PFIN 7 Chap4-7 Notes PDF

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PFIN 7 CH4 pg 85-107 4-1 THE ROLE OF CASH MANAGEMENT IN PERSONAL FINANCIAL PLANNING pg 85-87 Cash management - the routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family 4-2 TODAY’S FINANCIAL SERVICES MARKETPLACE pg 87-90 Deposit Insurance - a type of insurance that protects funds on deposit against failure of the institution; can be insured by the FDIC and the NCUA Internet Banks - an online Commercial Bank Share draft accounts - an account offered by credit unions that is similar to interest-paying checking accounts offered by other financial institutions 4-3 A FULL MENU OF CASH MANAGEMENT PRODUCTS pg 90-95 Demand deposit - an account held at a financial institution from which funds can be withdrawn On Demand by the account holder; same as a checking account Time deposits - a savings deposit at a financial institution; remains on deposit for a longer time than a demand deposit Negotiable order of withdrawal accounts - a checking account on which the financial institution pays interest; negotiable order of withdrawal accounts have no legal minimum balance Money market deposit accounts - federally insured savings account, offered by Banks and other depository institutions, that competes with money market mutual funds Money market mutual fund - a mutual fund pools the funds of many small investors and purposes High return short-term marketable securities Asset management account - comprehensive deposit account; offered primarily by brokerage houses and mutual funds Electronic funds transfer systems - systems using the latest telecommunications and computer technology to electronically transfer funds into and out of customers accounts

Debit cards - specially coated plastic cards used to transfer funds from a customers bank account to the recipient's account to pay for goods or services Automated teller machines - remote computer terminals that customers of depository institutions can use to make basic transactions open 24/7

4-4 MAINTAINING A CHECKING ACCOUNT pg 95-101

Checkbook Ledger - A booklet, provided with a supply of checks, used to maintain accurate records of all checking account transactions overdraft - the results of writing a check for an amount greater than the current account balance overdraft protection - an arrangement between the account holder and a depository institution where in the institution automatically pays a check that overdraws the account Stop payment - an order made by an account holder instructing the depository institution to refuse payment on an already issued check account reconciliation - verifying the accuracy of your checking account balance in relation to the bank's records as reflected in the bank statement, which is an itemized listing of all transactions in the checking account

Cashier's check - a check payable to a third party that is drawn by a bank on itself in exchange for the amount specified Plus, in most cases, a service fee traveler's checks - a check sold by many large institutions, typically in denominations ranging from $20 to $100, that can be used for making purchases and exchanged for local currencies in most parts of the world certified check - a personal check that is guaranteed by the bank on which it is drawn 4-5 ESTABLISHING A SAVINGS PROGRAM pg 101Compound interest-when interest is earned in subsequent period is determined by applying the nominal rate of interest to the sum of the initial deposit and the interest earned in each prior period Simple interest - interest that is paid only on the initial amount of the deposit nominal rate of interest - the promise rate of interest paid on a savings deposit or charged on a loan effective rate of interest - the annual rate of return that is actually earned during the period the funds are held Certificate of deposit-a type of savings instrument issued by a certain financial institutions in exchange for a deposit; typically requires a minimum deposit and has maturity ranging from seven days to As Long As seven or more years U.S. treasury bill - A short-term debt instrument issued at a discount by the US Treasury and it's ongoing process of funding the national debt Series EE Bonds - a savings bond issued in various denominations by the US Treasury I savings bonds - a savings bond issued at face value by the US Treasury; it's practically fixed rates provide some inflation protection

PFIN 7 CH5 pg 111-140 5-1 ‘BUYING AN AUTOMOBILE’ pg 111-116 Before making any major purchase, consider some basic guidelines to wise purchasing decisions:

Before buying you'll need to find out two numbers:

Depreciation - the loss in the value of an asset such as an automobile that occurs over its period of ownership; calculated as the difference between the price initially paid in the subsequent sale price

Anchoring - a behavioral bias in which an individual tends to allow an initial estimate of value or price to dominate the subsequent assessment of value or Price regardless of new information to the contrary Sales contract - an agreement to purchase an automobile that states the offering price and all conditions of the offer; when signed by the buyer and seller, the contract legally binding them to its terms

5-2 ‘LEASING A CAR’ pg 116-118 Lease - an arrangement in which the lessee receives the use of a car or other asset in exchange for making monthly lease payments over a specified length of time Closed-end lease - The most popular form of an automobile lease often called a walk away lease, because at the end of its term the lessee simply turns in the car open end lease - an automobile police under which the estimated residual value of the car is used to determine lease payments; if the car is actually worth less than this value at the end of the lease the lessee must pay the difference residual value - the remaining value of a leased car at the end of a lease term capitalized cost - the price of a car that is being leased

money factor - the financing rate on a lease; similar to the interest rate on a loan purchase option - a price specified in a lease at which the lessee can buy the car at the end of the lease term

