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PERSONAL FINANCE - PDF

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					   PERSONAL
    FINANCE
                     FOURTH EDITION




               JEFF MADURA
                Florida Atlantic University




     Boston Columbus Indianapolis New York San Francisco Upper Saddle River
Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto
    Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
                        Contents
Preface
Financial Literacy Pre-Test

Chapter 1 Overview of a Financial Plan                                                            3
            How You Benefit from an Understanding of Personal Finance                             4
            Make Your Own Financial Decisions                                                      4
            Judge the Advice of Financial Advisers                                                 4
            Become a Financial Adviser                                                             5
            Components of a Financial Plan.                                                       5
            A Plan forYour Budgeting andTax Planning                                               5
            A Plan to Manage Your Liquidity                                                        6
            A Plan forYour Financing                                                               7
            A Plan for Protecting Your Assets and Income                                           7
            A Plan forYour Investing                                                               7
            A Plan forYour Retirement and Estate                                                   7
            How theText Organization Relates to the Financial Plan's Components                    8
            Developing the Financial Plan                                                         10
            Step 1. Establish Your Financial Goals                                                10
            Step 2. ConsiderYour Current Financial Position                                       10
            Step 3. Identify and Evaluate Alternative PlansThat Could Achieve Your Goals. . . .   13
            Step 4. Select and Implement the Best Plan for Achieving Your Goals*.                 13
            Financial Planning Online 1.1: Financial PlanningTools for You                        14
            Step 5. Evaluate Your Financial Plan                                                  15
            Step 6. Revise Your Financial Plan                                                    15
            Summary                                                                               17
            Review Questions .                                                                    17
            Financial Planning Problems                                                           18
            Financial Planning Online Exercise                                                    19
            Video Exercise: Benefits of Financial Planning                                        19
            Building Your Own Financial Plan                                                      20
            The Sampsons—a Continuing Case                                                        20



PART 1 TOOLS FOR FINANCIAL PLANNING
Chapter 2   Planning with Personal Financial Statements                                           28
            Personal Cash Flow Statement                                                          29
            Cash Inflows                                                                          29
                                                                      Detailed Contents     xi


            Cash Outflows                                                                  29
            Creating a Personal Cash Flow Statement                                        29

            Factors That Affect Cash Flows                                                30
            Factors Affecting Cash Inflows                                                 30
            Factors Affecting Cash Outflows                                                32
            Creating a Budget                                                             32
            Anticipating Cash Shortages                                                    34
            Assessing the Accuracy of the Budget                                           34
            Forecasting Net Cash Flows over Several Months                                 34
            Creating an Annual Budget                                                      35
            Improving the Budget                                                           36
            Financial Planning Online 2.1: Budgeting Tips                                  37
        /   Personal Balance Sheet                                                        38
            Assets                                  :                                      38
            Financial Planning Online 2.2: The Impact of Reduced Spending                  38
            Financial Planning Online 2.3: Financial Planning Online: Budgeting Advice     39
            Liabilities                                                                    40
            Net Worth                                                                      40
            Creating a Personal Balance Sheet                                              40
            Changes in the Personal Balance Sheet                                          41
            How Cash Flows Affect the Personal Balance Sheet                               43
            Analysis of the Personal Balance Sheet                                         45
            How Budgeting Fits Within Your Financial Plan                                 46
            Discussion Questions                                                           47
            Summary                                                                        47
            Review Questions                                              *.               48
            Financial Planning Problems                                                    49
            Financial Planning Online Exercises                                            50
            Video Exercise: Budgeting                                                      51
            Building Your Own Financial Plan                                               51
            The Sampsons—A Continuing Case                                                 52


Chapter 3 Applying Time Value Concepts                                                    ei
            The Importance of the Time Value of Money                                     62
            Future Value of a Single Dollar Amount                                        62
            Using the Future ValueTable                                                    63
            Impact of a Longer Period                                                      64
            Impact of a Higher Interest Rate                                               64
            Using a Financial Calculator                                                   64
            The Power of Compounding                                                       65
            Present Value of a Dollar Amount                                               66
            Financial Planning Online 3.1: Paying Your Bills Online                         67
            Using the Present ValueTable                                                  . 67
xii   Detailed Contents


                Using a Financial Calculator                                                 67
                Impact of Economic Conditions on theTime Value of Money                      68
                Future Value of an Annuity                                                   68
                Using the Future Value Annuity Table                                         69
                Using a Financial Calculator to Determine the Future Value of an Annuity     70
                Financial Planning Online 3.2: Estimating the Future Value of Your Savings   71

                Present Value of an Annuity                                                  71
                Using the Present Value Annuity Table                                        72
                Using a Financial Calculator to Determine the Present Value of an Annuity    72

