Balance Sheet Assets Liabilities Ck Acct 500 Stud. Loan 7500 Auto Val.

4000 Auto loan 4200 Stocks 5000 Mort. Outst 50000 Retir. Acct. 3000 61,700 Savings Acct. 2000 Condo Value 65000 79,500 A =L +NW (Liab.) 79,500 = 61,700 + NW -61,700 -61,700 17,800 = NW Ch 4 3a. 5 x 12 = 60 .25 x 19 = 4.75 * 12 = 57 60 + 57 = 117 B. 8 * 4 = 32.00 2.5% * 815 * 8/12 = 13.58 13.58 32.00= -18.42 4a. PV = 5000, 1=i/yr = 4%, N = 5, FV = 6,083 B. PMT = 5000, i/yr = 4%, N= 5, FV = 27,082 Ch 5 Notes 3a. 4,000 * .30 = 1200 b. 4000 * .38 = 1520 yes 1520 750(car pmts) = 770 mort. pmts 4a PV= 80000 N= 360, i/yr = 6.5/12 PMT = 506 b. PV = 105000 N= 240, i/yr = 5.5/12, PMT=722 c. PV = 95000, N= 180, i/yr = 5/12, PMT= 751 2. Lease Options -600 sec dep -14,181 425/mo., N= 36 mths, i/yr = 5% + 518 FV= 600, i/yr. = 5, n=3, PV= 518 14,262 Buy Options -2400 dp -17,183 515/mth, N= 36mths, i/yr. = 5% - 1080 taxes - 20,663 +5615 resid value FV= 6500, i/yr. 5%, N=3 -15,048 Better to Leasse Glossary
Ch. 1 average propensity to consume The percentage of each dollar of income, on average, that a person spends for current needs rather than savings. 4 consumer price index (CPI) A measure of inflation based on changes in the cost of consumer goods and services. 20 depression The phase of the economic cycle when levels of employment and production are low and economic growth is at a virtual standstill or

even negative. 19expansion The phase of the economic cycle when levels of employment and production are high and the economy is growing, generally accompanied by rising prices for goods and services. 19 financial assets Intangible assets, such as savings accounts and securities, that are acquired for some promised future return. 5 financial goals Results that an individual wants to attain, such as buying a home, building a college fund, or achieving financial independence. 7 flexible-benefit (cafeteria)plans The employer allocates a certain amount of money to each employee and then lets the employee spend that money for benefits that suit his or her age, marital status, number of dependent children, and level of income. 15 goal dates Target dates in the future when certain financial objectives are expected to be completed. 9 inflation A state of the economy in which the general price level is increasing. money The medium of exchange used as a measure of value in financial transactions. 7 personal financial planning A systematic process that considers important elements of an individuals financial affairs in order to fulfill financial goals. 5 purchasing power The amount of goods and services each dollar buys at a given time. recession The phase of the economic cycle when levels of employment and production fall and the growth of the economy slows. 19 recovery The phase of the economic cycle when levels of employment and production are improving and the economy is growing. 19 standard of living The necessities, comforts, and luxuries enjoyed or desired by an individual or family. 3 tangible assets Physical assets, such as real estate and automobiles, that can be held for either consumption or investment purposes. 5 utility The amount of satisfaction received from purchasing certain types or quantities of goods and services. 8 wealth The total value of all items owned by an individual, such as savings accounts, stocks, bonds, home, and automobiles. 5 CH. 2 annuity A fixed sum of money that occurs annually. 42 assets Items that one owns. 25 balance sheet A financial statement that describes a persons financial position at a given point in time. 25 budget A detailed financial report that looks forward, based on expected income and expenses. 25 budget control schedule A summary that shows how actual income and expenses compare with the various budget categories and where variances (surpluses or deficits) exist. 39 cash basis A method of preparing financial statements in which only transactions involving actual cash receipts or actual cash outlays are recorded. 30 cash budget A budget that takes into account estimated monthly cash receipts and cash expenses for the coming year. 35 cash deficit An excess amount of expenses over income, resulting in insufficient funds as well as in decreased net worth. 32

