1. Introduction to Financial Planning Flashcards
GDP/Aggregate Output or Income
Total Consumption + Corporate Capital investments + Net Exports + Government Spending
Monetary Policy: M1 - Transaction Money
Money that can be directly used for transactions. Most money is in these funds…checking accounts are an example
Monetary Policy: M2 - Broad Money
M1 + Savings Accounts/Money Market Accounts
Discount Rate:
The interest rate banks pay to borrow money from the Federal Reserve
Federal Funds Rate:
The interest rate charged by the Federal Reserve to other banks on overnight loans
Nominal GDP (includes inflation) is < or > than Real GDP?
Nominal GDP > Real GDP
Business Cycle (Peak, Trough, Expansion, Contraction) Order?
Trough -> Expansion -> Peak -> Contraction
Annuity Due:
An annuity that pays at the BEGINNING of a period
Ordinary Annuity:
An annuity that pays at the END of a period
IRR is >, < or = Opportunity Rate when the NPV < 0
IRR is >, < or = Opportunity Rate when the NPV > 0
IRR is >, < or = Opportunity Rate when the NPV = 0
IRR is < Opportunity Rate when the NPV < 0
IRR is > Opportunity Rate when the NPV > 0
IRR is = Opportunity Rate when the NPV = 0
Housing Cost Ratio (Front-End):
Monthly Housing Cost / Borrower’s Gross Income (Should be less than 28%)
Total Cost Ratio (Back-End):
(Borrower’s PITI + Other Monthly Debt Payments) / Borrower’s Monthly Gross Income
Closed-End Lease (Net/Walkaway Lease):
You make fixed periodic payments based on your estimated usage. You return the car at the end of the lease and pay a surcharge for excess mileage.
Open-End Lease
You make fixed periodic payments but the total cost remains unknown until the end of the lease. The payments are based on the estimated resale value of the returned car and the car is appraised once the lease ends.
Regulation T Call:
Occurs when the Initial Margin Amount is below the minimum established in Regulation T (50%)
Maintenance Margin:
Required when the value of an account drops below the specified maintenance level at the brokerage firm that holds the margin account
Minimum Equity Call
There is a required minimum balance to establish and maintain a margin account. When the current account value falls below the required minimum, this is called. Generally this amount is $2,000, but for “pattern day traders” are required to maintain a minimum of $25,000.
The Financial Planning Process (What order?)
Presenting
Monitoring
Identifying
Analyzing
Understanding
Implementing
Developing
- Understanding the client
- Identifying goals
- Analyzing client’s current course of action and alternative’s
- Developing recommendations
- Presenting recommendations
- Implementing recommendations
- Monitoring progress
Looks a the amount of liquid assets compared to current liabilities (should be between 1.0-2.0)
Current Ratio
Liquid Assets / Current Liabilities
Current Ratio
Tells you how many months of living expenses you can cover with present level of monetary assets
Living Expense Ratio
Current Assets / Monthly Living Expenses (Non -Discretionary)
Living Expense Ratio
Cash & Cash Equivalents / Take Home Pay
Liquid Assets to Take Home Pay Ratio
Total Debt & Liabilities / Total Assets
Debt to Assets Ratio
Total Income available for Living Expenses / Total Long-Term Debt Payments (do NOT include short-term debt)…should be above 2.5
Long-Term Debt Coverage Ratio
Annual Savings / Annual Gross Income…should be at least 10%
Savings Ratio
