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Iowa Electronic Markets Personal Finance and Portfolio Management Strategies . Personal Finance Curriculum using the Federal Reserve Monetary Policy Market and Computer Industry Returns Market.
Personal Finance Curriculum
Federal Reserve Monetary Policy Market
and Computer Industry Returns Market
Personal Finance and Portfolio Management Strategies byJan E. ChristopherDelaware State UniversityandJuliet U. EluSpelman College August 2001
Personal Finance Planning
Budgeting and Cash – flow Management
Money Management Strategy
Credit and Debt Management
2. Providers of Financial Services and availability of Funds Banking Services and Savings Plan
Mortgage and Tangible Assets Financing
Interest Rate Fundamentals
Stocks, Bonds and Mutual Fund Quotations
Insurance Services and Hedging Strategies
3. Investment Decisions
Understanding the Relationship between Personal Finance and Investment
Using the IEM to make Rational Investment Decisions
Trading and Tracking Stocks using the IEM
Predicting Future Trades Based on Historical Trends
Understanding Risk and Return
The Personal Finance and Portfolio Management Strategies module seeks to define the correlation of money management strategies with economic and political activities using the IEM. Students will be introduced to classroom materials that enable them to understand the impact of consumer credit and debt as they apply to personal financial management strategies. The IEM will be used to predict and forecast market outcomes.
Upon completing a series of assignments, students will be able to understand the importance of personal financial planning and economic activities. In addition, Internet activities will be assigned to explain why banking services, developing personal savings plans, and interpreting payment accounts are paramount to personal financial management strategies.
The “time value of money” is the increase in an amount of money that results from interest earned on an investment. The time value of money is usually categorized into two components: the present value and the future value.
The “future value of money” is a compounding process over time, i.e., the amount to which a sum invested can increase over time based on the number of years invested.
The “present value of money” is the reverse of the future value and involves a discounting process that reflects what the investment is worth in current dollars.
FV = PV(1 + i)n
where n = number of years
The future value of $100 at an 8% interest rate to be received in 1 year is:
FV = 100(1+.08)1 = $108
Note: to take advantage of the compounding process, present consumption must be sacrificed.
PV = FV
(1 + i)n
where n = number of years
The present value of $100 to be received at the end of one year at an 8% interest rate is:
PV = 100
(1+.08)1 = $92.59
The future value interest factor for a one-dollar annuity discounted at i percent for n periods of $1000 to be received at the end of three year at an 6% interest rate is:
FVIFA 6%,3 = (1+.06)2 + (1+.06)1 + (1+.06)0
1.1236 + 1.06 + 1 = 3.1836
FV of the Annuity = PMT(FVIFAi,n)= $1,000 x 3.184
The present value interest factor for a one-dollar annuity discounted at i percent for n periods of $1000 to be received at the end of three year at an 6% interest rate is:
PVIFA 6%,3 = ___1___ + __1__ + ___1___
(1+.06)1 (1+.06)2 (1+.06)3
.9433 + .88999 + .83961 = 2.673
PV of the Annuity = PMT(PVIFAi,n) = $1,000 x 2.673
Develop a plan to manage debt.
The major sources of consumer credit are financial institutions such as commercial banks, building and loan associations, licensed lenders, credit unions, credit card banks, risk managers, and insurers. Other sources of credit are non-financial, including governmental agencies, families, friends, and community-based organizations.
Debt management is the ability to meet debt obligations in both the short term and the long term.
P(N + 1)
Tax Planning Strategy is the ability of an individual to effectively reduce, defer, or eliminate some taxes. Tax planning can influence an individual’s spending, savings, borrowing, and investment decisions. An understanding of the tax laws and maintenance of appropriate records can assist an individual to take advantage of some tax shelters. To successfully achieve this goal, it is essential to determine one’s current tax liability and the impact of the liability on financial transactions. Personal income tax is assessed on taxable income and the objective is to legally pay your fair share of taxes while taking advantage of the tax benefits appropriate to your personal financial situation.
At 7% At 9% At 11%
At 7% At 9% At 11%
At 7% At 8% At 10%
The main purpose is to protect renters against financial loss due to damage or loss of personal property. The coverage includes personal property protection, additional living expenses, and personal liability related coverage. Renters Insurance is typically a peril policy that covers 17 major peril items with liability protection. It is reasonably less expensive and also provides protection from losses to dwelling contents and personal property.