                Using Time Value to Estimate Savings                                         73
                Estimating the Future Value from Savings                                     73
                Estimating the Annual SavingsThat Will Achieve a Future Amount               73
                How a Savings Plan Fits Within Your Financial Plan                           75
                Discussion Questions                                                         75
                Summary                                                                      75
                Review Questions                                                             75
                Financial Planning Problems                                                  76
                Financial Planning Online Exercises                                          77
                Video Exercise: How Your Savings Grows                                       78
                Building Your Own Financial Plan                                             78
                The Sampsons—A Continuing Case                                               78


Chapter 4       Using Tax Concepts for Planning                                              85
                Background on Taxes                                                          86
                Tax Law Changes                                                              86
                Social Security and Medicare Taxes                                           87
                Financial Planning Online 4.1: Internal Revenue Service                      87
                Personal IncomeTaxes                                                         88

                Filing Status                                                                88
                Gross Income                                                                 91
                Wages and Salaries                                                           91
                Interest Income                                                              91
                Dividend Income                                                              91
                Capital Gains                                                                93
                Determining Gross Income                                                     93
                Adjusted Gross Income                                                        93

                Deductions and Exemptions                                                    96
                Standard Deduction                                                           96
                Itemized Deductions                                                          96
                Financial Planning Online 4.2: State Income Tax Rates                        99
                Exemptions                                                                   99
                                                                    Detailed Contents    xiii


            Taxable Income and Taxes                                                     99
            Taxable Income                                                               99
            Calculating Taxes                                                           100
            Tax Credits                                                                 102
            Financial Planning Online 4.3: Estimating Your Taxes                        103
            How Tax Planning Fits Within Your Financial Plan                            104
            Discussion Questions                                                        106
            Summary                                                                     106
            Review Questions                                                            107
            Financial Planning Problems                                                 107
            Financial Planning Online Exercises                                         108
            Video Exercise: Tax Saving Tips                                             109
        '   Building Your Own Financial Plan                                            109
            The Sampsons—A Continuing Case                                              110
            Part 1: Brad Brooks—A Continuing Case                                       110



PART 2 MANAGING YOUR LIQUIDITY
Chapter 5   Banking and Interest Rates                                                   2
                                                                                        10
            Types of Financial Institutions                                             121
            Depository Institutions                                                     121
            Nondepository Institutions                                                  122
            Financial Conglomerates                                                     123
            Banking Services Offered by Financial Institutions . .•                     123
            Checking Services                                                           123
            Check Float.                                                                125
            Credit Card Financing                                                       126
            Debit Cards                                                                 126
            Safety Deposit Boxes                                                        126
            Automated Teller Machines (ATMs)                                            126
            Cashier's Checks                                                            127
            Money Orders                                                                127
            Traveler's Checks                                                           127
            Selecting a Financial Institution                                           127
            Financial Planning Online 5.1: Internet Banking                             128

            Interest Rates on Deposits and Loans                                        129
            Risk-Free Rate                                                              129
            Risk Premium                                                                129
            Financial Planning Online 5.2: Financial Institutions
            That Can Serve Your Needs                                                   129
            Comparing Interest Rates and Risk                                           131
xiv   Detailed Contents


                Term Structure of Interest Rates                                      131
                Financial Planning Online 5.3: Current Interest Rate Quotations       132
                Why Interest Rates Change                                             133
                Shift in Monetary Policy                                              134
                Shift in the Government Demand for Funds                              134
                Financial Planning Online 5.4: Updated Treasury Yields                135
                Shift in the Business Demand for Funds                                135
                Loan Rate                                                             135
                Financial Planning Online 5.5: Fed's Upcoming Meetings                136
                How Banking Services Fit Within Your Financial Plan                   137
                Discussion Questions                                                  138
                Summary                                                               138
                Review Questions                                                      138
                Financial Planning Problems                                           139
                Financial Planning Online Exercises                                   140
                Video Exercise: BankingTips                                       ,   140
                Building Your Own Financial Plan                                      141
                The Sampsons—a Continuing Case                                        141


Chapter 6       Managing Your Money                                                   147
                Background on Money Management                                        148
                Liquidity                                                             148
                Adequate Return                                                       148

                Money Market Investments                                              149
                Checking Account                                                      149
                NOW Account                                                           150
                Savings Deposit                                                       150
                Certificate of Deposit                                                151
                Money Market Deposit Account (MMDA)                                   152
                Treasury Bills                                                        152
                Financial Planning Online 6.1: Interest Rate Data                     153
                Money Market Funds (MMFs)                                             154
                Asset Management Account                                              155
                Comparison of Money Market Investments                                155
                Risk of Money Market Investments                                      156
                Credit Risk                                                           156
                Financial Planning Online 6.2: Impact of Different Deposit
                Rates on Your Wealth                                                  156
                Interest Rate Risk                                                    157
                Liquidity Risk                                                        157
                Risk Management of Money Market Investments                           158
                Financial Planning Online 6.3: Identifying Insured Investments        158
                                                                    Detailed Contents    xv