cash surplus An excess amount of income over expenses that results in increased net worth. 32 compounding When interest earned each year is left in the account and becomes part of the balance (or principal) on which interest is earned in subsequent years. 41 current (short-term) liability Any debt due within 1 year of the date of the balance sheet. 27 debt service ratio Total monthly loan payments divided by monthly gross (before-tax) income; provides a measure of the ability to pay debts promptly. 35 discounting The process of finding present value; the inverse of compounding to find future value. 43 equity The actual ownership interest in a specific asset or group of assets. expenses Money spent on living expenses and to pay taxes, purchase assets, or repay debt. 30 fair market value The actual value of an asset, or the price for which it can reasonably be expected to sell in the open market. 27 fixed expenses Contractual, predetermined expenses involving equal payments each period. 30 future value The value to which an amount today will grow if it earns a specific rate of interest over a given period. 41 income Earnings received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets. 30 income and expense statement A financial statement that measures financial performance over time. insolvency The financial state in which net worth is less than zero. 27 investments Assets such as stocks, bonds, mutual funds, and real estate that are acquired in order to earn a return rather than provide a service. 26 liabilities Debts, such as credit card charges, loans, and mortgages. 27 liquid assets Assets that are held in the form of cash or can readily be converted to cash with little or no loss in value. 26 liquidity ratio Total liquid assets divided by total current debts; measures the ability to pay current debts. 34 long-term liability Any debt due 1 year or more from the date of the balance sheet. 27 net worth An individuals or familys actual wealth; determined by subtracting total liabilities from total assets. 27 open account credit obligations Current liabilities that represent the balances outstanding against established credit lines. 27 personal financial statements Balance sheets and income and expense statements that serve as planning tools that are essential to developing and monitoring personal financial plans. 25 personal property Tangible assets that are movable and used in everyday life. 27 present value The value today of an amount to be received in the future; its the amount that would have to be invested today at a given interest rate over a specified time period to accumulate the future amount. 43 real property Tangible assets that are immovable: land and anything fixed to it, such as a house. 27 savings ratio

Cash surplus divided by net income (after tax); indicates relative amount of cash surplus achieved during a given period. 35 solvency ratio Total net worth divided by total assets; measures the degree of exposure to insolvency. 34 CH 3 adjusted gross income (AGI) The amount of income remaining after subtracting all allowable adjustments to income from gross income. 52 adjustments to (gross)income Allowable deductions from gross income, including certain employee, personal retirement, insurance, and support expenses. 52 amended return A tax return filed to adjust for information received after the filing date of the taxpayers original return or to correct errors. 63 average tax rate The rate at which each dollar of taxable income is taxed on average; calculated by dividing the tax liability by taxable income. 48 estimated taxes Tax payments required on income not subject to withholding that are paid in four installments. 63 exemptions Deductions from AGI based on the number of persons supported by the taxpayers income. 53 Federal Insurance Contributions Act (FICA) or Social Security tax The law establishing the combined old-age, survivors, disability, and hospital insurance tax levied on both employer and employee. 49 federal withholding taxes Taxesbased on the level of earnings and the number of withholding allowances claimedthat an employer deducts from the employees gross earnings each pay period. 49 filing extension An extension of time beyond the April 15 deadline during which taxpayers, with the approval of the IRS, can file their returns without incurring penalties. 63 gross income The total of all of a taxpayers income (before any adjustments, deductions, or exemptions) subject to federal taxes; it includes active, portfolio, and passive income. 50 income shifting A technique used to reduce taxes in which a taxpayer shifts a portion of income to relatives in lower tax brackets. 67 income taxes A type of tax levied on taxable income by the federal government and by many state and local governments. 48 itemized deductions Personal expenditures that can be deducted from AGI when determining taxable income. 53 marginal tax rate The tax rate you pay on the next dollar of taxable income. 48 progressive tax structure A tax structure in which the larger the amount of taxable income, the higher the rate at which it is taxed. 48 standard deduction A blanket deduction that depends on the taxpayers filing status, age, and vision and can be taken by a taxpayer whose total itemized deductions are too small. 53 tax audit An examination by the IRS to validate the accuracy of a given tax return. 63 tax avoidance The act of reducing taxes in ways that are legal and compatible with the intent of Congress. 66 tax credits Deductions from a taxpayers tax liability that directly reduce his or her taxes due rather than taxable income. 55 tax deferred Income that is not subject to taxes immediately but that will later be subject to taxes. 67

