Skip to content
Textbook Guides

Personal Finance, Second Canadian Edition Solution Manual

Gain confidence in solving textbook exercises with Personal Finance, Second Canadian Edition Solution Manual, a comprehensive guide filled with answers.

Preview 16 of 177 pages

See the first 16 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    ’ S S OLUTIONS & R ESOURCE M ANUAL Prepared by Hardeep S. Gill NAIT P ERSONAL F INANCE Second Canadian Edition Jeff Madura Florida Atlantic University Hardeep S. Gill NAIT

  2. Page 2
  3. Page 3
    Read page 3 as text

    Contents Overview ................................ ................................ ................................ ................................ ................. iii Introduction ................................ ................................ ................................ ................................ ................. iv Chapter 1 Overview of a Financial Plan ................................ ................................ ................................ ... 1 Chapter 2 Applying Time Value Concepts ................................ ................................ ............................ 10 Chapter 3 Planning with Personal Financial Statements ................................ ................................ ....... 18 Chapter 4 Using Tax Concepts for Planning ................................ ................................ .......................... 26 Chapter 5 Banking Services and Managing Your Money ................................ ................................ ..... 39 Chapter 6 Assessing, Managing, and Securing Your Credit ................................ ................................ . 47 Chapter 7 Personal Loan s ................................ ................................ ................................ ........................ 58 Chapter 8 Purchasing and Financing a Home ................................ ................................ ........................ 66 Chapter 9 Auto and Homeowner’s Insurance ................................ ................................ ........................ 78 Chapter 10 Health and Life Insurance ................................ ................................ ................................ ...... 86 Chapter 11 Investing Fundamentals ................................ ................................ ................................ ...... 100 Chapter 12 Investing in Stocks ................................ ................................ ................................ .............. 111 Chapter 13 Investing in Bonds ................................ ................................ ................................ ............... 123 Chapter 14 Inve sting in Mutual Funds ................................ ................................ ................................ .. 134 Chapter 15 Retirement Planning ................................ ................................ ................................ ............ 145 Chapter 16 Estate Planning ................................ ................................ ................................ .................... 157 Chapter 17 Integrating the Components of a Financial Plan ................................ ............................... 167

  4. Page 4
    Read page 4 as text

    iii Overview The ’s Solutions and Resource Manual has been prepared to offer instructors course - planning assistance when teaching personal finance. It incorporates several teaching aids customized specifically for Personal Finance , Canadian Edition, Second Edition, by Jeff Madura and Hardeep Gill. The manual includes a brief overview of each chapter along with a list of chapter objectives. Answers to both the end - of - chapter review questions and the financial planning problems are included. Where possible, details of the calculations for the problems are also included. In some instances, answers may b e slightly different when using tables, calculators, and/or the student CD - ROM. The manual presents answers for the questions accompanying the two continuing case exercises The Sampsons (on MyFinanceLab) and Brad MacDonald. Each chapter includes numerous teaching tips. These tips arose from many years of teaching personal finance principles in the classroom. The tips are meant to help instructors promote discussion in the classroom. The tips also address some common misconceptions that students sometimes h ave about personal financial planning. Many thanks go to those at Pearson Canada for their help in preparing and technically checking this manual .

