business and finance basics. copyright ©cengage learning. all rights reserved.1 - 2 introduction...
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Business and Finance Basics
Copyright ©Cengage Learning. All rights reserved. 1 - 2
Introduction
Financial literacy is knowledge of:
FactsConceptsPrinciplesTechnological tools
…that are fundamental to being smart about money.
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Introduction
Personal finance is the study of resources important for achieving financial success and involves spending saving protecting and investing resources.
6 Steps of Financial Planning
Determine Current Financial Situation
Develop Your Financial GoalsIdentify Your OptionsEvaluate Your Options or Alternatives
Create and Use a Financial Plan of Action
Review and Revise Your Plan
Group WorkRosa and her friend Linda are students in
Chicago. They want to drive cross country next summer to visit Rosa’s aunt in Arizona and Linda’s brother in California. They both work part time and take home $77 per week after taxes. They think they need to save $1200 each to pay for the trip.
Each group is assigned to help Rosa and Linda apply one of the six steps of the financial planning process to help them reach their goal.
Be prepared to give a brief oral outline of your part of the plan.
Business Cycle
Expansion (prosperity)Production and sales highUnemployment, prices and interest rates low
Contraction (recession) Decline in employment, output, income and
sales
Trough (recovery)Production, employment and sales begin to
improve leads to eventual expansion
Figure 1.2: Business Cycle Phases
Business Cycle 1953 - 2008
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What is the Future Direction of the Economy?
The Gross Domestic Product is a procylical indicator.
The Unemployment Rate is a countercyclical indicator.
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What is the Future Direction of the
Economy?
The Index of Leading Economic Indicators and the Consumer Confidence Index
Key Economic Factors
Consumer Prices (Inflation)Gross Domestic Product (GDP)Consumer SpendingInterest RatesMoney SupplyUnemploymentHousing StartsStock Market Indices
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What Is the Future Direction of Inflation
Inflation: Steady rise in the general level of prices.
How does inflation affect income and consumption?
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Inflation
How inflation is measured:
Consumer Price Index (or CPI)
Personal Inflation Rate
Inflation reduces real incomes.
Inflation
(later value – original value)
% Inflation = X 100 original value
= increase/original X 100
Inflation ExampleWhat is the inflation rate if an item that costs $120
today costs $140 next year?
% infl. = (140 – 120)/120 X100 = (20/120)X100 = 16.7 %
What is the cost of an item today if it cost $65 last year and the inflation rate has been 4.0%?
0.040 X 65 = $2.6 increase $65 + $2.6 = $67.6 cost today
Strategies to Reach Financial Goals
ObtainPlanSpend WiselySave, Save More, Keep on SavingBorrow WiselyInvestManage RiskPlan for Retirement
Time Value of MoneyFuture Value (FV) of a current lump sum:
FV = (Present Value) (i + 1.0)n i = Interest Raten = number of time periods
See appendix A.1 (p. A-4)
Rule of 72 Double your money in how many years?
- Divide the interest rate (as a whole number) into 72
Time Value of Money
FV lump sum calculation
You have $2,400 to invest. Calculate the value of your money in 8 years assuming:
a) 3% interest
b) 5% Interest
c) 8% interest
Time Value of MoneyFuture Value (FV) of a Series of
Payments (Annuity) See Table A.3 (page A-8)
- For example, putting $100 per year for 5 years into an account making 4% interest per year gives you how much money?
- What if you put in $350 per year for 8 years at 3% interest?
Time Value of MoneyPresent Value (PV) of a future lump sum (single
amount)
See Table A.2 (p. A-6)
How much money would you have to set aside right now in an account making 5% interest to have $1,000 in 10 years?
How much money would you have to set aside right now in an account making 3% interest to have $7,000 in 12 years?
How much money would you have to set aside right now in an account making 8% interest to have $50,000 in 7 years?
Time Value of MoneyPresent Value (PV) of a series of payments
over time (annuity)
See Table A.4 (p. A-10)
You buy an investment that will pay you $1,000 per year for 10 years. The annual interest rate is 5%. What is the present value of that stream of money?
You win a scholarship that will pay $5,000 per year for 4 years. What is the present value of that scholarship assuming 5% per year?