Personal Finance Assignment - Principles and Applications

This homework assignment delves into various aspects of personal finance, starting with the fundamental steps of financial planning, including identifying current financial status, setting goals, and developing action plans. It explores credit card fees, debt-to-limit ratios, and mortgage types, including the role of Private Mortgage Insurance (PMI) and Adjustable Rate Mortgages (ARMs). The assignment also covers insurance types like term and whole life insurance, as well as variable life insurance. Investment categories, such as stocks, bonds, and mutual funds, are discussed, along with diversification strategies and the benefits of investing in mutual funds. Furthermore, it examines tax-deferred and tax-free investment accounts, interest rate risk, bond categories, and yield calculations. Finally, it touches upon stock indices and the impact of behavioral finance, including framing, disposition effect, familiarity heuristics, and hindsight bias. The assignment provides a comprehensive overview of personal finance concepts, supported by references to financial literature.

Running head: PERSONAL FINANCE
Personal Finance
Name of the student:
Name of the university:
Author Note:

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Table of Contents
Answer to Question 1.................................................................................................................3
Answer to Question 2.................................................................................................................3
Answer to Question 3.................................................................................................................3
Answer to Question 4.................................................................................................................3
Answer to Question 5.................................................................................................................4
Answer to Question 6.................................................................................................................4
Answer to Question 8.................................................................................................................4
Answer to Question 9.................................................................................................................4
Answer to Question 10...............................................................................................................5
Answer to Question 11...............................................................................................................5
Answer to Question 12...............................................................................................................5
Answer to Question 13...............................................................................................................5
Answer to Question 14...............................................................................................................5
Answer to Question 15...............................................................................................................6
Answer to Question 16...............................................................................................................6
Answer to Question 17...............................................................................................................6
Answer to Question 18...............................................................................................................6
Answer to Question 19...............................................................................................................6
Answer to Question 20...............................................................................................................6
Answer to Question 21...............................................................................................................6

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Answer to Question 22...............................................................................................................7
Answer to Question 23...............................................................................................................7
Answer to Question 24...............................................................................................................7
Answer to Question 25...............................................................................................................7
Problem 2...................................................................................................................................7
Answer to Question 1.............................................................................................................7
Answer to Question 2.............................................................................................................8
Answer to Question 3.............................................................................................................8
Answer to Question 4.............................................................................................................8
Answer to Question 5.............................................................................................................8

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Answer to Question 1
The five basic steps of the personal financing planning process are identify the current
financial status, develop financial goals, adopt alternative course of action, and identify the
opportunity cost and financial action plan. Effective financial planning by adopting all the
steps in this case is significant in order to enhance the financial status of the firms.
Answer to Question 2
Answer to Question 3
Answer to Question 4

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Answer to Question 5
Answer to Question 6
The four basic fees which are charged on the credit cards are the annual fee, balance
transfer fee, cash advance fee and expedited payment fee. These are the four basic fees which
are charged on dealing with the credit cards.
Answer to Question 7
The debt to limit ratio particularly refers to the debts which is related to the credit card
and limits includes the lines of credit and other revolving debts. The debt ratio of the
company is calculated by the balances divided by the total credit card limit. If the debt ratio
of the company is below 30% then it is considered as the favorable by FICO and will further
help improve the credit score of the company (Gitman, Roger and Jack).
Answer to Question 8
Private Mortgage Insurance is referred to as the type of mortgage insurance which is
required in order to pay off the conventional loan. PMI further ensures the mortgage for the
lenders in case of the event that the borrowers defaults.
Answer to Question 9
The two types of home loan are the land purchase loan and home purchase loan.
Basically land purchase loan is looking to construct the house where the banks lends up to

