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Chapter 8: Home and Automobile Insurance

LO 1: Develop risk management plan through insurance

− insurance: protection against possible financial loss; insurer: risk-sharing company; policy: written contract of
insurance; premium: amount of money policy holder is charged for an insurance policy; insured: person
covered by policy.
− Types of risks: risk: chance/uncertain of loss; peril: cause of losses; hazard: something that increases risk.
− Risk management: long-term planned strategy to protect against risks; pure risk: insurable; speculative
risk: uninsurable. Ways to manage risks: risk avoidance, risk reduction, risk assumption, risk shifting.
− What should be insured? For how much? What kind of insurance? From whom?
LO 2: Property & liability insurance
− property loss = great financial challenges; risk of losing property use.
- liability: legal responsibilieis for the financial cost of another person's loss/injury; responsibilities usually caused
by negligence (failure to do what a reasonable/prudent person would do in a given situation); vicarious liability:
responsible for actions of anothe person; strict liability: when one is held responsible for intentional/unintentional
LO 3: Principles of Home and Property Insurance
Property Insurance
− Homeowners insurance: coverage for a place of residence & associated loss (ex. Physical damages to
property, additional living expenses, personal property.
− Personal property endorsement: additional insurance to protect against damages to properties of high
values; need household inventory.
− Home replacement only covers building structure; appraised, not current market value;
− actual cash value (ACV) = current replacement cost – depreciation = current replacement cost – (original
price/years of life*age of furniture)
− replacement value: either 1. replace with an item of the same, or 2. replace with current value
− 80%-rule: need to insure 80% of the house value:
− claim amount received = (amount insured / 80% mark) * amount claimed
Home owner's insurance
− Homeowner's liability converage: protects against financial loss due to damages/injuries to others on my
− unbrella policy (aka. Personal catastrophe policy): extra coverage; $1 millions or more coverage;
voluntary medical payment
Tenant's Insurance
− Tenant's legal liability: tenants liable for loss or property damages under their controls.
Forms of home insurnace policy: 1. named perils. 2. All risks. 3. combination of different risks
LO 4: Factors that influence the amount of coverage & cost of home insurance
− Deductible: insured's share to pay in claims; fixed amount indicated on a policy; higher deductible --> lower
− purchase sufficient coverage for home replacement & personal properties (collections, camera, jewelry, etc)
− other factors: locations, type/age of structure, amount of coverage/deductible, discounts, company differences
LO 5: Important types of automobile insurance coverage
− third party liability: covers financial loss of car accidents which I am responsible
− accident benefits: covers health care costs of people injured in my automobile, including myself
− uninsured motorist protection: insures injuries/damages if my car get hit by someone someone
− No-fault insurance: allows insured to collect payment regardless whose fault it is; intended to provide faster
− with automobile insurance coverage: either 1. pay for damage of car or 2. value of the car at time of loss
− comprehensive coverage: covers damage to vehicle not caused by collisions, such as fire, theft, vandalism,
hail, etc.
LO 6: Factors that affect the cost of automobile insurance
Factors influencing auto insurance premium: the aotumobile itself, cost to repair replace, safety record, use of
vehicle, rating area/territory, driver classification (age, gender, marital status, driving habits), assigned risk pool
Reducing automobile insurance premiums: find out insurance premiums & compare companies, increase
deductibles, look for discounts (establish/maintain good driving record, install security devices, insure more than 1
car with same company if applicable.)

