Personal Finance
Madura Jeff
Personal Finance Jeff Madura - Boston: Addison Wesley 2002 - xxxv, 633p.: ill. col. 26cm.
Table of contents
Chapter 1 Overview of a Financial Plan 1
How You Benefit From An Understanding
Of Personal Finance 2
Make Your Own Financial Decisions 2
Judge the Advice of Financial Advisers 3
Become a Financial Adviser 3
COMPONENTS OF A FINANCIAL PLAN 3
A Plan for Your Budgeting and Tax Planning 4
A Plan to Manage Your Liquidity 5
A Plan for Your Financing 6
A Plan for Protecting Your Assets and Income 6
A Plan for Your Investing 6
A Plan for Your Retirement and Estate 6
How the Text Organization Relates to the Financial Plan's Components 7
DEVELOPING THE FINANCIAL PLAN 9
Step 1. Establish Your Financial Goals 9
Step 2. Consider Your Current Financial Position 10
Step 3. Identify and Evaluate Alternative Plans That
Could Achieve Your Goals 11
Step 4. Select and Implement the Best Plan for Achieving
Your Goals 13
Focus on Ethics: Personal Financial Advice 14
1.1 Financial Planning Online: Financial Planning Tools for You 15
Step 5. Evaluate Your Financial Plan 16
Step 6. Revise Your Financial Plan 16
SUMMARY 18
Integrating the Key Concepts 19
REVIEW QUESTIONS 19
FINANCIAL PLANNING PROBLEMS 20
FINANCIAL PLANNING ONLINE EXERCISES 20
Building Your Own Financial Plan 21
The Sampsons-A Continuing Case 22
IN-TEXT STUDY GUIDE 23
PART 1 Tools for Financial Planning 26
Chapter 2 Planning with Personal Financial Statements 27
PERSONAL CASH FLOW STATEMENT 28
Cash Inflows 28
Cash Outflows 28
Creating a Personal Cash Flow Statement 29
FACTORS THAT AFFECT CASH FLOWS 31
Factors Affecting Cash Inflows 31
Factors Affecting Cash Outflows 32
CREATING A BUDGET 33
Anticipating Cash Shortages 33
Assessing the Accuracy of the Budget 34
Forecasting Net Cash Flows over Several Months 35
Creating an Annual Budget 35
2.1 Financial Planning Online: Budgeting Tips 37
Improving the Budget 37
Focus on Ethics: Excessive Financial Dependence 39
PERSONAL BALANCE SHEET 39
2.2 Financial Planning Online: The Impact of
Reduced Spending 40
Assets 40
2.3 Financial Planning Online: Budgeting Advice 41
Liabilities 42
Net Worth 43
Creating a Personal Balance Sheet 43
Changes in the Personal Balance Sheet 44
Analysis of the Personal Balance Sheet 45
RELATIONSHIP BETWEEN CASH FLOWS AND WEALTH 48
HOW BUDGETING FITS WITHIN YOUR FINANCIAL PLAN 49
discussion Questions 50
SUMMARY 50
Integrating the Key Concepts 51
REVIEW QUESTIONS 52
FINANCIAL PLANNING PROBLEMS 52
FINANCIAL PLANNING ONLINE EXERCISES 53
Building Your Own Financial Plan 54
The Sampsons-A Continuing Case 54
IN-TEXT STUDY GUIDE 55
Chapter 3 Applying Time Value Concepts 59
The Importance of the Time Value of Money 60
FUTURE VALUE OF A SINGLE DOLLAR AMOUNT 61
Using the Future Value Table 61
Using a Financial Calculator 63
Focus on Ethics: Delaying Payments 64
PRESENT VALUE OF A DOLLAR AMOUNT 64
3.1 Financial Planning Online: Paying Your Bills Online 65
Using the Present Value Table 65
Using a Financial Calculator 68
FUTURE VALUE OF AN ANNUITY 68
Using the Future Value Annuity Table 69
3.2 Financial Planning Online: Estimating the Future Value
of Your Savings 72
Using a Financial Calculator to Determine the Future Value
of an Annuity 72
PRESENT VALUE OF AN ANNUITY 73
Using the Present Value Annuity Table 74
Using a Financial Calculator to Determine the Present Value
of an Annuity 76
USING TIME VALUE TO ESTIMATE SAVINGS 76
Estimating the Future Value from Savings 77
Estimating the Annual Savings That Will Achieve a Future Amount 77
HOW A SAVINGS PLAN FITS WITHIN YOUR FINANCIAL PLAN 78
DISCUSSION QUESTIONS 79
SUMMARY 79
Integrating the Key Concepts 80
REVIEW QUESTIONS 80
FINANCIAL PLANNING PROBLEMS 81
FINANCIAL PLANNING ONLINE EXERCISES 82
Building Your Own Financial Plan 83
The Sampsons-A Continuing Case 83
IN-TEXT STUDY GUIDE 84
Chapter 4 Using Tax Concepts for Planning 87
BACKGROUND ON TAXES 88
Social Security and Medicare Taxes 88
4.1 Financial Planning Online: Internal Revenue Service 89
Personal Income Taxes 90
Tax Relief Act of 2001 90
FILING STATUS 93
GROSS INCOME 94
Wages and Salaries 94
Interest Income 94
Dividend Income 94
Capital Gains 94
Determining Gross Income 96
Adjusted Gross Income 99
DEDUCTIONS AND EXEMPTIONS 99
Standard Deduction 99
Itemized Deductions 100
4.2 Financial Planning Online: State Income Tax Rates 101
Exemptions 102
TAXABLE INCOME AND TAXES 104
Taxable Income 104
Taxes 104
Tax Credits 106
COMPREHENSIVE TAX EXAMPLE 108
Ken's FICA Taxes 108
Ken's Personal Taxes 108
4.3 Financial Planning Online: Tax Information Resource 109
4.4 Financial Planning Online: Estimating Your Taxes 111
Ken's Capital Gain Tax 111
Focus on Ethics: Reducing Your Taxes 112
HOW TAX PLANNING FITS WITHIN YOUR FINANCIAL PLAN 113
Discussion Questions 115
SUMMARY 115
Integrating the Key Concepts 116
REVIEW QUESTIONS 116
FINANCIAL PLANNING PROBLEMS 117
FINANCIAL PLANNING ONLINE EXERCISES 118
Building Your Own Financial Plan 118
The Sampsons-A Continuing Case 119
IN-TEXT STUDY GUIDE 119
Part 1: Brad Brooks-A Continuing Case 122
Part 2 Managing Your Liquidity 124
Chapter 5 Banking and Interest Rates 125
TYPES OF FINANCIAL INSTITUTIONS 126
Depository Institutions 126
Focus on Ethics: Special Rates on Deposits 127
Nondepository Institutions 127
Financial Conglomerates 128
BANKING SERVICES OFFERED BY FINANCIAL INSTITUTIONS 129
Checking Services 129
Credit Card Financing 132
Debit Cards 132
Safety Deposit Boxes 132
Automated Teller Machines (ATMs) 132
Cashier's Checks 133
Money Orders 133
Traveler's Checks 133
SELECTING A FINANCIAL INSTITUTION 133
5.1 Financial Planning Online: Internet Banking 134
5.2 Financial Planning Online: Financial Institutions That Can
Serve Your Needs 135
INTEREST RATES ON DEPOSITS AND LOANS 135
Risk-Free Rate 136
Risk Premium 136
5.3 Financial Planning Online: Current Interest
Rate Quotations 137
Loan Rate 137
Impact of Changes in Interest Rates 139
Comparing Interest Rates and Risk 139
TERM STRUCTURE OF INTEREST RATES 140
Shifts in the Yield Curve 141
5.4 Financial Planning Online: Updated Treasury Yields 142
HOW BANKING SERVICES FIT WITHIN YOUR FINANCIAL PLAN 142
Discussion Questions 144
SUMMARY 144
Integrating the Key Concepts 144
Appendix 5A Interest Rates: How They Are Determined
and Why They Change 145
HOW THE RISK-FREE INTEREST RATE IS DETERMINED 145
