Personal Financial Planning

SHOW ALL YOUR WORK TO OBTAIN FULL CREDIT Time Value of Money Problem Chapter 2 If you won $250,000 today and invested all of it in a stock that paid 8% return, how much would you have in 20 yea

Solve for Future Value Input information:

If you invested $10,000 today, how much would you have in 10 years if you earned 10% on that money?

Solve for Future Value

If the average new home cost $200,000 today, how much would it be worth in 10 years if inflation is 4% per year?

Solve for Future Value

If you can earn 8% per year, how much will you have to save each year if you want to retire in 35 years with $2,000

Solve for PMT

Balance Sheet Problem Chapter 2 Construct a Balance Sheet for the Jones family from the information listed below. To save time formatting your answer, list the Assets, Liabilities, and Net Worth in a single vertical column on the left sid NOTE: Item Cash on hand

Bank Credit Card Balance Auto Loan Balance Monthly Credit Card Payment Total Value of Home Mortgage on Home Monthly Salary Jewelry Stocks Coin Collection 2011 Honda

Tax Problem Using Itemized Deductions Chapter 2 The Sanchez family is filing their joint tax return. They want to itemize their deductions, and have an Adjusted Gro (1) List each item they can deduct and the dollar amount associated with that item (2) Then, show the TOTAL amount that they can itemize on their tax return

Personal Financial Planning

SHOW ALL YOUR WORK TO OBTAIN FULL CREDIT CONTINUED:

Part 2 of Tax Problem:

Assuming that the Sanchez family has a Standard Deduction of $11,400, and that they are in a 25% Marginal t

Marginal Tax Bracket Total Tax Liability Actual Tax Savings Itemized The Sachez family real tax savings is $2,475 if they decide on using itemized deductions instead of standard deductions.

Housing Problem Chapter 5 Your bank is offering a 5.5% fixed-rate mortgage that requires a Down Payment of 10% of the homes Purchase Pri 1 point =1% of the loan (1) How much will the Closing Costs be on a $200,000 home? Home cost $200,000 they require 10% from the purchse price that is the following:

$200,000 10% $20,000

Total Closing Cost (2) What are the Pros and Cons of Fixed rate loan versus a Variable rate loan.

NOTE: Discuss how the Interest Rate and the Monthly Payment work on a Fixed Rate mortgage (a few sente

Personal Financial Planning

SHOW ALL YOUR WORK TO OBTAIN FULL CREDIT A Different Type of Housing Problem Chapter 5 Kevin and Julie are purchasing their first home with a $200,000 loan, but cant decide whether to finance it with a 1 (1) 15-year mortgage at 4.5% interest, OR (2) 30-year mortgage at 5% interest I Figure out Monthly Payment 15 years x 12=180 N (A) First, calculate the monthly payment for EACH loan using PV, I, N, and PMT PV FV Solve for PMT: PMT: Use The online Calculator for this problem

TVM Calculator PV: PMT: FV: TVM Calculator PV: PMT: FV:

Eleanor Smith wants to purchase her first car. Shes not familiar with the purchasing process but thinks that she ca (1) How would you advise her as far as researching the car? (2) Should she buy a new or a used car? (3) How should she go about negotiating the price? (4) How should she go about financing the loan? NOTE: This is NOT a math problem. YOUR ANSWER SHOULD BE IN THE FORM OF AN ESSAY. Use a paragraph (3-4 sentences) to answer EACH of the four (4) questions above. Disability Insurance ESSAY Problem Chapter 8 Pete is an accountant who earns $35,000 a year. His monthly TAKE HOME pay is $4,500. His wife is a volunteer at (1) Compute how much additional monthly benefit John will need after using his disability plan benefits. Calculate:

(2) Explain in a paragraph of 5-6 sentences how Pete can supplement his disability benefits with a personal insu

Personal Financial Planning

SHOW ALL YOUR WORK TO OBTAIN FULL CREDIT Medical Insurance Problem Chapter 10 Jonathan and Jeri have a comprehensive major medical insurance policy that covers them and their two daughters. (1) $500 calendar-year family deductible (2) $2600 stop-loss provision (3) 80% co-insurance clause They incur the following losses:

