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1. (TCO A) Use future or present value techniques to solve the following problems.
(Note: You can use tables or a financial calculator. If you use a calculator, please provide the inputs you used to solve the problems.)
a. If you invested 10,000 in a CD (certificate of deposit) paying you 5% per year, what would be the value of your CD at the end of 5 years?
b. If you won $250,000 today and invested all of it in a security that paid an 8% rate of return, how much would you have in 20 years?
c. If you bought a new home today valued at $300,000, what will be its value in 10 years if inflation is 3% per year?
d. If you can earn 8% per year on your retirement account, how much will you have to save each year if you want to retire in 20 years with $1 million?
2. (TCO A) Construct a balance sheet for the Harper family from the following information. Be sure the format is correct.
Are the Harpers solvent or insolvent? Explain.
Show all work.
Cash on hand 100
Bank credit card balance 35,000
Auto loan balance 19,000
Primary residence (FMV) 250,000
Coin collection 1,500
2010 Chevy 20,000
3. (TCO B) Jack has taxable income of $65,000. He is a single tax filer, and his federal income tax rates on the first $8,350 is 10%; it is 15% on income from $8,350 to $33,950 and 25% on income from $33,950 up to $82,250. What is Jack's federal income tax liability, what is his marginal rate, and why would he care? Finally, what is his average federal tax rate? (10 points for each part of the question for a total of 30 points)
Show all of your work for full credit.
4. (TCO C) Alan and Barbara are in the process of purchasing their first home. However, they cannot decide whether a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage is best for them. They have decided to finance $200,000 and can get the 15-year mortgage at 4.5% and the 30-year mortgage at 5%. (35 points total)
First, calculate the monthly payment of each loan.
Next, discuss the pros and cons of a 15-year mortgage versus a 30-year mortgage.
5. (TCO D) John Savage is a 35-year-old accountant who earns $72,000 per year. His monthly take-home pay is $4,500. His wife Jessica works part-time at their church but has no employee benefits. John's firm has a group short-term disability plan, which will provide him with 65% of his gross monthly pay for 2 years only. What would you advise John regarding his potential need for additional disability insurance, including the type, amount of benefits, or other policy provisions?
6. (TCO E) The ABC Class A share mutual fund has a NAV (net asset value) of $35.64 and an offer/purchase price of $37.81. Use this information to answer the following questions. You must show all work for full credit. (30 points total)
a. How many shares will you receive when you invest $10,000?
b. What is the percentage load?
c. What is the load charge, in dollars, for this transaction?
d. The fund in the above example is a front-end load fund. If it were a no-load fund, what three criteria must be met for a mutual fund to be considered a no-load fund?
7. (TCO F) Discuss the main characteristics of defined contribution plans and defined benefit plans. How do these differ from a cash balance plan, and does the employee or employer bear the risk of poor investment performance inside each of these types of plans? (40 pts total)
8. (TCO G) Jack and Dianne are married and in their mid-30s. They have two children, ages 3 and 5. They have a combined income of $100,000 and own their home in joint tenancy with right of survivorship. The house has a market value of $300,000, and the mortgage is $250,000. Jack has $100,000 of group term life insurance and an individual term life insurance policy of $200,000. However, Jack and Dianne have not prepared wills. Jack is not worried because the house is in joint tenancy. Jack does plan to have a will drafted soon but doesn't think that Dianne needs one. If you were advising them, what recommendations would you make regarding their estate planning? Why should they have wills drafted sooner rather than later?
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