  5. Page 5
    Read page 5 as text

    iv Introduction The ’s Solutions and Resource Manual for Personal Finance , Second Canadian Edition, by Jeff Madura and Hardeep Gill is designed to meet the far - ranging needs of personal finance instructors. In most schools, a personal finance course is not a required course and therefore will often attract students from many different backgrounds and col leges who will be taking the course as an elective. This subsequently creates a challenging teaching environment. Some students may feel overwhelmed by the material, while others may find it too basic. Having access to a variety of resources, methods, and materials may alleviate some of these challenges. This introduction describes the many resources this instructor’s solutions and resource manual contains. We hope it will ease the burden of busy instructors and help them to enhance their students’ ability to retain the material.  An Overview of Chapter - by - Chapter Resources This manual provides instructors with much more than the solutions to the end - of - the - chapter exercises. Each chapter begins with an introduction to the chapter. This introduction is int ended to aid the instructor by offering a brief summary of the topics that will be covered in that chapter. In this way, each instructor should be better able to determine if only a portion of the topics will be sufficient or if the coverage will be compre hensive. In - depth Teaching Suggestions for each chapter include both important topics to be discussed in an individual chapter and additional assignments that may be helpful to aid the students in learning the material. Some of the teaching suggestions we re created to provide a variety of teaching methods. Educational research shows that using a variety of teaching methods produces the best results. Thus, the instructor may choose to implement some of the following methods to vary instruction. Teams: Many of the suggestions are geared toward the implementation of teams (three to five members on a team). Of course, team make - up depends on several things, including class size, number of hours in the course, and whether the course is online or on - site. Studen ts do learn from each other and in a course such as personal finance, many students will have a variety of educational backgrounds and real - world experiences. The use of teams allows students to share this knowledge with their peers and has proven to be ve ry effective. Community Resources: The use of community resources is another way to provide a variety of learning experiences. The following is not a comprehensive list, but simply a few suggestions that may be available in various locales. These professi onals will generally be most willing to give a presentation to the class at no charge. The exposure to professionals with careers dealing with personal financial issues in the “real world” has proven to provide an invaluable learning experience for student s. Consumer Counseling Service: Credit use and abuse, prevention and management, budgeting. Banks and Credit Unions: Financial services, home buying and credit, chequing, investing. CMHC: housing finance options, mortgage loan insurance, information on t he housing market in Canada Insurance Companies : Features of Auto and Property, Health, Disability, Critical Illness, Long - Term Care, and Life Insurance. Taxes: Canada Revenue Agency on tax laws, filing, and returns. Lawyers: Information on wills, estat es, and legal issues.

  6. Page 6
    Read page 6 as text

    v Financial Planners/Advisors: Information on building a financial services business and how to build meaningful client relationships. Stockbrokers: Various types of information on a variety of investment issues and types. Internet: T here are many Internet assignments in the book and even more suggestions in the ’s Solutions and Resource Manual. The Internet is a source of information that will be available to the students even after the class is finished. The information is generally more up to date than any other source and everyone today has at least limited access to a computer.  Teaching Personal Finance Online The unique needs of online courses merit separate mention regarding teaching resources and suggestions. Teachi ng suggestions geared to the needs of online courses are included in the materials corresponding to each chapter. What follows are general suggestions to aid the many instructors who are restructuring their individual courses so they can be taught an onlin e course. 1. An online course should reflect the same rigour and content as the classroom course demands. This ensures that students are exposed to the same content and learning experiences, which will help ensure that the course both meets the prerequisi te criteria for upper - level courses and/or transfer. Using a common syllabus and textbook will diminish perceptions that the courses are different. 2. Teams can also be used in an online course. Since many students take courses online because of schedulin g conflicts with work, etc., it would be beneficial before assigning teams to survey the students as to the times they are available to work online. This would then do some self - selecting for the teams. The cases in the text are useful for team solving. W orksheets with discussion questions are also a good way to use teams. If the students are self - paced, it is more difficult to implement teams. Thus, it is important to know the target audience before implementation. 3. Communication is critical in any cour se and even more so in an online course. The address book is a valuable asset for an online course. The instructor can send messages to everyone at the same time, or individually. Information can be disseminated quickly and efficiently. For example, answer s to quizzes and exams can be distributed electronically immediately after the deadline assigned for each. 4. Chat Rooms: This is another way to communicate with students. This can serve as office hours. Students know when the instructor will be online an d can participate or not. 5. Just as instructors teach differently in the classroom, so also will this happen in an online course. Knowing the audience is critical to the success of any class. Today, even in a conventional classroom, there is often a mix o f traditional and nontraditional students. The nontraditional will often have more experience in financial matters. It is important, though, to remember that financial expertise is not a matter of intelligence. It is a skill that is learned and that is why students enroll in a personal finance course. Even though the nontraditional student may have had financial life experiences, it does not mean that he or she had the necessary skills to make the best decisions at the time. 6. Assessment instruments may v ary in an online course. It is virtually impossible to give an exam over the Internet and ensure that it has been completed as directed with no outside help. The use of a testing center is one way to alleviate this problem. The student would, of course, ha ve to go on campus during

