Introduction
Finance is a branch of economics concerned with providing funds to individuals, businesses, and governments. Finance allows these entities to use credit instead of cash to purchase goods and invest in projects. For example, an individual can borrow money from a bank to buy a home. An industrial firm can raise money through investors to build a new factory. Governments can issue bonds to raise money for projects ( 2002). Finance plays an important role in the economy. As banks, credit unions, and other financial institutions provide credit, they help expand the economy by directing funds from savers to borrowers. For example, a bank acquires large amounts of money from the deposits of individual savers. The bank does not let this money sit idle but instead provides loans to borrowers who might then build a house or expand a business. The savings of millions of people percolate through many financial institutions, spurring economic growth.
A wide variety of financial institutions have different roles in finance and the economy. These financial institutions help make sure finance and economy has no other problem. Some of these institutions include banks, link lenders and borrowers. These institutions act as an intermediary among consumers, businesses, and governments by lending out deposits. Other institutions, such as stock exchanges, provide a market for existing securities, which include stocks and bonds. Stock exchanges encourage investment because they enable investors to sell their securities when the need arises (2002).
Financial management is about analyzing financial situations, making financial decisions, setting financial objectives, formulating financial plans to attain those objectives, and providing effective systems of financial control to ensure plans progress towards the set objectives. In relation to the goals and objectives of financial management, these are likely to vary according to different circumstances. For example, the goal for an individual might be accumulating a certain amount of personal wealth, for a commercial company it might be making a target amount of profit. Alternatively, in the case of a not-for-profit organization (NPO) such as a charity, the goal might be providing the best value, in terms of the services provided, to its client group and probably from a limited financial budget. While the goal of shareholder wealth maximization may not be relevant for not-for-profit enterprises, which do not have shareholders, the basic principles, practices, and precepts of financial management still apply. Financial plans, like objectives, will have a timeframe, short, medium, or long-term and will essentially provide the road maps detailing how the firm’s objectives are to be reached. The essence of financial planning is to ensure that the right amount of funds is available at the right time and at the right cost for the level of risk involved to enable the firm’s objectives to be achieved ( 1999).
Financial plans show, for example, the volume, and timing of funding requirements needed to achieve the firm’s objectives. Budgeting will be a key financial planning tool. Budgets are essentially short-term, detailed financial plans and individual managers will be made responsible for their achievement. Ultimately the whole financial planning process is likely to be summarized in a few key budgeted or forecast financial statements: a budget balance sheet, a budget profit and loss account, and a budget cash flow statement. These budgets or forecasts will then provide the reference point, or financial master plan, against which progress can be monitored and controlled. The efficiency and effectiveness of the financial planning process will be greatly aided by the application of computerized financial modeling (1999). The paper will provide a short summary of the case. The paper will also provide answers to the different questions mentioned in the case. The different information acquired will be used to create a conclusion.
Summary of the case
The case was about ’s need of financial assistance given by . offers financial advices and assistance that are proven to be effective. discussed with the things they could possibly do to save some finances for the future while paying all the money they borrowed. Dan gave the couple suggestions that can help them fix their financial dilemma.
First Question
Popular misconceptions regarding debt and credit often stem from the assumption that debt is a commodity and borrowing is like purchase of any other good or service, where prices alone equilibrate supply and demand. In fact, unlike most market transactions, which can largely be summarized in terms of prices and quantities, debt is a highly complex contract. This is because debt entails a promise to repay principal and interest on a loan or advance. It is a promise whose fulfillment is by its nature uncertain and will differ among borrowers ( 1995).Key features of such a promise include different things such as quantity advanced; specification of interest, whether fixed or variable in relation to a benchmark rate; specification of maturity; collateral that the borrower must provide as security for the lender, if any; specification of the circumstances in which the loan is in default, thus giving the tender the right to seize the borrower’s assets. In the simplest case this will be failure to pay interest or principal; specification of the law under which default is to be adjudicated; specification of the seniority of the claim; pledges in relation to further borrowing, for example the lender can insist no further debt be incurred, or no further debt senior to it; any further commitments by the lender; provisions for transferability; whether or not the contract is standardized in terms of provisions or denomination; any tax exemption features; and call provisions ( 1995).
