Looking for help on about 7 questions, a couple require paragraphs.

MGMT 613 - Financial Management Module 11 Questions 1. You have a friend, Icahn Betitall, who just started a small business. He is paying a hefty premium for insurance. Icahn's insurance agent told him that he is insuring against the risk of loss on fire, theft, liability, and business interruption. Icahn also has policies for life, health, and automobiles. Icahn is planning a trip to Las Vegas. He plans to contact his agent and obtain a policy on the risk of losing his money at the blackjack table. 1. What should you tell Icahn about being able to purchase such a policy? 2. What are several methods that Icahn can choose to manage his risk exposure in Las Vegas? 2. Larry Kraft owns a restaurant that is open 7 days a week. He has 25 full-time employees, but he has fairly high employee turnover. He believes that he can stabilize his workforce if he has a pension plan for his employees. Larry hears about a small business retirement plan called the SIMPLE IRA. What are the qualifications and limitations for him to establish this plan? 3. You purchase a tax- free municipal bond paying an annual rate of 6 percent. Find the before- tax rate if you are in the 1. 15- percent tax bracket. 2. 28- percent tax bracket. 3. 36- percent tax bracket. 4. In pension planning, some people rely on the Social Security system for their entire retirement program. Give me one argument for Social Security and one against the system. 5. The Gilbert Guide has grown from its inception in 2003 as a groundbreaking guidebook setting new standards and criteria for assessing the quality of the many types of longterm care available to become the biggest senior care site on the Web, offering an even wider range of resources to help families and caregivers in their time of senior care need. The Gilbert Guide can be found on the Internet at http:// www. gilbertguide. com. Select one of the resources available and write a paragraph (between 200 and 400 words) about what the resource is and how it is benefits seniors. Notes on Personal Finance Personal finance encompasses every aspect of an individual's finance life. What we are attempting to address in this one chapter, I have personally been studying for years. My goal is not that you become an expert or learn how to value an individual investment, but to give you a broad overview and introduce you to concepts to give you a very general understanding of how investments work. I also want to make sure that you understand where and how to get more information because these are concepts that you will face regardless of what you ultimately do for a career. Let's start with risk. First of all there are different types of risk. The book covers speculative and pure risk as well as insurance fairly well so I am not going to address that type of risk except to say that insurance is one of the best tools we have to transfer away the risk that we don't want to have. Some specific types of risk include the following: Business Risk - These risks are associated with a particular industry or a particular company within an industry. For example, oil-drilling companies depend on finding oil and then refining it, a lengthy process, before they can generate a profit. They carry a higher risk of profitability than an electric company, which generates its income from a steady stream of customers who buy electricity no matter what the economic environment is like. Call Risk -Call risk is specific to bond issues and refers to the possibility that a debt security will be called prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below, because the bondholder must find an investment that provides the same level of income for equal risk. Call risk is most prevalent when interest rates are falling, as companies trying to save money will usually redeem bond issues with higher coupons and replace them on the bond market with issues with lower interest rates. In a declining interest rate environment, the investor is usually forced to take on more risk in order to replace the same income stream. Credit Risk -This refers to the possibility that a particular bond issuer will not be able to make expected interest rate payments and/or principal repayment. Typically, the higher the credit risk, the higher the interest rate on the bond. Currency Risk (also known as exchange rate risk) - Overseas investments are subject to fluctuations in the value of the dollar against the currency of the investment's originating country. This is also referred to as exchange rate risk. Financial Risk - Excessive borrowing to finance a business' operations increases the risk of profitability, because the company must meet the terms of its obligations in good times and bad. During periods of financial stress, the inability to meet loan obligations may result in bankruptcy and/or a declining market value. Inflation Risk (also known as purchasing power risk) - Inflation is the general rise in prices that diminishes the purchasing power of money. For example, if there were no other factors involved but inflation and you purchased a candy bar a year ago for a $1, when you go to buy that same candy bar this year that candy bar would cost you more than just $1 because of inflation. Interest-Rate Risk - Fluctuations in interest rates may cause investment prices to fluctuate. For example, when interest rates rise, yields on existing bonds become less attractive, causing their market values to decline. Liquidity Risk - Liquidity is the ability to readily convert an investment into cash without affecting the asset's price. For example, a stock or mutual fund can be converted into cash easily; however, their price is going to depend on the market so while they are highly marketable, they are not liquid. A great example of a liquid asset is a bank savings account. Market Risk (also known as systematic risk) - The price of a security, bond or mutual fund may drop in reaction to tangible and intangible events and conditions. This type of risk is caused by external factors independent of a security's particular underlying circumstances. Systematic risk is caused by some factor that cannot be controlled by diversification. In other words, market risk cannot be eliminated with diversification. Reinvestment Risk -In a declining interest rate environment, bondholders who have bonds coming due or being called face the difficult task of investing the proceeds in bond issues with equal or greater interest rates than the redeemed bonds. As a result, they are often forced to purchase securities that do not provide the same level of income, unless they take on more credit or market risk and buy bonds with lower credit ratings. This situation is known as reinvestment risk: it is the risk that falling interest rates will lead to a decline in cash flow from an investment when its principal and interest payments are reinvested at lower rates. Social/Political / legislative Risk -Risk associated with the possibility of nationalization, unfavorable government action or social changes resulting in a loss of value