurance provides benefits for nursing home care or in-home care not covered by Medicare. Low-income consumers may qualify for Medicaid and not need to purchase LTC. Consumers with high incomes may do better to have investments to cover costs of long term care. Review policies carefully. If your children are grown, it may be wise to shift money you were spending for life insurance to LTC insurance instead.

At the consumer level.....What happens if mortgage isn't paid?

When the consumer (home owner) cannot pay his/her mortgage payment? Is just the home owner impacted? No, then who else? ◦The whole neighborhood is impacted because when this home goes into foreclosure and gets sold by the bank at a lower price.....the value of all the houses in the neighborhood drop as well.

Lenders look at

Your NETWORTH: ◦= assets minus liabilities ◦= what you own (or are in the process of buying) minus your debt (what you owe to a creditor)

Free Market

a free market economy is "an economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions"

Social Security

a mandatory insurance program administered by the federal government that provides support in the event of death, disability, health problems, or retirement.•Tax rate of 6.20% of gross salary up to $132,900 in 2019, there is NO social security taken out after this maximum. •Medicare--a health care insurance program for elderly and disabled. •Tax rate of 1.45% of gross salary, with no annual cap.

stock market bubble

a situation in which stocks are trading at prices above their actual worth •is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation. •Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior.

Premiums

additional returns demanded by investors for taking on additional risk.

Single Payment lease

allows the consumer to obtain a discount on the vehicle rental agreement if certain standards are met

Closed credit

credit that you can must repay in fixed payments

Open credit

credit that you can use and repay at your pace so long as you pay the required minimum monthly payment.

Returns from Investing

investors expect a return for delayed consumption: capital gains/losses; income from bonds you receive interest and from stocks you receive dividends

Market failure

is a scenario postulated by some economists in which markets do not efficiently organize production or allocate goods and services to consumers.

Securitization

is the process of taking an illiquid asset (such as your mortgage or student loan payment), or group of assets, and through financial engineering (or something like magic), transforming them into a security. Fannie and Freddie then bundled the mortgages and resold the loans to investors as a Mortgage Backed Security Before the Housing Market Collapse of 2006....F and F held about 75% of American's mortgages!

Credit

receiving cash, goods, or services with an obligation to pay later.

Deregulation

removes or reduces government intervention. The idea behind deregulation is that competition --in any industry --will drive down prices and create a more efficient market. Airlines (1978) Banking (1980s) Electricity (1990s)

premiums

premiums are payments consumers make

"Jobs Bank" How did it get to this point? Auto industry employees budgets... The volume of cars sold in the U.S. was significantly tied to home equity lines of credit, with 24% of sales financed this way in 2006. When the availability of these loans suddenly dried up in 2008 due to the subprime mortgage crisis, vehicle sales declined dramatically, from 17 million in 2006 to 10.6 million in 2009.

the Big Three paid more than 12,000 idled employees their full salary and benefits in "jobs bank" program that was established in the 1984 UAW labor contracts to protect workers' salaries and discourage layoffs. The union's intent was to protect jobs via a plan to guarantee pay and benefits for union members whose jobs were extinguished by technological progress or plant restructurings.

Real rate

the inflation adjusted rate of return

Types of Predatory Lending

• Lender charges an excessive interest rate on a loan made to a person with excellent credit • "Loan targeting" - loans target a specific population or group of people • Lender continually encourages you to refinance, thus incurring additional fees

Clueless

•" I think there are a lot of indications that we may soon be in a recession," former Federal Reserve Chairman Ben Bernanke told his colleagues in January 2008, not knowing then that the deepest recession since the Great Depression was already well underway.

Risk and Diversification

•*Diversification* refers to the number of different types of securities owned. •Diversification reduces risk •Investors demand a return for taking on additional systematic risk

Step 2: Plan of Action

•*Flexibility*--The ability for your plan to change as your situations or goals change. •*Liquidity*--Your ability to convert noncash assets into cash with relative ease and speed. •*Protection*--Your ability to meet the unexpected large expenses without destroying your plan.) •*Minimization of Taxes*--Your ability to pay as little as possible to Uncle Sam.

Time Horizons for Financial Goals

•*Short-term goals* can be accomplished within a 1-year period. •Intermediate-term goals take *1-10* years to accomplish.•Long-term goals take *more than 10 years* to achieve.

types of investments

•*Stocks*: consumer has part ownership in a corporation. •*Bonds*: consumer is lending money to the company or government selling the bond. •*Mutual Funds*: groups of investments where consumers buy into the fund which in turn invests in many different types of stocks and/or bonds.

systematic and unsystematic risk

•*Systematic risk*: the risk associated with all securities and can not be reduced through diversification. (i.e. interest rate risk) •*Unsystematic risk*:risks associated with one particular investment and can be reduced through diversification. (i.e. financial risk)

Real Estate:

•*Tangible asset* such as land or a dwelling; •Represents most of your savings, and normally appreciates in value;•Examples --primary residence, vacation home, rental property

Banking, Debt and Credit Issues

•Achieve your financial *goals*. •Achieve financial *independence*. •Invest *intelligently* •Minimize your payments to *Uncle Sam* •Cover your *assets*

Factors That Determine Creditworthiness

•Annual income •Length of time at current residence •Length of time at current job •Number of bank accounts •Number of credit cards •Credit history

Investment Assets:

•Assets that are invested for the future •Examples --stocks, bonds, mutual funds, cash value life insurance