          Risk Assessment of Money Market Investments                                   159
          Determining the Optimal Allocation of Money Market Investments                159
          How Money Management Fits Within Your Financial Plan                          161
          Discussion Questions                                                          162
          Summary                                                                       162
          Review Questions                                                              162
          Financial Planning Problems                                                   163
          Financial Planning Online Exercises                                           164
          Video Exercise: Investing in Money Markets                                    164
          Building Your Own Financial Plan                                              165
          The Sampsons—A Continuing Case                                                165


Chapter 7 Assessing and Securing Your Credit                                            171
          Background on Credit                                                          172
'"[       Types of Credit                                                               172
          Advantages of Using Credit                                                    172
          Disadvantages of Using Credit                                                 173
          Credit Rights .                                                               173
          Credit History. .                                                             174
          Credit Insurance                                                              174
          Financial Planning Online 7.1: Personal Credit Counseling                     174

          Credit Bureaus                                                                175
           Credit Reports Provided by Credit Bureaus                                    175
           Credit Score                                                                 177
           Financial Planning Online 7.2: Obtaining a Free Credit Report                177
           Reviewing Your Credit Report                                                 179
           Identity Theft: a Threat to Your Credit                                      180
          The Cost of Identity Theft                                                    181

           Identity Theft Tactics                                                       181
           Shoulder Surfing                                                             181
           Dumpster Diving                                                              181
           Skimming                                                                     182
           Pretexting, Phishing, and Pharming                                           182
           Abusing Legitimate Access to Records                                         182
           Crime Rings                                                                  182
           Violating Your Mailbox                                                       182
           Protecting Against Identity Theft                                            183
           Shielding Personal Information at Home                                       183
           Protecting Personal Information at Work                                      184
           Identity Theft Insurance                                                     185
           Response to Identity Theft                                                   185
           Financial Planning Online 7.3: Identity Theft                                185
xvi   Detailed Contents


                How Credit Assessment and Security Fits
                Within Your Financial Plan                                          188
                Summary                                                             189
                Review Questions                                                    189
                Financial Planning Problem                                          190
                Financial Planning Online Exercises                                 190
                Video Exercise: Improving Your Credit                               190
                Building Your Own Financial Plan                                    191
                The Sampsons—a Continuing Case                                      191

Chapter 8       Managing Your Credit                                                197
                Credit Cards                                                        198
                Applying for a Credit Card                                          198
                Types of Credit Cards                                               199
                Financial Planning Online 8.1: Your Credit Card Report              200
                Credit Limit                                                        200
                Overdraft Protection                                                200
                Annual Fee                                                          201
                Incentives to Use the Card                                          201
                Prestige Cards                                                      201
                Grace Period                                                        201
                Financial Planning Online 8.2: Eliminating Credit Card Debt         202
                Cash Advances . .                                                   202
                Financing                                                           202
                Repayment Calculators                                               204
                Impact of the Interest Rate on Credit Payments                      204
                Impact of Financing Period on Credit Payments                       204
                Credit Card Statement                                               205
                Financial Planning Online 8.3: Your Rights When Using Credit        207
                Comparing Credit Cards                                              207
                Financial Planning Online 8.4: Selecting a Credit Card              208

                Tips on Using Credit Cards                                          209
                Use a Credit Card Only if You Can Cover the Bill                    209
                Impose aTight Credit Limit                                          210
                Reduce Credit Limit When Economic Conditions Weaken                 211
                Pay Credit Card Bills Before Investing Money                        211
                Financial Planning Online 8.5: Establishing and Protecting Credit   211
                Pay Off Credit Card Debt Before Other Debt                          212
                Financial Planning Online 8.6: Estimating the Time Necessary
                to Pay Off Your Balance                                             213
                Avoid Credit Repair Services                                        213
                Credit Repair Kit                                                   213
                How Credit Management Fits Within Your Financial Plan               214
                Discussion Questions                                                215
                                                                       Detailed Contents    xvii


            Summary                                                                        215
            Review Questions                                                               215
            Financial Planning Problems                                                    216
            Financial Planning Online Exercises                                            217
            Video Exercise: Tips on Using Credit Cards                                     217
            Building Your Own Financial Plan                                               218
            The Sampsons—a Continuing Case                                                 218
            Part 2: Brad Brooks—A Continuing Case                                          218



