FINANCE 101

Topics: Time value of money, Progressive tax, Interest Pages: 5 (819 words) Published: September 25, 2014
FIN 101
Exam 1
Chapter 1

Commerce Bank Credit
What does your credit card really cost you?
APR- Annual Percentage Rate
Prime 3.25%

Amount: $51,649
Rate: 4%
Years: 4
= $60,422.02
Time Value of Money- TVM
Future Value
FV=PV*(1+i)^n
FV= future value
PV= present value
i= interest rate
n= time
The Rule of 72
If at 10%, it will take 7.2 to double (just divide 72 by 10)
72 DIVIDED BY ANY NUMBER is how long it will take to double
Present value
PV=FV/(1+i)^n
FV= future value
PV= present value
i= interest rate
n= time
Annuity= an individual present/future value

IRA (10% compounding)
Investor A- Age 16 invests $2,000 for 8 years and stops
Results- $1,361,797
Investor B- Age 23 $2,000 for 43 years until age 65
Results- 1,303,282
Mortgage
30 years- $200,000 home
4.0% 3.75%
Payment- $954.83 Payment- $926.23
Total payments- $343,739.43 Total payments- $333,483.00

Chapter 2

Financial Statements and Plans
Special Planning Concerns
1) Dual income families
2) Employee benefit choices
3) Other extenuating circumstances:
First JobDivorce
MarriageChange in health
ChildrenLoss of job
Death of family memberChange in economy
Time Value of Money
Putting a dollar value on financial goals
Types of TVM calculations
Single sum- one lump sum investment with no more additions or subtractions Annuity- a series of equal payments made at fixed time intervals for a specified number of periods

Future value
The value your invested money will grow to, earning a specific rate of interest over a given time period - compounding. Present Value
The amount needed today to invest at a specific rate of interest over a given time period to accumulate the desired future amount
Balance sheet equation- assets= liabilities + net worth

Assets -Liabilities =Net Worth
(Fair market (Payoff amount of
loans and debts)
value of assets) NET WORTH
(Your equity position)
**Your net worth right now is probably negative**
Solvency
If your net worth is positive, you are solvent and have enough asset to cover your financial obligations. If you’re insolvent, you don’t have enough assets to cover your financial obligations. It’s normal for a 20 year old to be insolvent, but not a 40 year old

Income and Expense statement
Total income- Total expenses= cash surplus or cash deficit

Income: Cash IN
WAges and salaries
Bonuses
Interest and dividends
Child support
Etc

Expenses: Cash OUT
Fixed
Rent or mortgage payment
Cable TV
Insurance

Variable
Dry cleaning
Recreation 2
Eating out

Debt Service Ratio
Indicates ability to repay loan obligations promptly with before-tax income.
Affects FICO score
Total monthly loan payments divided by monthly income
The Budgeting Process
Estimate income
Estimate expenses
Finalize the cash budget
Deal with deficits
Economics of Income Taxes
Federal income taxes are assessed according to a progressive tax structure
the larger the taxable income, the higher the tax rate
The next higher rate applies only to the additional income in that bracket and not to the entire income
Tax brackets, standard deductions, and personal exemptions are indexed to inflation.
Tax rate for each bracket is called marginal tax rate
Filing status- a factor in determining amount of taxes paid
TAxes are due on a pay-as-you-go basis
Employer withholds taxes all year
Self employed deduct and pay taxes
Taxable income- is the amount of our income on which we calculate taxes owed
Tax credits- directly reduce the amount of taxes owed
Deductions- subtracted from AGI and reduce taxable income

Earning Interest on Your Money
Simple interest- interest paid only on initial deposit-- no compounding
Compound interest- interest paid at set intervals and added back to...
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