CHAPTER 1 – Financial Economics End-of-Chapter Problems
Defining Finance
1. What are your main goals in life? How does finance play a part in achieving those goals? What are
the major tradeoffs you face? SAMPLE ANSWER:
??????????????
Finish school
Get good paying job which I like
Get married and have children Own my own home Provide for family
Pay for children’s education Retire
How Finance Plays a Role: SAMPLE ANSWER:
??
Finance helps me pay for undergraduate and graduate education and helps me decide whether spending the money on graduate education will be a good investment decision or
not.?? Higher education should enhance my earning power and ability to obtain a job I like.
Once I am married and have children I will have additional financial responsibilities ??
will have to learn how to allocate resources among individuals in the household and learn how to set (dependents) and I aside enough
money to pay for emergencies, education, vacations etc. Finance also helps me understand how to manage risks such ??Finance helps me determine whether the home I want to buy is a good value or not. The study of as for disability, life and health. finance also helps me determine the cheapest source of financing for the purchase of that home. ??
Finance helps me determine how much money I will have to save in order to pay for my education as well as my own
retirement. children’s Major Tradeoffs: SAMPLE ANSWER
??
Spend money now by going to college (and possibly graduate school) but presumably make more money
once I graduate due to my higher education. ??
Consume now and have less money saved for future expenditures such as for a house and/or car more money now but consume less than some of my friends or save
Financial Decisions of Households
2. What is your net worth? What have you included among your assets and your liabilities? Would you list the value of your potential lifetime earning power as an asset or liability? How does it compare in value to
other assets you have listed?
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Copyright ?2009 Pearson Education, Inc. Publishing as Prentice
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Financial Economics
Solutions Manual
SAMPLE ANSWER:
$ ____________ (very possibly negative at this point) Assets: ??Checking account balance
Savings account balance ??
Furniture/Jewelry (watch) ??
Car (possibly) ??
Liabilities:
??Student loans
Credit card ??
balance If renting, remainder of rental agreement (unless subletting is a ??
possibility) ??
Car payments (possibly)
Students typically don’t think about the high value of their potential lifetime earning power when calculating their
net worth but for young people it is often their most valuable asset.
3. How are the financial decisions faced by a single person living alone different from those faced
by the head of a household with responsibility for several children of school age? Are the tradeoffs they have to
make different, or will they evaluate the tradeoffs differently?
A single person needs only to support himself and therefore can make every financial decision on his own. If he
does not want health insurance (and is willing to bear the financial risks associated with that decision) then no one
will be affected by that decision other than that single person. In addition, this person needs to make no decisions
about allocating income among dependents. A single person is very mobile and can choose to live almost anywhere.
The tradeoffs this individual makes generally concern issues of consuming (or spending) today versus The head of household with several children must share resources (income) among dependents. This individual saving for must
consumption tomorrow. Since this person is supporting only himself, the need to save now is less important be prepared to deal with risk management issues such as how to be prepared for potential financial than for emergencies
the head of household discussed next. (such as a serious health problem experienced by a member of the family or home owners insurance in case of a fire
or other mishap). Because there are more people in this household than with a single person, there are greater risks
that someone will get sick or injured. And because there are dependents, the wage earner(s) should think carefully
about life and disability insurance. In addition, the family is not as mobile as the single individual.Because of the
school age children, the family might want to live near “good schools” thinking that a
4. Family A and family B both consist of a father, mother and two children of school age. In family A stronger education will
both spouses have jobs outside the home and earn a combined income of $100,000 per year. In family B, only eventually help those children’s future well being and financial situation. Thus, the tradeoffs one for the head of
spouse works outside the home and earns $100,000 per year. How do the financial circumstances household are more complex: more money is needed to consume today (he or she needs to and support more
decisions faced by the two families differ? With two wage earners, there is less risk of a total loss of family income due to unemployment or dependents), but a lot more money is also needed to save for future expenses such as education and disability than housing and
there is in a single wage earning household. The single wage earning family will probably want more more money is needed for risk management such as life and disability insurance. disability and
life insurance than the two wage earning family. On the flip side, however, the two wage earning family may need to
spend extra money on child care expenses if they need to pay someone to watch the children after school.
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Copyright ?2009 Pearson Education, Inc. Publishing as Prentice
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Financial Economics
Solutions Manual
5. Suppose we define financial independence as the ability to engage in the four basic household
financial decisions without resort to the use of relative’s resources when making financing decisions. At what age
should children be expected to become financially independent?
Students will have differing responses to this question depending upon their specific experiences and opinions. Most
will probably say independence should come after finishing their education, and they have a significant flow of income. 6. You are thinking of buying a car. Analyze the decision by addressing the following
issues:
a. Are there are other ways to satisfy your transportation requirements besides buying a car? Make a list
of
all the alternatives and write down the pros and cons.
Pros Cons Transportation Mode
Walking ??Takes you directly where you ??Takes a long time
want ??Destination may be too to go ??No out of pocket far ??costs
Bicycle ??Requires physical strength Takes you directly to where ??Convenient
Bus
??
????
??Reaches more distant
destinations
you
want to go No out of pocket marginal costs
Convenient Inexpensive
??
and
endurance Destination may be too far
where
you want to go Inconvenient schedules to go
Many stops, not efficient May not take you directly where
you want to go Local destinations only on limited network Moderately expensive where
you want to goMost expensive where
you want to go
??May not take you directly ????????
Subway
??Inexpensive ??Fast
??Reaches distant
destinations
Train
??
??May not take you directly
Airplane
??Reaches distant ??destinations
Fast
??
??Will not take you directly
b. What are the different ways you can finance the purchase of a car?
Finance through a bank loan or lease, finance through a car dealer with a loan or a lease or finance the car out of your own savings.
c. Obtain information from at least three different providers of automobile financing on the terms they offer.
d. What criteria should you use in making your decision?
Your decision will be to select the financing alternative that has the lowest cost to you.
??When analyzing the information, you should consider the following:Do you have the cash saved to make an outright purchase? What interest rate would you be
giving up to make that purchase? Do you pay a different price for the car if you pay cash rather than finance?
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金融学兹维博迪第二版-第一章答案
