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Table of Contents
Table of Contents
PART
PART 11 EXERCISESEXERCISES
Chapter
Chapter 1
1 Financial
Financial Literacy:
Literacy: the
the Introduction
Introduction
Exercise
Exercise 1
1
‐‐
1
1 Rate
Rate of
of Return
Return
1
1
Exercise
Exercise 1
1
‐‐
2
2 Chapter
Chapter Review
Review
2
2
Chapter
Chapter 2
2 The
The Financial
Financial System
System in
in the
the U.S.
U.S.
Exercise
Exercise 2
2
‐‐
1
1 Annual
Annual Percentage
Percentage Yield
Yield
3
3
Exercise
Exercise 1
1
‐‐
2
2 Chapter
Chapter Review
Review
4
4
Chapter
Chapter 3
3 Financial
Financial Planning
Planning and
and Budgeting
Budgeting
Exercise
Exercise 3
3
‐‐
1
1 Monthly
Monthly Budget
Budget
5
5
Exercise
Exercise 3
3
‐‐
2
2 Time
Time Value
Value of
of Money
Money
7
7
Exercise
Exercise 3
3
‐‐
3
3 Chapter
Chapter Review
Review
8
8
Chapter
Chapter 4
4 Borrowing
Borrowing and
and Consumer
Consumer Credit
Credit
Exercise
Exercise 4
4
‐‐
1
1 Cost
Cost of
of Consumer
Consumer Credit
Credit
9
9
Exercise
Exercise 4
4
‐‐
2
2 Chapter
Chapter Review
Review
10
10
Chapter
Chapter 5
5 Financial
Financial Decision
Decision
‐‐
Making
Making in
in College
College
Exercise
Exercise 5
5
‐‐
1
1 Chapter
Chapter Review
Review
11
11
Chapter
Chapter 6
6 Saving
Saving and
and Investing
Investing
Exercise
Exercise 6
6
‐‐
1
1 Taxation
Taxation
12
12
Exercise
Exercise 6
6
‐‐
2
2 Chapter
Chapter Review
Review
13
13
Chapter
Chapter 7
7 Buying
Buying Your
Your First
First Home
Home
Exercise
Exercise 7
7
‐‐
1
1 Home
Home Mortgages
Mortgages
15
15
Exercise
Table of Contents
Table of Contents
PART
PART 22 SUMMARY SUMMARY OFOF EXPERTEXPERT INTERVIEWSINTERVIEWS
Chapter
Chapter 2
2 The
The Financial
Financial System
System in
in the
the U.S.
U.S.
Kathy
Kathy Smith,
Smith, Neighborhood
Neighborhood National
National Bank
Bank
17
17
Chapter
Chapter 3
3 Financial
Financial Planning
Planning and
and Budgeting
Budgeting
Scott
Scott Broberg,
Broberg, Financial
Financial Planner
Planner
18
18
Chapter
Chapter 4
4 Borrowing
Borrowing and
and Consumer
Consumer Credit
Credit
Manny
Manny Escuela,
Escuela, Money
Money Management
Management International
International
20
20
Chapter
Chapter 5
5 Financial
Financial Decision
Decision
‐‐
Making
Making in
in College
College
Emmi
Emmi Harward,
Harward, the
the Bishop
Bishop School
School
23
23
Rich
Rich Dusansky,
Dusansky, University
University of
of Texas
Texas Austin
Austin
25
25
Shannon
Shannon Faulk,
Faulk, Insurance
Insurance Agency
Agency Owner
Owner
26
26
Chapter
Chapter 7
7 Buying
Buying Your
Your First
First Home
Home
Mark
Mark Riedy,
Riedy, University
University of
of San
San Diego
Diego
28
28
Chris
Chris Sorenson,
Sorenson, H.E.L.P.
H.E.L.P.
30
30
Jaqueline
Jaqueline Carlisle,
Carlisle, NID
NID
32
32
Michael
Michael Spilger,
Spilger, Real
Real Estate
Estate Attorney
Attorney
34
34
Supplemental
Supplemental Interviews
Interviews
Dionne
Dionne Faulk,
Faulk, California
California DRE
DRE
35
35
Jeff
Jeff Davi,
Davi, California
California DRE
DRE
35
35
Steve
Steve Ellis,
Ellis, California
California DRE
DRE
36
36
Bill
Bill Moran,
Moran, California
California DRE
DRE
36
36
Tom
Tom Poole,
Poole, California
California DRE
DRE
37
37
Wayne
Wayne Bell,
Bell, California
California DRE
DRE
38
38
Chris
Chris Neri,
Neri, California
California DRE
DRE
38
38
Dan
P
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A
A
A
A
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1
1
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S
S
S
1 1
Exercise
Exercise 1
1
‐‐
1
1 Rate
Rate of
of Return
Return
1.
1. AnAn investorinvestor boughtbought aa stockstock forfor $35$35 aa yearyear agoago andand itit isis worthworth $42$42 now.now. WhatWhat isis thethe investor’s
investor’s raterate of of returnreturn onon thisthis investment?investment?
2.
2. JasonJason boughtbought aa stockstock forfor $20$20 aa yearyear agoago andand itit isis worthworth $18.4$18.4 now.now. WhatWhat isis Jason’sJason’s raterate of
of return?return?