Chapter 9
LO 1: Life insurance, its purpose and principle
Life insurance: a contract (policy), stating that a company promises to pay a lump sum to beneficiary at the time
of insured's death or sometime while they are still alive, for exchange of a regular premium payment. Purpose: to
protect a financial dependent in case policyholder dies. Money used for: 1. charitable bequests. 2. retirement
income. 3. education/income for children/survivors. 4. set up estate plan. 5. pay off mortgage/debts. 6. estate &
death payments. Principle: mortality table --> odds of dying --> base premium on that; factors include: age, sex,
other risk factors.
LO 2: Life insurance needs
Need? Do I have financial dependents (children, spouse)? Objectives: how much to leave financial dependents if I
die? How much retirement income? How much can I pay for insurance program. Income Replacement Method =
(current income * 7) * 0.7. “Family Need” Mehtod: detailed assessment of insurance need based on each family.
LO 3: Two types of life insurance policies & various types of life insurance
Term Life Insurance: protection for specific period of time (ex. 10 – 20 yrs); stop premium payment = no
coverage. Some options: 1. renewability option: renew insurance plan without a physical. 2. Conversion
option: change from term --> whole-life plan, no physical, higher premium. 3. decreasing term insurance:
premium stays level, but coverage amount decreases with age.
Permanent Life Insurance: covers life-long needs, comes in various types. 1. Whole Life Policy: pay flat
premium as long as you live, amount depends on age when policy start; death benefits, accumulates cash value;
borrow against cash value/draw it out at retirement; look carefully at rate of return of my money. Different options:
Limited payment: pay premium for a period of time and be insured for life; Participating: life insurance that
provides policy dividends; changes over time according to different factors. Non-participating policy: life
insurance that does NOT provide policy dividends; flat premium rate throughout. 2. Universal Life Policy:
combination of term insurance & investment elements; good for tax-exemption purpose when RRSP sufficient;
variable premium amount; interest, garanteed over a specific amount, on cash value; set/market interest rate;
death benefits. 3. Variable Life Policy: life insurance + other investment instruments in the same portfolio; return
depends on performance of investments.
Other Types: 1. Group life insurance: term-insurances provided by employer; cost split between
employer/employee. 2. Edowment life insurance: pays lump sum after maturity or early death. Credit life
insurance: insurances lives of a group of borrower; pays off debt if the borrowers die; protects lender.
LO 4: Important provisions in life insurance contracts – things to understand
1. beneficiary properly named. 2. grace period for late payment. 3. reinstatement of mature policy that has
not been cashed. 4. Non-forfeiture clause: if policy forfeited, accumulated cash value still usable. 5.
incontestability clause: after a period of time, insurance company cannot dispute/contest against validity of
policy claim. 6. suicide clause: in first two years, suiside = fash value. 7. automatic premium loan: uses policy
cash value to pay overdue premium. 8. misstatement of age. 9. policy loan provision: borrow against policy
cash value. 10. rider: modifications of the policy ( waiver of premium disablity benefit, accidental death benefit –
double benefit, guaranteed insuranbility option, critical illness, joint, last to die.
LO 5: Buying Life Insurance
− consider present/future income, savings, other insurances, government benefits
− determine whom to buy from (private/public, company rating, agent/direct insurer/broker?)
− compare policy costs (affected by: company operation cost, investment return, policyholder mortality rate,
policy features, competitions amongst companies)
− use interest-adjustd index: considers time value of money; lower the index the lower the cost
− Method of payment: lump-sum, limited instalment (equal payments for specific number of years after
death), life income option (payment to beneficiary for life), proceeds left with the company (pays
beneficiary interests)
LO 6: Health Insurance
− basic medical procesures provincially insured
− additional coverage required: semi-private/private hospital rooms, prescription drugs, vision, dental care
− types of supplemental health insurance:
− Group: 60% are this type; employer sponsored, covers employee & immediate faily, seldom requires
medical examinations
− Individual: covers one person/family; can be tailored to particular needs
LO 7: Need for disability income insurance
− disability income insurance: provides payments to replace income when insured is disabled
− protects your ability to earn an income
− disability: inability to perform one's regular work or any job
− components of diability income insurance: 1. waiting/elimination period (shorter the wait, higher the
premium). 2. duration of benefits. 3. amount of benefits. 4. accident/sickness coverage (get both). 5.
guaranteed renewability (in case one's health gets bad, can still get renewal)
− Sources of disability income: 1. employer. 2. Private. 3. Public (employment insurance, pension plans,
worker's compensations, short/long term welfare)
− My need for disability insurance: 1. determine public/private benefits. 2. 70-80% of after-tax income. 3.
waiting/benefit periods
Critical Illness Insurance: paid for being diagnosed with serious illnesses (Cancer, heart diseases, storke, etc.);
pays for treatments while alive; tax-free lump sum w/in 30 days after diagnosis; pay off other debts/take time off
work; waiver of premium; premium refund upon death
LO 8: the value of supplement health/disability insurance
− long term care insurance: provides day in/out care for long-term illness/disabilities

