Sample Paper on Financial Management

If there is no government – or company-provided pension system, how can an individual create a financially safe retirement?

Aside from the government and company provided pension system, a person can create a financially safe retirement through an immediate fixed annuity. An immediate fixed annuity involves an investor or a person trading a lump sum of money for a stream of lifetime annual income that primarily depends on the level of interest rates and the age of the annuitant (Evensky et al., 2011). An annuity can also be described as an insurance contract where an individual pays a specific amount of money in lump sum or a series of payment to an insurance company(Evensky et al., 2011). In return, the insurance company is expected to pay a specific amount of money to the annuitant after he or she retires. This payment is usually made on a regular basis or after specific intervals to the annuitant. However, an immediate fixed annuity requires one to predict his or her life span after which the insurance company will be able to pay back the annuitant for the agreed specified period of time after which the agreement expires when the annuitant surpasses his predicted life span age.

  1. Many state and local governments have been using an assumed 8 percent rate of return figure when calculating future funding of promised pension benefits. Why do you suppose they used this rather than as assumption of 2 percent, or even 0 percent?

Most of the states and local governments assume that the benefits accrued by the employees will achieve an expected rate of return ranging from 7.5 to 8.5 percent. This percentage rate however does not put into account the risk associated with plan investments (Petty et al., 2015).  The 7.5 – 8% return rate makes it possible for the government to pay all the benefit it owes to the retirees regardless of the liabilities experienced on the investment. This is because the assumed percentage rate is used by the government to discount liabilities on the investment. However, a lower percentage rate of returns such as 2 or 0% would mean that the government would have more liabilities that are unfunded for (Evensky et al., 2011). This would thus make it difficult for the government and investors to pay back the retired employees due to the increasing national debts due to the high amount of unfunded liabilities.

  1. It seems likely that member of Congress, even the strongest supporters of the CRA and those who put the most pressure on the GSEs to buy high-risk mortgages, will likely escape being held responsible for any part of the mortgage meltdown. Can you suggest why?

In the case of mortgage meltdown, the Congress played the role of ensuring that houses were much more affordable for the consumers to purchase. They did this by first amending a key mortgage-lending legislation and by putting immense pressure of the government sponsored mortgage agencies to make more loans to potential home buyers (Petty et al., 2015). It is with this profound reason that even the financially unstable people were motivated to obtain mortgage loans and purchase house. Mortgage meltdown thus arose due to a vast number of financially weaker people obtaining houses while not being able to repay the mortgage loans that they had been given by GSEs. Thus, the Congresses will most likely escape from being held responsible as it was the consumers own decision to take the mortgage loans and the Congress was not attributed in making such decision.

  1. In light of the fact that foreclosure rates have been much higher on ARMs than on fixed-rate mortgages, what do you predict will happen in the future to the proportion of mortgages that are of each type? Explain.

The high foreclosure rates on ARMs would discourage a vast majority of potential home owners. Thus many would end up opting for fixed rate mortgage due to the fact that ARMs usually increase their interest rates as compared to FRMs whose interest rates are usually fixed. Due to the likelihood of ARMs increasing their interest rates, many mortgagers are currently unable to pay back the mortgage loans and thus many eventually lose their houses due to foreclosure. The increasing rates of subprime lending by ARMs has also led to an increase in foreclosure rates due to the difficulties experienced by the mortgagors in repaying the loans whose interest rates have been adjusted to much higher rates (Edmiston, 2009). It is with this profound reason that I predict a higher proportion rate of FRMs as compared to FRMs in the near future.

 

References

Edmiston, K. D. (2009). Characteristics of High-Foreclosure Neighborhoods in the Tenth District.Economic Review-Federal Reserve Bank of Kansas City, 94(2), 51.

Evensky, H., Horan, S. M., Robinson, T. R., & Evensky, H. (2011).The new wealth management: The financial advisors guide to managing and investing client assets. Hoboken, N.J: John Wiley & Sons.

Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015).Financial management: Principles and applications. Pearson Higher Education AU.