Financial Planning (BMGMT 105) Ch. 1,2,4
the present value of $1 to be received in three years from now based on a 10% interest rate calculated:
$0.75 (current value)= $1 (future value) ---- (1 +.10)^3 you should deposit 75 cents now if you need a dollar in the future
whats the future value of three $1 deposits made at the end of the next three years, earning 10% interest
$1 (1+.10)^3 -1 ------------- = $3.31 .10
if you want $300 seven years from now and your savings earn 10%, compounded semiannually, how much would you need to deposit today?
$151.52 $300/ (1 + .05) ^ 14 =$151.52 its 5% because split 10% interest into two (semi annually) and 14 time periods because twice a year for 7 years
The Fram family has liabilities of $128,000 and a net worth of $340,000. What is their debt ratio?
.376 liabilities/ net worth
Whats the future value of $1 at 10% in three years
1(1+.1)^3= $1.33
Given the loan amount of $15,000, and a stated rate of interest of 10% compounded quarterly for one year, what would the effective rate of interest most likely be? Students should be able to rationalize this answer without performing the actual mathmatical calculations
10.38% when its compounded more often (in this case quarterly itll be slightly higher interest
using the rule of 72, 6.5 percent on your investments, how long will it take for your money to double?
11.1 years 72/6.5
using rule of 72, At an annual interest rate of 3.25 percent, how long will it take for your savings to double?
22.2 years 72/3.25
In 2013, selected automobiles had an average cost of $16,000. The average cost of those same automobiles is now $20,000. What was the rate of increase for these automobiles between the two time periods?
25% new-original ------------- x 100 original
Janie has a joint account with her mother with a balance of $565,000. Based on $250,000 of Federal Deposit Insurance Corporation coverage, what amount of Janie's savings would not be covered by deposit insurance?
32,500
Janie has a joint account with her mother with a balance of $577,000. Based on $250,000 of Federal Deposit Insurance Corporation coverage, what amount of Janie's savings would not be covered by deposit insurance
38,500 577,000/2 (split account) minus 250,000 = 38,500
Place the following steps for a personal financial plan in the proper order: 1. Review and revise the financial plan 2. Identify alternative courses of action 3. Create and implement your financial action plan 4. Determine your current financial situation 5. Evaluate alternatives 6. Develop your financial goals
4, 6, 2, 5, 3, 1
future value of $400, that earns 12%, compounded monthly, use the table to factor for 1% (monthly rate) over a year and a half, what's the future value?
400(1+.01)^18 = 478.46 to the 18th power because you earn interest each month for 18 month its 1% rather than 12% because the 12% is split evenly per month
using the rule of 72, if the value of land in an area is increasing 11 percent a year, how long will it take for property values to double?
6.5 years 72/ 11
If inflation is expected to be 8 percent, how long will it take for prices to double?
9 years 72/8 (use rule of 72)
Which of the following would be an example of a demand deposit? a. savings account b. A savings certificate c. A money market account d. A checking account
A checking account
Balance Sheet
A financial statement that reports what an individual or a family owns and owes; also called a net worth statement or statement of financial position.
financial plan
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities.
commerical bank
A full-service financial institution that offers a variety of services to individuals, businesses, and government agencies
Bankruptcy
A set of federal laws allowing you to either restructure your debts or remove certain debts.
the major function of personal financial planning is to
Achieve personal economic satisfaction
Interest Formula
Amount in savings x annual interest rate x time period
Net Worth Formula
Assets - Liabilities = Net Worth
future value of a series of payments
FV= Annunity(1+i)^n -1 ---------- i
future value of a single amount (original amount + compound interest)
FV=PV(1 + i)^n
True or False:The Empty Nester Stage recommends that investments be conservative since retirement funds will be needed within the next 5-10 years
False
Paul Davis wants to deposit a lump sum of money today for a vacation that he plans to take to Asia after he graduates from Graduate School. Which formula should he use to determine the amount of money he will have available for his vacation?
Future value of a single amount
Tim Taylor received a $500 gift from his grandparents. He wants to invest this money for the down payment of a house that he plans to purchase in 3 years. What type of computation should he use?
Future value of a single amount
Jennifer Rodriguez plans to attend graduate school in 5 years. She thinks that she will need a total of $32,000 to pay for school, and she wants to save money each month to reach her goal. What type of computation should she use?
Future value of an annuity
Steve Wilson wants to deposit $150 per month into an account earning 4 percent for the next 3 years, so he can purchase a used car at that time. What type of computation would he use to determine the amount he will have accumulated for his purchase?
Future value of an annuity
Many parents wait until a child is in middle school before contributing regular payments into an investment account on behalf of the child's education. Which of the following statements is true regarding this issue in the Family Life Cycle Stage?
Making smaller payments when children are toddlers will add up to a significant amount because of the Time ValueOf Money as opposed to slightly higher amounts when children are in middle school
present value of a single amount formula
PV? = FV ------ (1 +i) ^n
Rhonda Miller wants to take out a 4 year loan to purchase a car. What type of computation would she use to calculate her monthly payments?