3.
3. TheThe stockstock priceprice of of MicrosoftMicrosoft isis currentlycurrently $28.76.$28.76. JanetJanet paidpaid $24.89$24.89 forfor thethe stockstock 33 months
months ago.ago. WhatWhat isis Janet’sJanet’s raterate of of returnreturn onon thethe investment?investment?
4.
4. AmyAmy just just soldsold 500500 sharesshares of of GoogleGoogle stockstock forfor $625$625 aa shareshare andand earnedearned aa 7.20%7.20% raterate of of return.
Exercise
Exercise 1
1
‐‐
2
2 Chapter
Chapter Review
Review
1.
1. FinanceFinance isis aa subjectsubject thatthat dealsdeals withwith ____________, ____________, _____________, _____________, ____________ ____________ andand how
how theythey areare interrelated.interrelated.
2.
2. InvestmentInvestment isis anan assetasset oror itemitem thatthat isis purchasedpurchased withwith thethe hopehope thatthat itit willwill _________________
_________________ oror __________________. __________________.
3.
3. RateRate of of returnreturn isis thethe moneymoney youyou earnearn onon anan investment,investment, statedstated asas aa ____________. ____________.
4.
4. TheThe degreedegree of of uncertaintyuncertainty of of thethe raterate of of returnreturn onon anan investmentinvestment isis calledcalled ____________.
3 3
Exercise
Exercise 2
2
‐‐
1
1 Annual
Annual Percentage
Percentage Yield
Yield
(Round
(Round your your answersanswers toto thethe nearest nearest thousandththousandth of of aa percent.) percent.)
1.
1. BankBank AA offersoffers aa savingssavings accountaccount thatthat payspays 1.25%1.25% interestinterest rate.rate. a.
a. If If interestinterest isis compoundedcompounded annually,annually, whatwhat isis thethe APYAPY onon thisthis account?account? b.
b. If If interestinterest isis compoundedcompounded monthly,monthly, whatwhat isis thethe APYAPY onon thisthis account?account?
2.
2. BankBank BB offersoffers aa moneymoney marketmarket accountaccount withwith anan interestinterest raterate of of 3.0%3.0% andand quarterlyquarterly compounding.
compounding. WhatWhat isis thethe APY?APY?
3.
3. YouYou areare consideringconsidering threethree optionsoptions toto savesave youryour money.money. TheThe interestinterest raterate onon AccountAccount XX isis 8.50%
8.50% andand compoundedcompounded monthly;monthly; thethe interestinterest raterate onon AccountAccount YY isis 8.75%8.75% andand compounded
compounded annually;annually; thethe interestinterest raterate onon AccountAccount ZZ isis 8.65%8.65% andand compoundedcompounded semiannually.
Exercise
Exercise 2
2
‐‐
2
2 Chapter
Chapter Review
Review
1.
1. _________________ _________________ isis thethe centralcentral bankbank of of thethe US.US. ItIt consistsconsists of of thethe _________________
_________________ andand ___ ___ regionalregional FederalFederal ReserveReserve Banks.Banks.
2.
2. TheThe _________________ _________________ isis responsibleresponsible forfor producingproducing paperpaper currencycurrency whilewhile thethe _________________
_________________ isis responsibleresponsible forfor producingproducing coinage.coinage. BothBoth governmentgovernment agenciesagencies are
are partpart of of thethe U.S.U.S. DepartmentDepartment of of Treasury.Treasury.
3.
3. AboutAbout ___% ___% of of thethe newlynewly producedproduced notesnotes andand coinscoins areare usedused toto replacereplace thosethose alreadyalready inin circulation.
circulation.
4.
4. TheThe chairmanchairman of of thethe FederalFederal ReserveReserve BoardBoard isis appointedappointed byby thethe ______________ ______________ andand confirmed
confirmed byby thethe ______________ ______________ .. TheThe currentcurrent chairmanchairman isis _________________ _________________ ..
5.
5. DepositoryDepository institutionsinstitutions relyrely onon depositsdeposits fromfrom saverssavers asas thethe primaryprimary sourcesource of of raisingraising capital
capital andand useuse thethe fundsfunds toto makemake loans.loans. ExamplesExamples of of depositorydepository institutionsinstitutions includeinclude _________________
_________________ ,, _________________ _________________ ,, _________________ _________________ andand _________________.
_________________.
6.
6. TheThe _________________ _________________ isis thethe interestinterest raterate actuallyactually earnedearned oror paidpaid inin oneone year,year, takingtaking into
into accountaccount thethe effecteffect of of compounding.compounding.
7.
7. AA _________________ _________________ isis aa notnot
‐‐
forfor‐‐
profitprofit institutioninstitution thatthat offersoffers financialfinancial servicesservices toto itsits members.members.
8.
8. AA _________________ _________________ isis aa financialfinancial institutioninstitution thatthat acceptsaccepts savingssavings depositsdeposits andand investsinvests the
the bulkbulk of of thethe fundsfunds inin homehome mortgages.mortgages.
9.
9. WhenWhen selectingselecting aa bankbank account,account, youyou shouldshould considerconsider thethe followingfollowing factors:factors: 1)1) _____________,
_____________, 2)2) _____________, _____________, _____________, _____________, andand _____________, _____________, andand 3)3) _____________.