Chapter 10 (
LO 1: Why establish an investment program?
− financial goals: should be specific, measurable, & tailored to particular financial needs
− financial checkup: 1. save & balance budget. 2. adequate insurance protection. 3. an emergency fund for quick
access (3 – 6 months of living expenses). 4. access to other cash sources for emergenies.
− To get the start-up fund: 1. pay bills, save some, spend some. 2. elective savings program. 3. employer-
sponored retirement programs. 4. extra savings for one to two months a year. 4. use gifts, inheritances, and
LO 2: How safety, risk, income, growth, & liquidity affect investment decisions
Safety & Risk: potential return should be proportional to risk investors assume
− Safety: minimal risk of loss; risk tolerance: amount of psychological pain tolerable from investments
Safety investments: 1. savings accounts. 2. Canada savings bonds. 3. canadian T-Bills. 4. Guaranteed
Investment Certificate (GICs). Other investments with higher returns but riskier: 1. Government and corporate
bond. 2. Utility stocks. 3. Preferred and select common stocks. 4. mutual funds. 5. real estate/rental property.
− Speculative risk: high risk investment in hope of high profit in short time
Risk Factor components: 1. business risk. 2. inflation risk. 3. economic interest rate risk. 4. market
value risk. 5. global investment risk.
− either invest for income or for value growth. Income: stocks pay dividend. Value growth: companies retain
earning for reinvestments; no immediate income, but investments grow.
− liquidity: ability to buy/sell an investment quickly without substantially affecting investment's value
LO 3: Major types of investment alternatives
1. Stock: provides corporations with equity capital (business capital obtained from owners & shareholders). Two
things to consider when buying stocks: 1. buy/sell with other shareholders; corporations do NOT need to buy
back the shares. 2. corporations have freedom over whether to pay dividend or not.
2. Corporate & government bonds: written pledge by corporate/government to repay a specific sum of money;
a loan to corporate/government. Periodic interests to bondholders; principal repaid at maturity; bondholders can
keep bond until maturity or sell to others.
3. Mutual funds: an investment where people pool money together to
buy stocks, bonds, other securties selected by professional managers
of an investment company; buy shares in the fund; diversified
investment = reduced risk; from conservative to speculative; match
my needs with fund's objective
4. segregated funds: buy insurance, and the fund is invested in
underlying mutual funds
5. real estate: page 292-293.
Factors affecting investment choices
− diversification: spread assets among different types of
investmetents to lessen risk
− goals & how to attain them; evaluate BOTH risks & returns