tax evasion The illegal act of failing to accurately report income or deductions and, in extreme cases, failing to pay taxes altogether. 66 taxable income The amount of income subject to taxes; it is calculated by subtracting adjustments, the larger of itemized or standard deductions, and exemptions from gross income. 50 taxes The dues paid for membership in our society; the cost of living in this country. 47 CH 4 account reconciliation Verifying the accuracy of your checking account balance in relation to the banks records as reflected in the bank statement, which is an itemized listing of all transactions in the checking account. 84 asset management account (AMA) A comprehensive deposit account, offered primarily by brokerage houses and mutual funds. 76 automated teller machine (ATM) A remote computer terminal that customers of depository institutions can use to make basic transactions 24 hours a day, 7 days a week. 77 cash management The routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family. cashiers check A check payable to a third party that is drawn by a bank on itself in exchange for the amount specified plus, in most cases, a service fee (of about $5). 84 certificate of deposit (CD) A type of savings instrument issued by certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has a maturity ranging from 7 days to as long as 7 or more years. 88 certified check A personal check that is guaranteed (for a fee of $10 to $15 or more) by the bank on which it is drawn. 84 checkbook ledger A booklet, provided with a supply of checks, used to maintain accurate records of all checking account transactions. 81 compound interest When interest earned in each subsequent period is determined by applying the nominal (stated) rate of interest to the sum of the initial deposit and the interest earned in each prior period. 87 debit cards Specially coded plastic cards used to transfer funds from a customers bank account to the recipients account to pay for goods or services. 77 demand deposit An account held at a financial institution from which funds can be withdrawn on demand by the account holder; same as a checking account. 75 deposit insurance A type of insurance that protects funds on deposit against failure of the institution; can be insured by the FDIC and the NCUA. 73 effective rate of interest The annual rate of return that is actually earned (or charged) during the period the funds are held (or borrowed). 87 electronic funds transfer systems (EFTSs) Systems using the latest telecommunications and computer technology to electronically transfer funds into and out of customers accounts. 77 I Savings bond A savings bond issued at face value by the U.S. Treasury, whose partically fixed rates provides some inflation protection. 90 Internet bank An online commercial bank. 73 money market deposit account (MMDA) A federally insured savings account, offered by banks and other depository institutions, that competes with money market mutual funds. 76 money market mutual fund (MMMF)

A mutual fund that pools the funds of many small investors and purchases high-return, short-term marketable securities. 76 negotiable order of withdrawal (NOW) account A checking account on which the financial institution pays interest; NOWs have no legal minimum balance. 76 nominal (stated) rate of interest The promised rate of interest paid on a savings deposit or charged on a loan. 87 overdraft The result of writing a check for an amount greater than the current account balance. 82 overdraft protection An arrangement between the account holder and the depository institution wherein the institution automatically pays a check that overdraws the account. 82 Series EE bond A savings bond issued in various denominations by the U.S. Treasury. 90 share draft account An account offered by credit unions that is similar to interest-paying checking accounts offered by other financial institutions. 73 simple interest Interest that is paid only on the initial amount of the deposit. 87 stop payment An order made by an account holder instructing the depository institution to refuse payment on an already issued check. 82 time deposit A savings deposit at a financial institution; remains on deposit for a longer time than a demand deposit. 76 travelers check A check sold (for a fee of about 1.5%) by many large financial institutions, typically in denominations ranging from $20 to $100, that can be used for making purchases and exchanged for local currencies in most parts of the world. 84 U.S. Treasury bill (T-bill) A short-term (3- or 6-month maturity) debt instrument issued at a discount by the U.S. Treasury in the ongoing process of funding the national debt. 89 CH 5 closing costs All expenses (including mortgage points) that borrowers ordinarily pay when a mortgage loan is closed and they receive title to the purchased property. 106 condominium (condo) A form of direct ownership of an individual unit in a multiunit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project. contingency clause A clause in a real estate sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice. 112 conventional mortgage A mortgage offered by a lender who assumes all the risk of loss; typically requires a down payment of at least 20% of the value of the mortgaged property. 117 convertible ARM An adjustable-rate mortgage loan that allows borrowers to convert from an adjustable-rate to a fixed-rate loan, usually at any time between the 13th and the 60th month. 116 cooperative apartment (co-op) An apartment in a building in which each tenant owns a share of the nonprofit corporation that owns the building. 101 depreciation The loss in the value of an asset such as an automobile that occurs over its period of ownership; calculated as the difference between the price initially paid and the subsequent sale price. 95 down payment A portion of the full purchase price provided by the purchaser when a house or other major asset is purchased; often called equity. 104