Condominium Insurance covers losses to contents and personal property, losses due to additional living expenses that may arise if one of the covered perils occurs, and liability losses. The condominium owner can provide coverage for dwelling and losses resulting from structural alterations such as book shelves, electrical fixtures, and wall or floor coverings.
The replacement-cost-requirement can be estimated as:
R = (L – D) x 1/(RV x 0.80 or 1.00)
R = reimbursement payable
L = the amount of loss
D = deductible, if any
I = amount of insurance actually carried
RV = replacement value of dwelling
Actual Cash value (ACV) is estimated as:
ACV = P - [CA x (P/LE)]
P = purchase price of the property
CA= current price of the property
LE = life expectancy of the property in years
For example: What amount would Vivian Jones receive with cash value coverage for a two-year-old T.V. destroyed by fire? The T.V. would cost $1,000 to replace today and had an estimated life of five years.
ACV = $1,000 - [($1,000 / 5) x 2] = $600
The insurance premium reflects the homeowners’ policy choice, but standard policies typically provide $100,000 of personal liability coverage, $1,000 of no-fault medical expenses coverage, and $250 of no-fault property damage coverage. It is advisable for policyholders to purchase supplemental coverage depending on need.
Driving an automobile exposes individuals to disastrous financial losses. Automobile insurance protects consumers from financial losses that might result from accidents. In some states it is mandatory to have automobile insurance to cover motorists in case of an accident. The different types of coverage include liability insurance such as bodily injury, liability and property damage, medical coverage for passengers, uninsured or under-insured motorist, and physical damage such as collusion and comprehensive insurance.
Health Insurance is the ability of an individual to protect themselves against economic loss due to illness, accident, or disability. With rising health care costs, the purpose of health insurance is to alleviate financial burdens suffered by individuals in the form of medical expense coverage and disability income.
Health and medical insurance can be purchased directly or is provided by employers through private insurance companies and Blue Cross and Blue Shield organizations. Most health insurance coverage comes from companies operating as HMOs, PPOs, or under a system of deductibles and copayments made directly to private physicians and hospitals.
Disability Insurance is designed to protect individuals from loss of income due to unforeseen circumstances such as accident, illness, or pregnancy. Disability affects one’s ability to earn income and this insurance provides regular cash income to the insured. Disability can be short or long term and disability insurance usually is provided by the employer, under Social Security, and through workers’ compensation.
As a rule, if the Social Security and other disability benefits provided by the employer are insufficient to support your family, it is advisable to buy additional disability insurance to make up the difference.
The purpose of life insurance is to protect loved ones who depend on you from financial loss caused by death. The insurance company promises to pay a sum of money at the time of the policyholder’s death in return for the insured’s agreement to pay periodic premiums. Age and gender reflect the premium that one pay.
Note: Contracts will be designated using a tickersymbol and a letter denoting up, down, or the same
and the month of contract liquidation. The contracts traded in this market for liquidation will have a
unique date denoted by month “MM” and year “YY”.
You can access the IEM through its web-site address:http://www.biz.uiowa.edu/IEM/
In the Federal Reserve Monetary Policy Market (i.e., FRupMMYY, FRsameMMYY, and FRdownMMYY), a bundle can be purchased from or sold to the IEM system at any time at the price of $1.00 per bundle. A unit portfolio is a set of bundles, such as AAPLm, IBMm, MSFTm and SP500m, where the investor purchases one share of each stock in the bundle. You can always buy or sell such portfolios for $1.00 each. Thus, when you start to trade and do not own any contracts, you can buy a unit portfolio and then start to trade. (To do this, select the appropriate contract under “Buy Bundles” or “Sell Bundles” in the “Market Order” drop down menu. Enter a quantity and press the “Market Order” button.) Note that, regardless of the settlement value of stocks in the bundle, the liquidation values of the contracts in a bundle will total $1.00, the same as the price at which the bundles can be bought or sold. The bundles will be designated FR1$MMYY, where the suffix MMYY identifies the month of the FOMC meeting.