  7. Page 7
    Read page 7 as text

    vi the semester to complete the exams. This is a problem if the student lives a long distance from the campus and has enrolled in the Internet course specifically because of this predicament. The use of a proctor at another institu tion would be another way to ensure that examinations are secure. 7. Being a self - starter is a critical characteristic for a student to be successful in an online course. It is helpful to include at least a brief discussion of this in the syllabus. During the semester it would be advisable to repeat this message, perhaps by e - mail. The student’s success will rely on how responsible and self - motivated he/she is. Hardeep Singh Gill

  8. Page 8
    Read page 8 as text

    Chapter 1 Overview of a Financial Plan  Chapter Overview Every individual and family needs to develop a financial plan. Financial planning will help them clarify their goals and ensure that spending, financing, and investing decisions are aligned with tho se goals. Chapter 1 discusses the benefits of financial planning: making your own financial planning decisions, judging the advice of financial advisers, even, becoming a financial adviser. In addition, this chapter briefly discusses the six component plan s that make up the over - all financial plan. These components are budgeting and tax planning, managing liquidity, financing large purchases, protecting assets and income, investing, and retirement and estate plans. Each of these component plans requires six steps. First, an individual must establish financial goals. Once these are established, the individual must consider his or her current financial position. Next, alternative plans that could help achieve the goals should be identified and evaluated. One p lan should then be chosen and implemented. In the final two steps, the individual would evaluate his or her financial plan and revise it as needed.  Chapter Objectives The objectives of this chapter are to: 1. Explain how you could benefit from personal financial planning 2. Identify the key components of a financial plan 3. Outline the steps involved in developing a financial plan  Teaching Tips 1. Discuss t his quote with students: “Most people don’t plan to fail, they fail to plan.” Ask students for examples of situations (financial or otherwise) where they have seen this happen. Guide the discussion toward financial matters.

  9. Page 9
    Read page 9 as text

    1 - 2 Chapter 1 Overview of a Financial Plan 2. Relate financial planning to planning a trip. Steps in Financial Planning Steps in Planning a Trip Set goals Decide where you are going Determine your current financial position Locate your home on the map Identify and evaluate alternative plans Identify and evaluate alternate routes Choose and implement a plan Pick a route and start journey Evaluate plan Is the trip going smoothly? Revise plan as needed Road construction causes major delays, so you pick an alternate route A financial plan is just a financial road map. 3. M any younger students have difficulty recognizing the benefits of devising a financial plan now. Money talks, however, and an effective demonstration of the time value of money involves the “Rule of 72.” Briefly stated, the Rule of 72 is an indicator of how long it will take a single sum of money to double in value at a given interest rate. The time is computed by dividing 72 by the interest rate. For instance, at 12% a sum of money would double every six years. Provide this example for students: What if yo ur parents had been able to invest $1,000 at 12% the day you were born? Age Value of Investment Age Value of Investment 0 $1,000 36 $64,000 6 2,000 42 128,000 12 4,000 48 256,000 18 8,000 54 512,000 24 16,000 60 1,024,000 30 32,000 66 2,048,000 Thi s concept can also further be used to determine the rate of return necessary to achieve a financial goal by simply dividing 72 by the number of periods available to reach the goal. This answer will provide the percentage return needed to reach a goal. For instance, a $10,000 down payment on a house is desired in 6 years. Currently, $5,000 is the amount saved. The needed return would be 12%. Other considerations, such as amount of risk to be taken, would then also need to be assessed, but this is a quick too l to make preliminary estimates. 4. Have students write up a set of goals. Suggest a minimum of 2 goals for each time frame — short, medium - , and long - term goals. One of the short - term goals should be achievable by the completion of the course. Remind studen ts that goals need to be monitored and assessed to determine progress toward overall life goals. 5. Teams — at the beginning of the semester/class, assign groups of 3 – 5 students to a team. In many chapters, these teams can be used for discussion purposes, re viewing quantitative materials, and quizzes. 6. Discuss with students that goals are not stagnant. They change as an individual’s life changes. The addition of a spouse or child, change of career or job, etc., would often create a need to review and perhap s modify financial goals.