Investment Problem: Bonds Chapter 12 Explain the DIFFERENCE between a bonds CURRENT YIELD and its YIELD TO MATURITY NOTE: Use 2-3 sentences to explain Yield to Maturity Use 2-3 sentences to explain the importance of these yields to an investor Find the CURRENT YIELD and the YIELD TO MATURITY of a bond that has the following features: (1) It will mature in 20 years (2) It has an coupon (interest) rate of 20% (3) It has a Par Value of $1,000 (4) It currently trades in the market at 20% Find the Price of Bond: Po= 1000[(1.20)-1]/(.20)=$1000

Current Yiel

The two mo of annual in

Current yiel

The amount

Current yiel

As you can s

Current yiel

The amount
From online Calculator find the YTM:

Example Problems Find the yield to maturity for the semiannual coupon bond with the following features. To solve for Current Yield we have to solve for Present Value of Bond Calculator or Excel Input: N=20 years I=20% or .20 PMT=(1000 x .20)= 200 or -200 PV?= 850.44 present value or current price of bond So the current yield input: 20% Coupon or interest rate on bond 1000 par value or FV $850.44 PV or Current market price of Bond Calculate the annual interest income on the bond first 1000 x .20= 200 So that Current Yield: $200/850.44=23.52% The current yield is always closely tied to the interest rates of the bond Solving For YTM or Yield to Maturity Financial Calculator Input: Solving for I/YR or I (interest rate) N=20 PV= -850.44 PMT= 200 FV=100 I= 23.57 or 23.6% Solve online http://www.zenwealth.com/BusinessFinanceOnline/BV/YTM.html

Current yiel

As you can s that a 6% bo to $60 (i.e., ($60/$910) higher the c

The annual yield to mat also include purchased a hand, if the prevailing le

Final Exam Review Exercise 1

would you have in 20 years? I N PMT PV FV?=

0.08 20 0 -250,000 $1,165,239.29

n that money? I N PMT PV FV?=

0.1 10 0 -10,000 $25,937.42

inflation is 4% per year? I N PMT PV FV?=

0.04 10 0 -200,000 $296,048.86

e in 35 years with $2,000,000?

I N PV FV PMT?=

0.08 35 0 2,000,000 ($11,606.53)

cal column on the left side of the page.

Dollars 100

Assets Liquid Assets Cash on hand

100

5,000 25,000 325 250,000 225,000 4,500 500 1,000 1,500 25,000

Total Liquid asset: Investment Stocks Total Investment: Real Property Primary Home Total Rel Property: Personal Property Auto Jewelry Coin Collection Total Personal Property Total Assets(i): Liabilities Current Liabilities Credit Card Balances Total Current Liabilities: Long Term Liabilities Home Mortgage Auto Loan Balance Total Long Term Liability: II Total Liabilities Net Worth (I - II) Total Liability

100

1,500 1,500

250,000 250,000

25,000 500 1,500 27,000 277,100

5,000 5,000

225,000 25,000 250,000 255,000 22,100 277,100

nd have an Adjusted Gross Income (AGI) of $85,000. Based on the information listed on the next page below:

Page 2 Tax Problem Using Itemized Deductions Chapter 2 Item Medical Expenses Dollar Amount (A) 5000

Cannot Deduct FALLS BELLOW AGI

State Income Taxes Paid Real Estate Taxes Paid Home Mortgage Interest Paid Gifts to Charity Credit Card Interest Paid Unreimbursed Employee Expenses

5,000 4,000 10,000 2,000 1,000 (B) 2000

Deduct full amount Deduct full amount Deduct full amount Deduct full amount Cannot Deduct Deduct Only: $2000 - $1700= $300

NOTES: AGI=$85,000 The percentage deduction for medical and dental is 7.5% that is 85,000 X 7.5%= $6,375 they cannot Refer to Chapter 3 pgs. (94-95) to find that 7.5% is only for medical and dental you have to multiplied with AGI for Also unreimbursed job expenses can only be deducted if it exceeds the minimum threshold when multiplied from However in this case you can include, because $2,000>$1,700, you can only deduct the differece of $300. Also 2% Total Itemized deductions allowed for the Sanchez family is $21,300

Tax Problem Using the Standard Deduction Chapter 2

y are in a 25% Marginal tax bracket. Then, determine how much they can save by Itemizing their deductions instead of using the Standa

Standar Deductions: $11,400 25% $2,850 $2,475

Itemized Deductions 21,300 25% $5,325.00

tandard deductions.

the homes Purchase Price. Closing costs are $750 PLUS three (3) Points.