Lecture Outline (Slide 4)
Personal Finance and Portfolio Management Strategies - Lecture Notes (Slide 5)
Introduction (Slide 6)
Why Financial Planning Is Beneficial (Slide 7)
The Financial Planning Process (Slide 8)
What Variables Affect the Financial Planning Process? (Slide 9)
Significant Terminology Used in the Financial Planning Process (Slide 10)
Example of the Compounding Process Using Future Value (Slide 11)
Example of the Discounting Process Using Present Value (Slide 12)
Example of the Future Value Interest Factor for an Annuity (Slide 13)
Example of the Present Value Interest Factor for an Annuity (Slide 14)
Budgeting and Cash Flow Management (Slide 15)
Budgeting (Slide 16)
Cash-Flow Management (Slide 17)
Money Management Strategies (Slide 18)
Key Variables in Asset Management Strategies (Slide 19)
Key Indicators of Good Financial Management (Slide 20)
The Debt-to-Equity Ratio (Slide 21)
The Current Ratio (Slide 22)
Liquidity Ratios (Slide 23)
The Debt Service-to-Income Ratio (Slide 24)
The Savings Ratio (Slide 25)
Credit and Debt Management (Slide 26)
Developing a Debt Management Plan to Control Credit Usage (Slide 27)
Credit Management (Slide 28)
Debt Management (Slide 29)
Signals of Debt Mismanagement (Slide 30)
Tax Planning (Slides 31-33)
Tax Rate Table (Slide 34)
Marginal and Average Tax Rates (Slide 35)
The Ways Taxes Are Paid (Slide 36)
Calculating Adjusted Income (Slide 37)
Tax Shelter Strategies (Slides 38-43)
Providers of Financial Services and Availability of Funds (Slide 44)
Banking Services and Savings Plans (Slide 45)
Savings Plans (Slide 46)
Mortgage and Tangible Asset Financing (Slide 47)
Mortgage Financing (Slide 48)
Real Estate Investment and Cash Flow (Slide 49)
Direct and Indirect Real Estate Investment (Slide 50)
Interest Rate Fundamentals (Slide 51)
Present Value (Slide52)
Future Value (Slide 53)
The Present Value of an Annuity (Slide 54)
The Future Value of an Annuity (Slide 55)
Determining a Car Payment (Slide 56)
Determining a Mortgage Payment (Slide 57)
Computing Present and Future Values (Slide 58)
Stocks, Bonds, and Mutual Fund (Slide 59)INDEX
Investment Bankers (Slide 61)
Individual Investors (Slide 62)
Portfolio and Investment Management (Slide 63)
Bonds (Slide 64)
Bond Value (Slide 65)
Mutual Funds (Slide 66)
Classification of Mutual Funds (Slide 67)
Insurance Services and Hedging Strategies (Slides 68-69)
Risk and Insurance (Slide 70)
Types of Insurance (Slide 71)
Types of Insurance - Homeowners (Slides 71-75)
Types of Insurance - Automobile (Slides 76-77)
Types of Insurance - Property Liability Insurance (Slides 78-79)
Types of Insurance - Health and Disability Insurance (Slides 80-83)
Types of Insurance - Disability Insurance (Slides 84)
Types of Insurance - Life Insurance (Slides 85-87)
Making a Claim (Slide 88)
Investment Decisions (Slide 89)
Keys to Choosing an Investment (Slide 90)
Investing through Ownership (Slide 91)
Purchasing Short- or Long-Term Investments (Slide 92)
Understanding the Relationship between Personal Finance and Investments (Slide 93)
Using the IEM to make Rational Investment Decisions (Slide 94)
Background on the FOMC (Slides 95-96)
FOMC Policy Decisions (Slide 97)
Fed Policy Contract Description (Slide 98)
Assignment One (Slide 99)
Assignment Two (Slide 100)
Trading and Tracking Stocks on the IEM (Slide 101)
Trading on the IEM (Slide 102)
Tracking Shares on the IEM (Slide103)
Buying and Selling Limit Orders on the IEM (Slide 104)
Accessing Contracts on the IEM (Slide 105)
Predicting Future Trades Based on Historical Trends (Slide 106)
Charting Trends (Slide 107)
Assignment Three (Slide 108)
Computer Industry Returns Contract Description (Slide 109)
Understanding the Relationship Between Risk and Return (Slide 110)
Risk and Return (Slide 111)
Determining Your Own Investment (Slides 112-114)
Strategies for Portfolio Management (Slides 115-117)
Making the Right Decision (Slide 118)
Index (Slides 119-120)
Internet Resources (Slide 121)
Works Consulted (Slide 122)Index (continued)