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Bonus C - Managing Personal Finances
D-58
Sadly, those unlucky people may just be setting themselves up for yet another disappointment. In
the world of securities arbitration, claims of more than $100,000 are heard before a three-person panel
sponsored by the Financial Industry Regulatory Authority (FINRA), not a court. Present on every panel is
one representative of the brokerage industry, essentially leaving each decision against one broker in the
hands of a fellow broker. The practice has been decried as biased and unfair, but FINRA doesn’t see it
that way, citing its streamlined arbitration process as consumer-friendly because it costs less than a long,
drawn-out lawsuit. FINRA also claims that over half of the customers who file complaints receive a set-
tlement.
But FINRA’s assertions don’t tell the whole story. Investors who emerge victorious from the ar-
bitration process usually receive only 50% of their claim, and awards received go down as the size of the
brokerage gets bigger. Customers who challenge the top three brokerages usually only receive 21% of
their claim. Some brokers even boast about their arbitration record, such as Morgan Keegan, which
proudly states on its website that of 113 cases levied against the firm, 95 were dropped or dismissed.
While complaints from customers and consumer groups continue, intervention from the highest authority
in America might not be too far away. President Obama has already proposed that arbitration reform
could be included in a new wave of financial regulation.iv
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critical
thinking exercises
Name: ___________________________
Date: ___________________________
critical thinking exercise D-1
PREPARING A PERSONAL BALANCE SHEET
Angela and Chris North are recent college graduates. They own a three-year-old car valued at
$5,400, have $700 in a savings account, and $200 in their checking account. They owe $2,200 on their car
loan. The Norths also have personal items valued at $1,800, plus a CD collection worth $300. They owe
$4,800 on student loans and $150 on credit cards. Chris owns General Motors common stock worth $660,
and Angela owns a $1,000 personal computer.
1. Prepare a simple balance sheet for the Norths.
2. The Norths decide to buy a $5,000 motorcycle, using $500 from their savings account as the
down payment and borrowing the rest from the bank. Modify their balance sheet to reflect these
changes. Has their net worth changed?
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notes on critical thinking exercise D-1
1. Prepare a simple balance sheet for the Norths.
ASSETS
Car $ 5,400
Savings Account 700
Checking Account 200
Personal Items 1,800
CD Collection 300
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2. The Norths decide to buy a $5,000 motorcycle, using $500 from their savings account as the
down payment and borrowing the rest from the bank. Modify their balance sheet to reflect these
changes. Has their net worth changed?
ASSETS
Car $ 5,400
Motorcycle 5,000
Savings Account ($700 − $500) 200
Checking Account 200
Personal Items 1,800
CD Collection 300
General Motors Stock 660
The net worth has not changed. Assets have been increased, but so have liabilities.
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Name: ___________________________
Date: ___________________________
critical thinking exercise D-2
DEVELOPING A SPENDING PLAN
Pam Washburn earns $19,080 a year as a file clerk. She also earns $100 a month selling home-
made cakes. Her monthly rent is $420, monthly groceries run $200, and monthly utility bills are about
$275. Auto and renter’s insurance runs about $600 a year. Health insurance costs $110 a month. Her car
payment is $315 per month. Annual medical expenses are $900, and she spends $150 a month on enter-
tainment and recreation. Miscellaneous personal expenses run $30 a month.
1. Develop a monthly budget (income – expenses) for Pam and determine her surplus or deficit.
2. Her landlord has told Pam that the rent will be raised $50 per month beginning next month. Can
Pam afford the same apartment?
3. What advice would you give Pam about her finances?
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notes on critical thinking exercise D-2
1. Develop a monthly budget (income – expenses) for Pam and determine her surplus or deficit.
INCOME
Salary (19,080 ÷ 12) $1,590
Sales Income 100
TOTAL INCOME $1,690
EXPENSES
Rent $ 420
Groceries 200
Utilities 275
2. Her landlord has told Pam that the rent will be raised $50 per month beginning next month. Can
Pam afford the same apartment?