Chapter 11
LO 1: Common Stocks
Index: statistical measure of changes in a portfolio of stocks, which represents a portion of the overall market. Ex.
S&P/TSX Composite Index (Canadian-based), Dow Jones Industrial Average (30 sig. Stocks in NY Stock
Exchange), NYSE Composite Index (all stocks in NYSE), NASDAP Composite Index (NASDAQ stock market),
Standard & Poor's 500 stock index (World).
Why companies issue Common stocks? 1. raise money for company expension (Equity: difference between
market value and claimed value); don't need to pay back. 2. Dividend optional – depends on company. Stock split
Why consumers buy common stocks? 1. right to vote at shareholder's meeting, in person or proxy (legal form that
list issues of discussion and transfer of voting rights to others). 2. pre-emptive right (the right of current holder to
purchase new stocks from the cooperation before it is issued). 3. divident income; be aware of ex-divident (2 days
before record date).
LO 2: Preferred Stocks (preference on dividend and asset distributes over common stock holders)
Advantages over common stocks: 1. order of dividend paying: preferred --> common. (Dividend amount either a
stated amount or a par value [assigned value on the stock certificate]) 2. first claim on asset. 3. callable
(exchanged for specific amount of money; ex. Buy preferred stock with 6% dividend --> interest rate decrease -->
callables allow replacement with stocks of 4.5% interest rates.) Special features: 1. cumulative dividend
(unpaid/omited dividend accumulate and repaid before common share holders are paid). 2. participation feature
(rare; share dividend beyong the stated value with common holders). 3. conversion (change for common).
Unlike bonds, common/preferred stocks do NOT need to be repaid by corporations.
LO 3: Stock Evaluation & Investment --> know this section well. 8 types
Blue chip stock: safe investment (look for leadership, history of stable earning, consistently paying dividends).
Income stock: pays high-than-average dividend (ex. Utility stock). Growth stock: potential to earn above-
average profits (look for expanding product line of quality merchandise, effective research/development
department). Penny Stocks: sell for < 1$ by new companies, drastic fluctuation in price, high risk. Cyclical stock:
follows business cycle of economic advances & declines. Defensive stock: remains stable during economic
declines (ex. Kellogg, utility stocks). Large Cap Stocks: stocks of corporations with large capitalization ( >$150
millions). Small cap stocks: stocks of corporations with small capitalization ( <$150 millions).
note: capitalization: total amount of securities – stocks & bonds – issued by corporation; market capital = # of
common shares * market price per share.
Bull Market: investors optimistic about nation's economy & buy stocks (increased demand --> incrased price).
Bear Market: investors pessimistic about economy & sell stocks (decreased demand --> decreased price).
Numeric Measures to Consider When Evaluating a Stock
Annual Shareholder Return = (Annual divident + Appreciation in values) / (Initial Stock Investment)
Annual Dividend Yield = (Annual dividend) / (Initial Stock Investment)
Capital Gains Yield = (Appreciation in value) / (Initial stock investment)
Earning per Share = (After-tax earning of corporation) / (Number of outstanding shares of common stock);
Outstanding share: shares sold out
Price-Earning Ratio = (Price per share) / (Earnings per share over past 12 months)
Annual average compound return = [(1 +R1)(1+R2)...(1+Rn)]^(1/n) - 1
LO 4: How stocks are bought and sold
Types of stock transactions
market order: buy/sell a stock at current market values. Limit order: buy/sell a stock at a specific price or price
range. Stop order: request to sell a stock at the next available opportunity after its market price reaches a
specific amount. Discretionary order: allow account executive to decide when and at what price to place a
LO 5: Trading Techniques – Long terms & short terms
Long-term techniques: 1. diversification: combining many assets in a portfolio to reduce risk. 2. buy and hold:
portolio value incrases through dividend payment, appreciation in stock value, and dividend reinvestment. 3.
Dollar cost averaging: purchasing equal dollar-amount of the same stocks at equal intervals --> may raise or
lower average price of stock holdings. 4. direct investment: allows for direct purchase of stocks from corporations
without going through an account executive/brokerage firm. 5. dividend reinvestment plan (DRIP): reinvest
dividends into purchasing more stocks.
− generally suggested diversifaction distribution: 5% cash, 35% bonds (10 – 20 holdings), 60% stocks (10 – 20
Short-term techniques – these techniques are RISKY
1. Buying on margin: borrow to invest. 2. Selling short: borrow and sell stocks at a price today, and buy to
return the stocks at a lower price later. 3. trading in options: the right to buy (call) or sell (put) stocks at a
predetermined price during a specific time frame.