5-3 ‘MEETING HOUSING NEEDS: BUY OR RENT?’ pg 118-124 Foreclosures-the process whereby lenders attempt to recover loan balances from borrowers who have quit making payments by forcing the sale of the home pledged as collateral Condominium - a form of direct ownership of an individual unit in a multi-unit project in which lobbies, swimming pools, and other common areas and facilities are jointly owned by all property owners in the project Cooperative apartment - an apartment in a building in which the each tenant owns a share of the nonprofit corporation that owns the building rent ratio - the ratio of the average house price to the average annual rent, which provides insight into the relative attractiveness of buying a house versus renting in a given area of potential interest

5-4 ‘HOW MUCH HOUSING CAN YOU AFFORD’ pg 124-131 Financial payoffs for owning a home:

Down payment - a portion of the full purchase price provided by the purchaser when a house or other major asset is purchased; often called equity loan-to-value ratio - the maximum percentage of the value of a property that the lender is willing to loan Private mortgage insurance - an insurance policy that protects the mortgage lender from loss in the event of the borrower defaults on the loan; typically required by lenders when the down payment is less than 20% Mortgage points - fees turns by lenders at the time that Grant a mortgage loan; a related to the lender supply of loanable funds and the demand for mortgages closing costs - all expenses that Borrowers ordinarily pay in a mortgage loan is closed and they receive title to the purchased property PITI - acronym that refers to a mortgage payment consisting of principal, interest, property taxes, and homeowners insurance

property taxes - taxes levied by local governments on the asset value of real estate for the purchase of funding schools, law enforcement, and other local services homeowners insurance - insurance that is required by mortgage lenders and covers the replacement value of a home and its contents

5-5 ‘THE HOME-BUYING EXPERIENCE’ pg 132-135 Real estate short sale - sale of real estate property in which the proceeds are less than the balance owned on a loan secured by the property sold multiple listing service - comprehensive listing, updated daily, of properties for sale in a given Community or metropolitan area; includes a brief description of each property with a photo and it's asking price but can be accessed only by Realtors who work for MLS member Pre-qualification - the process of arranging with a mortgage lender, in advance of buying a home, to obtain the amount of mortgage financing the lender deems affordable for the home buyer Earnest money deposit - money pledged to buy a buyer to show good faith when making an offer to buy a home contingency clause - a clause in a Real Estate Sales contract that makes the agreement conditional on such factors as the availability of financing, property inspections, or obtaining expert advice real estate settlement procedures Act - a federal law requiring mortgage lenders to give potential borrowers a government publication describing the closing process and providing clear, Advanced disclosure of all closing costs to home buyers

5-6 ‘FINANCING THE SITUATION’ pg 135-140 Mortgage loan - a loan secured by the property: if the borrower defaults, the lender has the legal right to liquidate the property to recover the funds it's owed

Mortgage Banker - a firm that solicits borrowers, originates primarily government insured and government guaranteed loans, and places them with mortgage lenders; often uses its own money to initially fund mortgages it later resells mortgage broker - a firm that solicits borrowers, originates primarily conventional loans and places them with mortgage lenders; the broker merely takes loan applications and then finds lenders willing to Grant the mortgage loans under the desired terms fixed rate mortgage - the traditional type of mortgage in which both the rate of interest and the monthly mortgage payment are fixed over the full term of the loan Adjustable rate mortgage - a mortgage on which the rate of interest, and therefore the size of the monthly payment, is adjusted based on Market interest rate movements

Negative amortization - when the principal balance on a mortgage loan increases because the monthly loan payment is lower than the amount of monthly interest being charged; some ARMs are subject to this undesirable condition convertible arm - an adjustable rate mortgage loan that allows borrowers to convert from an adjustable rate to a fixed rate loan usually at anytime between the 13th and the 60th month

Two Step arm - an adjustable rate mortgage with just two interest rates: one for the first five to seven years of the loan, and a higher one for the remaining term of the loan Other mortgage options see page 138 Conventional mortgage - a mortgage offered by A lender who assumes all the risk of loss; typically requires a down payment of at least 20% of the value of the mortgage property FHA mortgage insurance - a program under which the federal housing Administration offers lenders mortgage insurance on loans having a high loan-to-value ratio; its intent is to encourage loans to home buyers who have very little money available for a down payment and closing costs VA loan guarantee - I guarantee offered by the US Veterans Administration two lenders who make qualified mortgage loans to eligible Veterans for the US Armed Forces and their unmarried surviving spouses