_____________.
10.
10. _________________ _________________ isis aa typetype of of bankbank accountaccount thatthat payspays aa fixedfixed interestinterest raterate forfor aa setset period
period of of time.time. YouYou dodo notnot havehave accessaccess toto thethe moneymoney untiluntil thethe endend of of thethe period.period.
11.
11. TheThe processprocess of of earningearning interestinterest onon interestinterest thatthat waswas earnedearned inin aa previousprevious periodperiod isis calledcalled _______________.
5 5
Exercise
Exercise 3
3
‐‐
1
1 Monthly
Monthly Budget
Budget
1.
1. JerryJerry wouldwould likelike toto prepareprepare aa monthlymonthly budgetbudget andand hashas collectedcollected thethe followingfollowing informationinformation about
about hishis incomeincome andand expenses.expenses. HeHe hashas aa partpart
‐‐
timetime job job andand earnsearns aboutabout $520$520 eacheach month.month. HisHis employeremployer withholdswithholds 10%10% of of hishis wageswages forfor taxes.taxes. InIn termsterms of of spending,spending, JerryJerry needsneeds toto paypay for
for luncheslunches atat schoolschool andand gasolinegasoline forfor hishis car,car, whichwhich averageaverage aboutabout $135$135 andand $60$60 eacheach month,
month, respectively.respectively. JerryJerry playsplays manymany sportssports andand typicallytypically payspays $80$80 eacheach monthmonth forfor thosethose activities.
activities. HeHe estimatesestimates thatthat hehe payspays $40$40 forfor hishis cellcell phonephone andand spendsspends approximatelyapproximately $70$70 on
on activitiesactivities suchsuch asas goinggoing toto movies,movies, rentingrenting videovideo gamesgames andand hanginghanging outout withwith friends.friends. Jerry
Jerry setssets asideaside 5%5% of of hishis monthlymonthly incomeincome forfor unanticipatedunanticipated expensesexpenses andand plansplans toto savesave atat least
least $50$50 eacheach month.month.
HelpHelp JerryJerry prepareprepare thethe budgetbudget usingusing thethe followingfollowing worksheet.worksheet.
M
M
M
Mooononnnttththlhhlllyyy ByBuBBuududdgdgggeeetettt
Category
Category BudgetedBudgeted AmountAmount ActualActual AmountAmount DifferenceDifference Income
Income Wages Wages Other
Other IncomeIncome Total
Total IncomeIncome Expenses Expenses Taxes Taxes Food Food Gasoline Gasoline Sports Sports Entertainment Entertainment Cell
Cell PhonePhone Other
Other ExpensesExpenses Total
Total ExpensesExpenses Contingencies Contingencies Savings Savings Surplus/Deficit Surplus/Deficit
2.
2. AfterAfter finishingfinishing thethe budget,budget, JerryJerry decidesdecides toto tracktrack hishis actualactual expensesexpenses andand comparecompare themthem with
with thethe budgetedbudgeted amounts.amounts. HeHe startsstarts aa spendingspending loglog andand recordsrecords everyevery paymentpayment hehe makes.makes. At
At thethe endend of of thethe month,month, JerryJerry summarizessummarizes hishis spendingspending inin thethe followingfollowing categories:categories: a. a. Food:Food: $128$128 b. b. Gasoline:Gasoline: $72$72 c. c. Sports:Sports: $80$80 d. d. Entertainment:Entertainment: $85$85 e.
e. CellCell Phone:Phone: $40$40 f.
f. SchoolSchool FieldField TripTrip (not(not budgeted):budgeted): $30$30 Jerry’s
Jerry’s incomeincome fromfrom hishis partpart
‐‐
timetime job job isis thethe samesame asas hehe expected;expected; additionally,additionally, hehe receivesreceives $25$25 forfor hishis birthdaybirthday inin thethe month.month.
DoesDoes JerryJerry havehave aa surplussurplus oror aa deficitdeficit inin thethe month?month?
7 7
Exercise
Exercise 3
3
‐‐
2
2 Time
Time Value
Value of
of Money
Money
1.
1. HowHow muchmuch moneymoney willwill youyou havehave inin 33 yearsyears if if youyou savesave $20$20 inin anan accountaccount thatthat payspays aa 4.5%4.5% annual
annual interestinterest rate?rate?
2.
2. HowHow muchmuch willwill $1,000$1,000 becomebecome inin 5050 yearsyears if if itit isis compoundedcompounded atat 3.0%3.0% annually?annually?
3.
3. HowHow muchmuch dodo youyou needneed toto depositdeposit intointo anan accountaccount withwith aa 7.5%7.5% interestinterest raterate inin orderorder toto accumulate
accumulate $200$200 inin tenten years?years?
4.
4. YourYour bankbank accountaccount payspays aa 2.5%2.5% interestinterest rate.rate. InIn orderorder toto havehave $1,000$1,000 inin fivefive yearsyears inin thethe account,
account, howhow muchmuch dodo youyou needneed toto depositdeposit today?today?
5.
5. If If youyou savesave $1,000$1,000 eacheach yearyear andand thethe interestinterest raterate onon youryour bankbank accountaccount isis 5%,5%, howhow much
much moneymoney willwill youyou havehave inin 2020 years?years?