Aggregate Supply of Funds 145
Aggregate Demand for Funds 146
Combining Supply and Demand 146
WHY INTEREST RATES CHANGE 147
Shift in the Supply Curve 147
5.5 Financial Planning Online: Fed's Upcoming Meetings 149
Shift in the Demand Curve 149
Combining the Factors 151
REVIEW QUESTIONS 152
FINANCIAL PLANNING PROBLEMS 152
FINANCIAL PLANNING ONLINE EXERCISES 153
Building Your Own Financial Plan 154
The Sampsons-A Continuing Case 154
IN-TEXT STUDY GUIDE 155
Chapter 6 Managing Your Money 159
BACKGROUND ON MONEY MANAGEMENT 160
Liquidity 160
Adequate Return 161
MONEY MARKET INVESTMENTS 161
Checking Account 162
NOW Account 163
Savings Deposit 164
Certificate of Deposit 164
Focus on Ethics: Risky Deposit Rates 165
Money Market Deposit Account (MMDA) 166
Treasury Bills 166
6.1 Financial Planning Online: Deposit Rates Offered
by Banks 167
Money Market Funds (MMFs) 168
Asset Management Account 170
Comparison of Money Market Investments 170
RISK OF MONEY MARKET INVESTMENTS 171
6.2 Financial Planning Online: Impact of Different Deposit Rates
on Your Wealth 171
6.3 Financial Planning Online: Identifying Insured
Investments 172
Credit Risk 172
Interest Rate Risk 172
Liquidity Risk 173
RISK MANAGEMENT OF MONEY MARKET INVESTMENTS 173
Risk Assessment of Money Market Investments 173
Determining the Optimal Allocation of Money Market Investments 174
HOW MONEY MANAGEMENT FITS WITHIN
YOUR FINANCIAL PLAN 176
Discussion Questions 177
SUMMARY 178
Integrating the Key Concepts 178
REVIEW QUESTIONS 179
FINANCIAL PLANNING PROBLEMS 179
FINANCIAL PLANNING ONLINE EXERCISES 180
Building Your Own Financial Plan 180
The Sampsons-A Continuing Case 181
IN-TEXT STUDY GUIDE 182
Chapter 7 Managing Your Credit 185
BACKGROUND ON CREDIT 186
Advantages of Using Credit 186
Disadvantages of Using Credit 186
Establish a Credit History 187
7.1 Financial Planning Online: Personal Credit Counseling 188
Impact of the Interest Rate on Credit Payments 188
CREDIT CARDS 189
Applying for a Credit Card 190
Credit Check 190
7.2 Financial Planning Online: Your Credit Card Report 192
Focus on Ethics: Guarding Your Financial Information 192
Types of Credit Cards 193
Credit Limit 194
7.3 Financial Planning Online: Estimating Your Future
Credit Card Payments 194
Annual Fee 195
Incentives to Use the Card 195
Prestige Cards 195
Grace Period 195
Cash Advances 196
Interest Rate 196
Credit Card Statement 196
7.4 Financial Planning Online: Your Rights When
Using Credit 198
Comparing Credit Cards 198
7.5 Financial Planning Online: The Best Credit Card for You 199
TIPS ON USING CREDIT CARDS 199
Use a Credit Card Only If You Can Cover the Bill 199
Impose a Tight Credit Limit 200
7.6 Financial Planning Online: Establishing and
Protecting Credit 200
Pay Credit Card Bills before Investing Money 201
7.7 Financial Planning Online: Estimating the Time Necessary
to Pay Off Your Balance 202
Use Savings If Necessary to Pay the Credit Card Bill on Time 203
If You Cannot Avoid Credit Card Debt, Pay It Off before Other Debt 203
Avoid Credit Repair Services 203
Avoid Credit Card Fraud 203
Deter Identity Theft 203
7.8 Financial Planning Online: Identity Theft 204
DEALING WITH CREDIT DEBT 204
HOW CREDIT MANAGEMENT FITS WITHIN YOUR FINANCIAL PLAN 205
Discussion Questions 206
SUMMARY 206
Integrating the Key Concepts 207
Appendix 7A Finance Payment Methods 208
REVIEW QUESTIONS 210
FINANCIAL PLANNING PROBLEMS 210
FINANCIAL PLANNING ONLINE EXERCISES 211
Building Your Own Financial Plan 212
The Sampsons-A Continuing Case 212
IN-TEXT STUDY GUIDE 213
Part 2: Brad Brooks-A Continuing Case 215
Part 3 Personal Financing 216
Chapter 8 Personal Loans 217
BACKGROUND ON PERSONAL LOANS 218
Sources of Loans 218
The Personal Loan Process 219
8.1 Financial Planning Online: Loan Request Online 221
Focus on Ethics: Predatory Lending 222
INTEREST RATES ON PERSONAL LOANS 222
Annual Percentage Rate 223
Simple Interest 223
Add-On Interest 225
HOME EQUITY LOAN 226
Credit Limit on a Home Equity Loan 226
8.2 Financial Planning Online: Applying for a Home
Equity Loan 227
Interest Rate 228
8.3 Financial Planning Online: Prices of New Cars 229
CAR LOANS 229
Selecting the Car 229
8.4 Financial Planning Online: Trade-in and Retail Values
of Used Cars 231
8.5 Financial Planning Online: Car Loan Interest
Rate Quotation 232
Negotiating the Price 233
8.6 Financial Planning Online: Prevailing Car Loan
Interest Rates 233
Financing Decisions 235
PURCHASE VERSUS LEASE DECISION 236
8.7 Financial Planning Online: What Is the
Optimal Loan Maturity? 237
8.8 Financial Planning Online: Should You Lease or Buy? 238
STUDENT LOANS 240
HOW PERSONAL LOANS FIT WITHIN YOUR FINANCIAL PLAN 240
Discussion Questions 241
SUMMARY 241
Integrating the Key Concepts 242
REVIEW QUESTIONS 242
FINANCIAL PLANNING PROBLEMS 243
FINANCIAL PLANNING ONLINE EXERCISES 244
Building Your Own Financial Plan 245
The Sampsons-A Continuing Case 245
IN-TEXT STUDY GUIDE 246
Chapter 9 Purchasing and Financing a Home 249
SELECTING A HOME 250
Relying on a Realtor 251
Using Online Realtor Services 251
How Much Can You Afford? 252
9.1 Financial Planning Online: How Much Money
Can You Borrow? 252
Criteria Used to Select a Home 253
9.2 Financial Planning Online: Recent Sales Prices
of Nearby Homes 254
9.3 Financial Planning Online: Listing of Homes
Nearby for Sale 255
Focus on Ethics: Disclosing Defects 256
VALUATION OF A HOME 256
Market Analysis 256
Effects of Business Activity and Zoning Laws 257
Obtaining a Second Opinion on Your Valuation 257
Negotiating a Price 258
TRANSACTION COSTS OF PURCHASING A HOME 258
Down Payment 258
9.4 Financial Planning Online: Applying for a Mortgage 259
Closing Costs 260
CHARACTERISTICS OF A FIXED-RATE MORTGAGE 261
9.5 Financial Planning Online: Average Mortgage Rates 262
Amortization Table 262
9.6 Financial Planning Online: Estimating
Mortgage Payments 265
Impact of the Mortgage Amount on the Monthly Payment 265
9.7 Financial Planning Online: Should You Obtain a 15-Year
or a 30-Year Mortgage? 266
Impact of the Interest Rate on the Monthly Payment 266
Impact of the Mortgage Maturity on the Monthly Payment 266
Estimating the Monthly Mortgage Payment 267
CHARACTERISTICS OF AN ADJUSTABLE-RATE MORTGAGE 269
Initial Rate 269
Interest Rate Index 269
Frequency of Rate Adjustments 269
9.8 Financial Planning Online: Should You Obtain a Fixed-