Home Value $200,000 20,000 $180,000 3% $5,400 $750 $6,150 ESSAY QUESTION

Deduct Multiply Add

ate mortgage (a few sentences) as opposed to a Variable Rate mortgage ( a few sentences).

Final Exam Review Exercise 1

ther to finance it with a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage. Their options are:

15-Year Mortgage at 4.5% 30 Year Mortgage at 5% 4.5% 5% 180 360 200,000 200,000 0 0 DO NOT Excell to solve this problem it gives an error

$200,000 1,529.99 $0

Rate: Periods:

4.50% 180

$200,000 $1,013.37 $0

Rate: Periods:

5% 360

ess but thinks that she can afford to pay $350 per month on a loan or a lease. She has $3000 to put towards a down payment. If you we

His wife is a volunteer at a local charity organization, but receives NO benefits. Petes company has a short-term disability plan that provi

ility plan benefits.

$35,000 65%

22,750 Monthly Disability benefits for par 12

$22,750

1895.833333

nefits with a personal insurance policy. State the type of supplemental insurance policy he should buy, and what kind of provisions it shou

Final Exam Review Exercise 1

and their two daughters. The policy has the following provisions:

Type of Loss Flu (Jeri) Leg Injury (Jonathan) Surgery ( Jonathan) Broken Arm (Jonathan)

Date of Loss 1/10/2012 6/27/2012 10/25/2012 1/4/2013

Indicate how much the insurance company will pay for each of the four losses listed above.

Use 2-3 sentences to explain Current Yield.

Current Yield and Yield to Maturity The two most commonly cited bond yields are current yield and yield to maturity. Current yield reflects the amount of annual interest income the bond provides relative to its current market price. Heres the formula for current yield: Current yield The amount of current income a bond provides relative to its market price. Current yield = Annual interest income Market price of bond As you can see, the current yield on a bond is basically the same as the dividend yield on a stock. Assume, for example,

Current yield The amount of current income a bond provides relative to its market price. Current yield = Annual interest income Market price of bond As $ you can see, the current yield on a bond is basically the same as the dividend yield on a stock. Assume, for example, % interest income would amount that a 6% bond with a $1,000 face value is currently selling for $910. Because annual to $60 (i.e., 0.06 $1,000) and because the current market price of the bond is $910, its current yield would be 6.59% % ($60/$910). This measure would be of interest to investors seeking current income; other things being equal, the higher the current yield, the more attractive a bond would be to such an investor. The annual rate of return a bondholder would receive if she held the issue to its maturity is captured in the bonds yield to maturity. This measure captures both the annual interest income and the recovery of principal at maturity; it also includes the impact of interest on interest and therefore provides a fully compounded rate of return. If a bond is purchased at its face value then its yield to maturity will equal the coupon, or stated, rate of interest. On the other hand, if the bond is purchased at a discount or a premium then its yield to maturity will vary according to the prevailing level of market yields.
Yield To Maturity The fully compounded rate of return that a bond would yield if it were held to maturity. You can find the yield to maturity on discount or premium bonds by using the approximate yield formula introduced earlier in this chapter. Or you can use a handheld financial calculator (which well demonstrate soon) to obtain a yield to maturity thats a bit more accurate and is, in fact, very close to the measure used in the market. The only difference is that market participants normally use semi-annual compounding in their calculations whereas we use annual compounding. (Bonds are normally priced in the market using semi-annual compounding, because the vast majority of U.S. bonds pay interest semiannually. Actually, using semi-annual rather than annual compounding is more of a technical matter thats of concern primarily to large institutional bond investors. The fact is, the difference in yields using annual versus semi-annual compounding usually amounts to no more than 5 or 6 basis points, where 1 basis point = 1/100 of 1%. Now that might be a big deal to institutional investors, but not to the small individual investor. So well stick with annual compounding here, though well show how you can use your handheld calculator to find yield to maturity on a semi-annual basis). So, employing the approximate yield approach for now, by setting the future price (FP) of the investment equal to the bonds face value ($1,000), you can use the following version of the equation to find the approximate yield to maturity on a bond: Approximate yieldto maturity=CI + [$1,000CPN][CP + $1,0002] (Gitman, Lawrence. Personal Financial Planning, 12th Edition. South-Western, 2014-01-15. p. 426). <vbk:9781133614128#outline(14.4.7.4)>
$