  10. Page 10
    Read page 10 as text

    Chapter 1 Overview of a Financial Plan 1 - 3 7. Online courses — individual or team submissions on questionnaires, review sheets, and Internet exercises can be helpful. 8. Assign the internet exercise: http://cgi.money.cnn.com/tools/prioritize/prioritize_101.jsp . This takes st udents through a prioritizing goals exercise. Require students to hand in the final summary or send it online to the instructor. This is a good exercise because it forces individuals to make choices. To reach goals, it is impossible to “have it all.” There are several reiterations before the goal statement is summarized in rank order.  Answers to End - of - Chapter Review Questions 1. Personal financial planning is the process of planning your spending, financing, and investing activities, while taking into account uncontrollable events such as death or disability, in order to optimize your fi nancial situation. A personal financial plan specifies your financial goals, describes the spending, financing, and investing activities that are intended to achieve those goals, and the risk management strategies that are required to protect against uncon trollable events such as death or disability. 2. An opportunity cost is what you forgo as the result of a decision. Some of the opportunity costs of spending $10 on lottery tickets every week might be: lunch out once a week, reducing debt by an additional $40 per month, or having $520 in savings at the end of the year. 3. An understanding of personal finance enables you to make more informed decisions about your financial situation. You would be able to better judge the advice of financial advisers. You might ev en pursue a career as a financial adviser. 4. 1. Budgeting and tax planning 2. Managing your liquidity 3. Financing your large purchases 4. Protecting your assets and income (insurance) 5. Investing your money 6. Planning your retirement and estate 5. Budg et planning represents the process of forecasting future expenses and savings. It involves evaluating your current financial position by assessing your income, your expenses, your assets, and your liabilities. 6. Your net worth is your assets (what you own) m inus your liabilities (what you owe). You can measure your wealth by your net worth and budgeting strategies can help you increase your net worth and thereby your wealth. For example, you can build your net worth by setting aside part of your income to inv est in additional assets or reduce your liabilities. 7. Income is influenced by your life stage. If expenses are not accurately estimated, it may be difficult to reach savings goals. Many financial decisions are affected by tax laws, such as certain types of income being taxed at a higher rate than others. Knowledge of tax laws allows you to make more favourable choices. 8. Liquidity means having access to ready cash, including savings and credit, to cover unexpected expenses. In managing your liquidity you consi der money management and credit management. Money management deals with deciding how much money to retain in a liquid form and how to

  11. Page 11
    Read page 11 as text

    1 - 4 Chapter 1 Overview of a Financial Plan allocate the funds among short - term investment instruments. Credit management deals with the decisions about how much cred it you need to support your spending and which sources of credit to use. 9. Factors considered in managing financing include: the size of the loan you can afford to borrow, the length of time for the loan, and selecting a loan that charges a competitive low i nterest rate. 10. The primary objective of investing is to use funds not needed for liquidity purposes to earn a high return. Most investments also carry an amount of risk. Potential investments include stocks, bonds, mutual funds, and real estate. 11. A plan to p rotect your assets requires insurance planning, retirement planning, and estate planning. Insurance planning involves determining the types and amount of insurance that you need such as automobile, homeowner’s, and life. Insurance reimburses you for damage s to your assets, limits your exposure to potential liabilities, or protects your income. Retirement planning involves determining how much money you should set aside each year for retirement and how you should invest those funds. Retirement planning must begin well before you retire so that you can accumulate sufficient money to invest and use after you retire. Estate planning is the act of planning how your estate will be distributed before and/or after you die. Effective estate planning can protect your wealth against unnecessary taxes and ensure that your wealth is distributed to your family in the manner that you desire. 12. Budgeting focuses on the relationship between your income and your expenses. Liquidity management focuses on depositing a portion of your excess cash in an emergency fund or obtaining credit if you are short on cash. Financing focuses on obtaining cash to support large purchases. Protecting your assets and income focuses on determining your insurance needs and spending money on insuranc e premiums. Investing focuses on using some of your excess cash to build wealth. Planning your retirement and estate dictates the wealth that you will accumulate by the time you retire and its distribution before or after your death. 13. 1. Establish your fina ncial goals 2. Consider your current financial position 3. Identify and evaluate alternative plans that could achieve your goal 4. Select and implement the best plan for achieving your goals 5. Evaluate your financial plan 6. Revise your financial pla n 14. Your goals will influence the amount of money and the timing you need to achieve the goals. If goals are not realistic, they will be very difficult to accomplish and you will become discouraged and lose an interest in planning. Short - term goals are those to be accomplished in less than a year such as saving $500 for Christmas gifts. A medium - term goal takes from one to five years to accomplish, such as paying off a 3 - year note. A long - term goal takes more than five years to accomplish; an example is savi ng for retirement in a set number of years. 15. Some factors that might affect your current financial position are: your level of debt, your marital status and family responsibility, your age, and your level of wealth accumulated. 16. Your goals are where you wan t to be and your current financial position is where you are. Your alternative financial plans will “map” how to get from one position to the other. Several alternative