Chapter 12: Investing in Bonds

LO 1: Characteristics of Corporate Bonds
− bond: corporation's written pledge to repay a specific amount of money, borrowed as loan, with interest; face
value: dollar amount paid at maturity date. Bond indenture: legal document detailing conditions relating to
the bond. Bondholers interact with corporations through a trustee (bondholder's representative).
− Interest paid on bond, between time of issue and maturity date; twice a year. Interest = face value * interest
(coupon) rate
LO 2: Why corporations sell bonds
− borrow to make purchase, raise money for business operations; interest paid on bond = tax deductible business
− 4 types of bonds: 1. debenture: backed by corporation's reputation; if bankrupt, bondholder --> general
creditors. 2. mortgage bond: secured by corporation's assets (ex. Land, building, etc). 3. subordinated
debenture: unsecured bond; 2ndary claim to interest/repayment/asset, with respect to other bondholders;
higher interest. 4. convertible bond: bonds that can be converted to a specific number of shares of the
corporate's common stock.
− Most bonds have callback (issuer buy back bond before maturity, with a premium compensation, when bond
coupon rate is much higher than going rate); usually agree not to callback for 5 – 10 years.
− 2 ways to fund bond-repayments: 1. sinking fund. 2. serial bonds
− other types of bonds:1. Domestic, foreign, eruobond. 2. units: two or more corporate securities bundled by
an investment dealder & sold at an overall price. 3. strip bond: coupon/bonds sold separately
LO 3: Why investor purchase corporate bonds
− interest income (twice a year); paid differently according the types of bond held. Bond interest > common stock
− 1. Registered bond: under owner's name; interest sent to owner directly. 2. Registered coupon bond:
registered for principal only; use coupon to get interest. 3. bearer bond: not registered in investor's name.
4. zer-coupon bond: sold at a price far below face value, no interest, redeemed for face value at maturity.
− appreciation of bond value: fluctuates with respect to market interest rate. (market value of bond = annual
bond interest / current interest rate)
− Selling at premium: decreased market interest rate = higher face value
− Selling at discount: increased market interest rate = lower face value
− Bond face value repaid at maturity
− GIC: loan to bank, gauranteed value but lower interest, protected by CDIC; Bond: loan to coporation, higher risk
of default, so higher interest.
− Bond transactions: sold through full-service/discount brokerage firms, Internet, bond market; bond/investment
dealers paid a fee
LO 4: Why federal/provincial/municipal governments issue bonds & why purchase government bonds
− government sells bonds/securitis --> finance national debt/activities
− lower risk & interest than corporate.
− 3 types of Government of Canada securities: 1. Marketable bonds: tradable on the maket, no callback. 2.
T-bills: discount bills. 3. Canada Savings Bonds: regular/compound interest
LO 5: Evaluating Bonds when investing
− Ask myself: Can the corporation/government pay back face value/interest? Read annual report
− Signs of financial strength/weaknesses: 1. firm profitable? 2. increasing revenues? 3. decreasing liabilities?
− Rate of bond: AAA (highest) --> D (lowest)
− yield: rate of return earned by an investor who holds a bond for a stated period of time
− Current Yield = (dollar amount of annual interest) / (current market value) = (face value * coupon rate) /
(current market value)
− yeid to maturity (YTM): Face value = FV, Current market price = PV, N, PMT = face value * interest rate, find

Chapter 13: Investing Mutual Fund

LO 1: What is a mutual fund
− Mutual fund: investment chosen by people who pool their money to buy stocks, bonds, other financial
securties selected by professional managers who work for investment companies
− each investor entitled to fund share/income; many uses as retirement account
Why mutual fund? 1. professional management. 2. diversification. 3. inestment company does the investment &
security selections. Two types --> Closed-end funds: finite-sized fund; issued by investment company at time of
original set-up; after original shares sold, can only purchase shares from other investors. Open-end funds: shares
are issued/redeemed by investment company at investors' requests; buy/sell at net asset value (NAV = (current
market price of fund's portfolio – liabilities) / (# of shares outstanding)).
− Types of fees associated with mutual fund investment: 1. Load fund: commission paid when investors buy
(fron-end load) or sell (back-end load). 2. No-load fund: investor pays no sales charge. 3. Front-end load:
sales fee charged with purchases. 4. Back-end load (aka. Contingent deferred sales load): charge at sales;
decreases over time as fund owned for longer. 5. Management fee: expressed as Management Expense Ratio
(MER), which is % of the fund's total value; range = 0.25 – 4 %, 0.5% higher for back-end load fund; covers
investment company's costs.
LO 2: Mutual fund classification – by investment choice
1. Money Market Funds: seek high level of income/liquidity through short-term money market instrument (T-bills,
commercial paper, short-term government bonds). 2. Mortgage funds: seek income & safety; hold a group of
mortgage. 3. Bond funds: seek income & safety of principal; capital gains/losses --> tax implications;
government/corporate debt securities. 4. Dividend funds: seek tax-advantaged income & capital gain; preferred &
high quality common shares. 5. Balanced/asset allocation funds: mixture of safety, income, & capital
appreciation. 6. Equity or common stock funds: seek capital gains in common shares; greater price fluctuations.
7. Specialty funds: concentrate investment in one sector; less diversification. 8. international/global fund:
subset of specialty fund. 9. Real estate fund: long-term growth in capital appreciation; income-producing real
estates. 10. Ethical funds: invest under guided moral criteria. 11. Segregated funds: offered by insurance
companies; guaranteed return of a portion of principal at maturity. 12. Labour-sponsored venture capital
corporations (LSVCCs): labour organization groups; invest in small to medium-sized business; generous
federal/provincial taxes, but higher risks.
LO 4: How and why mutual funds are bought and sold
Advantages: diversification, professional management, ease of buying/selling, small amount of money needed to
open account, multiple withdrawal options, distribution/reinvestment of income/capital gains, switching privileges
in fund family, multiple services.
Disadvantages: purchase & withdrawal costs, ongoing management fees, potential poor performance, no control
over capital gain distribution, complicated tax reporting isses, potential market risk with all investments, potentially
aggressive sales personnel.
− How to get return on mutual fund investment: 1. income dividends: earnings a fund pays to shareholders after
it has deducted expenses from its dividend/interest. 2. Capital gain distributions: payments resulting from
sales of securities in the fund's portfolio. 3. Selling shares at higher value than paid.
Taxes & Mutual Funds
− mutual fund returns subject to taxation; for full year even if only owned fund for part of the year
Mutual Fund Transactions
− Closed-end: through stock exchange market; Open-end, no-load: directly from investment company by
phone/mail/sales representative; reinvestment plan: shareholders' income dividends/capital gain
automatically reinvested to purchase additional shares of fund.
Withdrawal Options:
− close-end fund: sell to another investor; Open-end fund: sell back to investment company that sponsors the
fund, at Net Asset Value
− if net asset of at least $5,000, four additional options available: 1. withdraw specific, fixed dollar amount until
fund exhausted. 2. sell certain number of shares over period. 3. withdraw fixed % of asset growth. 4. withdraw
all asset growth, leaving principal untouched.

