FIN 3632 Andrews Chapter 7

Time Value of Money

The idea that a dollar today is worth more than a dollar in the future because the dollar received today can earn interest until the time the future dollar is received

Present Value

The amount in todays's currency that future income or outlay would be worth if received or payed today

Future Value

What money or assets currently in hand will be worth at a specified time if left to grow at a given rate

Net Present Value

The difference between the cost of an investment and the discounted present value of that investment's future earnings

Net Future Value

The difference at a specific future date between the sum of the future values of all earnings and the sum of the future values of all costs resulting from a current investment

Risk/Return Tradeoff

The relationship between an investment's risk and its potential return; the lower the investment's risk, the lower the return and vice versa

Trust

A fiduciary Relationship in which one party holds title to property for another party based on a legal agreement and the fiduciary principles of law

Financial Planning Steps

1) Determine the customer's needs

2) Prepare a net worth statement

3) Identify short, medium, and long term goals

4) Decide how to bring the present position into balance

5) Prepare a cash flow strategy

6) Draw up a full plan

7) Reassess the plan regularly

Appreciation

the increase in usefulness of an asset

Estate

The assets a person owns such as real estate, stocks, bonds, and all other personal property, and the person's liabilities and other legal obligations. Often used to describe the property of a decedent

Heir

A person who inherits property

Mid-cap Stock

Generally, stock of companies whose market value is between $2 billion and $10 billion.

Large-cap stock

Generally, stock of companies whose market value is greater than $10 billion.

Small-cap stock

Generally, stock of companies whose total market value is less than $2 billion.

Net Worth

the difference between total assets and total liabilities as calculated for an individual or business

Depreciation

The decrease in the value or usefulness of an asset

Nondeposit investment product

Any financial product with an investment component that is not a deposit product and thus not insured by the Federal Deposit Insurance Corporation (FDIC). Stocks, bonds, insurance products, and government and municipal securities are examples.

Premium

1. The payment for insurance coverage in either a lump sum or installments

2. The amount or percentage above face value at which securities are bought or sold

Portfolio

The assets owned by one organization or person and managed as a collective whole to reach specific investment goals

Diversification

A method of decreasing the total risk of investments by investing funds in different kinds of assets

DIvidend

Payments made by a corporation to its stockholders. The payments are based on a percentage of the corporation's after tax earnings and are usually made quarterly

Closed-end fund

an investment fund that allows only an original prescribed number of shares to be distributed. It raises substantially all of its funds at the time the fund is established. The fund is traded like a stock on an exchange. Compare to open-end fund.

Open-end fund

A mutual fund that sells new shares directly to new investors and redeems shares at the market price when investors wish to sell. Assets in the fund increase or decrease as investors move money into or out of the fund

Annuity

An insurance product that provides a systematic payment for a specific period, usually a number of years. Payments typically are made monthly but can be made quarterly, semiannually, or annually

Annuitant

The beneficiary of an annuity; the person insured under an annuity plan and on whose life expectancy annuity payments are based

Defined Benefit Pension Plan

A pension plan that guarantees the payment of a specified benefit at retirement

Defined Contribution Pension Plan

a retirement plan fund that takes in employee contributions, which may be matched by employer contributions, and then invests the contributions into one or more investment alternatives determined by the employee

Probate

A judicial procedure whereby the validity of a will is proved and a decedent's estate, in accordance with a will if it exists, is administered

Executor

A party, often a bank, trust company, attorney, or even an heir, who is appointed in a will to carry out the terms of the will

Intestate

Derived from the Latin word intestatus, meaning one who dies without having made or left a valid will