or an Adjustable-Rate Mortgage? 270
Caps on Adjustable-Rate Mortgages 270
Financing with a Fixed- versus an Adjustable-Rate Mortgage 271
DECISION TO OWN A HOME VERSUS RENT 271
Estimating the Total Cost of Renting and Owning 271
SPECIAL TYPES OF MORTGAGES 275
Graduated Payment Mortgage 275
9.9 Financial Planning Online: Should You Rent or Buy? 276
Balloon Payment Mortgage 276
MORTGAGE REFINANCING 276
Refinancing Analysis 277
HOW A MORTGAGE FITS WITHIN YOUR FINANCIAL PLAN 278
Discussion Questions 279
SUMMARY 280
Integrating the Key Concepts 280
REVIEW QUESTIONS 281
FINANCIAL PLANNING PROBLEMS 281
FINANCIAL PLANNING ONLINE EXERCISES 282
Building Your Own Financial Plan 283
The Sampsons-A Continuing Case 284
IN-TEXT STUDY GUIDE 284
Part 3: Brad Brooks-A Continuing Case 287
Part 4 Protecting Your Wealth 288
Chapter 10 Auto and Homeowner's Insurance 289
BACKGROUND ON INSURANCE 290
MANAGING RISK 290
Avoid Risk 291
Reduce Risk 291
Accept Risk 291
Insure Against Risk 291
ROLE OF INSURANCE COMPANIES 292
Insurance Company Operations 293
Insurance Company Credit Ratings and Service 294
Role of Insurance Agents and Brokers 294
10.1 Financial Planning Online: Reviews of
Insurance Companies 295
AUTO INSURANCE 295
Auto Insurance Policy Provisions 295
Coverage A: Liability Coverage 296
Coverage B: Medical Payments Coverage 298
Coverage C: Uninsured or Underinsured Motorist Coverage 298
Coverage D: Collision and Comprehensive Coverage 298
Other Provisions 299
Summary of Auto Insurance Provisions 300
10.2 Financial Planning Online: How Much Car Insurance
Coverage Do You Need? 301
FACTORS THAT AFFECT YOUR AUTO INSURANCE PREMIUMS 301
Characteristics of Your Car 301
Your Personal Characteristics 302
Comparing Premiums Among Insurance Companies 303
Focus on Ethics: Impact of Lawsuits and Fraud on Premiums 305
HOMEOWNER'S INSURANCE 307
Types of Perils Covered by Homeowner's Insurance 307
HOMEOWNER'S INSURANCE POLICY PROVISIONS 307
Property Damage 307
Other Structures on Property 308
Personal Property 309
Liability 309
Other Types of Expenses 310
HOMEOWNER's INSURANCE PREMIUMS 310
Factors That Affect Homeowner's Insurance Premiums 311
10.3 Financial Planning Online: Purchasing
Homeowner's Insurance 312
Reducing Your Homeowner's Insurance Premium 312
FILING A CLAIM 313
RENTER'S INSURANCE 313
10.4 Financial Planning Online: Renter's Insurance
Quotation 314
Renter's Insurance Policy Provisions 314
UMBRELLA PERSONAL LIABILITY POLICY 314
HOW HOME AND AUTO INSURANCE FIT
WITHIN YOUR FINANCIAL PLAN 315
Discussion Questions 316
SUMMARY 316
Integrating the Key Concepts 316
REVIEW QUESTIONS 317
FINANCIAL PLANNING ONLINE EXERCISES 318
Building Your Own Financial Plan 318
The Sampsons-A Continuing Case 318
IN-TEXT STUDY GUIDE 319
Chapter 11 Health and Disability Insurance 321
HEALTH INSURANCE 322
PRIVATE HEALTH INSURANCE 323
Types of Private Health Insurance Coverage 323
Options for Purchasing Private Health Insurance 323
Private Health Care Plans 323
Comparison of Private Health Insurance Plans 326
Maintaining Private Health Care Insurance Coverage 326
Expenses Not Covered by Private Insurance Plans 327
GOVERNMENT HEALTH CARE PLANS 327
11.1 Financial Planning Online: Should You Enroll
in an HMO or a PPO? 328
Medicare 328
11.2 Financial Planning Online: Medicare Coverage 329
Medicaid 329
LONG-TERM CARE INSURANCE 329
Long-Term Care Insurance Provisions 330
Other Factors That Affect Long-Term Care Insurance Premiums 331
Reducing Your Cost of Long-Term Care Insurance 331
Determining the Amount of Coverage 332
ADDITIONAL TYPES OF HEALTH CARE PLANS 332
Dental Insurance 332
Vision Insurance 332
DISABILITY INSURANCE 332
Sources of Disability Income Insurance 333
Disability Insurance Provisions 334
Deciding on Disability Insurance 336
HOW HEALTH AND DISABILITY INSURANCE FIT
WITHIN YOUR FINANCIAL PLAN 336
Discussion Questions 337
SUMMARY 337
Integrating the Key Concepts 337
REVIEW QUESTIONS 338
FINANCIAL PLANNING PROBLEMS 339
FINANCIAL PLANNING ONLINE EXERCISES 339
Building Your Own Financial Plan 339
The Sampsons-A Continuing Case 340
IN-TEXT STUDY GUIDE 340
Chapter 12 Life Insurance 343
BACKGROUND ON LIFE INSURANCE 344
Role of Life Insurance 344
Role of Life Insurance Companies 345
TYPES OF LIFE INSURANCE 345
Term Insurance 345
12.1 Financial Planning Online: Buying Term Life Insurance 347
Whole Life Insurance 348
12.2 Financial Planning Online: Should You Buy
Whole Life or Term Insurance? 350
12.3 Financial Planning Online: Return on Your Whole
Life Insurance Policy 351
Universal Life Insurance 351
DETERMINING THE AMOUNT OF LIFE INSURANCE NEEDED 352
Income Method 352
Budget Method 352
LIFE INSURANCE PREMIUMS 354
Factors That Affect Your Insurance Premiums 354
Using the Internet to Price Term Insurance 354
Focus on Ethics: Applying for Life Insurance 354
12.4 Financial Planning Online: How Much Life Insurance
Do You Need? 355
SETTLEMENT OPTIONS ON A LIFE INSURANCE POLICY 355
Lump Sum 355
Installment Payments 356
Interest Payments 356
HOW LIFE INSURANCE FITS WITHIN YOUR FINANCIAL PLAN 356
Discussion Questions 357
SUMMARY 357
Integrating the Key Concepts 358
REVIEW QUESTIONS 358
FINANCIAL PLANNING PROBLEMS 359
FINANCIAL PLANNING ONLINE EXERCISES 359
Building Your Own Financial Plan 360
The Sampsons-A Continuing Case 360
IN-TEXT STUDY GUIDE 361
Part 4: Brad Brooks-A Continuing Case 363
Part 5 Personal Investing 364
Chapter 13 Investing Fundamentals 365
TYPES OF INVESTMENTS 366
Money Market Securities 366
Stocks 366
13.1 Financial Planning Online: IPOs 367
Bonds 369
13.2 Financial Planning Online: Price Trends of Your Stocks 370
Mutual Funds 370
Real Estate 371
INVESTMENT RETURN AND RISK 372
Measuring the Return on Your Investment 372
How Wealth Is Influenced by Your Return on Investment 374
Risk from Investing 376
TRADEOFF BETWEEN RETURN AND RISK 377
Return-Risk Tradeoff among Stocks 378
Return-Risk Tradeoff among Bonds 379
Return-Risk Tradeoff among Mutual Funds 379
Return-Risk Tradeoff among Real Estate Investments 379
Comparing Different Types of Investments 380
LEARNING FROM THE INVESTMENT MISTAKES OF OTHERS 381
Making Decisions Based on Unrealistic Goals 381
Borrowing to Invest 381
Taking Risks to Recover Losses from Previous Investments 382
Focus on Ethics: Falling Prey to Online Investment Fraud 382
HOW INVESTMENTS FIT WITHIN YOUR FINANCIAL PLAN 383