The key difficulty is raised by the uncertain possibility that the borrower will default, given costs of bankruptcy, asymmetric information, and incomplete contracts. If there were no costs of bankruptcy, default risk would be of no concern to the lender; assets to pay off the loan would pass smoothly to him in the case of default. In practice, resolution of default takes time and effort, the tender may find that assets seized from the borrower have depreciated in value, and/or he may find that secondhand markets for such assets are weak or non-existent. But even given costs of bankruptcy, if there were no asymmetries of information or if the lender were able to specify and verify the borrower’s behavior in every eventuality, then issue of debt would be a relatively straightforward transaction, because probability of default could be known or controlled precisely, and charged or collateralized accordingly ( 1995). The information provided in table 1 showed that if the s continue minimum payments on their outstanding debts about ,280 not including interest would be left for other expenses. Such amount was acquired by adding all the loans they have then multiply it with the 3% minimum monthly payment and then multiplying it with 12 for the twelve months. After a result has been acquired the next thing done was to subtract the results of the initial computations with the total earnings of .
Second Question
In the absence of financial markets and financial institutions that are involved in lending and borrowing and of investing for dividends. The only way that individuals could earn a rate of return on their savings would be by investing them in businesses under their own management. The possibility of investing in the enterprises of friends or close associates in the form of lending or accepting a partnership in which one plays no role in the management already represents the existence of a primitive, highly circumscribed form of financial market. Such limited possibilities may be of significant value to those to whom they are open, but they are obviously of substantially less value than the existence of full-fledged financial markets and the vastly greater opportunities for investment that the latter afford. Moreover, they are of no value for the great majority of individuals, whose friends and close associates are unable to offer the prospect of worthwhile investments ( 1990). Thus, in the absence of financial markets and financial institutions, for the great majority of people, if not for everyone, the only means of earning a rate of return on their savings would be investment in businesses under their own management. Yet there are many individuals for whom it would be highly disadvantageous to have to run a business of their own, given the alternative of being employed for wages that are higher than the profits they could hope to make in business for themselves. This in fact is the case for the great majority of people today, who can work as employees in fairly well-paying positions, but who, if they had to live by being in business for themselves would earn much less, or even lose the capital they invested ( 1990).
On the basis of these facts, it should be obvious that the absence of financial markets and financial institutions would mean that to an important extent; individuals who had savings would have no incentive to invest them. Individuals in such a position would thus have no alternative but to hold their savings in the form of hoards of money or accumulations of consumers’ goods, such as jewelry, housing, and works of art. The consequence would be that their savings would not serve to make possible a demand for capital goods or for labor. The result of the lesser demand for capital goods would be that the extent to which the economic system concentrated on the production of capital goods would be correspondingly less. And thus the ability to achieve a production of capital goods sufficient to make possible capital accumulation would be correspondingly less. The effect would almost certainly be economic stagnation at an extremely low level of productivity of labor. The standard of living of the average worker would also suffer from the fact that savings that are hoarded or held in the form of accumulations of personal consumers’ goods do not contribute to the demand for labor and the payment of wages, as do savings that are invested ( 1990). The couple can engage in a business to generate income and use their money well. But since the couple has many standing debts it is not advisable for them to do such not unless they are shown to have the capacity to hastily pay well their debts. The couple will have to deposit about 1.65 per month. By continuously saving the couple can probably save around 0,000 which can be said is big enough for the future of their child.
Third Question
Housing is permanent shelter for human habitation. Because shelter is necessary to everyone, the problem of providing adequate housing has long been a concern, not only of individuals but of governments as well. Thus, the history of housing is inseparable from the social, economic, and political development of humankind. Housing is a critical component in the social and economic fabric of all nations. No country is yet satisfied that adequate housing has been delivered to the various economic groups that make up its populace. Thus, most nations, in one form or another, continue to claim a housing problem (2002). Each month the couple wants to save money to have a down payment on the house costing 0,000. If they will set aside around ,371 per month they can gather enough money to act as down payment for the house.