Present value of an annuity
Changes in personal, social, and economic factors may require you to
Review and revise your financial plan more frequently
What does SMART stand for in financial goals
Specific, Measurable, Action Oriented, Realistic, Time based
annual percentage yield
The percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365-day period
Use the following items to determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows. Rent for the month$1,400 Monthly take-home salary$2,935 Spending for food$720 Cash in checking account$600 Savings account balance$2,040 Balance of educational loan$3,060 Current value of automobile$9,550 Telephone bill paid for month$140 Credit card balance$310 Loan payment$230 Auto insurance$380 Household possessions$4,900 Video equipment$2,725 Payment for electricity$165 Lunches/parking at work$255 Donations$310 Personal computer$1,950 Value of stock investment$1,235 Clothing purchase$185 Restaurant spending$205
Total assets $23,000 Total liabilities$3,370 Net worth $19,630 Total cash inflows $2,935 Total cash outflows $3,990
Based on the following data, determine the amount of total assets, total liabilities, and net worth. Liquid assets$3,970 Investment assets $8,440 Current liabilities $2,570 Household assets $88,890 Long-term liabilities $77,230
Total assets$101,300 Total liabilities$79,800 Net worth$21,500
Using the following balance sheet items and amounts, calculate the total liquid assets and total current liabilities: Money market account$3,250 Medical bills$366 Mortgage$162,000 Checking account$910 Retirement account $92,600 Credit card balance$619
Total liquid assets$4,160 Total current liabilities$985 KEYWORD CURRENT (retirement and mortgage don't count)
savings and loan association (S&L)
a financial institution that traditionally specialized in savings accounts and mortgage loans
Cash Flow Statement
a financial statement that summarizes cash receipts and payments for a given period, also called a personal income and expenditure statement
trust
a legal agreement that provides for the management and control of assets by one party for the benefit of another
Compounding
a process that calculates interest based on previously earned interest
money market account (MMA)
a savings account offered by banks, savings and loans associations, and credit unions that requires a minimum balance and has earnings based on the market interest rates
Certificate of Deposit
a savings plan requiring that a certain amount be left on deposit for a stated time period to earn a specified interest rate
money market fund
a savings-investment plan offered by investment companies, with earnings based on investments in various short-term financial instruments
Annunity
a series of equal regular deposits
budget
a specific plan for spending income; also called a spending plan
Credit Union
a user-owned, not-for-profit, cooperative financial institution that is organized for the benefit of its members
In the Family Life cycle, job searching criteria should include a. family-friendly benefits b. healthcare benefits c. sick leave and family leave options d. all of the above
all of the above
overdraft protection
an automatic loan made to checking account customers to cover the amount of checks written in excess of the available balance in the checking account
Which one of the following is the most liquid? a. savings bond b. interest-earning checking c. individual retirement account d. saving certificate
an interest-earning checking
The primary goals of the Coupling Life Cycle Stage are to: a. save money by reducing housing expenses. b. begin to invest and partner c. consolidate housing expenses to purchase real estate d. both a and c above are goals
both a and c above are goals
Assests
cash or other property with monetary value
Financial services would usually be most expensive at a
check cashing outlet
Traditionally, the widest range of financial services has been offered by
commercial banks
All of the following statements concerning Compensating Balances are true except compensating balances can result in a minimum balance being required by the institution in a saving or checking account compensating balances produce effective interest rates that are higher than the stated rate of interest compensating balances can reduce the amount of money consumers have available from loan proceeds compensating balances result in effective interest rates below the stated interest rate
compensating balances result in effective interest rates below the stated interest rate
Identify the term that refers to interest that is earned on previously earned interest
compounding
Current liabilities
debts must be paid within a short time, usually less than a year
Values
ideas and principles that a person considers correct, desirable, and important
present value of a single amount
if you want to know how much you need to deposit now to receive a certain amount in the future
time value of money
increase in an amount of money as a result of interest earned
The rising or falling of prices that causes changes in buying power is referred to as ____________ risk
inflation
Changes in the cost of money is referred to as ____________ risk
interest-rate
financial decisions are effected by what
life situation( income, age, household size, health), personal values, and economic factors (prices, interest rates, and employment opportunities)
The purpose of a trust is to
manage funds for another person
discretionary income
money left over after paying for housing, food, and other necessities
surplus
more inflows than outflows
deficit
more outflows than inflows
what are the major elements of financial planning
obtaining, planning, saving, borrowing, spending, managing risks, investing, and retirement and estate planning
A ___________ endorsement includes the words "for deposit only."
restrictive
Inflation
rise in the general level of prices
Which one of the following items would be subtracted from your checkbook balance when preparing a bank reconciliation? a. Deposits in transit b. Outstanding checks c. Interest earned d. Service charges
service charges
Which one of the following is an interest-bearing checking account? a. Activity account b. EFT account c. Share account d. share-draft account
share-draft account
cash flow
the actual inflow and outflow of cash during a given time period
Future Value
the amount to which current savings will increase based on a certain interest rate and a certain time period; also referred to as compounding
Present Value (PV)
the current value for a future amount based on a certain interest rate and a certain time period; also referred to as discounting
budget variance
the difference between the amount budgeted and the actual amount received or spent
insolvency
the inability to pay debts when they are due because liabilities far exceed the value of assets
rate of return
the percentage of increase in the value of your savings as a result of interest earned; also called yeild
personal financial planning
the process of managing your money to achieve personal economic satisfaction
adult life cycle
the stages in the family situation and financial needs of an adult
Economics
the study of how wealth is created and distributed
True or False: When considering the (5) Life Cycle Strategies, all require that planners/investors maintain a liquid emergency fund equal to at least 3 months of living expenses
true
opportunity cost
what a person gives up by making a choice
When considering the accumulation of debt, it would be to your advantage if the debt was compounded
yearly
___________ refers to the earnings received on savings
yield