Discussion Questions 385
SUMMARY 385
Integrating the Key Concepts 385
REVIEW QUESTIONS 386
FINANCIAL PLANNING PROBLEMS 386
FINANCIAL PLANNING ONLINE EXERCISES 387
Building Your Own Financial Plan 388
The Sampsons-A Continuing Case 388
IN-TEXT STUDY GUIDE 389
Chapter 14 Stock Analysis and Valuation 391
STOCK QUOTATIONS 392
14.1 Financial Planning Online: Stock Information 393
ANALYSIS OF THE FIRM 394
Annual Report 394
Firm-Specific Characteristics 395
Information Provided by Value Line 398
14.2 Financial Planning Online: Determining Industry Norms 399
Focus on Ethics: Accounting Fraud 399
14.3 Financial Planning Online: Stock Market Quotations and Conditions 402
ECONOMIC ANALYSIS OF STOCKS 402
Economic Growth 403
Interest Rates 403
Inflation 404
INDUSTRY ANALYSIS OF STOCKS 404
Industry Indicators 405
STOCK VALUATION 405
Price-Earnings (PE) Method 406
14.4 Financial Planning Online: Earnings Estimates
for Valuing Your Stock 408
Price-Revenue (PR) Method 408
INTEGRATING YOUR ANALYSES 409
14.5 Financial Planning Online: Screening Stocks for
Investment Decisions 411
STOCK MARKET EFFICIENCY 411
HOW STOCK VALUATION FITS WITHIN YOUR FINANCIAL PLAN 412
Discussion Questions 413
SUMMARY 414
Integrating the Key Concepts 414
REVIEW QUESTIONS 415
FINANCIAL PLANNING PROBLEMS 416
FINANCIAL PLANNING ONLINE EXERCISES 416
Building Your Own Financial Plan 417
The Sampsons-A Continuing Case 418
IN-TEXT STUDY GUIDE 418
Chapter 15 Investing in Stocks 421
STOCK EXCHANGES 422
New York Stock Exchange 422
Other Stock Exchanges 423
Over-the-Counter (OTC) Market 423
Electronic Communication Networks (ECNs) 424
Foreign Stock Exchanges 424
PURCHASING OR SELLING STOCKS 424
Relying on Brokerage or Analyst Recommendations 424
15.1 Financial Planning Online: Analyst Recommendations 425
Buying or Selling Stock Online 426
Placing an Order 426
15.2 Financial Planning Online: Trading Stocks Online 427
BUYING STOCK ON MARGIN 429
Impact of Margin on Returns 429
Impact of Margin on Risk 430
ASSESSING PERFORMANCE OF STOCK INVESTMENTS 430
Comparing Returns to an Index 431
Price Quotations for Indexes Used to Measure Stock Performance 431
HOW STOCK INVESTMENT METHODS FIT
WITHIN YOUR FINANCIAL PLAN 432
15.3 Financial Planning Online: Stock Market Summary 433
15.4 Financial Planning Online: Stock Index Quotations 433
Discussion questions 435
SUMMARY 435
Integrating the Key Concepts 435
REVIEW QUESTIONS 436
FINANCIAL PLANNING PROBLEMS 436
FINANCIAL PLANNING ONLINE EXERCISES 437
Building Your Own Financial Plan 437
The Sampsons-A Continuing Case 438
IN-TEXT STUDY GUIDE 438
Chapter 16 Investing in Bonds 441
BACKGROUND ON BONDS 442
Bond Characteristics 442
A Bond's Yield to Maturity 443
16.1 Financial Planning Online: Your Bond's Yield 444
Bond Trading in the Secondary Market 444
TYPES OF BONDS 444
Treasury Bonds 444
Municipal Bonds 445
16.2 Financial Planning Online: Municipal Bond Quotations 446
Federal Agency Bonds 446
Corporate Bonds 446
RETURN FROM INVESTING IN BONDS 447
Impact of Interest Rate Movements on Bond Returns 447
Tax Implications of Investing in Bonds 449
16.3 Financial Planning Online: Today's Events That
Could Affect Bond Prices 449
RISK FROM INVESTING IN BONDS 450
Default Risk 450
Focus on Ethics: Accounting Fraud and Default Risk 452
Call Risk 453
Interest Rate Risk 453
BOND INVESTMENT STRATEGIES 455
Interest Rate Strategy 455
Passive Strategy 455
Maturity Matching Strategy 456
HOW BOND DECISIONS FIT WITHIN YOUR FINANCIAL PLAN 456
Discussion Questions 457
SUMMARY 457
Integrating the Key Concepts 457
Appendix 16A Valuing a Bond 459
REVIEW QUESTIONS 461
FINANCIAL PLANNING PROBLEMS 461
FINANCIAL PLANNING ONLINE EXERCISES 462
Building Your Own Financial Plan 463
The Sampsons-A Continuing Case 463
IN-TEXT STUDY GUIDE 464
Chapter 17 Investing in Mutual Funds 467
BACKGROUND ON MUTUAL FUNDS 468
Motives for Investing in Mutual Funds 468
Net Asset Value 469
Open-End versus Closed-End Funds 469
Load versus No-Load Funds 470
Expense Ratios 471
TYPES OF MUTUAL FUNDS 472
Types of Stock Mutual Funds 472
17.1 Financial Planning Online: Index Mutual Funds 475
Types of Bond Mutual Funds 476
RETURN AND RISK OF A MUTUAL FUND 477
Return from Investing in a Mutual Fund 477
17.2 Financial Planning Online: Return from Investing
in Mutual Funds 479
Comparing Returns among Stock Mutual Funds 480
Risk from Investing in a Stock Mutual Fund 480
Tradeoff between Expected Return and Risk of Stock Funds 482
Risk from Investing in a Bond Mutual Fund 482
Tradeoff between Expected Return and Risk of Bond Funds 484
DECIDING AMONG MUTUAL FUNDS 484
Determining Your Preferred Mutual Fund Characteristics 485
Reviewing a Mutual Fund's Prospectus 485
17.3 Financial Planning Online: Mutual Fund Reports 487
Making the Decision 487
17.4 Financial Planning Online: Online Services
by Mutual Funds 489
QUOTATIONS OF MUTUAL FUNDS 489
DIVERSIFICATION AMONG MUTUAL FUNDS 492
17.5 Financial Planning Online: Diversifying among
Mutual Funds 493
Diversification through Mutual Fund Supermarkets 494
HOW MUTUAL FUNDS FIT WITHIN YOUR FINANCIAL PLAN 494
Discussion Questions 496
SUMMARY 496
Integrating the Key Concepts 497
REVIEW QUESTIONS 497
FINANCIAL PLANNING PROBLEMS 498
FINANCIAL PLANNING ONLINE EXERCISES 498
Building Your Own Financial Plan 499
The Sampsons-A Continuing Case 500
IN-TEXT STUDY GUIDE 501
Chapter 18 Asset Allocation 503
HOW DIVERSIFICATION REDUCES RISK 504
Benefits of Portfolio Diversification 504
Determining Portfolio Benefits 506
Factors That Influence Diversification Benefits 507
18.1 Financial Planning Online: Correlations
among Stock Returns 509
STRATEGIES FOR DIVERSIFYING 509
Diversification of Stocks across Industries 509
Diversification of Stocks across Countries 510
ASSET ALLOCATION STRATEGIES 512
Including Bonds in the Portfolio 512
Including Real Estate Investments in the Portfolio 512
Stock Options 513
How Asset Allocation Affects Risk 513
Benefits of Asset Allocation 514
An Affordable Way to Conduct Asset Allocation 514
FACTORS THAT AFFECT THE ASSET ALLOCATION DECISION 515
Your Stage in Life 515
Your Degree of Risk Tolerance 516
Your Expectations about Economic Conditions 517
includes bibliographic references and index
0201703645
332.024 / MAD
Personal Finance Jeff Madura - Boston: Addison Wesley 2002 - xxxv, 633p.: ill. col. 26cm.
