Test Bank For Personal Finance, 2nd Edition By Vickie L. Bajtelsmit

1 The Financial Planning Process 1-1

Feature Story 1-1

1.1 What is Personal Financial Planning? 1-2

Why Study Personal Financial Planning? 1-3

The Personal Financial Planning Process 1-5

Case Study 1.1: The Naughtons Revise Their Financial Plan after Job Loss 1-7

Elements of a Comprehensive Financial Plan 1-7

1.2 Factors That Influence Financial Planning Decisions 1-8

Individual Characteristics and Your Financial Plan 1-8

Economic Factors and Your Financial Plan 1-11

1.3 Setting Short-Term and Long-Term Financial Goals 1-16

Why Goals are Important 1-16

The Goal-Setting Process 1-16

Case Study 1.2: The Riveras Develop Prioritized Goals 1-19

1.4 Selecting Qualified Financial Planning Professionals 1-21

When Do You Need a Financial Planner? 1-21

Factors to Consider in Choosing a Planner 1-22

How are Planners Paid? 1-22

1.5 Making Effective Decisions 1-24

Make Reasonable Assumptions 1-24

Apply Marginal Reasoning 1-25

Consider Opportunity Costs 1-26

Use Sensitivity Analysis 1-26

Decision-Making Styles 1-27

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

2 Financial Planning Tools: Personal Financial Statements and the Time Value of Money 2-1

Feature Story 2-1

2.1 Organizing Your Financial Information 2-2

What Financial Records Do You Need to Keep? 2-2

Summarizing Your Financial Condition 2-5

Case Study 2.1: Danelle Washington Develops a Balance Sheet 2-7

2.2 Evaluating Your Personal Financial Situation 2-9

The Personal Cash Flow Statement 2-9

Net Cash Flow 2-11

Case Study 2.2: Danelle Washington’s Personal Cash Flow Statement 2-11

Using Financial Ratios 2-13

2.3 The Time Value of Money 2-16

The Power of Compound Interest 2-16

Time Value of Money Calculation Methods 2-18

Future Value: How Much Will My Money Grow? 2-19

2.4 Present Value: How Much Do I Need Today to Reach a Future Goal? 2-24

Present Value of a Lump Sum 2-25

Present Value of an Annuity 2-27

Loan Payments 2-30

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

3 Budgeting and Cash Management 3-1

Feature Story 3-1

3.1 Developing, Implementing, and Monitoring a Household Budget 3-2

Factors Affecting Household Budgets 3-3

The Budgeting Process 3-4

Case Study 3.1: The Riveras Develop a Budget 3-5

Case Study 3.2: The Riveras Track Their Budget Variances 3-8

Money Attitudes and Household Budgeting 3-11

Ethics in Action: Financial Infidelity 3-11

3.2 The Role of Cash in Your Financial Plan 3-13

Costs and Benefits of Holding Cash 3-14

How Much Should You Hold in Cash? 3-15

Rules of Effective Cash Management 3-15

3.3 Providers of Cash Management Services 3-17

Depository Institutions 3-17

Nondepository Institutions 3-19

Evaluating Financial Institutions 3-20

3.4 Evaluating Cash Management Products and Services 3-21

Criteria for Evaluating Cash Management Accounts 3-21

Checking Accounts 3-23

Savings Accounts 3-25

The Rule of 72 3-28

3.5 Resolving Cash Management Problems and Avoiding Identify Theft 3-29

Cash Management Problems and Solutions 3-29

Identity Theft 3-31

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

4 Tax Planning 4-1

Feature Story 4-1

4.1 The Federal Income Tax System 4-2

The Progressive Nature of the U.S. Tax System 4-2

Marginal Tax Rates 4-3

4.2 Filing Requirements 4-8

Filing Status 4-9

Adjusted Gross Income and Taxable Income 4-9

IRS Forms 4-10

4.3 Federal Income Tax Calculation 4-11

Reporting Income 4-12

Deductions 4-15

Calculation of Taxes Owed 4-18

Determining Taxes Due or Refund to Be Received 4-20

4.4 Tax Planning Strategies 4-21

Maximize Pretax Contributions to Qualified Benefit Plans 4-22

Reduce the Applicable Tax Rate on Certain Income 4-22

Make Use of Available Deductions and Credits 4-23

Avoid Audits and Penalties 4-25

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

5 Managing Credit: Credit Cards and Consumer Loans 5-1

Feature Story 5-1

5.1 What is Consumer Credit? 5-2