PART 3 PERSONAL FINANCING
Chapter 9   Personal Loans                                                                 226
            Background on Personal Loans                                                   227
            Determining Whether a Loan Is Sensible                                         227
            Financial Planning Online 9.1: Loan Information                                227
            Sources of Loans                                                               228
            The Personal Loan Process                                                      228
            Interest Rates on Personal Loans                                               232
            Annual Percentage Rate                                                         232
            Simple Interest                                                                232
            Add-On Interest                                                                234
            Car Loans'                                                                     235
            Selecting the Car                                                              235
            Financial Planning Online   9.2: Prices of New Cars                            235
            Financial Planning Online   9.3: Trade-in and Retail Values of Used Cars       236
            Financial Planning Online   9.4: Car Loan Interest Rate Quotation              237
            Negotiating the Price                                                          238
            Financial Planning Online   9.5: Prevailing Car Loan Interest Rates            239
            Financing Decisions                                                            240
            Purchase versus Lease Decision                                                 241
            Financial Planning Online 9.6: Should You Lease or Buy?                        242
            Student Loans                                                                  242
            Home Equity Loan                                                               244
            Credit Limit on a Home Equity Loan                                             244
            Financial Planning Online 9.7: Applying for a Home Equity Loan                 244
            Interest Rate                                                                  245
            How Personal Loans Fit Within Your Financial Plan                              246
            Financial Planning Online 9.8: Personal Loan Scams                             246
            Discussion Questions                                                           247
            Summary                                                                        247
            Review Questions                                                               248
xviii   Detailed Contents


                  Financial Planning Problems                                           249
                  Financial Planning Online Exercises                                   250
                  Video Exercise: Applying for a Personal Loan                          251
                  Building Your Own Financial Plan                                      251
                  The Sampsons—A Continuing Case                                        252


Chapter 10 Purchasing and Financing a Home                                              257
                  Selecting a Home                                                      258
                  Relying on a Realtor                                                  258
                  Using Online Realtor Services                                         258
                  How Much Can You Afford?                                              259
                  Affordable Down Payment                                               259
                  Affordable Monthly Mortgage Payments                                  259
                  Criteria Used to Select a Home                                        260
                  Financial Planning Online 10.1: How Much Money Can You Borrow?        260
                  Financial Planning Online 10.2: Recent Sales Prices of Nearby Homes   261
                  Financial Planning Online 10.3: Listing of Homes Nearby for Sale      262
                  Valuation of a Home                                                   262
                  Market Analysis                                                       262
                  Economic Impact on Market Prices                                      263
                  Effects of Business Activity and Zoning Laws                          263
                  Obtaining a Second Opinion on Your Valuation                          264
                  Negotiating a Price                                                   264

                  Transaction Costs of Purchasing a Home                                264
                  Down Payment                                                          264
                  Financial Planning Online 10.4: Applying for a Mortgage               265
                  Closing Costs                                                         265
                  Financial Planning Online 10.5: Mortgage Rates                        267
                  Characteristics of a Fixed-Rate Mortgage                              267
                  Amortization Table                                                    267
                  Impact of the Mortgage Amount on the Monthly Payment                  268
                  Impact of the Interest Rate on the Monthly Payment                    269
                  Impact of the Mortgage Maturity on the Monthly Payment                270
                  Financial Planning Online 10.6: Estimating Mortgage Payments          270
                  Estimating the Monthly Mortgage Payment                               271
                  Characteristics of an Adjustable-Rate Mortgage                        272
                   Initial Rate                                                         273
                   Interest Rate Index                                                  273
                   Frequency of Rate Adjustments                                        273
                   Financial Planning Online 10.7: Should You Obtain
                   a Fixed- or an Adjustable-Rate Mortgage?                             273
                   Caps on Adjustable-Rate Mortgages                                    274
                   Financing with a Fixed- versus an Adjustable-Rate Mortgage           274
                                                          Detailed Contents    xix


Decision to Own versus Rent a Home                                            275
Estimating theTotal Cost of Renting and Owning                                276
Special Types of Mortgages                                                    279
Graduated Payment Mortgage                                                    279
Balloon Payment Mortgage                                                      279
Interest-Only Mortgage                                                        279
Mortgage Refinancing                                                          279
Rate Modification                                                             279
Financial Planning Online 10.8: Should You Rent or Buy?                       280
Refinancing Analysis                                                          280
How a Mortgage Fits Within Your Financial Plan                                281
Discussion Questions                                                          282
Summary                                                                       282
Review Questions                                                              283
Financial Planning Problems                                                   284
Financial Planning Online Exercises                                           285
Video Exercise: Purchasing a Home                                             286
Building Your Own Financial Plan                                              286
The Sampsons—A Continuing Case                                                286
Part 3: Brad Brooks—A Continuing Case                                         287