Table of contents
Chapter 1 Overview of a Financial Plan 1
How You Benefit From An Understanding
Of Personal Finance 2
Make Your Own Financial Decisions 2
Judge the Advice of Financial Advisers 3
Become a Financial Adviser 3
COMPONENTS OF A FINANCIAL PLAN 3
A Plan for Your Budgeting and Tax Planning 4
A Plan to Manage Your Liquidity 5
A Plan for Your Financing 6
A Plan for Protecting Your Assets and Income 6
A Plan for Your Investing 6
A Plan for Your Retirement and Estate 6
How the Text Organization Relates to the Financial Plan's Components 7
DEVELOPING THE FINANCIAL PLAN 9
Step 1. Establish Your Financial Goals 9
Step 2. Consider Your Current Financial Position 10
Step 3. Identify and Evaluate Alternative Plans That
Could Achieve Your Goals 11
Step 4. Select and Implement the Best Plan for Achieving
Your Goals 13
Focus on Ethics: Personal Financial Advice 14
1.1 Financial Planning Online: Financial Planning Tools for You 15
Step 5. Evaluate Your Financial Plan 16
Step 6. Revise Your Financial Plan 16
SUMMARY 18
Integrating the Key Concepts 19
REVIEW QUESTIONS 19
FINANCIAL PLANNING PROBLEMS 20
FINANCIAL PLANNING ONLINE EXERCISES 20
Building Your Own Financial Plan 21
The Sampsons-A Continuing Case 22
IN-TEXT STUDY GUIDE 23
PART 1 Tools for Financial Planning 26
Chapter 2 Planning with Personal Financial Statements 27
PERSONAL CASH FLOW STATEMENT 28
Cash Inflows 28
Cash Outflows 28
Creating a Personal Cash Flow Statement 29
FACTORS THAT AFFECT CASH FLOWS 31
Factors Affecting Cash Inflows 31
Factors Affecting Cash Outflows 32
CREATING A BUDGET 33
Anticipating Cash Shortages 33
Assessing the Accuracy of the Budget 34
Forecasting Net Cash Flows over Several Months 35
Creating an Annual Budget 35
2.1 Financial Planning Online: Budgeting Tips 37
Improving the Budget 37
Focus on Ethics: Excessive Financial Dependence 39
PERSONAL BALANCE SHEET 39
2.2 Financial Planning Online: The Impact of
Reduced Spending 40
Assets 40
2.3 Financial Planning Online: Budgeting Advice 41
Liabilities 42
Net Worth 43
Creating a Personal Balance Sheet 43
Changes in the Personal Balance Sheet 44
Analysis of the Personal Balance Sheet 45
RELATIONSHIP BETWEEN CASH FLOWS AND WEALTH 48
HOW BUDGETING FITS WITHIN YOUR FINANCIAL PLAN 49
discussion Questions 50
SUMMARY 50
Integrating the Key Concepts 51
REVIEW QUESTIONS 52
FINANCIAL PLANNING PROBLEMS 52
FINANCIAL PLANNING ONLINE EXERCISES 53
Building Your Own Financial Plan 54
The Sampsons-A Continuing Case 54
IN-TEXT STUDY GUIDE 55
Chapter 3 Applying Time Value Concepts 59
The Importance of the Time Value of Money 60
FUTURE VALUE OF A SINGLE DOLLAR AMOUNT 61
Using the Future Value Table 61
Using a Financial Calculator 63
Focus on Ethics: Delaying Payments 64
PRESENT VALUE OF A DOLLAR AMOUNT 64
3.1 Financial Planning Online: Paying Your Bills Online 65
Using the Present Value Table 65
Using a Financial Calculator 68
FUTURE VALUE OF AN ANNUITY 68
Using the Future Value Annuity Table 69
3.2 Financial Planning Online: Estimating the Future Value
of Your Savings 72
Using a Financial Calculator to Determine the Future Value
of an Annuity 72
PRESENT VALUE OF AN ANNUITY 73
Using the Present Value Annuity Table 74
Using a Financial Calculator to Determine the Present Value
of an Annuity 76
USING TIME VALUE TO ESTIMATE SAVINGS 76
Estimating the Future Value from Savings 77
Estimating the Annual Savings That Will Achieve a Future Amount 77
HOW A SAVINGS PLAN FITS WITHIN YOUR FINANCIAL PLAN 78
DISCUSSION QUESTIONS 79
SUMMARY 79
Integrating the Key Concepts 80
REVIEW QUESTIONS 80
FINANCIAL PLANNING PROBLEMS 81
FINANCIAL PLANNING ONLINE EXERCISES 82
Building Your Own Financial Plan 83
The Sampsons-A Continuing Case 83
IN-TEXT STUDY GUIDE 84
Chapter 4 Using Tax Concepts for Planning 87
BACKGROUND ON TAXES 88
Social Security and Medicare Taxes 88
4.1 Financial Planning Online: Internal Revenue Service 89
Personal Income Taxes 90
Tax Relief Act of 2001 90
FILING STATUS 93
GROSS INCOME 94
Wages and Salaries 94
Interest Income 94
Dividend Income 94
Capital Gains 94
Determining Gross Income 96
Adjusted Gross Income 99
DEDUCTIONS AND EXEMPTIONS 99
Standard Deduction 99
Itemized Deductions 100
4.2 Financial Planning Online: State Income Tax Rates 101
Exemptions 102
TAXABLE INCOME AND TAXES 104
Taxable Income 104
Taxes 104
Tax Credits 106
COMPREHENSIVE TAX EXAMPLE 108
Ken's FICA Taxes 108
Ken's Personal Taxes 108
4.3 Financial Planning Online: Tax Information Resource 109
4.4 Financial Planning Online: Estimating Your Taxes 111
Ken's Capital Gain Tax 111
Focus on Ethics: Reducing Your Taxes 112
HOW TAX PLANNING FITS WITHIN YOUR FINANCIAL PLAN 113
Discussion Questions 115
SUMMARY 115
Integrating the Key Concepts 116
REVIEW QUESTIONS 116
FINANCIAL PLANNING PROBLEMS 117
FINANCIAL PLANNING ONLINE EXERCISES 118
Building Your Own Financial Plan 118
The Sampsons-A Continuing Case 119
IN-TEXT STUDY GUIDE 119
Part 1: Brad Brooks-A Continuing Case 122
Part 2 Managing Your Liquidity 124
Chapter 5 Banking and Interest Rates 125
TYPES OF FINANCIAL INSTITUTIONS 126
Depository Institutions 126
Focus on Ethics: Special Rates on Deposits 127
Nondepository Institutions 127
Financial Conglomerates 128
BANKING SERVICES OFFERED BY FINANCIAL INSTITUTIONS 129
Checking Services 129
Credit Card Financing 132
Debit Cards 132
Safety Deposit Boxes 132
Automated Teller Machines (ATMs) 132
Cashier's Checks 133
Money Orders 133
Traveler's Checks 133
SELECTING A FINANCIAL INSTITUTION 133
5.1 Financial Planning Online: Internet Banking 134
5.2 Financial Planning Online: Financial Institutions That Can
Serve Your Needs 135
INTEREST RATES ON DEPOSITS AND LOANS 135
Risk-Free Rate 136
Risk Premium 136
5.3 Financial Planning Online: Current Interest
Rate Quotations 137
Loan Rate 137
Impact of Changes in Interest Rates 139
Comparing Interest Rates and Risk 139
TERM STRUCTURE OF INTEREST RATES 140
Shifts in the Yield Curve 141
5.4 Financial Planning Online: Updated Treasury Yields 142
HOW BANKING SERVICES FIT WITHIN YOUR FINANCIAL PLAN 142
Discussion Questions 144
SUMMARY 144
Integrating the Key Concepts 144
Appendix 5A Interest Rates: How They Are Determined
and Why They Change 145
HOW THE RISK-FREE INTEREST RATE IS DETERMINED 145
Aggregate Supply of Funds 145
Aggregate Demand for Funds 146