Your Net Worth: A Measure of Your Wealth

•Assets(own) -Liabilities(owe) = Net Worth

Monetary Assets:

•Cash or other assets that can be easily liquidated •Examples --cash, checking accounts, savings accounts

Your Liabilities: What You Owe

•Current liabilities are liabilities that must be paid-off within the next year. •examples --credit cards and utility bills •Long-term liabilities are liabilities that extend beyond one year.•examples --home mortgage and auto loans

One-Time or Initial Costs

•Down payment •Opportunity cost of down payment •Closing or settlement costs -Loan origination fees -Loan application fee -Appraisal fee -Other fees and costs

Our role in this

•Emotional and cognitive biases seem to be the causes of bubbles, but often, when the phenomenon appears, investors try to find a rationale, so as not to be against the crowd. •We want to get caught up in the next best thing!•Thus, sometimes, people will dismiss concerns about overpriced markets

Importance of Tax Planning

•In 1913, the 16th Amendment gave Congress the right to impose the first income tax •The average American works more than 4 months just to pay his/hers taxes

Retirement Plans:

•Investments by you or your employer to save for retirement •Examples --pensions, IRAs, 401(k), 403(b), Keogh, or SEP-IRA plans

Real Estate

•Investments in real estate or Real Estate Investment Trusts (REITs) are investments in land alone or in improved land (land with apartments, houses, or other buildings upon the land). •Real estate investments are not liquid. It may take a while to sell a property.

Franchises

•Is the right to operate a business and sell the franchisor's products or services in a given area (i.e. McDonalds, Subway) •There are benefits: investment risk is reduced •Downside: give up individual control—must comply with parent company •Responsibilities: you must determine the value/cost of this investment type

Investing: Terms

•Key terms: •*dividends* -distributions of money from companies or government to investors. •*diversity* -spreading money among several different kinds of investments. •*portfolio* -one's set of investment holdings. •*capital gain (loss)* --appreciation (depreciation) in value of investment in stock.

Why good finances matter?

•Number one reason cited for divorce here in America: money problems •One of the top reasons cited for suicide is money problems.•Good money skills are important

Guiding Principles

•Risk -probability of loss •Return -amount earned on an investment •Investments that may have the highest rate of return are typically those with the highest risk. •Conversely, investments that have lower rates of return have lower risk of loss.

Bonds

•Similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as the issuer. •The issuer promises to pay you a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it "matures," or comes due.

Basics of Investing in Stocks

•Stock is a share in the ownership of a company. -Why would a company offer this?? •Stock represents a claim on the company's assets and earnings. •When the company's stock does well.. You are rewarded with income.

New Publicly Traded Companies

•Stock market bubbles frequently produce hot markets in initial public offerings, since investment bankers and their clients see opportunities to float new stock issues at inflated prices. •These hot markets misallocate investment funds to areas dictated by speculative trends, rather than to enterprises generating long standing economic value.

Automobiles and Other Vehicles:

•Tangible assets that must be inspected and licensed •Reported as *fair market value*, but normally depreciate in value •Examples --cars, trucks, motorcycles, and recreational vehicles

Credit Evaluation: The Credit Bureau

•The credit bureau: collects and reports information from creditors, public court records, and the consumer. •Determining your creditworthiness --credit scoring determines if you qualify for credit and the interest rate offered.

Investing: Purpose and Guiding Principles

•The purpose of investing is to build and maintain wealth. •Many consumers have investments through retirement plans. However, consumers should have additional investment accounts.

Investing: Guiding Principles

•To be a successful investor:•keep perspective and stay through the ups and downs of the market•keep investing, even if you can only invest small amounts•believe in the growth of business or the strength of government bonds over time

Paying Your Income Taxes

•Withholdings--tax payment from each paycheck, determined on the basis of income and W-4 form •Quarterly estimated payments •Payments with the tax return (the dreaded April 15th) •Withholdings from stock, retirement funds, and prize or gambling winnings

Purchasing a vehicle

◦Comparison shop: price, product features, and quality. ◦Be informed: check library and Web sources. Narrow down your selection

Debt Collectors and Creditor Rights

◦Debts are what is owed. Examples of debts are bonds, notes, mortgages, and other forms of paper evidencing amounts owed and payable on specified dates or on demand. ◦A debtor is a person who owes money.

New car

◦Great Warranties available now: ◦0.0% financing for up to 72 months Must meet credit qualifications ◦Rebates

Expenses for auto

◦Insurance (vehicle model, driving record) ◦Licensing (annual periodic expense) ◦Maintenance & operating expenses (SUVs drink more gas than a Hyundai) ◦Financing charges if applicable

Used vehicles

◦Who absorbs the initial depreciation in price? ◦Some come with limited warranties ◦Best buy is a vehicle 2 to 3 years old

lease payment depends on

◦agreed-upon price ◦up-front fees ◦down payment or trade allowance ◦residual value ◦finance charge ◦length of the lease

Open-end leases

◦compare the fair market value to the lease residual value of the vehicle ◦are to be avoided because you pay the difference

sign a lease

◦negotiate a fair vehicle value (also known as the: gross capitalized cost) ◦Negotiate your trade in price (Kelly Blue book) ◦www.kbb.com ◦Negotiate a low finance charge ◦Choose a vehicle with slow depreciation

Closed-end leases, or walk-away leases

◦normally offer a purchase option ◦require the dealer to be responsible for resale ◦account for about 80% of all leases