                                      leisyraince                             302
Background on Insurance                                                       303
Managing Risk                                                                 303
Avoid Risk                                                                    303
Reduce Risk                                                                   303
Accept Risk                                                                   304
Insure Against Risk                                                           304
Economic Impact on the Decision to Insure Against Risk                        304
Role of Insurance Companies                                                   305
Insurance Company Operations                                                  305
Insurance Company Credit Ratings and Service                                  306
Role of Insurance Agents and Brokers                                          306
Financial Planning Online 11.1: Reviews of Insurance Companies                307
Auto Insurance                                                                307
Auto Insurance Policy Provisions                                              307
Coverage A: Liability Coverage                                                307
Coverage B: Medical Payments Coverage                                         309
Coverage C: Uninsured or Underinsured Motorist Coverage                       310
xx   Detailed Contents


               Coverage D: Collision and Comprehensive Coverage                   310
               Other Provisions                                                   311
               Summary of Auto Insurance Provisions                               311
               Financial Planning Online 11.2: How Much Car Insurance
               Coverage Do You Need?                                              312
               Factors That Affect Your Auto Insurance Premiums                   313
               Characteristics of Your Car                                        313
               Your Personal Characteristics                                      313
               Comparing Premiums among Insurance Companies                       314
               If You Are in an Auto Accident                                     317
               Homeowner's Insurance                                              317
               Types of Perils Covered by Homeowner's Insurance                   317
               Homeowner's Insurance Policy Provisions                            318
               Property Damage                                                    318
               Other Structures on Property                                       319
               Personal Property                                                  319
               Liability                                                          319
               OtherTypes of Expenses                                             320
               Expenses Incurred by Homeowner's Insurance Companies               320
                Homeowner's Insurance Premiums                                    320
               Factors That Affect Homeowner's Insurance Premiums                 321
               Reducing Your Homeowner's Insurance Premium                        321
               Financial Planning Online 11.3: Purchasing Homeowner's Insurance   321
               Filing a Claim                                                     322
               Financial Planning Online 11.4: Renter's Insurance Quotation       323

               Renter's Insurance                                                 323
               Renter's Insurance Policy Provisions                               323
               Umbrella Personal Liability Policy                                 323
               How Home and Auto Insurance Fit Within Your Financial Plan         324
               Discussion Questions                                               324
               Summary                                                            325
               Review Questions                                                   325
               Financial Planning Online Exercises                                326
               Video Exercise: Selecting Auto Insurance                           326
               Building Your Own Financial Plan                                   327
               The Sampsons—a Continuing Case                                     327


                                        DillSty Imsyrasmce                        339
               Health Insurance                                                   340
               Private Health Insurance                                           340
               Types of Private Health Insurance Coverage                         341
                                                       Detailed Contents     xxi


Options for Purchasing Private Health Insurance                             341
Private Health Care Plans                                                   341
Premiums for Private Health Care Insurance                                  343
Comparison of Private Health Insurance Plans                                343
Financial Planning Online 12.1: Should You Enroll in an HMO or a PPO?       344
Individual Insurance                                                        345
Contents of Health Care Insurance Policies                                 345
Identification of Insured Persons                                          345
Location                                                                   346
Preexisting Conditions                                                     346
Cancellation Options                                                       346
Determinants of Unreimbursed Medical Expenses                              346
Rehabilitation                                                             347
Mental Illness                                                             347
Pregnancy                                                                  347
Renewability Option                                                        347
Maintaining Private Health Care Insurance Coverage                         347
Expenses Not Covered by Private Insurance Plans                            347
Government Health Care Plans                                               348
Medicare                                                                   348
Medicaid                                                                   349
Financial Planning Online 12.2: Medicare Coverage                          349
Long-Term Care Insurance                                                   350
Long-Term Care Insurance Provisions                                        350
Other Factors That Affect Long-Term Care Insurance Premiums                351
Reducing Your Cost of Long-Term Care Insurance                             351
Determining the Amount of Coverage                        »                352
Additional Types of Health Care Plans                                      .352
Dental Insurance                                                           352
Vision Insurance                                                           352
Disability Insurance                                                       352
Sources of Disability Income Insurance                                     352
Disability Insurance Provisions                                            353
Deciding on Disability Insurance                                           355
How Health and Disability Insurance Fit
Within Your Financial Plan                                                 355
Discussion Questions                                                       356
Summary                                                                    356
Review Questions                                                           356
Financial Planning Problems                                                357
Financial Planning Online Exercises                                        357
Video Exercise: Selecting Health Insurance                                 357
Building Your Own Financial Plan                                            358
The Sampsons—a Continuing Case                                             358
xxii   Detailed Contents


                                                                                                 367

                 Background on Life Insurance                                                    368
                 Role of Life Insurance                                                          368
                 Role of Life Insurance Companies                                                368

                 Types of Life Insurance                                                         369
                 Term Insurance                                                                   369
                 Financial Planning Online 13.1: Buying Term Life Insurance                       373
                 Whole Life Insurance                                                             373
                 Financial Planning Online 13.2: Should You Buy Whole Life or Term Insurance? . . 374
                 Universal Life Insurance                                                         375

