Test Bank for Personal Finance 8th Canadian Edition by Kapoor, Dlabay, Hughes, Stevenson and Kerst

Personal Finance 8th Canadian Editio By Kapoor, Dlabay, Hughes, Stevenson and Kerst




Test Bank for Personal Finance 8th
Canadian Edition by Kapoor, Dlabay,
Hughes, Stevenson and Kerst




Test Bank Page 1

, Personal Finance 8th Canadian Editio By Kapoor, Dlabay, Hughes, Stevenson and Kerst
Chapter 1 – An Introduction

 Why financial planning is important?
o Is the process of managing your money to achieve personal economic satisfaction
o Advantages: increased effectiveness in obtaining, using and protecting resources
o Increased control of financial affairs, improved personal relationships, sense of freedom
 Understand how life cycle can affect planning
o Early years (up to mid 30’s)
 Focus on creating emergency fund, saving for down payments, purchasing life
insurance, retirement
o Middle years (mid 30’s to 50’s)
 Focus on building wealth by paying down mortgage and increasing savings and
investments
o Middle years (50’s +)
 Focus is on providing an adequate retirement plan
o Retirement years
 Focus is on the efficient management of previously acquired wealth
o Common goals and activities:
 Obtain career training, create effective record system, regular savings and
investment program, accumulate emergency fund, purchase appropriate
insurance, implement flexible budget, evaluate and select investments,
establish retirement goals, create a will and estate plan
 6 Steps in the Financial Planning Process
o Step 1 – Determine your current financial situation:
 Prepare a list of current asset and debt balances and amounts spent for various
items
o Step 2 – Develop financial goals
 Analyze your financial values and attitudes towards money
 What is your financial decision making process?
o Step 3 – identify alternative courses of action
 Continue as you are, expand or change the current situation, or take a new
course of action
o Step 4 – Evaluate Alternatives
 Take into consideration your life situation, personal values and current
economic situation
 Opportunity cost is what you give up by making a choice
 The cost, referred to as the trade--‐off of a decision, can be measured in money
or time
Test Bank Page 2

, Personal Finance 8th Canadian Editio By Kapoor, Dlabay, Hughes, Stevenson and Kerst
 Consider lost opportunities that will result from decisions
 Evaluate the risks faced
 Interest Rate – changing rates affecting borrowing and benefits
 Inflation risk – rising prices cause lost buying power
 Liquidity risk – difficulty of converting to cash or sell without significant
loss
 Product risk – products flawed or don’t meet expectations, retailers not
honouring obligations
 Risk of death – premature death causing financial hardship



 Risk of Income Lost – job loss or injury
 Health Risk – increased medical costs, reduce working capacity or life
expectancy
 Asset and Liability Risk – assets stolen or damaged, suing for negligence
or for damages caused by yourself
o Step 5 – Create and implement a financial action plan
 Choose ways to achieve your goals, assistance from others
o Step 6 – Re--‐evaluate and revise your plan
 Plan should be reviewed regularly based on life circumstances
 How to set financial goals
o Influenced by:
 Timing – short--‐term, intermediate and long--‐term
 Needs – consumable products (food, clothing), durable products (appliances,
cars, equipment)
 Life Situation – age, income, status, household, personal beliefs, employment
 Also influenced by graduation, engagement and marriage,
birth/adoption, career change or move, dependent children, health,
divorce, retirement, death
 Social – married at later age, more households/multiple incomes, single parents,
living longer
o Goals should be realistic, stated in specific/measurable items, time frame, indicate type
of action to be taken
 How economy affects decisions
o Economics – study of how wealth is created and distributed
o Market forces – supply and demand, production costs and competition
o Financial institutions – influence of the Bank of Canada
o Global influences – level of exports, foreign investors, competition


Test Bank Page 3

, Personal Finance 8th Canadian Editio By Kapoor, Dlabay, Hughes, Stevenson and Kerst
o Economic conditions:
 Consumer prices – value of dollar, changes in inflation (caused by increase in
demand without increase in supply)
 Consumer spending – influences employment opportunities
 Interest Rates – represents costs of money, costs of credit when you borrow
(increased demand in IR rises), return on your money when you save or invest
(increase the supply of money and IR decrease)
 Money supply – dollars available for spending
 Unemployment rate -‐‐ # of people without employment who are willing/able to
work
 Housing starts -‐‐ # of new homes built
 GDP – value of goods and services produced within a country’s borders
including items produced with foreign resources
 Trade balance – difference between imports and exports
 S&P/TSX – composite index and other stock market indexes, value of stocks
 Opportunity cost – cost related to the next--‐best choice available to someone


 Calculating interest:
o time value of money – increase in an amount of money as a result of interest earned,
should be considered an opportunity cost
o simple interest – compounded on the principal, excluding previous interest earned

 PxrxT=I
P r T I
Amount in Savings Annual Interest Rate Time Period Interest
 Ex. $100 x 6% (0.06) x 1 (year) = $6 or in 1 year you have $106.
 Compound interest – interest that is earned on previously earned interest
o Each time interest is added to the principal, the next interest is computed on the new
balance
 Ex. Year 1: $100 x 6% x 1 (year) = $$6
 Ex. Year 2: ($100 + $6) x 6% x 1 (year) = $6.36
 Ex. Year 3: ($106 + $6.36) x 6% x 1 (year) = $6.74
 Year 1 = $106
 Year 2 = $ 112.36
 Year 3 = $119.10
 Future Value of Money
o Is the amount to which current savings will increase based on certain interest rate and
certain time period


Test Bank Page 4