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Unformatted text preview: 2011 LexisNexis Australia 1 Financial Planning in Australia 4ed by Taylor, Juchau, Houterman Solutions by Sharon Taylor CHAPTER 9 MANAGING RISKS AND CONSTRUCTING PORTFOLIOS Solutions to Questions Question 1: Define the terms: simple interest, compound interest, nominal interest rate and effective interest rate. The following are simple definitions of the terms: Simple interest is a calculation used when there is a single time frame where money is borrowed at one point in time and a lump some is repaid at some point in the future. Compound interest is the calculation of additional interest that can be generated additionally on interest already earned. A nominal rate of interest is a case where the frequency of repayment of a debt does not coincide with the time period specified by the loan contract. An effective rate of interest is one where the frequency of the payments coincides with the time specified by the loan agreement. Question 2: Discuss the various stages of a clients life cycle and what actions can be taken by the financial adviser to minimise possible risk. During the clients life cycle there could be many changes. Some of the changes may result from: marriage; divorce; additional dependants; illness; redundancy; windfalls; age-based events. In constructing a Statement of Advice/financial plan for a client there needs to be some consideration of the likelihood of some of these changes actually taking place and a determination as to how resilient the plan will be in coping with such occurrences. It is essential that these possibilities be discussed with the client to minimise the risk should any 2011 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher. 2010 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Financial Planning in Sustralia 4ed - Taylor, Juchau, Houterman 2011 LexisNexis Australia 2 of these changes eventuate and to discuss what strategies are in place to minimise the impact on the financial wellbeing of the client. Possible strategies may include: setting up resilient business structures to allow for succession and protection of assets; legal frameworks such as prenuptial agreements, Wills, Powers of Attorney and possible use of trust structures; using insurance as a means of transferring risk; devising investment strategies to hedge risk; consideration of lifestyle changes in retirement such as relocation, hobbies, and travel and health issues....
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This note was uploaded on 04/02/2012 for the course FINS 2643 taught by Professor Fong during the Three '10 term at University of New South Wales.
- Three '10