INCOME
Salary (19,080 ÷12) $1,590
Sales Income 100
TOTAL INCOME $1,690
EXPENSES
Rent $ 470
Groceries 200
Utilities 275
Auto/Renter’s Insurance (600 ÷ 12) 50
Health Insurance 110
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Name: ___________________________
Date: ___________________________
critical thinking exercise D-3
FINDING THE BEST CAR LOAN
Finding information about automobile loans is easier than ever by using the Internet. Use one of
the online loan calculators (example: www.bankrate.com)v to calculate the following information. Use
local rate function to find your zip code. (Sometimes the Web address for a location changes. You might
need to search to find the exact location mentioned.)
1. In your zip code, find the following information for a 30-month car loan.
a. What is the highest interest rate quoted?
b. What is the lowest interest rate quoted?
c. Using the lowest rate quoted, calculate the monthly payment for a $20,000 car loan.
D. What is the total amount you will repay (monthly payments 30 months)?
2. In your zip code, find the following information for a 48-month car loan.
a. What is the highest interest rate quoted?
b. What is the lowest interest rate quoted?
c. Using the lowest rate quoted, calculate the monthly payment for a $20,000 car loan.
D. What is the total amount you will repay (monthly payments 48 months)?
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3. In your zip code, find the following information for a 72-month car loan.
a. What is the highest interest rate quoted?
b. What is the lowest interest rate quoted?
c. Using the lowest rate quoted, calculate the monthly payment for a $20,000 car loan.
D. What is the total amount you will repay (monthly payments 72 months)?
4. Next, explore the cost of car loans in other areas of the country. Choose one of the zip codes be-
low and find information for a 36-month car loan using the lowest interest rate quoted.
New York 10013
Chicago 60601
Los Angeles 90230
New Orleans 70130
a. What is the interest rate for a 36-month loan?
b. What is the monthly payment for a $20,000 36-month loan?
c. Is this less, more, or the same as the rates quoted for your zip code? What do you think are the
reasons for the differences, if any?
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Name: ___________________________
Date: ___________________________
critical thinking exercise D-4
CHOOSING THE RIGHT MORTGAGE LOAN
What would be the monthly mortgage payment for your dream house? It is easier than ever to
find this information by using one of the mortgage calculators available online. Try the website for your
local bank, or use one of the national news or finance sites such as www.money.cnn.com,
www.bankrate.com, or www.bankofamerica.com.vi (Search for “Mortgage Calculator.” Sometimes the
Web address for a location changes. You might need to search to find the exact location mentioned.)
You have found a great little house in an older section of town. Because it needs lots of renova-
tion, the offering price is $85,000. You have saved $5,000 to use as a down payment.
1. What would be the monthly mortgage payment for a 30-year fixed-rate loan if the interest rate
is:
a. 5.5%
b. 7.0%
c. 9.5%
2. What would be the monthly mortgage payment for a 15-year fixed-rate loan if the interest rate
is:
a. 5.5%
b. 7.0%
c. 9.5%
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3. If you can afford a monthly payment of only $400 or less, what is the most expensive house you
could buy (assuming 30-year fixed-rate loan) at:
a. 5.5%
b. 7.0%
c. 9.5%
4. If your parents offer to lend you another $5,000 for the down payment ($10,000 total) for your
$85,000 dream house, what would be the monthly mortgage payment on a 30-year fixed-rate loan
if the interest rate is:
a. 5.5%
b. 7.0%
c. 9.5%
5. Use the “local rate” function and enter your zip code. In your area, what is the current rate for an
$85,000
a. 30-year fixed-rate loan?
b. 15-year fixed-rate loan?
6. Adjustable rate mortgages (ARMs) offer a low initial rate and then recalculate (“reset”) at inter-
vals to reflect the current market interest rates. Use the “local rate” function on the website and
enter your zip code. This time choose one of the ARM offers. ARM quotes give “caps,” or the
maximum percentage points that can be added to your loan.
a. What is the initial interest rate (annual percentage rate, or APR) for an $85,000 ARM mortgage
in your zip code?
b. What is the estimated monthly payment?
c. What is the maximum amount percent interest that can be added to this loan when it resets?
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endnotes