6.
6. If If thethe interestinterest raterate onon youryour bankbank accountaccount isis 6%6% andand youyou startstart savingsaving $500$500 eacheach yearyear atat the
the ageage of of 18,18, howhow muchmuch moneymoney willwill youyou havehave atat thethe ageage of of 30?30?
7.
7. GivenGiven anan interestinterest raterate of of 4%,4%, whatwhat isis thethe presentpresent valuevalue of of aa seriesseries of of paymentspayments of of $100$100 that
Exercise
Exercise 3
3
‐‐
3
3 Chapter
Chapter Review
Review
1.
1. AA _______________ _______________ isis aa detaileddetailed planplan of of financialfinancial activityactivity thatthat pertainspertains toto incomeincome andand expenses
expenses expectedexpected duringduring aa specificspecific periodperiod inin thethe future.future.
2.
2. WhenWhen youryour incomeincome exceedsexceeds youryour spending,spending, youyou havehave aa _______________; _______________; onon thethe otherother hand,
hand, whenwhen youryour expensesexpenses exceedexceed thethe income,income, youyou havehave aa _______________. _______________.
3.
3. PreparingPreparing aa detaileddetailed planplan forfor futurefuture financialfinancial activitiesactivities maymay helphelp you:you: a. a. _______________________________________________________________. _______________________________________________________________. b. b. _______________________________________________________________. _______________________________________________________________. c. c. _______________________________________________________________. _______________________________________________________________. d. d. _______________________________________________________________. _______________________________________________________________. 4.
4. ListList threethree possiblepossible sourcessources of of incomeincome forfor teenagers:teenagers: _______________, _______________, _______________,
_______________, andand _______________. _______________.
5.
5. ListList fivefive typicaltypical expensesexpenses forfor teenagers:teenagers: _______________, _______________, _______________, _______________, _______________,
_______________, _______________, _______________, andand _______________. _______________.
6.
6. _______________ _______________ areare thingsthings youyou mustmust havehave inin orderorder toto survivesurvive oror meetmeet thethe minimumminimum living
living standards;standards; _______________ _______________ areare discretionarydiscretionary expensesexpenses thatthat maymay bebe delayeddelayed oror substituted
substituted withoutwithout affectingaffecting youryour abilityability toto survive.survive.
7.
7. AA majormajor differencedifference betweenbetween shortshort
‐‐
termterm andand longlong‐‐
termterm budgetingbudgeting isis thatthat youyou shouldshould taketake intointo accountaccount thethe ______________________ ______________________ whenwhen planningplanning forfor thethe longlong run.run. TheThe concept
9 9
Exercise
Exercise 4
4
‐‐
1
1 Cost
Cost of
of Consumer
Consumer Credit
Credit
1.
1. JackJack wouldwould likelike toto borrowborrow $8,000$8,000 forfor thethe purchasepurchase of of aa car.car. TheThe APRAPR onon aa 55
‐‐
yearyear autoauto loanloan isis 6.0%.6.0%. WhatWhat isis Jack’sJack’s monthlymonthly loanloan payment?payment? WhenWhen thethe loanloan isis paidpaid off off atat thethe end
end of of YearYear 5,5, howhow muchmuch totaltotal interestinterest willwill JackJack havehave paid?paid?
2.
2. SharonSharon isis planningplanning toto buybuy aa newnew carcar andand needsneeds toto borrowborrow $13,000$13,000 withwith aa 55
‐‐
yearyear loan.loan. TheThe bankbank tellstells herher thatthat thethe interestinterest raterate dependsdepends onon herher credit.credit. TheThe followingfollowing tabletable shows
shows thethe relationshiprelationship betweenbetween thethe interestinterest raterate andand aa borrower’sborrower’s FICOFICO score.score. FICO
FICO ScoreScore InterestInterest RateRate MonthlyMonthly PaymentPayment 720 720
‐‐
850850 4.20%4.20% 690 690‐‐
719719 6.00%6.00% 660 660‐‐
689689 7.80%7.80% 620 620‐‐
659659 10.80%10.80% Below Below 620620 18.00%18.00% CalculateCalculate Sharon’sSharon’s monthlymonthly loanloan paymentpayment givengiven eacheach interestinterest rate.rate.
SharonSharon findsfinds outout thatthat herher FICOFICO scorescore isis 650.650. CompareCompare tt someonesomeone withwith excellentexcellent
credit
credit (FICO>720),(FICO>720), howhow muchmuch additionaladditional interestinterest doesdoes SharonSharon needneed toto paypay overover thethe life
Exercise
Exercise 4
4
‐‐
2
2 Chapter
Chapter Review
Review
1.
