BUS 123 Ch 1
future value=$100+($100x0.06x1year)
$106
john has an interest rate of 7.2% on his savings. Using the rule of 72, his money will double in
10 years
if you want $1000 five years from now and you earn 5% on your savings you need to deposit
1000x0.784=$784
if your savings earn 6% your money will double in
12 years
fred has good credit and can borrow at 5%, bob has poor credit and can borrow at 11%. What is the amount of risk premium Bob will pay?
6%
fed
Federal Reserve System
interest rates
The cost of borrowing money
hidden inflation
The cost of necessities (food, gas, health care) may rise at a higher rate than the cost of nonessential items
present value
The current value for a future amount based on a certain interest rate for a certain time period; also referred to as discounting
rule of 72
The number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of interest
principal
amount of the savings
trade-off
an alternative that we sacrifice when we make a decision
risk premium
an expected return in excess of that on risk-free securities
action oriented goal setting
basis for financial activities, i.e. reduce credit card debt
measurable goal setting
by a specific amount, i.e. accumulate $5,000 in savings in three years" is much better than "put money into savings"
for the time value of money table to be used and for an annuity to exist, the deposits must
earn a constant interest rate
what is the most common mistake related to implementing a financial plan?
emotional decision making
specific goal setting
know exactly what your goals are and create a plan designed to achieve them
what are the four situational influences for financial decisions?
marital status, employment situation, age, number and age of household members
opportunity cost
whatever must be given up to obtain some item
Paul needs to have $200 in two years. The interest earned on the account is 4%, compounded annually. How much does he need to invest today?
$185
paul invested $185. The interest earned is 4%, compounded annually. After 2 years paul will have about
$200
financial planning process:
1. Determine current financial situation 2. Develop your financial goals 3. Identify alternative courses of action 4. Evaluate alternatives 5. Create and implement your financial action plan 6. Review and revise the financial plan
an annual inflation rate of 4% means prices will double in
18 years
Consumer Price Index (CPI)
A measure of the average change in prices over time in a fixed "basket" of goods and services
Consumable-product goals
usually occur on a periodic basis and involve items that are used up relatively quickly, such as food, clothing, and entertainment
intangible-purchase goals
relate to personal relationships, health, education, and leisure
three types of financial goals
short-term, long-term and intermediate
short-term goals
achieved within the next year or so, such as saving for vacation or paying off small debts
if deposit $500 per year in an account for six years at 9%, about how much will you have in your account?
$3,762
if you want to take $400 out of an investment account each year for nine years and your money earns an annual rate of 8% you would need to make a current deposit of
$400x6.247=$2,498.80
simon will be receiving $200 per year for the next five years. The interest on the account is 6% compounded annually. What is the present value of this annuity?
$842
Bankruptcy
A legal process to get out of debt when you can no longer make all your required payments
to calculate time value of money for savings, the following items are needed
annual interest rate, principal amount, length of time
sam has an investment of $200 that is expected to earn 10%. How much will his investment be worth at the end of the year if he earns simple interest?
$220
tom needs a new washing machine that costs $400. He decides to save and buy one next year. If inflation is 4% how much will the washing machine cost next year?
$416
Alex has an interest rate of 3.6% on his savings account. Using the rule of 72, his money will double in
20 years
What does the Fed do?
attempts to maintain adequate money supply to encourage consumer spending, business growth and job creation
intermediate goals
2-5 year time frame
inflation
rise in the general level of prices
when determining goal setting guidelines, what three things should you take into account?
saving, spending, investing activities
Which of the following are part of evaluating alternative courses of action in financial planning process?
evaluating risk, considering the consequences of your choices, inflation risk
global economy influences
financial activities
Financial Planning
formalized report summarizing current financial situation, analyzing your needs, and recommending future activities
five methods of calculating time value of money
formula calculation, time value of money tables, financial calculator, spreadsheet software, websites and apps
compounding
future value computations
compounding allows
future value of a deposit to grow faster than it would if interest were paid only on the original deposit
values
ideas and principles that a person considers correct, desirable, and important
time based goals
indicating a time frame for achieving a goal
key factors for most people in making financial decisions include
inflation costs, financial opportunity costs, time value of money
durable-product goals
involve infrequently purchased, expensive items such as appliances, cars, etc (tangible items)
realistic goal setting
involving goals based on income and life situation
future value
is the amount to which current savings will grow based on certain interest rate and a certain time period
which elements collectively create the national economy?
labor force, government, businesses
long-term goals
more than five years off, such as retirement, vacation home purchase, etc
goal setting guidelines (SMART)
Specific Measurable Action-oriented Realistic Time-based
People with poor credit ratings pay
a higher interest rate
hidden inflation results in
a reported inflation rate much lowing than the actual cost-of-living increase
annuity
a series of equal regular deposits
achieving personal financial satisfaction starts with
clear financial goals
economic effects of deflation
consumers cut their spending as they expect prices will go even lower
deflation
decline in prices
according to the text, you should do a complete review of your finances at least
once a year
you should consider the time value of money as an
opportunity cost
two main factors causing money problems for americans
poor planning and weak money management habits; overbuying
determining current situation involves which of the following
preparing personal financial statements, identifying current income, savings, living expenses and debts
Future Value=
present value + interest earned
amount of interest
principal x interest rate x time
a refrigerator is usually considered as a
tangible item
in times of inflation
the buying power of a dollar decreases
time value of money
the increase of an amount of money as result of interest earned
American companies compete with foreign companies for
the spending money of American consumers
adult life cycle
the stages in the family and financial needs of an adult
economics
the study of how wealth is created and distributed
what can be used to determine future value of equal yearly savings deposits
time value of money table
what is the purpose of developing and analyzing financial goals?
to differentiate needs from wants
present value computations or discounting allows
your to determine how much to deposit now to obtain a desired total in the future