PFIN 7 CH6 pg 145-168 6-1 ‘THE BASIC CONCEPTS OF CREDIT’ pg 145-148

debt safety ratio - the proportion of total monthly Consumer Credit obligations to monthly take-home pay 6-2 ‘CREDIT CARDS AND OTHER TYPES OF OPEN ACCOUNT CREDIT’ pg 148-157 open account credit - a form of credit extended to a consumer in advance of any transaction Credit limit - a specified amount Beyond which a customer may not borrow or purchase on credit bank credit card - a credit card issued by a bank or other financial institution that allows the holder to charge purchases at any establishment that accepts it line of credit - the maximum amount of credit customer is allowed to have outstanding at any point in time cash advance - alone that can be obtained by a bank credit card holder at any participating bank or financial institution Base rate - the rates of Interest a bank uses as a base for loans to individuals and small to midsize businesses Grace period - a short period of time, usually 20 to 30 days, during which you can pay your credit card bill in full and not incur any interest charges Reward credit card - A Bank credit card that combines features of a Traditional Bank credit card with an additional incentive, such as rebates and Airline mileage

Affinity cards - Standard Bank credit card issued in conjunction with some charitable, political, or other nonprofit organization Secured credit cards - what type of credit card that's secured with some form of collateral, such as bank CD student credit card - a credit card marketed specifically to college students Retail change card - a type of credit card issued by retailers that allows customers to change goods and services up to a pre-established amount Debit card-carne used to make transactions for cash rather than credit; replaces the need for cash or checks by initiating charges against the checking account revolving line of credit - a type of a open account credit offered by Banks and other financial institutions that can be accessed by writing checks against demand deposit or specially designed credit line accounts Overdraft protection line - a lot of credit linked to a checking account that allows a depositor to overdraw the account up to a specified amount Unsecured personal credit line - a line of credit made available to an individual on an as-needed basis Home equity credit line - a line of credit issued against the existing equity in a home 6-3 ‘OBTAINING AND MANAGING OPEN FORM OF CREDIT’ pg 157-164 Credit investigation - an investigation that involves contacting credit references or corresponding with a credit bureau to verify information on a credit application Credit bureau - an organization that collects and sells credit information about individual Borrowers Credit scoring - a method of evaluating an applicant's credit worthiness by assigning values to such factors as income existing debts and credit references Annual percentage rate - the actual or true rate of interest paid over the life of a loan; includes all fees and costs Average daily balance method - a method of computing finance charges by applying interest charges to the average daily balance of the account over the billing period Minimum monthly payment - in open account credit, a minimum specified percentage of the new account balance that must be paid in order to remain current 6-4 ‘USING CREDIT WISELY’ pg 164-168 Personal bankruptcy - a form of legal recourse open to insolvent debtors, who may petition a court for protection from creditors and arranged for the orderly liquidation and distribution of their assets Wage earner plan - an arrangement for a scheduled that repayment over future years that is an alternative to straight bankruptcy; used when a person has a steady source of income and there is a reasonable chance of repayment within 3 to 5 years

PFIN 7 CH7 pg 173-193 7-1 ‘BASIC FEATURES OF CONSUMER LOANS’ pg 173-179 Consumer loans - loans made for specific purposes using formally negotiated contracts that specify the borrowing terms and repayment. Collateral - an item of value used to secure the principal portion of a loan. Single payment loan - alone made for a specified length of time, at the end of which payment is due in full. Interim financing - the use of a single payment loan to finance a purchase or pay bills in situations where funds to be used for repayment are known to be forthcoming in the near future. Installment loan - a loan that is repaid in a series of fixed, scheduled payments rather than a lump sum. Consumer Finance Company - firms that makes secured and unsecured personal loans to qualified individuals; also called a small loan company. Sales Finance Company - a firm that purchases notes drawn up by sellers of certain types of merchandise, typically Big Ticket items. Captive Finance Company - a sales finance company that is owned by a manufacturer of a big-ticket merchandise GMAC is a captive finance company. Cash value - accumulation of savings in a life insurance policy that can be used as a source of loan collateral. 7-2 ‘MANAGING YOUR CREDIT’ pg 179-182

7-3 ‘SINGLE-PAYMENT LOANS’ pg 182-187 Loan application - gives a lender information about the purpose of the loan as well as the applicants Financial condition. Lien - a legal claim permitting the lender, in case the borrower defaults, to liquidate the items serving as collateral to satisfy the obligation. Chattel mortgage - a mortgage on personal property given as security for the payment of an obligation. Collateral note - a legal note giving the lender the right to sell collateral if the borrower defaults on the obligation.

Prepayment penalty - an additional charge you may owe if you decide to pay off your loan prior to maturity. Loan rollover - the process of paying off a loan by taking out another loan. Loan disclosure statement - a document, which lenders are required to supply Borrowers, that states both the dollar amount of finance charges and the APR applicable to a loan. Simple interest method - a method of computing finance charges in which interest is charged on the actual loan balance outstanding. Discount method - a method of calculating finance charges in which interest is computed then subtracted from the principal, with the remainder being disbursed to the borrower. 7-4 ‘INSTALLMENT LOANS’ pg 187-193 Add on method - a method of calculating interest by computing finance charges on the original loan balance and then adding the interest to that balance. Rule of 78s - a method of calculating interest that has extra heavy interest charges in the early months of the loan....