1. __________________ __________________ isis thethe useuse of of creditcredit forfor personalpersonal needsneeds byby individualsindividuals andand families,families, in
in contrastcontrast toto creditcredit usedused byby businessesbusinesses andand governments.governments. TheThe twotwo basicbasic typestypes are:are: a.
a. __________________, __________________, whichwhich isis aa oneone
‐‐
timetime borrowingborrowing thatthat hashas aa specifiedspecified loanloan amountamount andand isis forfor aa specificspecific purpose.purpose. ItIt isis usuallyusually repaidrepaid withwith equalequal periodicperiodic payments
payments overover time.time. b.
b. __________________, __________________, whichwhich isis aa loanloan whosewhose maximummaximum amountamount isis approvedapproved byby the
the creditorcreditor butbut notnot delivereddelivered toto thethe borrowerborrower atat once.once. OverOver time,time, thethe borrowerborrower can
can getget moneymoney fromfrom thethe lenderlender (up(up toto thethe maximummaximum amount),amount), oror paypay backback aa portion
portion oror thethe entireentire amountamount of of thethe principal.principal.
2.
2. TheThe situationsituation wherewhere aa borrowerborrower failsfails toto makemake timelytimely paymentpayment of of interestinterest and/orand/or principal
principal onon aa loanloan isis calledcalled ______________. ______________.
3.
3. __________________ __________________ isis thethe maximummaximum amountamount youyou cancan borrowborrow usingusing aa specificspecific openopen
‐‐
endend credit.credit.
4.
4. 4Cs4Cs areare thethe fourfour keykey factorsfactors lenderslenders of of consumerconsumer creditcredit considerconsider whenwhen theythey assessassess thethe riskiness
riskiness of of aa loan:loan: _______________, _______________, _______________, _______________, _______________, _______________, andand _______________.
_______________.
5.
5. TheThe __________________ __________________ isis aa numbernumber thatthat summarizessummarizes anan individual’sindividual’s historyhistory of of usingusing credit.
credit. ItIt waswas developeddeveloped byby FairFair IsaacIsaac CorporationCorporation andand hashas aa rangerange of of ____ ____ toto ____. ____. This
This scorescore takestakes intointo accountaccount fivefive categoriescategories of of information:information: _______________, _______________, _______________,
_______________, _______________, _______________, _______________, _______________, andand _______________. _______________.
6.
6. __________________ __________________ isis thethe costcost of of creditcredit expressedexpressed inin aa yearlyyearly rate;rate; itit includesincludes thethe interest
interest raterate asas wellwell asas otherother lenderlender feesfees thethe borrowerborrower isis requiredrequired toto pay.pay.
7.
11 11
Exercise
Exercise 5
5
‐‐
1
1 Chapter
Chapter Review
Review
1.
1. WhenWhen makingmaking financialfinancial decisions,decisions, youyou oftenoften needneed toto considerconsider variousvarious typestypes of of cost.cost. ForFor example,
example, __________________ __________________ isis thethe costcost associatedassociated withwith oneone additionaladditional unitunit of of production,
production, oror withwith aa specificspecific decision;decision; __________________is __________________is thethe costcost of of anan activityactivity that
that isis measuredmeasured inin termsterms of of thethe valuevalue of of thethe bestbest alternativealternative thatthat isis notnot chosen.chosen.
2.
2. WhenWhen selectingselecting aa creditcredit card,card, therethere areare severalseveral featuresfeatures youyou shouldshould consider,consider, including:including: _______________,
_______________, _______________, _______________, _______________, _______________, andand _______________. _______________.
3.
3. __________________ __________________ isis thethe situationsituation wherewhere aa person’sperson’s identificationidentification (including(including name,name, social
social securitysecurity numbernumber and/orand/or anyany accountaccount number)number) isis usedused oror transferredtransferred byby someonesomeone else
else forfor unlawfulunlawful activities.activities.
4.
4. ListList fivefive factorsfactors youyou wouldwould considerconsider whenwhen choosingchoosing anan apartment:apartment: _______________, _______________, _______________,
_______________, _______________, _______________, _______________, _______________, andand _______________. _______________.
5.
5. AA ______________ ______________ isis aa writtenwritten agreementagreement underunder whichwhich aa propertyproperty ownerowner (called(called thethe ______________)
______________) allowsallows someonesomeone elseelse (called(called thethe ______________) ______________) toto useuse thethe property
property forfor aa specifiedspecified periodperiod of of timetime inin exchangeexchange forfor aa monetarymonetary benefitbenefit (which(which isis thethe ______________).
______________).
6.
6. __________________ __________________ isis aa typetype of of homehome insuranceinsurance thatthat protectsprotects thethe holderholder againstagainst accidents,
Exercise
Exercise 6
6
‐‐
1
1 Taxation
Taxation
1.
1. SupposeSuppose youyou areare subjectsubject toto aa 33%33% taxtax raterate andand youryour investmentinvestment inin stocksstocks earnsearns aa 15.00%15.00% return
return inin thethe year.year. WhatWhat isis youryour afterafter
‐‐
taxtax raterate of of return?return?2.
2. YouYou areare subjectsubject toto aa 20%20% taxtax raterate andand youryour goalgoal isis toto earnearn aa 6.40%6.40% raterate of of returnreturn afterafter paying
paying taxes.taxes. HowHow muchmuch beforebefore
‐‐
taxtax returnreturn doesdoes youryour investmentinvestment needneed toto produceproduce soso youyou cancan reachreach youryour goal?goal?
3.
3. YourYour investmentinvestment generatesgenerates anan 8.50%8.50% beforebefore
‐‐
taxtax return,return, butbut afterafter payingpaying taxes,taxes, youyou actual13 13
Exercise
Exercise 6
6
‐‐
2
2 Chapter
Chapter Review
Review
1.