Fourth Question
Mortgage is a legal instrument that pledges a house or other real estate as security for repayment of a loan. By providing a guarantee that the loan will be paid back, a mortgage enables a person to buy property without having the funds to pay for it outright. If the borrower fails to repay the loan, the lender may foreclose on the property that is; force the sale of the house to recover the amount of the loan. The mortgage lending process has two instruments, a note and a mortgage. The note specifies the financial terms of a loan agreement. The mortgage contains a legal description of the property and a statement that pledges the property as security for the loan ( 2001). However, the word mortgage commonly refers to both parts of the loan agreement as a whole. A borrower can obtain a mortgage from a bank, credit union, or other lender. Most lenders require the borrower to have a certain amount of money to use as a down payment toward the purchase of the house. For example, if an individual wants to buy a home priced at 0,000 and the lender requires a down payment of 00, the individual will apply for a loan of ,000 to pay for the difference. A lender requires detailed information about borrowers to assess their ability and willingness to repay a loan (2001). After the couple has loaned for the payment of the house they acquire a mortgage. The mortgage payment of the halls is more or less ,450 not included in this is the taxes and insurance.
Fifth Question
One of the more common loan repayment plans is a traditional amortization loan. Under this plan, total periodic loan obligations remain constant over the loan’s life. Thus, over time, the principal and interest portions of the total payment vary, with the interest payment constituting a larger portion of the total payment in earlier years than in later years. The advantage of this plan is simplicity. A disadvantage is that loan repayments do not vary with returns to assets. Another loan repayment plan is what is termed as a flexible amortization plan. Under this plan, total debt obligations are calculated as under the amortization loan. In each year, the principal must be reduced to the level prescribed by the amortization schedule. Reducing principal then reduces future interest payments. In a future year, a principal payment may not have to be made if the principal has been previously paid. One advantage of the flexible amortization plan over the traditional amortization plan is that the people can repay future principal payments in years of high income. Thus, the plan provides some flexibility in matching returns from assets to loan repayments. If, however, principal has not been prepaid, the plan does not allow for lower debt repayments in adverse income years ( 1993). The amortization schedule contains the principal, the year, the balance and the interest. This gives the knowledge about how the loan they have and what can they do to pay it.
Sixth Question
It is quite clear that the same dollar of income cannot be spent for two different things. Therefore, money paid out for taxes cannot be used to buy new securities. Hence one would naturally expect to find the total volume of sales of new securities to be correlated less closely with the total income of any class of the population than with the income which the given class has available after paying the tax bills. Unfortunately, figures showing for the various classes of the population incomes after all taxes have been paid are not readily available. However, data can be obtained showing, for the higher brackets, the approximate amounts of income remaining for the recipients after they have paid their Federal income taxes ( 1948). Each month the halls should set aside around ,000 to have enough money accumulated in their retirement nest egg. They should save the mentioned amount of money so that there are still some money exceeding for their future.
Seventh Question
If the halls continue paying the 3% minimum on their credit card debt each month. It will take them at least 33 months to pay their debt. The interest would balloon to 31.98%. The halls should continue paying this since it will not take them that long to pay for that debt. By paying off this debt their worries would be lessened and they can have more money to save. In any way this debt is a debt and should be paid so that they can have lesser things to think of.
Conclusion
Finance allows entities to use credit instead of cash to purchase goods and invest in projects. Finance plays an important role in the economy. As banks, credit unions, and other financial institutions provide credit, they help expand the economy by directing funds from savers to borrowers. Financial management is about analyzing financial situations, making financial decisions, setting financial objectives, formulating financial plans to attain those objectives, and providing effective systems of financial control to ensure plans progress towards the set objectives. Financial plans, like objectives, will have a timeframe, short, medium, or long-term and will essentially provide the road maps detailing how the firm’s objectives are to be reached.
The case was about ’s need of financial assistance given by . Debt entails a promise to repay principal and interest on a loan or advance. It is a promise whose fulfillment is by its nature uncertain and will differ among borrowers. The halls should continue paying this since it will not take them that long to pay for that debt. By paying off this debt their worries would be lessened and they can have more money to save.
References
Credit:ivythesis.typepad.com
0 comments:
Post a Comment