  12. Page 12
    Read page 12 as text

    Chapter 1 Overview of a Financial Plan 1 - 5 financial plans are possible given one’s current financial position and goals. For exam ple, two alternative plans may involve different amounts of savings. 17. Once you have developed and implemented a plan, you must monitor it. Monitoring the plan will ensure that you are following the plan and that the plan is working as intended. 18. You may fin d you need to revise the plan to make it more realistic. In addition, your life circumstances and financial condition may change. As your financial conditions change, your goals may change, especially as the results of specific events such as graduating fr om a post - secondary institution, getting married, or the birth of a child. 19. • Bank deposit rates: buy now vs. save decision. • Prices of homes and cars in your area: planning for purchase. • Financing rates on car loans, personal loans, and home loans: de ciding how much of a loan you can afford. • Stock price quotations and quotations on other investments: deciding when to invest and where to invest. • Insurance quotations based on your needs: getting the best value for your insurance dollar. • Tax rate s: for tax planning. • Retirement rules: retirement planning. • Financial calculators: determining how your savings will grow or what your mortgage payment will be. 20. There are several different levels of unethical behaviour by financial advisers. Some adv isers are involved in Ponzi schemes and are focused on stealing your money. A more modest level of unethical behaviour is providing advice that is intended to benefit them, not you. An understanding of personal financial planning will enable you to make so me decisions without an adviser. If you require an adviser, you will be better prepared to determine which advice is truly intended to benefit you.  Answers to Financial Planning Problems 1. a. Julia’s Income: $1,600 Julia’s Expenses: Rent $350 Utilities 100 Car Payment 250 Braces 200 Groceries ($50 × 4) 200 Miscellaneous 150 Total Expenses 1,250 Available for savings: ($1,600 − $1,250) $ 350

  13. Page 13
    Read page 13 as text

    1 - 6 Chapter 1 Overview of a Financial Plan b. Increase in car payment = $ 75 Increase in insurance = 60 Opportunity cost = $135 per month that could not be used for savings, other purchases, etc. 2. Net worth is the difference between assets and liabilities: $3,000 − $500 − $135 = $2,365 3. Arianne added $1,200 to her assets and $500 to her liabilities , so her new net worth is: $5,000 + $1,200 − $500 = $5,700 4. Buying the stereo would not change her net worth as she would be exchanging one asset for another. Investing $500 at 10 percent for one year will be worth $550 in one year. 5. Although the situ ation seems dismal, Jason has a couple of options. First, he could look for a car that requires payments of less than $200 per month in either financing costs or lease payments. This would require him to consult various dealers. Second, he could buy a chea per car using the classifieds in the newspaper. In either case, Jason’s net worth will be reduced by a large percentage, since a new car will require a down payment even if he finances it. If Jason buys a cheap car using the classifieds or another source, his cash flow will not be affected if he finds a car cheaper than $3,000.