1. ______________ ______________ isis anan assetasset oror itemitem thatthat isis purchasedpurchased withwith thethe hopehope thatthat itit willwill generategenerate income
income oror increaseincrease inin value.value. __________________ __________________ isis thethe moneymoney youyou earnearn fromfrom it,it, stated
stated asas aa percentage.percentage.
2.
2. TheThe fourfour stagesstages inin thethe lifelife cyclecycle of of investinginvesting include:include: _______________, _______________, _______________,
_______________, _______________, _______________, andand _______________. _______________.
3.
3. AA bondbond isis aa contractcontract throughthrough whichwhich aa governmentgovernment oror aa corporationcorporation (the(the ______________)
______________) borrowsborrows moneymoney fromfrom investorsinvestors (the(the ______________). ______________). TheThe systemsystem that
that evaluatesevaluates thethe possibilitypossibility of of defaultdefault byby thethe borrowerborrower isis calledcalled _________________. _________________.
4.
4. __________________ __________________ areare thosethose whosewhose ratingsratings areare belowbelow investmentinvestment gradegrade (typically(typically BBBB and
and below).below). TheyThey havehave muchmuch higherhigher riskrisk thanthan investmentinvestment
‐‐
gradegrade bonds.bonds.5.
5. ______________ ______________ isis aa typetype of of investmentinvestment thatthat reflectsreflects ownershipownership of of aa corporationcorporation represented
represented byby sharesshares thatthat areare aa claimclaim onon thethe corporation’scorporation’s earningsearnings andand assets.assets. Investors
Investors whowho ownown sharesshares of of aa corporationcorporation areare calledcalled __________________. __________________.
6.
6. WhenWhen investinginvesting inin aa stock,stock, youryour returnreturn maymay comecome fromfrom twotwo sources:sources: 1)1) ______________ ______________ are
are thethe periodicperiodic paymentspayments thethe companycompany makesmakes toto distributedistribute itsits earningsearnings toto owners;owners; 2)2) _________________
_________________ isis thethe amountamount byby whichwhich thethe salesale priceprice of of thethe stockstock exceedsexceeds itsits initialinitial purchase
purchase price.price.
7.
7. ManyMany indexesindexes havehave beenbeen createdcreated toto measuremeasure thethe performanceperformance of of thethe stockstock market.market. TheThe most
most recognizedrecognized examplesexamples are:are: a.
a. __________________, __________________, whichwhich isis basedbased onon thethe pricesprices of of 3030 largelarge companies.companies. ItIt isis the
the oldestoldest andand mostmost quotedquoted stockstock marketmarket indicator.indicator. b.
b. __________________, __________________, whichwhich isis basedbased onon thethe pricesprices of of allall stocksstocks tradedtraded onon thethe NASDAQ
NASDAQ system.system. c.
c. __________________, __________________, whichwhich isis constructedconstructed byby StandardStandard && Poor’sPoor’s andand basedbased onon the
the pricesprices of of 500500 largelarge corporations.corporations.
8.
8. __________________ __________________ isis defineddefined asas landland andand improvementsimprovements onon thethe landland (such(such asas buildings
buildings andand landscaping).landscaping). ExamplesExamples includeinclude houses,houses, condominiumscondominiums andand otherother typestypes of of properties.
properties. PropertiesProperties thatthat areare purchasedpurchased forfor incomeincome
‐‐
producingproducing purposespurposes areare calledcalled __________________.__________________.
9.
9. AA __________________ __________________ isis anan entityentity thatthat poolspools moneymoney fromfrom manymany investorsinvestors andand investsinvests in
in aa varietyvariety of of investmentinvestment opportunities.opportunities. ItIt providesprovides investorsinvestors thethe benefitbenefit of of _______________
_______________ ,, whichwhich meansmeans combiningcombining aa largelarge numbernumber of of investmentsinvestments toto reducereduce risk.
10.
10. AA __________________ __________________ isis aa collectioncollection of of investmentsinvestments ownedowned byby thethe samesame individualindividual oror organization.
organization.
11.
11. ListList fourfour typestypes of of taxtax thatthat individualsindividuals andand familiesfamilies maymay needneed toto pay:pay: _______________, _______________, _______________,
_______________, _______________, _______________, andand _______________. _______________.
12.
12. AnAn __________________ __________________ isis aa specialspecial investmentinvestment accountaccount thatthat allowsallows thethe ownerowner toto deferdefer paying
paying taxestaxes onon moneymoney savedsaved forfor retirement.retirement.
13.
13. RankRank bankbank accounts,accounts, stocks,stocks, realreal estateestate andand bondsbonds basedbased onon thethe levellevel of of riskrisk involvedinvolved inin each
each investmentinvestment (from(from thethe highesthighest toto thethe lowest):lowest): 1)1) _______________, _______________, 2)2) _______________,
15 15
Exercise
Exercise 7
7
‐‐
1
1 Home
Home Mortgages
Mortgages
1.
1. ConsiderConsider aa $320,000,$320,000, 3030
‐‐
yearyear mortgagemortgage withwith aa 7.20%7.20% interestinterest rate.rate. WhatWhat isis thethe monthlymonthly payment?payment?
2.
