CC3152_L03_ch4_5 - LECTURE 3 ASSETS MANAGEMENT CC3152...

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CC3152 Principles of Financial Planning LECTURE 3 ASSETS MANAGEMENT
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1-2 Part 1 – Cash Management
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1-3 Role of Cash Management in Personal Financial Planning ! Cash management deals with the routine, day-to-day use of liquid assets . Liquid assets consist of cash and other assets that can be converted easily to cash with little or no loss in value.
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1-4 Examples of Liquid Assets ! Cash ! Checking Accounts ! Savings Accounts ! U.S. Treasury Bills ! Certificates of Deposit (shorter- term)
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1-5 Establishing A Savings Program ! PAY YOURSELF FIRST : On payday, write yourself a check and deposit it into a savings account, or transfer a set amount to savings account ! Establish an emergency fund. ! Regularly set aside funds for financial goals. ! Utilize direct deposits and automatic transfers. ! Choose instruments best suited to your goals and time horizon.
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1-6 ! Simple Interest —interest paid only on initial amount of deposit. ! Compound Interest —interest paid at set intervals and added back to principal. Earning Interest on Your Money
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1-7 ! Nominal rate —the named or stated rate of interest. ! Effective rate —the annual rate of return actually earned. If interest is compounded more frequently than once a year, the effective rate will be greater than the nominal rate of interest.
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1-8 Effective rate = Annual amount of interest earned Amount of money invested Example : Invest $1000 at 5% for 1 year. How Is Interest Calculated?
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1-9 ! If simple interest is used, there is no compounding: Interest = Principal x rate x time = $1000 x .05 x 1 = $50
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1-10 ! If compound interest is used and the compounding occurs semiannually First 6 months' interest: $1000 x .05 x 6/12 = $25.00 Second 6 months' interest: + $1025 x .05 x 6/12 = $25.63 Total annual interest = $50.63
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1-11 ! The nominal rate is 5%, the stated rate of interest. Effective Rate = $50.63 ! $1000 = 0.05063 = 5.063% ! The effective rate is 5.063%.
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1-12 Amount of interest earned depends on ! Frequency of compounding ! Balance on which interest is paid ! Interest rate applied How Much Interest Will You Earn? Time value of money concepts are used in compounding to find interest earned. (Refer to Appendix)
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1-13 Part 2 – Automobile & Housing Decision
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1-14 Buying an Automobile ! Research purchase thoroughly, consider the market and your needs ! Determine how much you can afford amount of down payment
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CC3152_L03_ch4_5 - LECTURE 3 ASSETS MANAGEMENT CC3152...

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