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