2. KatieKatie isis planningplanning toto buybuy aa homehome forfor $260,000.$260,000. SheShe hashas savedsaved somesome moneymoney soso cancan affordafford to
to paypay $50,000$50,000 forfor downdown payment.payment. If If thethe interestinterest raterate onon aa 3030
‐‐
yearyear mortgagemortgage isis 6.00%,6.00%, howhow muchmuch isis Katie’sKatie’s monthlymonthly mortgagemortgage payment?payment?
3.
3. JamesJames needsneeds toto borrowborrow $450,000$450,000 forfor thethe purchasepurchase of of aa newnew home.home. HeHe isis consideringconsidering two
two options:options: aa 1515
‐‐
yearyear mortgagemortgage withwith aa 3.60%3.60% interestinterest raterate andand aa 3030‐‐
yearyear mortgagemortgage withwith aa 4.20%4.20% interestinterest rate.rate. a.
a. WhatWhat isis thethe differencedifference inin termsterms of of monthlymonthly mortgagemortgage payments?payments? b.
b. WhatWhat isis thethe differencedifference inin termsterms of of totaltotal interestinterest JamesJames needsneeds toto paypay overover thethe lifelife of
of eacheach loan?loan?
4.
4. KellyKelly needsneeds toto borrowborrow $240,000$240,000 withwith aa mortgagemortgage andand thethe lenderlender chargescharges 2.502.50 discountdiscount points.
points. InIn orderorder toto getget thethe loan,loan, sheshe alsoalso hashas toto paypay additionaladditional feesfees of of $3,600.$3,600. WhatWhat isis Kelly’s
Exercise
Exercise 7
7
‐‐
2
2 Chapter
Chapter Review
Review
1.
1. TheThe __________________ __________________ isis thethe midpointmidpoint of of anan orderedordered arrayarray of of actualactual transactiontransaction prices
prices of of homes.homes. ItIt isis aa commonlycommonly usedused marketmarket indicatorindicator of of housinghousing value.value.
2.
2. ListList threethree expensesexpenses thatthat usuallyusually needneed toto bebe paidpaid byby homeowners,homeowners, butbut notnot byby apartmentapartment renters:
renters: _______________, _______________, _______________, _______________, andand _______________. _______________.
3.
3. DuringDuring thethe homehome
‐‐
buyingbuying process,process, youyou maymay workwork withwith variousvarious realreal estateestate professionals.professionals. OneOne exampleexample isis aa __________________, __________________, whowho isis licensedlicensed toto provideprovide servicesservices suchsuch asas showing
showing homes,homes, makingmaking offersoffers andand counteroffers,counteroffers, negotiatingnegotiating prices,prices, andand assistingassisting inin thethe closing.
closing. AnotherAnother exampleexample isis aa __________________, __________________, whowho takestakes aa mortgagemortgage application,application, processes
processes andand reviewsreviews credit,credit, andand preparesprepares documentsdocuments forfor thethe lender.lender.
4.
4. AA loanloan thatthat usesuses realreal estateestate asas collateralcollateral forfor itsits repaymentrepayment isis calledcalled aa _______________. _______________.
5.
5. ThereThere areare manymany differentdifferent typestypes of of mortgages.mortgages. ForFor example:example: a.
a. __________________: __________________: aa mortgagemortgage whosewhose interestinterest raterate remainsremains constantconstant overover the
the entireentire lifelife of of thethe loan.loan. b.
b. __________________: __________________: aa mortgagemortgage whosewhose interestinterest raterate changeschanges periodicallyperiodically based
based onon aa predeterminedpredetermined formula.formula. c.
c. __________________: __________________: aa mortgagemortgage whosewhose monthlymonthly paymentspayments dodo notnot includeinclude principal
principal repayment.repayment.
6.
6. AA __________________ __________________ isis aa oneone
‐‐
timetime feefee paidpaid byby thethe borrowerborrower toto reducereduce thethe interestinterest raterate onon aa mortgagemortgage andand isis equalequal toto oneone percentpercent of of thethe amountamount borrowed.borrowed.
7.
7. ConsiderConsider aa fixedfixed
‐‐
raterate mortgagemortgage thatthat isis amortizedamortized overover 3030 years:years: a.a. TheThe monthlymonthly paymentpayment __________________ __________________ (increases/decreases/stays(increases/decreases/stays thethe same)
same) overover time.time. b.
b. TheThe interestinterest paymentpayment __________________ __________________ (increases/decreases/stays(increases/decreases/stays thethe same)
same) overover time.time. c.
c. TheThe principalprincipal repaymentrepayment __________________ __________________ (increases/decreases/stays(increases/decreases/stays thethe same)
same) overover time.time.
8.
8. AccordingAccording toto thethe U.S.U.S. taxtax code,code, onlyonly thethe __________________ __________________ portionportion of of aa mortgagemortgage payment
payment isis taxtax deductible.deductible.
9.
9. ExpensesExpenses thatthat areare relatedrelated toto completingcompleting aa realreal estateestate transactiontransaction butbut separateseparate fromfrom thethe actual
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Chapter
Chapter 2
2 The
The Financial
Financial System
System in
in the
the U.S.
U.S.