Combining Supply and Demand 146
WHY INTEREST RATES CHANGE 147
Shift in the Supply Curve 147
5.5 Financial Planning Online: Fed's Upcoming Meetings 149
Shift in the Demand Curve 149
Combining the Factors 151
REVIEW QUESTIONS 152
FINANCIAL PLANNING PROBLEMS 152
FINANCIAL PLANNING ONLINE EXERCISES 153
Building Your Own Financial Plan 154
The Sampsons-A Continuing Case 154
IN-TEXT STUDY GUIDE 155
Chapter 6 Managing Your Money 159
BACKGROUND ON MONEY MANAGEMENT 160
Liquidity 160
Adequate Return 161
MONEY MARKET INVESTMENTS 161
Checking Account 162
NOW Account 163
Savings Deposit 164
Certificate of Deposit 164
Focus on Ethics: Risky Deposit Rates 165
Money Market Deposit Account (MMDA) 166
Treasury Bills 166
6.1 Financial Planning Online: Deposit Rates Offered
by Banks 167
Money Market Funds (MMFs) 168
Asset Management Account 170
Comparison of Money Market Investments 170
RISK OF MONEY MARKET INVESTMENTS 171
6.2 Financial Planning Online: Impact of Different Deposit Rates
on Your Wealth 171
6.3 Financial Planning Online: Identifying Insured
Investments 172
Credit Risk 172
Interest Rate Risk 172
Liquidity Risk 173
RISK MANAGEMENT OF MONEY MARKET INVESTMENTS 173
Risk Assessment of Money Market Investments 173
Determining the Optimal Allocation of Money Market Investments 174
HOW MONEY MANAGEMENT FITS WITHIN
YOUR FINANCIAL PLAN 176
Discussion Questions 177
SUMMARY 178
Integrating the Key Concepts 178
REVIEW QUESTIONS 179
FINANCIAL PLANNING PROBLEMS 179
FINANCIAL PLANNING ONLINE EXERCISES 180
Building Your Own Financial Plan 180
The Sampsons-A Continuing Case 181
IN-TEXT STUDY GUIDE 182
Chapter 7 Managing Your Credit 185
BACKGROUND ON CREDIT 186
Advantages of Using Credit 186
Disadvantages of Using Credit 186
Establish a Credit History 187
7.1 Financial Planning Online: Personal Credit Counseling 188
Impact of the Interest Rate on Credit Payments 188
CREDIT CARDS 189
Applying for a Credit Card 190
Credit Check 190
7.2 Financial Planning Online: Your Credit Card Report 192
Focus on Ethics: Guarding Your Financial Information 192
Types of Credit Cards 193
Credit Limit 194
7.3 Financial Planning Online: Estimating Your Future
Credit Card Payments 194
Annual Fee 195
Incentives to Use the Card 195
Prestige Cards 195
Grace Period 195
Cash Advances 196
Interest Rate 196
Credit Card Statement 196
7.4 Financial Planning Online: Your Rights When
Using Credit 198
Comparing Credit Cards 198
7.5 Financial Planning Online: The Best Credit Card for You 199
TIPS ON USING CREDIT CARDS 199
Use a Credit Card Only If You Can Cover the Bill 199
Impose a Tight Credit Limit 200
7.6 Financial Planning Online: Establishing and
Protecting Credit 200
Pay Credit Card Bills before Investing Money 201
7.7 Financial Planning Online: Estimating the Time Necessary
to Pay Off Your Balance 202
Use Savings If Necessary to Pay the Credit Card Bill on Time 203
If You Cannot Avoid Credit Card Debt, Pay It Off before Other Debt 203
Avoid Credit Repair Services 203
Avoid Credit Card Fraud 203
Deter Identity Theft 203
7.8 Financial Planning Online: Identity Theft 204
DEALING WITH CREDIT DEBT 204
HOW CREDIT MANAGEMENT FITS WITHIN YOUR FINANCIAL PLAN 205
Discussion Questions 206
SUMMARY 206
Integrating the Key Concepts 207
Appendix 7A Finance Payment Methods 208
REVIEW QUESTIONS 210
FINANCIAL PLANNING PROBLEMS 210
FINANCIAL PLANNING ONLINE EXERCISES 211
Building Your Own Financial Plan 212
The Sampsons-A Continuing Case 212
IN-TEXT STUDY GUIDE 213
Part 2: Brad Brooks-A Continuing Case 215
Part 3 Personal Financing 216
Chapter 8 Personal Loans 217
BACKGROUND ON PERSONAL LOANS 218
Sources of Loans 218
The Personal Loan Process 219
8.1 Financial Planning Online: Loan Request Online 221
Focus on Ethics: Predatory Lending 222
INTEREST RATES ON PERSONAL LOANS 222
Annual Percentage Rate 223
Simple Interest 223
Add-On Interest 225
HOME EQUITY LOAN 226
Credit Limit on a Home Equity Loan 226
8.2 Financial Planning Online: Applying for a Home
Equity Loan 227
Interest Rate 228
8.3 Financial Planning Online: Prices of New Cars 229
CAR LOANS 229
Selecting the Car 229
8.4 Financial Planning Online: Trade-in and Retail Values
of Used Cars 231
8.5 Financial Planning Online: Car Loan Interest
Rate Quotation 232
Negotiating the Price 233
8.6 Financial Planning Online: Prevailing Car Loan
Interest Rates 233
Financing Decisions 235
PURCHASE VERSUS LEASE DECISION 236
8.7 Financial Planning Online: What Is the
Optimal Loan Maturity? 237
8.8 Financial Planning Online: Should You Lease or Buy? 238
STUDENT LOANS 240
HOW PERSONAL LOANS FIT WITHIN YOUR FINANCIAL PLAN 240
Discussion Questions 241
SUMMARY 241
Integrating the Key Concepts 242
REVIEW QUESTIONS 242
FINANCIAL PLANNING PROBLEMS 243
FINANCIAL PLANNING ONLINE EXERCISES 244
Building Your Own Financial Plan 245
The Sampsons-A Continuing Case 245
IN-TEXT STUDY GUIDE 246
Chapter 9 Purchasing and Financing a Home 249
SELECTING A HOME 250
Relying on a Realtor 251
Using Online Realtor Services 251
How Much Can You Afford? 252
9.1 Financial Planning Online: How Much Money
Can You Borrow? 252
Criteria Used to Select a Home 253
9.2 Financial Planning Online: Recent Sales Prices
of Nearby Homes 254
9.3 Financial Planning Online: Listing of Homes
Nearby for Sale 255
Focus on Ethics: Disclosing Defects 256
VALUATION OF A HOME 256
Market Analysis 256
Effects of Business Activity and Zoning Laws 257
Obtaining a Second Opinion on Your Valuation 257
Negotiating a Price 258
TRANSACTION COSTS OF PURCHASING A HOME 258
Down Payment 258
9.4 Financial Planning Online: Applying for a Mortgage 259
Closing Costs 260
CHARACTERISTICS OF A FIXED-RATE MORTGAGE 261
9.5 Financial Planning Online: Average Mortgage Rates 262
Amortization Table 262
9.6 Financial Planning Online: Estimating
Mortgage Payments 265
Impact of the Mortgage Amount on the Monthly Payment 265
9.7 Financial Planning Online: Should You Obtain a 15-Year
or a 30-Year Mortgage? 266
Impact of the Interest Rate on the Monthly Payment 266
Impact of the Mortgage Maturity on the Monthly Payment 266
Estimating the Monthly Mortgage Payment 267
CHARACTERISTICS OF AN ADJUSTABLE-RATE MORTGAGE 269
Initial Rate 269
Interest Rate Index 269
Frequency of Rate Adjustments 269
9.8 Financial Planning Online: Should You Obtain a Fixed-
or an Adjustable-Rate Mortgage? 270
