Chapter 1 Preview
p5 The distinction between standard of living and level of living is not usual. Most would use "standard of living" for what our authors are calling "level of living".
p6 Figure 1.1 "objectives" - not a good label
for general steps.
We'll distinguish between goals, objectives, and actions (or steps)
(pp7-14 are assigned with Part I, Section 3)
p8 - the business cycle chart is not drawn well. In Section 3, we'll see a better
illustration.
Depression is not a normal part of the business
cycle - we haven't had a depression since the 1930s.
p11-12 inflation adjustment - it is more accurate to calculate
it as (1 + % change in dollar amount)/(1 + inflation rate) minus 1 rather than % change
minus inflation rate. The percents need to be in decimal form. In their example this would
be 1.0432/1.04 - 1 or .0031, which corresponds to the .31% they calculate in dollar terms
rather than the .3% by subtracting. When the rates are low and close together,
there's not much difference in the two methods, but it's better to get used to using the
more accurate one.
p15-16 effect of taxes - note that it is the marginal tax rate that is relevant. Their
example using utility stocks ignores the possibility of growth prospects for the stocks
which would not be possibile with the bonds. A better comparison would be with a similar
corporate bond.
(pp17-22 Interest calculations are very important. Since they are difficult
for some people, we take them up in chunks instead of all at once. In this edition
the authors do a more complete job of explaining them than they did in the previous
edition, but I will still assign segments of my online interest book to provide additional
study material.)
p19 Figure 1.6 & p21 Figure 1.8 - Note the substantial
difference in accumulated amount over time just 2 percentage points difference in rates
can make. An implication of this is that if we overestimate the rate we expect to make on
our investments, we can fall far short of the amount we are trying to accumulate. Thus,
it's better to initially estimate a moderate rate and then adjust our plans if we are able
to earn a higher rate.
pp24-27 - We'll cover retirement plans in Part V, so come back to these pages then.