earnest money deposit Money pledged by a buyer to show good faith when making an offer to buy a home. 112 FHA mortgage insurance A program under which the Federal Housing Administration (FHA) offers lenders mortgage insurance on loans having a high loan-tovalue ratio; its intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs. fixed-rate mortgage The traditional type of mortgage in which both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan. foreclosure A borrower typically cannot make scheduled mortgage payments and the lender repossesses the property in an effort to recover the loan balance owed. 111 graduated-payment mortgage A mortgage that starts with unusually low payments that rise over several years to a fixed payment. 116 growing-equity mortgage Fixed-rate mortgage with payments that increase over a specific period. Extra funds are applied to the principal so that the loan is paid off more quickly. 117 homeowners insurance Insurance that is required by mortgage lenders and covers the replacement value of a home and its contents. 109 index rate On an adjustable-rate mortgage, the baseline index rate that captures interest rate movements. 115 interest rate cap On an adjustable-rate mortgage, the limit on the amount that the interest rate can increase each adjustment period and over the life of the loan. 115 interest-only mortgage A mortgage that requires the borrower to pay only interest; typically used to finance the purchase of more expensive properties. 116 lease An arrangement in which the lessee receives the use of a car (or other asset) in exchange for making monthly lease payments over a specified period. 98 loan-to-value ratio The maximum percentage of the value of a property that the lender is willing to loan. 104 margin On an adjustable-rate mortgage, the percentage points a lender adds to the index rate to determine the rate of interest. 115 money factor The financing rate on a lease; similar to the interest rate on a loan. mortgage banker A firm that solicits borrowers, originates primarily governmentinsured and government-guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells. 114 mortgage broker A firm that solicits borrowers, originates primarily conventional loans, and places them with mortgage lenders; the broker merely takes loan applications and then finds lenders willing to grant the mortgage loans under the desired terms. mortgage loan A loan secured by the property: If the borrower defaults, the lender has the legal right to liquidate the property to recover the funds it is owed. 113 mortgage points Fees (one point equals 1% of the amount borrowed) charged by lenders at the time the grant a mortgage loan; they are related to the lenders supply of loanable funds and the demand for mortgages. Multiple Listing Service (MLS) A comprehensive listing, updated daily, of properties for sale in a given community or metropolitan area; includes a brief description of each property with a photo and its asking price but can be accessed only by realtors who work for an MLS member. 111

negative amortization When the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition. open-end (finance) lease An automobile lease under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less than this value at the end of the lease, the lessee must pay the difference. 98 payment cap On an adjustable-rate mortgage, the limit on the monthly payment increase that may result from a rate adjustment. 115 PITI Acronym that refers to a mortgage payment including stipulated portions of principal, interest, property taxes, and homeowners insurance. 108 prequalification The process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable to the home buyer. 112 property taxes Taxes levied by local governments on the assessed value of real estate for the purpose of funding schools, law enforcement, and other local services. 108 purchase option A price specified in a lease at which the lessee can buy the car at the end of the lease term. 99 Real Estate Settlement Procedures Act (RESPA) A federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, advance disclosure of all closing costs to home buyers. 112 real estate short sale Sale of real estate property in which the proceeds are less than the balance owed on a loan secured by the property sold. 111 residual value The remaining value of a leased car at the end of the lease term. 98 sales contract An agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract legally binds them to its terms. 98

Zero Coupon Bonds FV = 1000, i/yr 5%, N = 10yrs, PV = 613.91 PV= -700, N = 10, i/yr = 3.63, FV= 1000 PV = -600, i/yr = 4%, FV = 1000, N= 13.02