a big deal to institutional investors, but not to the small individual investor. So well stick with annual compounding here, though well show how you can use your handheld calculator to find yield to maturity on a semi-annual basis). So, employing the approximate yield approach for now, by setting the future price (FP) of the investment equal to the bonds face value ($1,000), you can use the following version of the equation to find the approximate yield to maturity on a bond: Approximate yieldto maturity=CI + [$1,000CPN][CP + $1,0002] (Gitman, Lawrence. Personal Financial Planning, 12th Edition. South-Western, 2014-01-15. p. 426). <vbk:9781133614128#outline(14.4.7.4)>

Page 1

Deduct FALLS BELLOW AGI TRESHOLD

Itemised Deductions: State Income Taxes Paid

full amount full amount full amount full amount

Real Estate Taxes Paid Home Mortgage Interest Paid Gifts to Charity Unreimbursed Employee Expenses Total Itemized Deductions:

Only: $2000 - $1700= $300

7.5%= $6,375 they cannot deduct is below minimum e to multiplied with AGI for the year. hold when multiplied from AGI which in this case is $85,000 X .02= $1,700 if it falls below this amount it won't be included in it e differece of $300. Also 2% applies to job related expense multiplied with the AGI for that year.

ns instead of using the Standard Deduction.

Page 3

a down payment. If you were asked to guide her through the buying experience:

erm disability plan that provides employees with 65% of their GROSS monthly pay for only TWO (2) years.

y Disability benefits for part A. is $1,895.83

what kind of provisions it should include.

Page 4

Amount Coverage $ Amount of Loss Co-Insurance Clause and Carryover Amount Deductible $200.00 500 $300.00 0 $1,500.00 300 1,500x.80=1,200 80% $10,000.00 2600 0 0 $2,000.00 500 Carry Over $300 0

yield reflects the amount formula for current yield:

tock. Assume, for example,

tock. Assume, for example, st income would amount rent yield would be 6.59% hings being equal, the

captured in the bonds of principal at maturity; it rate of return. If a bond is interest. On the other y according to the

maturity.

pproximate ncial bit more difference is lations et using semiof a s. The fact ly amounts at might be well stick held pproximate to the find the

2014-01-15.

well stick held pproximate to the find the

2014-01-15.

me Taxes Paid

5,000

gage Interest Paid

ed Employee Expenses ed Deductions:

4,000 10,000 2,000 300 21,300

lls below this amount it won't be included in itemized deductions. AGI for that year.

only TWO (2) years.

Jonathan/Jerry Payment

Insurance Payment 200 $0 300+240=540 1,200/.80=960 2,600-200-540=1,860 10,000-1,860=8,140 New Year 500+300=800 2,600-800=1,200

Investing in Mutual Funds Chapter 13 The XYZ Class A Share mutual fund has the following features: - Net Asset Value (NAV) of $35.64 - Offer/purchase price of $37.81 Use this information to answer the following the four questions on the following page: four questions:EQUATION: NET ASSET VALUE= MUTUAL FUND'S NET ASSET VALUE/ SHARE OUTSTANDING

SHARES OUTSTANDING=MUTUAL FUND'S NET ASSET VALUE/ NET ASSET VALUE (A) How many SHARES will you receive when you invest $10,000? That is $10,000/35.64=280.58 o

(B) What is the PERCENTAGE load? (C) What is the LOAD CHARGE, in dollars, for this transaction? (D) The Class A fund in this example is a front-load fund. If instead, it were a NO-LOAD funds, what THREE (3) criteria

SHARE OUTSTANDING UE/ NET ASSET VALUE hat is $10,000/35.64=280.58 or 281 shares

AD funds, what THREE (3) criteria must a mutual fund meet to be considered a NO-LOAD fund?