Kathy
KathySmith,Smith,BankBank BranchBranchManagerManager
Neighborhood
NeighborhoodNationalNationalBankBank
What
What areare somesome of of thethe productsproducts andand servicesservices offeredoffered byby aa bank?bank?
Checking
Checking accounts,accounts, savingsaving accounts,accounts, bankbank CDs,CDs, moneymoney marketsmarkets accounts,accounts, businessbusiness accounts,accounts, loans,
loans, debitdebit cards,cards, andand onlineonline billbill pay.pay.
Why
Why isis itit importantimportant forfor aa highhigh schoolschool studentstudent toto openopen aa bankbank account?account?
ToTo learnlearn financialfinancial responsibilitiesresponsibilities
ToTo knowknow howhow toto balancebalance outout accountaccount withwith moneymoney theythey earnedearned
ToTo earnearn moneymoney onon savingsaving accountaccount
ToTo growgrow upup inin aa financialfinancial soundsound worldworld
What
What shouldshould someonesomeone considerconsider whenwhen choosingchoosing aa bank?bank?
TheThe locationlocation of of thethe bankbank
WillWill he/shehe/she bebe comfortablecomfortable withwith thethe bankbank
TheThe bank’sbank’s productsproducts && servicesservices
How
How safesafe isis thethe moneymoney youyou depositdeposit inin aa bank?bank?
It’sIt’s safesafe andand secured.secured. TheThe FDICFDIC insuresinsures upup toto $250,000.$250,000.
AdditionalAdditional benefits:benefits: interest;interest; nono thefttheft oror robbery!robbery!
(For
(For moremore informationinformation aboutabout FDIC,FDIC, gogo toto http://www.fdic.gov/deposit/http://www.fdic.gov/deposit/.).)
What’s
What’s thethe biggestbiggest mistakemistake youyou seesee clientsclients makemake inin theirtheir accounts?accounts?
BalancingBalancing checkingchecking accountsaccounts
18 18
Chapter
Chapter 3
3 Financial
Financial Planning
Planning and
and Budgeting
Budgeting
Scott
Scott Broberg,Broberg, FinancialFinancial plannerplanner
What
What doesdoes aa financialfinancial plannerplanner do?do?
He/she
He/she helpshelps peoplepeople establishestablish goalsgoals (save(save moneymoney forfor retirement,retirement, buyingbuying house,house, gogo toto college)college) and
and create/developcreate/develop thethe planplan toto getget toto theirtheir goal.goal. ThereThere isis nono guaranteeguarantee thatthat itit willwill workwork outout asas planned.
planned. However,However, planningplanning aheadahead helpshelps youyou alongalong thethe wayway whenwhen lifelife changes.changes.
Who
Who cancan benefitbenefit fromfrom thethe servicesservices of of aa financialfinancial planner?planner?
Everybody
Everybody cancan useuse financialfinancial adviceadvice inin somesome shapeshape oror form.form. Practicality
Practicality issue:issue: HowHow muchmuch wouldwould youyou paypay forfor thethe advice?advice? You
You maymay getget adviceadvice fromfrom otherother placesplaces whenwhen youyou firstfirst startstart outout youryour careercareer thenthen eventuallyeventually workwork your
your wayway intointo aa financialfinancial plannerplanner officeoffice onceonce youyou havehave moremore complexitycomplexity toto youryour financialfinancial situation.
situation.
At
At whatwhat pointpoint shouldshould someonesomeone seekseek thethe servicesservices of of aa financialfinancial planner?planner?
Today,
Today, asas soonsoon asas possible,possible, becausebecause timetime isis shortshort andand wewe needneed toto makemake thethe mostmost of of thethe timetime wewe have
have andand thethe limitedlimited assetsassets wewe havehave inin ourour life.life. YoungYoung peoplepeople beginningbeginning toto savesave moneymoney maymay gogo to
to aa financialfinancial plannerplanner andand paypay aa onetimeonetime feefee toto getget guidanceguidance toto movemove ahead.ahead. OnceOnce youyou startstart toto accumulate
accumulate assets,assets, thenthen itit makemake moremore sensesense toto havehave anan ongoingongoing relationshiprelationship withwith aa financialfinancial planner
planner thatthat youyou paypay onon aa regularregular basis.basis.
What
What shouldshould oneone looklook forfor inin aa financialfinancial planner?planner?
1.
1. GoodGood fit!fit! (comfortable(comfortable with,with, trusttrust thatthat he/shehe/she cancan helphelp you)you) 2.
2. ComfortableComfortable toto shareshare financialfinancial informationinformation toto thethe individualindividual 3.
3. HowHow muchmuch areare youyou paying?paying? AreAre youyou gettinggetting aa goodgood valuevalue forfor whatwhat youyou areare payingpaying him/her?
him/her?
What’s
What’s thethe bestbest financialfinancial adviceadvice forfor highhigh schoolschool students?students?
Spend
Spend lessless thanthan youyou earn!earn! ThisThis alsoalso appliesapplies toto allall incomeincome levels!levels!
What’s
What’s thethe bestbest ageage toto startstart workingworking withwith aa financialfinancial planner?planner?
Today!
Today! ThinkThink aboutabout wherewhere youyou areare atat thisthis presentpresent situationsituation andand startstart toto planplan outout forfor youryour future.