Types and Sources of Consumer Credit 5-3

Ethics in Action: What’s the Harm in Payday Loans? 5-5

The Advantages and Disadvantages of Consumer Credit 5-5

Applying for Consumer Credit 5-7

5.2 Your Consumer Credit Plan 5-8

Measuring Your Credit Capacity 5-8

When and How to Use Consumer Credit 5-12

Strategies for Reducing Debt 5-12

Your Consumer Credit Rights 5-15

Bankruptcy 5-18

5.3 Credit Cards 5-20

Types of Cards 5-20

Common Credit Card Contract Terms 5-22

5.4 Consumer Loans 5-25

Common Types of Consumer Loans 5-25

Comparing Consumer Loan Alternatives 5-27

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

6 Making Automobile and Housing Decisions 6-1

Feature Story 6-1

6.1 Making Auto Decisions on a Budget 6-2

Making Smart Purchase Decisions 6-3

Assessing Needs and Affordability 6-4

Case Study 6.1: The Walkers Estimate the Costs of an Additional Vehicle 6-5

Evaluating Vehicle Choices 6-6

6.2 Should You Lease or Buy a Car? 6-10

Leasing versus Buying 6-10

Negotiating the Auto Purchase Price 6-12

Making Consumer Complaints 6-14

6.3 Making Housing Decisions on a Budget 6-14

Housing Needs over the Life Cycle 6-15

The Rent-versus-Buy Decision 6-15

How Much House Can You Afford? 6-18

6.4 Mortgage Financing 6-22

What is a Mortgage? 6-22

Ethics in Action: Who is to Blame for Mortgage Loan Defaults? 6-25

Factors That Affect Mortgage Payments 6-26

When to Refinance 6-31

Case Study 6.2: The Nguyens Consider Refinancing Their Mortgage 6-32

6.5 Completing a Real Estate Transaction 6-33

Determinants of Real Estate Value 6-33

The Home-Buying Process 6-35

The Closing 6-37

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

7 Insuring Cars and Homes 7-1

Feature Story 7-1

7.1 Managing Personal Risks 7-2

The Risk Management Process 7-3

Identify and Evaluate Property and Liability Risks 7-3

Risk Management Methods 7-6

7.2 How Insurance Works 7-7

Risk Pooling and Insurance 7-7

Insurance Premiums 7-8

Insurance Policy Terminology 7-9

7.3 Managing Homeowner’s and Renter’s Risk 7-9

What Risks Do Homeowners and Renters Face? 7-10

Ethics in Action: Dog Owner’s Dilemma 7-12

Insuring Your Home 7-12

Pricing of Homeowner’s Insurance 7-14

Case Study 7.1: How Does a Bad Credit History Affect Insurance Premiums? 7-16

Umbrella Liability Insurance 7-16

7.4 Auto Insurance 7-17

State Auto Insurance Laws 7-18

Policy Coverage 7-19

Case Study 7.2: Which Auto Policy Will Cover the Loss? 7-19

Auto Insurance Pricing 7-20

7.5 Buying Insurance and Making Claims 7-23

Steps to Buying Property and Liability Insurance 7-23

The Role of Agents and Brokers 7-23

Comparing Insurance Policies 7-24

Using Online Resources to Evaluate Your Insurance Options 7-24

Making a Claim on Your Insurance 7-25

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

8 Life Insurance and Long-Term Care Planning 8-1

Feature Story 8-1

8.1 Life Insurance and Your Financial Plan 8-2

Life Insurance Compared with Auto and Homeowner’s Insurance 8-2

Case Study 8.1: When Will Carson Die? 8-5

Life Insurance Needs Analysis 8-6

Case Study 8.2: How Much Life Insurance Do Arjun and Tanya Chopra Need? 8-7

Factors Affecting Your Life Insurance Needs 8-9

8.2 Buying Life Insurance 8-10

Choosing the Type of Policy 8-10

Choosing an Insurer 8-15

Choosing an Agent 8-17

8.3 Reading Your Policy 8-17

Policy Declarations 8-18

Key Provisions in a Life Insurance Policy 8-18

Ethics in Action: The Ethics of Viatical Settlements 8-21

Settlement Options 8-21

8.4 Planning for Long-Term Care Costs 8-22

Long-Term Care Needs Analysis 8-23

Sources of Funds for Long-Term Care 8-24

Long-Term Care Insurance 8-26

Summary / Excel Worksheet / Key Terms / Concept Review Questions / Application Problems / Case Applications

9 Employee Benefits: Health, Disability, and Retirement Plans 9-1

Feature Story 9-1

9.1 The Value of Employee Benefits 9-2

Why Benefits are Preferable to Cash Compensation 9-4

Case Study 9.1: Lori Evaluates Tax Savings from Employer-Provided Health Insurance 9-6