Caps on Adjustable-Rate Mortgages 270
Financing with a Fixed- versus an Adjustable-Rate Mortgage 271
DECISION TO OWN A HOME VERSUS RENT 271
Estimating the Total Cost of Renting and Owning 271
SPECIAL TYPES OF MORTGAGES 275
Graduated Payment Mortgage 275
9.9 Financial Planning Online: Should You Rent or Buy? 276
Balloon Payment Mortgage 276
MORTGAGE REFINANCING 276
Refinancing Analysis 277
HOW A MORTGAGE FITS WITHIN YOUR FINANCIAL PLAN 278
Discussion Questions 279
SUMMARY 280
Integrating the Key Concepts 280
REVIEW QUESTIONS 281
FINANCIAL PLANNING PROBLEMS 281
FINANCIAL PLANNING ONLINE EXERCISES 282
Building Your Own Financial Plan 283
The Sampsons-A Continuing Case 284
IN-TEXT STUDY GUIDE 284
Part 3: Brad Brooks-A Continuing Case 287
Part 4 Protecting Your Wealth 288
Chapter 10 Auto and Homeowner's Insurance 289
BACKGROUND ON INSURANCE 290
MANAGING RISK 290
Avoid Risk 291
Reduce Risk 291
Accept Risk 291
Insure Against Risk 291
ROLE OF INSURANCE COMPANIES 292
Insurance Company Operations 293
Insurance Company Credit Ratings and Service 294
Role of Insurance Agents and Brokers 294
10.1 Financial Planning Online: Reviews of
Insurance Companies 295
AUTO INSURANCE 295
Auto Insurance Policy Provisions 295
Coverage A: Liability Coverage 296
Coverage B: Medical Payments Coverage 298
Coverage C: Uninsured or Underinsured Motorist Coverage 298
Coverage D: Collision and Comprehensive Coverage 298
Other Provisions 299
Summary of Auto Insurance Provisions 300
10.2 Financial Planning Online: How Much Car Insurance
Coverage Do You Need? 301
FACTORS THAT AFFECT YOUR AUTO INSURANCE PREMIUMS 301
Characteristics of Your Car 301
Your Personal Characteristics 302
Comparing Premiums Among Insurance Companies 303
Focus on Ethics: Impact of Lawsuits and Fraud on Premiums 305
HOMEOWNER'S INSURANCE 307
Types of Perils Covered by Homeowner's Insurance 307
HOMEOWNER'S INSURANCE POLICY PROVISIONS 307
Property Damage 307
Other Structures on Property 308
Personal Property 309
Liability 309
Other Types of Expenses 310
HOMEOWNER's INSURANCE PREMIUMS 310
Factors That Affect Homeowner's Insurance Premiums 311
10.3 Financial Planning Online: Purchasing
Homeowner's Insurance 312
Reducing Your Homeowner's Insurance Premium 312
FILING A CLAIM 313
RENTER'S INSURANCE 313
10.4 Financial Planning Online: Renter's Insurance
Quotation 314
Renter's Insurance Policy Provisions 314
UMBRELLA PERSONAL LIABILITY POLICY 314
HOW HOME AND AUTO INSURANCE FIT
WITHIN YOUR FINANCIAL PLAN 315
Discussion Questions 316
SUMMARY 316
Integrating the Key Concepts 316
REVIEW QUESTIONS 317
FINANCIAL PLANNING ONLINE EXERCISES 318
Building Your Own Financial Plan 318
The Sampsons-A Continuing Case 318
IN-TEXT STUDY GUIDE 319
Chapter 11 Health and Disability Insurance 321
HEALTH INSURANCE 322
PRIVATE HEALTH INSURANCE 323
Types of Private Health Insurance Coverage 323
Options for Purchasing Private Health Insurance 323
Private Health Care Plans 323
Comparison of Private Health Insurance Plans 326
Maintaining Private Health Care Insurance Coverage 326
Expenses Not Covered by Private Insurance Plans 327
GOVERNMENT HEALTH CARE PLANS 327
11.1 Financial Planning Online: Should You Enroll
in an HMO or a PPO? 328
Medicare 328
11.2 Financial Planning Online: Medicare Coverage 329
Medicaid 329
LONG-TERM CARE INSURANCE 329
Long-Term Care Insurance Provisions 330
Other Factors That Affect Long-Term Care Insurance Premiums 331
Reducing Your Cost of Long-Term Care Insurance 331
Determining the Amount of Coverage 332
ADDITIONAL TYPES OF HEALTH CARE PLANS 332
Dental Insurance 332
Vision Insurance 332
DISABILITY INSURANCE 332
Sources of Disability Income Insurance 333
Disability Insurance Provisions 334
Deciding on Disability Insurance 336
HOW HEALTH AND DISABILITY INSURANCE FIT
WITHIN YOUR FINANCIAL PLAN 336
Discussion Questions 337
SUMMARY 337
Integrating the Key Concepts 337
REVIEW QUESTIONS 338
FINANCIAL PLANNING PROBLEMS 339
FINANCIAL PLANNING ONLINE EXERCISES 339
Building Your Own Financial Plan 339
The Sampsons-A Continuing Case 340
IN-TEXT STUDY GUIDE 340
Chapter 12 Life Insurance 343
BACKGROUND ON LIFE INSURANCE 344
Role of Life Insurance 344
Role of Life Insurance Companies 345
TYPES OF LIFE INSURANCE 345
Term Insurance 345
12.1 Financial Planning Online: Buying Term Life Insurance 347
Whole Life Insurance 348
12.2 Financial Planning Online: Should You Buy
Whole Life or Term Insurance? 350
12.3 Financial Planning Online: Return on Your Whole
Life Insurance Policy 351
Universal Life Insurance 351
DETERMINING THE AMOUNT OF LIFE INSURANCE NEEDED 352
Income Method 352
Budget Method 352
LIFE INSURANCE PREMIUMS 354
Factors That Affect Your Insurance Premiums 354
Using the Internet to Price Term Insurance 354
Focus on Ethics: Applying for Life Insurance 354
12.4 Financial Planning Online: How Much Life Insurance
Do You Need? 355
SETTLEMENT OPTIONS ON A LIFE INSURANCE POLICY 355
Lump Sum 355
Installment Payments 356
Interest Payments 356
HOW LIFE INSURANCE FITS WITHIN YOUR FINANCIAL PLAN 356
Discussion Questions 357
SUMMARY 357
Integrating the Key Concepts 358
REVIEW QUESTIONS 358
FINANCIAL PLANNING PROBLEMS 359
FINANCIAL PLANNING ONLINE EXERCISES 359
Building Your Own Financial Plan 360
The Sampsons-A Continuing Case 360
IN-TEXT STUDY GUIDE 361
Part 4: Brad Brooks-A Continuing Case 363
Part 5 Personal Investing 364
Chapter 13 Investing Fundamentals 365
TYPES OF INVESTMENTS 366
Money Market Securities 366
Stocks 366
13.1 Financial Planning Online: IPOs 367
Bonds 369
13.2 Financial Planning Online: Price Trends of Your Stocks 370
Mutual Funds 370
Real Estate 371
INVESTMENT RETURN AND RISK 372
Measuring the Return on Your Investment 372
How Wealth Is Influenced by Your Return on Investment 374
Risk from Investing 376
TRADEOFF BETWEEN RETURN AND RISK 377
Return-Risk Tradeoff among Stocks 378
Return-Risk Tradeoff among Bonds 379
Return-Risk Tradeoff among Mutual Funds 379
Return-Risk Tradeoff among Real Estate Investments 379
Comparing Different Types of Investments 380
LEARNING FROM THE INVESTMENT MISTAKES OF OTHERS 381
Making Decisions Based on Unrealistic Goals 381
Borrowing to Invest 381
Taking Risks to Recover Losses from Previous Investments 382
Focus on Ethics: Falling Prey to Online Investment Fraud 382
