Finance FACS 320
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This 8 page Class Notes was uploaded by Dr. Marcellus Schmidt on Tuesday September 22, 2015. The Class Notes belongs to FACS 320 at Colorado State University taught by Staff in Fall. Since its upload, it has received 11 views. For similar materials see /class/210328/facs-320-colorado-state-university in Family and Consumer Sciences at Colorado State University.
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Date Created: 09/22/15
Chapter 5 Cash Management amp Financial Institutions Objectives of Cash Management Managing monthly transactions Preparing for cash emergencies Cash reservea accumulation ofliquid assets help to meet emergency cash needs Making a temp investment How much should you hold in cash 58 months of expenses Pay your bills on time Pay yourself first setting aside enough money to achieve personal goals FIRST Savings Types of banks and baking services Depository Institutions commercial banks several savings institutions and credit unions Their primary source of funds comes from customer deposits Primary source ofincome earned on loans Commercial banks gets its funds from checking and savings account deposits and uses the money to provide financial services business loans mortgages credit cards Savings lnstitituons savings and loan associations SampL39s thrift institutions and savings banks receives funds mostly from household deposits and uses most ofits funds to make home mortgages Mutual Savings Institution savings institution owned by its depositors Credit Unionsnonprofit depository institution owned by its depositors Nondepository lnstitutionsGet funds from sources other than customer deposits checking amp savings Mutual funds companies investment company that shells shares to investors and then invests the pool of funds in a selection of financial securities Life insurances Co39s sells products intended to provide financial security to dependents in the event ofthe death of the policy owner Brokerage firms facilitates investors purchases of stocks bonds and other investments Financial Service firms onestop shopping for customers looking for financial assistance Types of accounts Checking pays no interest may have minimum balance Interest Earning Checking usually have fees and min balance requirement Savings Accounts Regular demand deposits CD time deposit pays certain amount ifyou leave your money in acct for X amount of time 15 years Higher interestlonger maturity Money Market acct pays interest that uctuates with market rates on money market securities The rule of 72 tells you how long it takes for an investment to double in value or rate needed to earn double amount in a specific time period good for determining simple interest situations when savings bonds will be worth face value or simple interest loans Divide 72 by average rate to see how long to double in value 72return on investment years for to double Interest Rates Two Approaches consumers amp businesses Prime Rate rates that large banks charge their business customers Fed Funds Rate rate that large banks charge each other for every shortterm borrowing Discount Rate Chapter 7 Loans amp Credit Managment The 5 CS Of Credit the key to determining your credit worthiness 1 Capacity are you able to repay the loan 2 2 Capital Do you have assets that could be liquidated to pay the loan if needed Collateral Are you pledging security for the loan down payments repossession value Character Are you the type of person who takes debt responsibility seriously Credit History 5 Conditions Any unique circumstances economic conditions to consider 0 4 Consumer Loan Characteristics Installment Loans set payments for a specific period of time closed ended Fixed Rate Interest rate remains the same throughout the term ofthe loan Variable Rate rate of interest varies periodically with a changing market rate Principal original amount borrowedinvested Collateral secured V unsecured repossession value Secured pledge of collateral Unsecured no collateral Promissory Note contract with lender payments set up and closed ended credit single payment V installment Types of Consumer Loans Home Equity Car loans Student loans Sources of Consumer loans Depository institutions Consumer and sales finance companies Investment accounts at brokerage firms Loan Calculation Simple Interest principal X periodic rate Add on interest Discount APR Annual Percentage Rate Total annual Finance charges Average loan balance Credit Reports amp Credit Score Personal credit scores Lenders want higher down payments and credit scores Information included in credit report preVious current and future credit history Personal information SSN DOB current and past addresses name aliases etc account summary types specific information about average balances late payments and overlimit charges employment and income history home mortgage amounts and payments Public records related to credit collections bankruptsy tax liens foreclosures etc Every request for your credit Within 2 years What is NOT on Report Race religion marital statue nationality medical conditions gender age spouses on report but not supposed to be used for credit decisions Credit Reports 2 types soft and hard Soft you wanting score hard lender wanting score Scores FICO Vantagescore 2006 direct competition to FICO Major lenders may have their own model 3 Major Credit Bureaus EXperian Transuneion EquitaX should check each one annually could each be different Fico Scores determined through a statistical model of one39s credit report Credit Report Composed ofinfo provided by lenders amp financial institution scores based on FICOJ 35 repayment history 30 outstanding Debt 15 length of credit history 10 pursuit of new credit 10 types of credit in use Scores Range between 300850 anything below 650 is not considered good low9High bad9 good Basic Terms APR annual percentage rate APY Annual Percentage Yieldamount of interest paid each year given as a percentage ofthe investment Collateral valuable assets or real property that can be taken by the lender in the event of a loan default Finance Charges the dollar amount of periodic interest charged by the lender on a credit account Term length ofloan Garnishmentsgovt taking portion of income directly out of paycheck to repay debts PITI monthly payment for mortgage principal interest property taxes and home owners insurance in both equations What happens if a lease vehicle depreciates more than expected Assuming that the reduction wasn39t due to your mistreatment ofthe car ClosedEnd Lease you can walk away ifyou are wI the milage Penalty for cancellation oflease OpenEnd Lease You will owe more at the end ifthe depreciation was greater then expected Bum39ng a House Disadvantage to renters Increasing costs over time No investment value No Tax deduction Restrictions on use ofthe property Uncertainty for entire rental period Real Estate Broker professional who helps home owners find buyers for their homes and assist in the purchase transaction in return for a fee Broker is paid on a commission basis by the seller commonly 67 Mortgage longterm amortized loan that is secured by real property Chapter 6 Credit Steps of Making a major purchase Identify your alternatives Evaluate your alternatives Advantages and Disadvantages of Consumer Credit Advantages buy now pay later convenience and safety source of emergency cash Disadvantages financial statement impact increased costs risk of overspending higher insurance premiums Types of Consumer Credit 1 Closed End Credit loans for a specific purpose paid back in a specified period of time usually with monthly payments 2 Open End Credit revolving preapproved continuous loan that can cover many purchases and usually requires monthly partial payments Credit Limitlines preapproved maximum amount ofborrowing for open end credit accounts 0 Credit Cards Smart cards cards that store identification and electronic cash in a computer chip Common Credit Card Contract Terms Annual fees Credit Limit Transaction Billing and Due Dates Minimum Payments Penalties and Late Fees Billing Billing Date the last day of the billing cycle Due Date the date by which payment must be received by the lender to avoid penalties Average Daily Balance with grace period interest on average balance NOT included on new charges wo grace period interest on average balance INCLUDES new charges Two cycle ADB interest on the daily balance over previous 60 days instead of 30 AND includes new purchases Previous Balance Method interest charged on the balance owed at the close ofthe cycle Chapter 8 Insurance automobiles amp housing Terms Warranties Express written or oral promised by the seller Implied legal obligation that the product will do What its39 intended to do Limited less than a full promise to repair or replace often covering parts and labor for specifically identified types or problems Extended service contract agreement that for a set price extends an original warranty or adds service or coverage Policy Premium Grace Period Indemnity Limits Exclusions Property Riders Perils Hazards Independent agents Insurer Insure Concept of Risk Risk Management Insurance pools
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