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80-85% of the price plots or land. In case of home purchase loan is utilized by buying a
residential property where the institution generally provide 80-85% of house as loan amount.
Answer to Question 10
Adjustable mortgage rate is the rate which is also known as the variable rate mortgage
adjusted based on the index which reflects cost to the lender of borrowing on the credit
market. The main risk of ARM is regarding the interest rates which can also rise in the future.
Answer to Question 11
Term life insurance is referred to as the insurance policy which provides guarantee on
the premium or survivors benefits for the particular period of time. Whole life insurance are
much more expensive than the term life insurance with a guarantee rate of money which is
paid (Brooks).
Answer to Question 12
Variable life insurance is referred to as the permanent life insurance policy considers
a particular value of the investment.
Answer to Question 13
The three main investment categories are the stock, bond and cash equivalents. The
much riskier categories in this case stock, bond and cash equivalents.
Answer to Question 14
Diversification means that diversifying the risk associated in the investment process
of the business. It is accomplished when a particular business is trying to expand its ongoing
business (Heaton).

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Answer to Question 15
The benefits of investing in the mutual fund is that it is easy, convenient to invest. The
risk associated in the investment process is lower compared to the investment in stocks and
bonds (Pilbeam).
Answer to Question 16
The low beta fund is less volatile compared to the high beta fund which lowers the
average price fluctuations. This means that the fund with low standard deviation.
Answer to Question 17
The term fund expense ratio is referred to as the certain percentage of the funds asset
which is used for the purpose of administrative management and advertising (Fisher).
Answer to Question 18
In order to diversify the funds and investor should have minimum up to 4 portfolio
stocks for perfect diversification.
Answer to Question 19
Tax deferred investment account is referred to as the employer sponsored plan for
retirement whereas tax free retirement account is basically the tax free amount which is
withdrawn at the time of retirement (Shoup).
Answer to Question 20
Interest rate risk is the risk which comes out from the bond owners from interest rates
fluctuations (Ehrhardt, Michael and Eugene).
Answer to Question 21
The categories of bond with maximum debt must be considered in order to lower the risk.

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Answer to Question 22
Current yield is the annual income on an investment which is further divided by the
current price of the securities. It is calculated by the following way:
Answer to Question 23
Yield to maturity is referred to as the anticipated total return on the bond which is
held at the time of the maturity of such bond (Fracassi).
Answer to Question 24
Formula of taxable equivalent yield for municipal bonds
Answer to Question 25
Stock Index is an evaluation of the stock in the stock market which is computed from
the prices of the selected stocks.
Problem 2
Answer to Question 1
The term framing in behavioral finance refers to the method of observing the decision
which affects the choices that are framed.

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Answer to Question 2
Disposition effect is referred to as the anomaly which relates to the tendency of the
investors in order to sell the assets which are increased in value.
Answer to Question 3
Familiarity heuristics is referred to frequent way of judging the significance as these
are familiar in the memory of the individual.
Answer to Question 4
Arbitrage must be limited based on the behavioral finance where the risk will be
minimized by attaining the profit.
Answer to Question 5
Hindsight bias refers to the common tendency of people in order to perceive events
which is considered as more predictable. There are some of the effects which actually is the
reason in the hindsight bias which is the distortions of the memories when an event occurred
with an significant source of overconfidence regarding the ability to predict outcomes which
are related to the future events.

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References
Brooks, Chris. Introductory econometrics for finance. Cambridge university press, 2019.
Gitman, Lawrence J., Roger Juchau, and Jack Flanagan. Principles of managerial finance.
Pearson Higher Education AU, 2015.
Shoup, Carl. Public finance. Routledge, 2017.
Fisher, Ronald C. State and local public finance. Routledge, 2015.
Pilbeam, Keith. Finance & financial markets. Macmillan International Higher Education,
2018.
Heaton, J. B., Nicholas G. Polson, and Jan Hendrik Witte. "Deep learning in finance." arXiv
preprint arXiv:1602.06561 (2016).
Ehrhardt, Michael C., and Eugene F. Brigham. Corporate finance: A focused approach.
Cengage learning, 2016.
Fracassi, Cesare. "Corporate finance policies and social networks." Management Science
63.8 (2016): 2420-2438.

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