HOW INVESTMENTS FIT WITHIN YOUR FINANCIAL PLAN 383
Discussion Questions 385
SUMMARY 385
Integrating the Key Concepts 385
REVIEW QUESTIONS 386
FINANCIAL PLANNING PROBLEMS 386
FINANCIAL PLANNING ONLINE EXERCISES 387
Building Your Own Financial Plan 388
The Sampsons-A Continuing Case 388
IN-TEXT STUDY GUIDE 389
Chapter 14 Stock Analysis and Valuation 391
STOCK QUOTATIONS 392
14.1 Financial Planning Online: Stock Information 393
ANALYSIS OF THE FIRM 394
Annual Report 394
Firm-Specific Characteristics 395
Information Provided by Value Line 398
14.2 Financial Planning Online: Determining Industry Norms 399
Focus on Ethics: Accounting Fraud 399
14.3 Financial Planning Online: Stock Market Quotations and Conditions 402
ECONOMIC ANALYSIS OF STOCKS 402
Economic Growth 403
Interest Rates 403
Inflation 404
INDUSTRY ANALYSIS OF STOCKS 404
Industry Indicators 405
STOCK VALUATION 405
Price-Earnings (PE) Method 406
14.4 Financial Planning Online: Earnings Estimates
for Valuing Your Stock 408
Price-Revenue (PR) Method 408
INTEGRATING YOUR ANALYSES 409
14.5 Financial Planning Online: Screening Stocks for
Investment Decisions 411
STOCK MARKET EFFICIENCY 411
HOW STOCK VALUATION FITS WITHIN YOUR FINANCIAL PLAN 412
Discussion Questions 413
SUMMARY 414
Integrating the Key Concepts 414
REVIEW QUESTIONS 415
FINANCIAL PLANNING PROBLEMS 416
FINANCIAL PLANNING ONLINE EXERCISES 416
Building Your Own Financial Plan 417
The Sampsons-A Continuing Case 418
IN-TEXT STUDY GUIDE 418
Chapter 15 Investing in Stocks 421
STOCK EXCHANGES 422
New York Stock Exchange 422
Other Stock Exchanges 423
Over-the-Counter (OTC) Market 423
Electronic Communication Networks (ECNs) 424
Foreign Stock Exchanges 424
PURCHASING OR SELLING STOCKS 424
Relying on Brokerage or Analyst Recommendations 424
15.1 Financial Planning Online: Analyst Recommendations 425
Buying or Selling Stock Online 426
Placing an Order 426
15.2 Financial Planning Online: Trading Stocks Online 427
BUYING STOCK ON MARGIN 429
Impact of Margin on Returns 429
Impact of Margin on Risk 430
ASSESSING PERFORMANCE OF STOCK INVESTMENTS 430
Comparing Returns to an Index 431
Price Quotations for Indexes Used to Measure Stock Performance 431
HOW STOCK INVESTMENT METHODS FIT
WITHIN YOUR FINANCIAL PLAN 432
15.3 Financial Planning Online: Stock Market Summary 433
15.4 Financial Planning Online: Stock Index Quotations 433
Discussion questions 435
SUMMARY 435
Integrating the Key Concepts 435
REVIEW QUESTIONS 436
FINANCIAL PLANNING PROBLEMS 436
FINANCIAL PLANNING ONLINE EXERCISES 437
Building Your Own Financial Plan 437
The Sampsons-A Continuing Case 438
IN-TEXT STUDY GUIDE 438
Chapter 16 Investing in Bonds 441
BACKGROUND ON BONDS 442
Bond Characteristics 442
A Bond's Yield to Maturity 443
16.1 Financial Planning Online: Your Bond's Yield 444
Bond Trading in the Secondary Market 444
TYPES OF BONDS 444
Treasury Bonds 444
Municipal Bonds 445
16.2 Financial Planning Online: Municipal Bond Quotations 446
Federal Agency Bonds 446
Corporate Bonds 446
RETURN FROM INVESTING IN BONDS 447
Impact of Interest Rate Movements on Bond Returns 447
Tax Implications of Investing in Bonds 449
16.3 Financial Planning Online: Today's Events That
Could Affect Bond Prices 449
RISK FROM INVESTING IN BONDS 450
Default Risk 450
Focus on Ethics: Accounting Fraud and Default Risk 452
Call Risk 453
Interest Rate Risk 453
BOND INVESTMENT STRATEGIES 455
Interest Rate Strategy 455
Passive Strategy 455
Maturity Matching Strategy 456
HOW BOND DECISIONS FIT WITHIN YOUR FINANCIAL PLAN 456
Discussion Questions 457
SUMMARY 457
Integrating the Key Concepts 457
Appendix 16A Valuing a Bond 459
REVIEW QUESTIONS 461
FINANCIAL PLANNING PROBLEMS 461
FINANCIAL PLANNING ONLINE EXERCISES 462
Building Your Own Financial Plan 463
The Sampsons-A Continuing Case 463
IN-TEXT STUDY GUIDE 464
Chapter 17 Investing in Mutual Funds 467
BACKGROUND ON MUTUAL FUNDS 468
Motives for Investing in Mutual Funds 468
Net Asset Value 469
Open-End versus Closed-End Funds 469
Load versus No-Load Funds 470
Expense Ratios 471
TYPES OF MUTUAL FUNDS 472
Types of Stock Mutual Funds 472
17.1 Financial Planning Online: Index Mutual Funds 475
Types of Bond Mutual Funds 476
RETURN AND RISK OF A MUTUAL FUND 477
Return from Investing in a Mutual Fund 477
17.2 Financial Planning Online: Return from Investing
in Mutual Funds 479
Comparing Returns among Stock Mutual Funds 480
Risk from Investing in a Stock Mutual Fund 480
Tradeoff between Expected Return and Risk of Stock Funds 482
Risk from Investing in a Bond Mutual Fund 482
Tradeoff between Expected Return and Risk of Bond Funds 484
DECIDING AMONG MUTUAL FUNDS 484
Determining Your Preferred Mutual Fund Characteristics 485
Reviewing a Mutual Fund's Prospectus 485
17.3 Financial Planning Online: Mutual Fund Reports 487
Making the Decision 487
17.4 Financial Planning Online: Online Services
by Mutual Funds 489
QUOTATIONS OF MUTUAL FUNDS 489
DIVERSIFICATION AMONG MUTUAL FUNDS 492
17.5 Financial Planning Online: Diversifying among
Mutual Funds 493
Diversification through Mutual Fund Supermarkets 494
HOW MUTUAL FUNDS FIT WITHIN YOUR FINANCIAL PLAN 494
Discussion Questions 496
SUMMARY 496
Integrating the Key Concepts 497
REVIEW QUESTIONS 497
FINANCIAL PLANNING PROBLEMS 498
FINANCIAL PLANNING ONLINE EXERCISES 498
Building Your Own Financial Plan 499
The Sampsons-A Continuing Case 500
IN-TEXT STUDY GUIDE 501
Chapter 18 Asset Allocation 503
HOW DIVERSIFICATION REDUCES RISK 504
Benefits of Portfolio Diversification 504
Determining Portfolio Benefits 506
Factors That Influence Diversification Benefits 507
18.1 Financial Planning Online: Correlations
among Stock Returns 509
STRATEGIES FOR DIVERSIFYING 509
Diversification of Stocks across Industries 509
Diversification of Stocks across Countries 510
ASSET ALLOCATION STRATEGIES 512
Including Bonds in the Portfolio 512
Including Real Estate Investments in the Portfolio 512
Stock Options 513
How Asset Allocation Affects Risk 513
Benefits of Asset Allocation 514
An Affordable Way to Conduct Asset Allocation 514
FACTORS THAT AFFECT THE ASSET ALLOCATION DECISION 515
Your Stage in Life 515
Your Degree of Risk Tolerance 516
Your Expectations about Economic Conditions 517
includes bibliographic references and index
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