  14. Page 14
    Read page 14 as text

    Chapter 1 Overview of a Financial Plan 1 - 7  Suggested answers to E thical D ilemma questions (a) Although Larry did not act unethically, he should have provided Sandy and Phil with clearer information on the two life insuran ce products. Although whole life insurance and segregated funds provide some opportunity for savings, they are probably not the ideal choice for investors who are focused on growing their investments. Whole life insurance is discussed in chapter 10. Segreg ated funds are discussed in chapter 12. In many instances, whole life insurance and segregated funds pay out a very large commission to the brokers that sell these products to their clients. If Larry had sold these products with the intention of maximizing his income, he would have been acting unethically with Sandy and Phil. (b) Sandy and Phil failed to judge the advice provided by their financial adviser. A relative may not be the best source for financial information and advice because it may be awkward to ask the hard questions that you need to when making long - term decisions. As Sandy and Phil have learned, not asking the right questions can have negative consequences for your retirement. (c) In the future, Sandy and Phil need to ask the right questions in order to become more informed about the products they are purchasing. It may be better to deal with a financial adviser who is not related to either of them. In addition, a course in personal finance may help them understand which questions to ask when purchasing investment products for retirement planning. Note to : The instructor may wish to have the students research the name of this practice, which is churning. They may also wish to have the students research the legal aspects of churning.  Answers to Questions in The Sampson Family: A Continuing Case Current Financial Position Major Assets Home valued at $250,000; two cars Savings Very little Money Owed $150,000 mortgage; $2,000 credit card balance Salary The Sampson’s income was $54, 000, but will now be about $66,000 since Sharon just started a part - time job.

  15. Page 15
    Read page 15 as text

    1 - 8 Chapter 1 Overview of a Financial Plan Financial Goals Goal 1. Purchase New Car for Sharon this Year Goal 2. Pay for Children’s Post - secondary Education in 12 – 17 Years from Now Goal 3. Set Aside Money for Retireme nt How to Achieve the Goal Assess alternative plans available and choose the most appropriate plan given the financial situation. Assess alternative plans available and choose the most appropriate plan given the financial situation and the savings necessa ry for Sharon’s new car. Set aside a manageable and realistic amount each month toward retirement. This amount is currently contingent on meeting their other, shorter - term plans of buying a new car and saving for their children’s post - secondary education. How to Implement the Plan Sharon decided saving $500 a month is the best plan; deposit the money in a liquid investment, such as a savings account. The Sampsons decided saving $300 a month is the best plan. Long - term investments, such as a tax - deferred ed ucation account (RESP), should be considered as investments. Seek the advice of a financial adviser to assess different investment options, such as stocks or bonds. The Sampsons should be aware that advisers may exaggerate the potential of investments and may recommend investments that give the adviser high commissions. How to Evaluate the Plan Sharon should monitor the progress to ensure that saving $500 each month is not too ambitious and is realistic. The Sampsons should monitor the progress to ensure they are saving $300 each month, especially given the additional savings for Sharon’s new car. The Sampsons should monitor their progress to ensure they are saving at least some money for retirement. Since this is a very long - term goal, an annual assessmen t of their retirement savings is appropriate.

  16. Page 16
    Read page 16 as text

    Chapter 1 Overview of a Financial Plan 1 - 9  Answers to Myth or Fact M argin Questions Page Myth or Fact 3 Financial planners and advisers are registered with a provincial financial planning regulatory agency. Myth. Although the Institute of Advanced Financial Planners offers a Registered Financial Planner designation, and the activities of planners/advisers/dealers are regulated if they are registered with the Mutual Fund Dealers Association of Canada (MFDA) or the Investment Industry Regulatory Organization of Canada (IIROC); there is no provincia l financial planning regulatory agency that registers financial planners and advisers. 5 Budgeting is more important for individuals who have trouble covering their monthly expenses. Myth. Budgeting is a tool that you use to help you reach your financial goals. As such, budgeting is for everyone. 10 When setting goals, it is important to share them with family members so you are motivated to achieve them. Fact. In general, sharing your goals, such as saving up for a Christmas vacation, will help motivat e you to achieve them. Similar to a New Year’s Resolution, a goal that is shared with the ones who are most affected by your personal success are more likely to be achieved.

161 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Finance study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.