Announcements

1. Announcements

2. Conceptual Clarifications Common phraseology: Losing money Losing money is not the same thing as decreased purchasing power. If I invest at 5% today and tomorrow there are several opportunities to invest at 7%, I have not lost money, because I am still earning, rather, I have less future purchasing power because I chose a lower return than I might have had if I waited another day.

3. Similarly, when the price of goods increases by a greater percentage than my investments have grown, it does not mean that I have lost money. Rather, it means that my purchasing power has decreased.

4. Mortgage Many students understand that a mortgage is a loan that uses collateral, but have used examples of cars. Mortgages are usually for property. Cars are usually other forms of consumer loans.

5. ______Which of the following are advantages of personal financial planning? • Increased effectiveness in obtaining, using, and protecting your financial resources. • Increased control / awareness of your financial affairs. • Improved personal relationships (know what to expect, fewer surprises, less stress) • All of the above.

6. 2._______Which of the following is not a reliable source of information to assist you with your financial planning? • Financial institutions. • School courses and educational seminars. • Financial specialists: Financial planners, bankers, accountants, insurance agents, lawyers and tax preparers. • Television Advertisements

7. 3._______The Financial Planning Process involves which of the following steps? • Determine your current financial situation. A personal balance sheet will work. Develop your financial goals. Identify alternative courses of action. • Searching for a financial planner and hiring them to make your decisions. Reading the New York Times or Financial Post in the hope of finding a good stock tip. Investing in the best three alternatives you find and selling them when they increase by 20% and then reinvesting in another three choices. • Evaluate your alternatives. Create and implement your financial action plan. Review and revise your plan frequently. • A and C.

8. 4._______Why is it important to live within your means? • It is not important to live within your means, money grows on trees. • Living within your means contributes to lower levels of stress. • To have financial resources to invest, which will begin working for you and create more wealth. • B and C

9. 5. _______What is Opportunity Cost? • The cost of doing business. • A lower interest rate • Always a good thing to have. • What you give up when you make a choice.

10. Choose any two (2) of the following financial terms, write the definitions and give one example of how it applies to your life. Personal financial planning – Def: Process of managing money to achieve personal economic satisfaction. Application: A series of decisions on how much money you need at some future time in order to meet your goals, and how you will get that money. Goals must be in monetary terms, and have some date attached to them, in order to plan for them. = Existing savings + investment income for n years on the existing savings + (Earnings – consumption each year) + investment income on the annual savings, n1 .

11. Time Value of Money. Def:Allows us to compare amounts of money received or paid at different times. Also, increases in an amount of money as result of interest earned. Example: When I graduate and begin earning 35,000 RMB in 2013, I will need to concern myself with becoming better and better at my job so that I get a raise in my pay. If I don’t improve my performance and get an increase in my pay, I will find that annual inflation decreases my purchasing power and my 35,000 RMB will no longer buy the same amount of goods that it did in 2012. DISCUSSION

12. Discount Bond pays no interest during its life. The interest is built into the final payment. Example: On November 1st, 2011 you purchase a 100 RMB savings bond from the government of China. It has a 5 year term and pays compound interest at 5% annually. Once each year, on November 1st, for the next five years, it increases in value by 5%. On November 1st 2016, I get my 100 RMB back and the compound interest, totaling 127.63RMB

13. 100 becomes 105105 becomes 110.25110.25 becomes 115.76115.76 becomes 121.55121.55 becomes 127.62Students must know how to perform the equation below. It is on your equation sheet.

14. Compounding gives a return on your original investment plus a return on previous returns. Example: Differs from the discount bond example in that it does not have the restriction on how long you have to leave it in and penalties for taking it early. Compounding in a regular bank account usually pays less than making a contract to leave the money in a bond for a specified period of time.

15. Written Response Questions Directions: • Provide a definition for each of the financial terms below APR and EAR. • Explain the risk of not knowing the difference between the APR and the EAR.

16. Annual Percentage Rate (APR) The APR is a conventional method of quoting interest rates that ignore the compounding effect completely. The periodic rate (day/month/quarter/semi/etc) is multiplied by the number of periods in a year. k is the interest rate m is the number of periods in one year km is the rate of return for the period of time being discussed

17. Effective Annual Rate (EAR) EAR = (1 + the annual stated interest rate K, DIVIDED by the number of periods M) RAISED TO THE POWER of the number of periods M, MINUS 1 k is the interest rate m is the number of periods in one year Example: an APR of 15% = 1.25% each month. 15% divided by 12 = 1.25% EAR = (1+ 1.25%) RAISED TO THE POWER of 12, MINUS 1 (1+.0125) ^ 12 - 1 = 16.08%

18. What is the risk of not knowing or not being able to calculate the difference between the APR (Annual Percentage Rate) and the EAR (Effective Annual Rate) The risk of not knowing the difference between the APR (Annual Percentage Rate) and the EAR (Effective Annual Rate) is that you may choose to borrow an amount based on the advertised APR but have to repay based on the EAR, which is a larger amount because it includes compounding from each previous period in subsequent calculations.

19. Below, are four risks that need to be evaluated when making financial decisions. Give an example of each risk. Inflation risk Rising prices lead to lost buying power. If my income remains the same every year for the next 5 years, but inflation continues to increase, meaning that the value of the currency is decreasing by a small amount each year, my purchasing power will also decrease every year.

20. Interest-rate risk A Change in interest rates that affect the cost of borrowing and the rate of return. To stimulate the economy and create jobs, the central bank lowers interest rates. Lower interest rates encourage more people to borrow RMB and buy more consumer goods (tv’s cars, clothing, etc). Factories need to make more products to keep up with the peoples demand to buy more, so they hire more people. More people working leads to more people exchanging RMB - spending money.

21. Income risk The potential loss of employment income and other sources of income. In most cases, the loss of primary employment has serious and negative consequences on economic survival. In these cases, if I do not have a substantial reserve of investments, the loss of a job may mean that my family has difficulty paying for food and shelter. Rule of thumb says that a family should have a minimum of three months living expenses available for immediate use in the case of employment loss.

22. Personal risk If I have partial or no health benefits and I have a medical emergency, I may not be able to afford medical care and may be seriously ill and never recover.

23. Mortgage A legal agreement that conveys the conditional right of ownership on an asset or property by its owner (the mortgagor) to a lender (the mortgagee) as security for a loan. The lender’s security interest is recorded in the register of title documents to make it public information, and is voided when the loan is repaid in full.

24. You are the manager of credit card statements for Scotia Bank, in Toronto, Ontario, Canada. Declining interest rates have led the bank to lower its monthly interest rate on unpaid balances to 1.35%. What is the APR? What is the EAR?

25. m = number of periods k = the interest rate APR = 12 months x 1.35% per month APR = 16.2%

26. m = number of compounding periods k = the interest rate EAR = (1 + 1.35%)12-1 Convert the percent to a decimal EAR = (1+.0135)12 - 1 EAR = 17.5% Do not mix up percent and decimals.

27. Go to Lesson 7