                 Determining the Amount of Life Insurance Needed                                 376
                 Income Method                                                                   376
                 Budget Method                                                                   377

                 Contents of a Life Insurance Policy                                             379
                 Beneficiary                                                                     379
                 Grace Period                                                                    379
                 Living Benefits                                                                 379
                 Nonforfeiture Clause                                                            380
                 Loans                                                                           380
                 Incontestability Date                                                           380
                 Renewability Option                                                             380
                 Conversion Option                                                               380
                 Settlement Options                                                              380
                 Financial Planning Online 13.3: How Much Life Insurance Do You Need?            381

                 Selecting a Life Insurance Company                                  '.          381
                 OtherTypes of Insurance                                                         381
                 The Specific Policy That You Want                                               381
                 Services                                                                        382
                 Relatively Low Insurance Premiums                                               382
                 Strong Financial Condition                                                      382

                  How Life Insurance Fits Within Your Financial Plan                             382
                  Discussion Questions                                                           383

                 Summary                                                                         383
                  Review Questions                                                               384
                  Financial Planning Problems                                                    384
                  Financial Planning Online Exercises                                            385
                 Video Exercise: Selecting Life Insurance                                        386
                 Building Your Own Financial Plan                                                386
                 The Sampsons—A Continuing Case                                                  386
                 Part 4: Brad Brooks—A Continuing Case                                           387
                                                                    Detailed Contents   xxiii


PART 5 PERSONAL INVESTING
Chapter 14 Investing Fundamentals                                                       396
           Types of Investments                                                         397
           Money Market Securities                                                      397
           Stocks                                                                       397
           Financial Planning Online 14.1: IPOs                                         398
           Financial Planning Online 14.2: Price Trends of Your Stocks                  399
           Bonds                                                                        400
           Mutual Funds                                                                 400
           Real Estate                                                                  401
           Investment Return and Risk                                                   401
           Measuring the Return on Your Investment                                      401
           How Wealth Is Influenced by Your Return on Investment                        403
           Risk from Investing                                                          404
           Trade-Off Between Return and Risk                                            405
           Return-RiskTrade-Off among Stocks                                            406
           Return-RiskTrade-Off among Bonds                                             406
           Return-RiskTrade-Off among Mutual Funds                                      407
           Return-RiskTrade-Off among Real Estate Investments                           407
           Comparing Different Types of Investments                                     407
           Learning from the Investment Mistakes of Others                              408
           Making Decisions Based on Unrealistic Goals                                  408
           Borrowing to Invest                                                          409
           Taking Risks to Recover Losses from Previous Investments                     409
           How Investments Fit Within Your Financial Plan                               410
           Discussion Questions                                                         411
           Summary                                                                      411
           Review Questions                                                             412
           Financial Planning Problems                                                  412
           Financial Planning Online Exercises                                          413
           Video Exercise: Investing                                                    414
           Building Your Own Financial Plan                                             414
           The Sampsons—a Continuing Case                                               414

Chapter 15 Investing in Stocks                                                          419
           Stock Exchanges                                                              420
           New York Stock Exchange                                                      420
           Other Stock Exchanges                                                        421
           Over-the-Counter (OTC) Market                                                421
           Electronic Communication Networks (ECNs)                                     421
                                                                      Detailed Contents        xxv


            Valuing a Bond                                                                   446
            Financial Planning Online 16.3: Today's Events That Could Affect Bond Prices . . . 447

            Risk from Investing in Bonds                                                     449
            Default Risk                                                                      449
            Call Risk                                                                         451
            Interest Rate Risk                                                                451

            Bond Investment Strategies                                                       452
            Interest Rate Strategy                                                            452
            Passive Strategy                                                                  452
            Maturity Matching Strategy                                                        453
            How Bond Decisions Fit Within Your Financial Plan                                453
            Discussion Questions                                                              454
            Summary                                                                           454
            Review Questions                                                                  454
.•':        Financial Planning Problems                                                       455
            Financial Planning Online Exercises                                               456
            Video Exercise: Investing In Bonds                                                457
            Building Your Own Financial Plan                                                  457
            The Sampsons—a Continuing Case                                                    457

 Chapter 17 Investing In Mutual Funds                                                        463
            Background on Mutual Funds                                                       464
            Motives for Investing in Mutual Funds                                             464
            Net Asset Value                                                                   464
            Open-End versus Closed-End Funds                                      f           464
            Load versus No-Load Funds                                                         465
            Expense Ratios                                                                    466
            Types of Mutual Funds                                                             467
            Types of Stock Mutual Funds                                                       467
            Types of Bond Mutual Funds                                                        469
            Financial Planning Online 17.1: Index Mutual Funds                                470

