YUPFP #7-October 25,2007

YUPFP #7-October 25,2007 - LECTURE#7-PERSONAL FINANCIAL...

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1 LECTURE #7-PERSONAL FINANCIAL PLANNING AGENDA 1. Take up the Mid-Term Exam. 2. Chapter #10-Take up Problems #6, #8 & 9. 3. Chapter #14-Take up the Chapter Notes, multiple choice questions and problems.
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2 Chapter #10 Problem #6 Assuming Laura Lobo is a non-smoker with average health: The rate for a $250,000 coverage term policy at age 32 will fall within age group 30 (i.e.30-34). From Table 10.2: 10-year term: $132.50 20-year term: $217.50 Therefore the premium coverages are: 10-year term: 340 x 250,000/132.50=641,509 20-year term: 340 x 250,000/217.50=390,805. She should consider if she needs life insurance beyond the 10 or 20 year term. The premium on term life will rise with age beyond the fixed term, while it is constant with a whole life policy.
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3 Chapter #10 Problems-Continued Problem #8 -See last week’s lecture notes plus class take-up.
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4 Chapter #10 Problems-Continued Problem #9 Calculate the present value of the first 10 years of earnings: 35,000 { [1-(1.05 ) 10 ] = $316,518 (.06-.05) 1.06 Then calculate the present value of the next 10 years of earnings: 35,000(1.05) 10 { 1-{1.04} 10 } 1 =276,070 (.06-.04) 1.06 (1.06) 10
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5 Chapter #10 Problems-Continued Problem #9-Continued Lastly, calculate the P.V. of the last 15 years of earnings: $35,000 (1.05) 10 (1.04) 10 { 1- 1.03 } 15 } 1 (.06 - .03) 1.06 1.06 20 =$306,915 Therefore, the amount of insurance that he should buy, using a 75% adjustment: = (.75) [316,518 + 276,070 + 306,915] = 674,627.
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6 Chapter #14-Study Notes Basic Terms 1. Investments and Savings Savings-Simply the money that is left over after your consumption. Investing-Using the savings that you have and investing it in securities to earn investment income.
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7 Investment Terms Defined-Continued Basic Characteristics of an Investment See page 331. The most important characteristics that affect an investors investment decision are return and risk. Return on Investment-Total return includes income return and capital gains return. Rate of Return = P 1 - P 0 + D P 0 (See page 332 and Example 14.1). Expected Rate of Return = E(P 1 ) – P 0 + E(D) P 0 Review Example 14.2.
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8 Investment Risks RISK is the uncertainty about the rate of return that you will earn from an investment.
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