Chapter 8 Questions
− Jewellery lost – limit covered(1000) Silverware lost – limit covered (2500)
− Actual Cash Value = Replacement value – Depreciated (i.e. Depreciated = original/life x age of furniture)
− Replacement cost = original x 1.__ (i.e. __ = % increased)

− Insurance pays = claim – deductible

− Savings/PMT = (Insurance 1 + Insurance 2) x 10% savings n=# compound, i=interest, PVA=0, FVA=?
Chapter 9 Questions
− Premium = amount paid to dependent x probability of death
− Income Replacement Method Current income x 7 x 0.70 = Life Insurance Needed
− Family Needs Method
Five times your personal yearly income
+) Total approximate expenses above & beyond daily living costs for you & dependents (i.e. tuition, care of
+) Emergency Fund (3-6 month expense)
+) Estimated funeral expense (~ $6000)
= Total estimate of family financial need
-) Total liquid asset (i.e. savings account, GIC, money market funds, existing life insurance – individual & group,
pension plan death benefits & government benefits
= estimate of shortfall family would face upon your death
− Disability Benefit = Pay x %Covered
Disability received = (off work - waiting period) x disability benefit
Chapter 11 Questions
− Common Share Dividend = shares x $/share
− Annual Returns = annual dividend + capital appreciation (closing price – opening price)
Opening price
Closing price = price + commission when bought
Opening price = price – commission when sold
Dividend Yield = annual dividend/cost
Capital gain yield = (closing price – opening price)/ cost
− Annual Average Compound Return =((1+ R1) (1+R2)(1+Rn))1/n – 1, where R=annual year return
− Dividend = dividend rate x par value
− Cumulative preferred stock = may not receive but will be paid what was owed before common paid
− Earnings per Share (EPS) = net income/# outstanding shares of common stock
P/E Ratio = Price per share/EPS
− Average cost per share = Total investment / total number of shares
Chapter 12 Questions
1. Annual Interest = face value x interest rate
− Current yield = dollar amount of annual interest/current market value
Yield to Maturity = equation OR
PV= current market price FV = face value n = # years PMT = % x FV i=?
Chapter 13 Questions
− Net Asset Value = (Market value of assets – liabilities)/# shares
− Commission fee = investment x % commission
− Management fee = investment x % management
− Contingent deferred sales load = % x bond fund