            Return and Risk of a Mutual Fund                                                  471
            Return from Investing in a Mutual Fund                                            471
            Financial Planning Online 17.2: Return from Investing in Mutual Funds             473
            Risk from Investing in a Stock Mutual Fund                                        473
            Trade-Off between Expected Return and Risk of Stock Funds                         474
            Risk from Investing in a Bond Mutual Fund                                         475
            Trade-Off between Expected Return and Risk of Bond Funds                          476

            Selecting Mutual Funds                                                            477
            Determining Your Preferred Mutual Fund Characteristics                            477
            Reviewing a Mutual Fund's Prospectus                                              477
            Financial Planning Online 17.3: Mutual Fund Reports                               479
            Making the Decision                                                               479
xxvi   Detailed Contents


                 Quotations of Mutual Funds                                          480
                 Financial Planning Online 17.4: Online Services by Mutual Funds     481
                 Diversification Among Mutual Funds                                  481
                 Financial Planning Online 17.5: Diversifying among Mutual Funds     482
                 International Diversification of Mutual Funds                       483
                 Diversification through Mutual Fund Supermarkets                    483
                 How Mutual Funds Fit Within Your Financial Plan                     484
                 Discussion Questions                                                485
                 Summary                                                             486
                 Review Questions                                                    486
                 Financial Planning Problems                                         487
                 Financial Planning Online Exercises                                 488
                 Video Exercise: Investing In Mutual Funds                           488
                  Building Your Own Financial Plan                                   489
                 The Sampsons—A Continuing Case                                      489

Chapter 18 Asset Allocation                                                          495
                  How Diversification Reduces Risk                                   496
                  Benefits of Portfolio Diversification                              496
                  Determining Portfolio Benefits                                     497
                  Factors That Influence Diversification Benefits                    498
                  Financial Planning Online 18.1: Correlations among Stock Returns   499

                  Strategies for Diversifying                                        500
                  Diversification of Stocks across Industries                        500
                  Diversification of Stocks across Countries                         501
                  Asset Allocation Strategies                                        502
                  Including Bonds inYour Portfolio                                   502
                  Including Real Estate Investments inYour Portfolio                 502
                  Including Stock Options inYour Portfolio                           503
                  How Asset Allocation Affects Risk                                  505
                  An Affordable Way to Conduct Asset Allocation                      505

                  Factors That Affect Your Asset Allocation Decision                 506
                  Your Stage in Life                                                 506
                  Your Degree of RiskTolerance                                       507
                  Your Expectations about Economic Conditions                        508
                  Financial Planning Online 18.2: Advice on Your Asset Allocation    509
                  How Asset Allocation Fits Within Your Financial Plan               509
                  Discussion Questions                                               510
                  Summary                                                            510
                  Review Questions                                                   511
                  Financial Planning Problems                                        511
                  Financial Planning Online Exercises                                512
                                                                 Detailed Contents   xxvii


          Video Exercise: Asset Allocation                                           512
          Building Your Own Financial Plan                                           513
          The Sampsons—A Continuing Case                                             513
          Part 5: Brad Brooks—A Continuing Case                                      513




PART 6 RETIREMENT AND ESTATE PLANNING
Chapter 19 Retirement Planning                                                       522
          Social Security                                                            523
          Qualifying for Social Security                                             523
          Social Security Taxes                                                      523
          Retirement Benefits                                                        524
          Concern about Retirement Benefits in the Future                            524
          Financial Planning Online 19.1: Request a Social Security Statement        525

          Employer-Sponsored Retirement Plans                                        525
          Defined-Benefit Plans                                                      525
          Defined-Contribution Plans                                                 526
          Financial Planning Online 19.2: Retirement Expense Calculator              527
          Your Retirement Planning Decisions                                         527
          Which Retirement Plan Should You Pursue?                                   527
          How Much to Contribute                                                     527
          How to Invest Your Contributions                                           528
                                                                          ;
          Retirement Plans Offered by Employers                                      530
          401 (k) Plan                                                               530
          Roth 401 (k) Plan                                                          531
          403(b) Plan                                                                532
          Simplified Employee Plan (SEP)                                             532
          SIMPLE Plan                                                                532
          Profit Sharing                                                             532
          Employee Stock Ownership Plan (ESOP)                                       532
          Managing Your Retirement Account after Leaving Your Employer               533

          Retirement Plans for Self-Employed Individuals                             533
          Keogh Plan                                                                 533
          Simplified Employee Plan (SEP)                                             533

          Individual Retirement Accounts                                             533
          Traditional IRA                                                            533
          Roth IRA                                                                   534
          Comparison of the Roth IRA andTraditional IRA                              534