Comparing Job Offers Based on Salary and Benefit Packages 9-8

Case Study 9.2: Lori Compares Salary Offers Based on Cost of Living 9-8

Case Study 9.3: Lori Compares Job Offers Based on Salary and Benefits 9-9

9.2 Health Insurance and Your Financial Plan 9-10

Health Insurance Needs Analysis 9-11

What Happened to Health-Care Reform? 9-13

Types of Health Insurance Plans 9-14

Government-Sponsored Health Insurance Plans 9-18

9.3 Planning for Disability Income 9-20

Disability Income Needs Analysis 9-20

Sources of Disability Income 9-20

Case Study 9.4: Mateo Rivera Estimates His Disability Income Needs 9-23

9.4 Employer-Sponsored Retirement Plans 9-24

Tax Advantages of Qualified Plans 9-24

Defined-Benefit versus Defined-Contribution Plans 9-25

Features of Defined-Benefit Plans 9-26

Features of Defined-Contribution Plans 9-28

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

10 Saving for Distant Goals: Retirement and Education Funding 10-1

Feature Story 10-1

10.1 Developing a Retirement Plan 10-2

What are Your Retirement Goals? 10-3

How Much Will You Need to Save for Retirement? 10-4

Case Study 10.1: Camilla Hardin Develops a Plan for Retirement Saving 10-9

Why Do So Many People Avoid Retirement Planning? 10-10

10.2 Retirement Income from Employer Plans and Social Security 10-11

Income from Employer-Sponsored Plans 10-13

Income from Social Security 10-14

10.3 Individual Retirement Savings Alternatives 10-18

Individual Retirement Accounts 10-18

Taxable Accounts 10-20

Annuities 10-20

Not on Track to Retire? 10-22

10.4 Planning for Education Costs 10-22

How Much Will Future Education Cost? 10-23

How Much Will You Need to Save? 10-24

Financing Higher Education with Student Loans 10-24

Case Study 10.2: Funding Jake Johnson’s College Education 10-24

Government Programs to Help Fund Education Expenses 10-29

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

11 The Fundamentals of Investing 11-1

Feature Story 11-1

11.1 Developing a Realistic Investment Plan 11-2

First Things First: Establishing a Firm Foundation 11-2

Establishing Investment Goals 11-4

Case Study 11.1: Newlyweds Set Their Investment Goals 11-4

Key Strategies for Investment Success 11-6

11.2 Understanding Your Investment Choices 11-9

Investing by Lending and by Owning 11-10

Major Asset Classes 11-11

11.3 The Risk–Return Trade-off 11-13

Rate of Return 11-14

Risk 11-15

How Risk-Averse are You? 11-16

Factors Affecting Risk Attitudes 11-17

Types of Investment Risk 11-18

11.4 Diversification and Performance Evaluation 11-20

How Diversification Works 11-21

Asset Allocation 11-22

Evaluating Performance Against a Benchmark 11-23

Active versus Passive Investing 11-25

Summary / Excel Worksheet / Key Terms / Concept Review Questions / Application Problems / Case Applications

12 Investing in Stocks and Bonds 12-1

Feature Story 12-1

12.1 Investing in Common Stock 12-2

What is Common Stock? 12-2

Advantages of Stock Investing 12-5

Disadvantages of Stock Investing 12-8

Classification of Common Stock 12-9

Measures of Common Stock Performance 12-12

12.2 Investing in Bonds 12-13

What is a Bond? 12-14

Types of Bonds 12-15

Ethics in Action: Mortgage-Backed Securities 12-16

Bond Terminology 12-18

Bond Valuation 12-21

Why Do Investors Buy Bonds? 12-23

12.3 Investing in Preferred Stock 12-25

What is Preferred Stock? 12-25

Preferred Stock Valuation 12-26

Contract Terms Affecting Preferred Stock Cash Flows 12-27

The Benefits and Risks of Preferred Stock 12-28

12.4 Securities Markets 12-28

Primary versus Secondary Market 12-29

Securities Exchanges 12-30

Buying and Selling Stocks and Bonds 12-30

Regulation of the Securities Markets 12-34

Summary / Excel Worksheet / Key Terms / Concept Review Questions / Application Problems / Case Applications

13 Investing in Mutual Funds and Real Estate 13-1

Feature Story 13-1

13.1 What is a Mutual Fund? 13-2

What Does a Mutual Fund Investor Actually Own? 13-3

Types of Investment Companies 13-4

Growth in the Market 13-6

Fund Classifications 13-7

13.2 Mutual Fund Investing 13-10

The Advantages of Mutual Fund Investing 13-10

The Costs of Mutual Fund Investing 13-13

Selecting and Evaluating Mutual Funds 13-15

13.3 Real Estate Investment 13-17

Your Home as an Investment 13-18

Direct Real Estate Investment 13-18

Indirect Real Estate Investment 13-21

13.4 Speculative Investments 13-22

Precious Metals and Gems 13-22

Collectibles and Art 13-23

Cryptocurrencies 13-24

Financial Derivatives 13-25

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

14 Estate Planning 14-1

Feature Story 14-1

14.1 What is Estate Planning? 14-2

The Estate-Planning Process 14-3

Who Needs an Estate Plan? 14-3

Case Study 14.1: Estate Planning Changes over the Life Cycle 14-4

Key Components of an Estate Plan 14-5

Ethics in Action: Terri Schiavo’s Life-or-Death Experience 14-6

Organizing Financial and Legal Documents 14-7

14.2 Methods of Transferring Property 14-8

Preparing a Valid Will 14-8

Passing Property Outside a Will 14-12

14.3 Estate and Gift Taxes 14-13

Federal Gift Taxes 14-13

Federal Estate Taxes 14-13

Case Study 14.2: Lisa Calculates Her Taxable Estate 14-14

State Death Taxes 14-16

14.4 Reducing Taxes Through Trusts and Gifts 14-17

When are Trusts Useful? 14-17

Types of Trusts 14-17

Gifting Alternatives 14-18

Summary / Excel Worksheets / Key Terms / Concept Review Questions / Application Problems / Case Applications

Glossary G-1

Index I-1