is called social or political risk. Because the U.S. Congress has the power to change laws affecting securities, any ruling that results in adverse consequences is also known as legislative risk. Now some of the above risks are systematic and some aren't. The most important thing to note about systematic risk is that it can't be diversified away and non-systematic risk can. In other words, let's say you invested all of your money in Apple. You have taken on greater risk because you would be subject to all the risk associated with the fluctuations in the market (systematic) as well as all the risks associated with how Apple is run and the decisions the individual company makes (business risk). One of the most difficult challenges that I face as a financial planner is properly quantifying the risk that a client is willing to assume. You might think that risk is highly correlated to the time. For example, I am 52 years old. If you were to compare me to a 25 year old and a 77 year old, you might think that the 25 year old would easily be comfortable taking on more risk than me and that the 77 year old would not. You may be right, but you are far more likely to be wrong. Risk has less to do with time than you would think. One of the phenomenon that I have witnessed over the last several years is that the 20 somethings (generation Y, I believe) are far more risk averse than Baby Boomers and much more like those who came of age during the Great Depression. It makes sense when you think about it. Put yourself in their shoes; what if you had graduated from college during the Great Recession. You might have left college with a Bachelor's degree, a big student loan, a sizeable chunk of credit card debt and no job. You can't blame them for being risk averse. The book does a pretty good job at explaining different investment vehicles, but it left out what I think are a few key options, so I have detailed a brief description of most of the common investment vehicles below: The Investment Portfolio The portfolio will be invested in various investment products designed to achieve both asset allocation as previously discussed and product diversification. The Client's total portfolio may consist of any of the following types of investments detailed as follows unless the Client requests that an investment type be eliminated. Common Stock - Individual ownership positions in a company. Gains and losses are directly tied to the trading price of the company's stock. Preferred Stock - Individual ownership positions in a company that have a stated targeted dividend. Ownership of preferred stock does not entitle holder to general corporate gains like common stock. Bonds - Bonds are debt instruments used by corporations and municipalities to raise capital and pay a stated rate of return (called the coupon) for a specific period of time, and then at maturity pay back the face amount of the bond. The exception to that are zero-coupon bonds which don't pay coupon payments. With zero-coupon bonds you typically pay a portion of the face value of the bond and wait until maturity to receive the full face amount of the bond. Treasuries - Debt instruments issued by the federal government used to raise capital. Treasuries can be in the form of bills (issued for 4, 13, 26, or 52 weeks), notes (issued for 2 to 10 years) and bonds. (Issued for greater than 10 years). Mutual Funds - An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of pooling resources to invest in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. Index fund - A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. Exchange-traded Fund (EFT) - A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. Structured Notes - The term \"structured products\" covers a wide range of complex investments created to address specific investment needs. Some structured products provide exposure to a specific security or asset class, while others are designed to hedge against existing assets or specific security exposure. Structured products typically have two components, a note and a derivative (i.e. option), and have a fixed maturity. Some structured notes have FDIC protection on the principle as long as the note is held to maturity and some have a buffer which provides some protection against losses against the index or investment that it is tracking. Options - A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). In this investment portfolio, options will be limited to hedge long stock positions. Real Estate Investment Trusts (REIT) Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents. Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. Unit Investment Trust (UIT) A UIT is a fixed portfolio of securities, held for a predetermined time, investors purchase units which represent an undivided ownership in the securities contained in the portfolio. Annuities - Annuities are Investments with an insurance company and can be in several forms: o o o o Immediate annuity (also referred to as a single premium immediate annuity (SPIA). Where you invest a certain amount with the insurance company and they promise a set payment for a period of time up to the life of the annuitant or joint annuitant. Fixed annuity - A lump sum investment that pays a set rate of return for a fixed period of time. Indexed annuity - A lump sum investment that pays a return that is tied to a specific index for a fixed period of time. Variable annuity - A lump sum investment that is invested in sub accounts where the investment is placed can gain or lose value. (Sub accounts function very much like mutual funds). Riders can be added to annuities to add some insurance protection like a death benefit or income rider A Retirement Plan When it comes to retirement planning, one of my biggest gripes is when you read on the internet, or hear that you need to have \"_______\" in order to retire. I've heard some say a half a million, a million, even 2 million. The problem is that this is not only useless information; it is dangerous information. I say dangerous because it is bad enough that there are people who become despondent because they feel as if they will never have enough to retire, but what is dangerous is an individual who needs more than the \"amount of the month\" that they have been told. There is really a lot more to creating a retirement plan than we can adequately cover in this class. There are many resources available and I strongly suggest that if you are interested in creating a retirement plan that you work with a CERTIFIED FINANCIAL PLANNER or other qualified individual. I will caution you that there are no regulations on anyone calling themselves a financial planner, so if you want to make sure that you are working with an individual with the knowledge and experience to help you that you use a CFP (aka CERTIFIED FINANCIAL PLANNER). If you are interested in learning how to do retirement planning, then I would start by learning as much as possible. The following are a couple of resources with great information for you to explore. http://askebsa.dol.gov/SavingsFitness/Worksheets http://www.letsmakeaplan.org