          Annuities                                                                  535
          Fixed versus Variable Annuities                                            535
          Annuity Fees                                                               535
xxviii   Detailed Contents


                   Estimating Your Future Retirement Savings                           536
                   Estimating the Future Value of One Investment                       536
                   Estimating the Future Value of a Set of Annual Investments          538
                   Measuring the Tax Benefits from a Retirement Account                540
                   Financial Planning Online 19.3: How to Build Your Retirement Plan   542
                   How Retirement Planning Fits Within Your Financial Plan             542
                   Discussion Questions                                                543
                   Summary                                                             543
                   Review Questions                                                    544
                   Financial Planning Problems                                         545
                   Financial Planning Online Exercises                                 546
                   Video Exercise: Retirement Planning                                 546
                   Building Your Own Financial Plan                                    546
                   The Sampsons—a Continuing Case                                      547


Chapter 20 Estate Planning                                                             553
                   Purpose of a Will                                                   554
                   Reasons for Having a Will                                           554
                   Creating a Valid Will                                               554
                   CommonTypes of Wills                                                554
                   Key Components of a Will                                            554
                   Financial Planning Online 20.1: Quiz for Preparing Your Own Will    556
                   Changing YourWill                                                   557
                   Executing the Will during Probate                                   557
                   Estate Taxes                                                        558
                   Determining Estate Taxes                                            558
                   Other Related Taxes                                                 558
                   Valuing Your Estate to Assess Potential Estate Taxes                558

                   Trusts, Gifts, and Contributions                                    558
                   Trusts                                                              558
                   Gifts                                                               559
                   Contributions to Charitable Organizations .                         560
                   Other Aspects of Estate Planning                                    560
                   Living Will                                                         560
                   Power of Attorney                                                   560
                   Financial Planning Online 20.2: How to Build Your Estate Plan       560
                   Maintaining Estate Plan Documents                                   561
                   Financial Planning Online 20.3: Legal Advice on Estate Planning     561

                   How Estate Planning Fits Within Your Financial Plan                 562
                   Discussion Questions                                                562
                   Summary                                                             563
                   Review Questions                                                    563
                                                                    Detailed Contents   xxix


            Financial Planning Online Exercise                                          564
            Video Exercise: Estate Planning                                             564
            Building Your Own Financial Plan                                            564
           The Sampsons—A Continuing Case                                               565
            Part 8; Brad Brooks—A Continuing Case                                       565


PART 7 SYNTHESIS OF FINANCIAL PLANNING
Chapter 21 Integrating the Components of a Financial Plan                               574
            Review of Components Within a Financial Plan                                575
            Budgeting \                                                                 575
            Managing Liquidity                                                          576
            Personal Financing                                                          576
            Protecting Your Assets and Income                                           576
            Managing Investments                                                        577
            Retirement Planning                                                         577
            Maintaining Your Financial Documents                                        578
            Financial Planning Online 21.1: Insight about Financial Planning Concepts   579
            Integrating the Components                                                  579
            Budgeting                                                                   581
            Managing Liquidity                                                          582
            Personal Financing                                                          583
            Insurance                                                                   584
            Managing Investments                                                        584
            Protecting and Maintaining Wealth                                           585
            Financial Plan                                                              586
            Financial Planning Online 21.2: A Synthesized Financial Plan                587
            Summary                                                                     588
            Review Questions                                                            589
            Financial Planning Problems                                                 589
            Financial Planning Online Exercise                                          590
            Video Exercise: Financial Plan                                              590
            Certified Financial Planner Exercise                                        590
            Building Your Own Financial Plan                                            591
                             A Continuing Case                                          591


Financial Literacy Post-Test                                                            597

Appendix A Your Career                                                                  599
            Determining Your Career Path                                                599
            Factors That May Affect Your Career Path                                    599
            Sources of Information That Can HelpYou SelectYour Career Path              599
xxx   Detailed Contents


                Getting the Skills You Need                               600
                Training                                                  600
                Education                                                 601
                Expanding Your Education                                  601
                Changing Your Career                                      602
                Self-Employment                                           602

                Criterial Used to Assess Applicants                       602
                Your Application                                          602
                Your Resume                                               602
                Your Interview                                            603
                Conclusion                                                603

Appendix B Projects                                                       605
                Assessing Your Credit                                     605
                 Career Planning Project                                  606
                 Information on Career Planning                           606
                 Leasing an Apartment                                     607
                 Stock Market Project                                     608
                 Obtaining Stock Price and Dividend Information           608
                 Enter the Stock Information                              609
                 Determine Your Gain over the School Term                 609
                 Comparing Your Stock to the General Market               609
                 Team Project                                             609
                 Comparison Shopping: Online versus Local Purchases ..-   610

Appendix C Financial Tables                                               6n

Index                                                                     621

Credits                                                                   645

				
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