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
Liabilities / Shareholders’ Equity
Asset
Gross Sales - Discounts/Returns
Net Sales
Net Sales - Cost of Sales
Gross margin
Gross Margin - Operating Expenses (Depreciation/Amortization) - Selling & Administrative Expenses
Income from operations
Income from Operations +/- Other Income (Dividend & Interest Income, Interest Expense, Income Taxes, Extraordinary Loss)
Net Income
Total Income Available for Living Expenses / Total Long-Term Debt Payment
Long-Term Debt Ratio
Total Monthly Non-Mortgage Debt Payments / Total Monthly Take-Home Pay….Should NOT exceed 20%
Debt Limit Ratio
Prohibits unfair, abusive, and deceptive practices by debt collectors, and establishes procedures for debt collection.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
Fair Debt Collection Practices Act
Requires customers be provided with the name of any credit agency supplying a credit report that leads to the denial of credit.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
Fair Credit Reporting Reform Act of 1996
Prohibits credit discrimination on the basis of gender, race, religion, age, marital status, etc.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
Equal Credit Opportunity Act
Regulates how financial institutions may gather and subsequently disclose personal financial information to others.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
The Financial Privacy Rule
Requires financial institutions to create and implement procedures to protect the personal financial information they obtain from customers.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
The Safeguards Rule
Requires lenders to disclose the true cost of consumer credit, explaining all charges, terms, and conditions involved.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
Truth in Lending Act
Safeguards the privacy of consumer information held by financial institutions.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
Gramm-Leach Bliley Modernization Act of 1999
Requires financial institutions to create and implement procedures to protect the personal financial information they obtain from customers.
Truth in Lending Act, Fair Credit Billing Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Fair Credit Reporting Reform Act of 1996, Gramm-Leach Bliley Modernization Act of 1999, The Financial Privacy Rule, The Safeguards Rule
Sets procedures for correcting billing errors on open credit accounts, allows customers to withhold payment for defective goods purchased with a credit card, and sets limits on the time some information can be kept in your credit file.
Allows debtors to keep all their personal assets, but they are obligated to repay their debt in full, over a period of time.
Chapter 13 Bankruptcy
Eliminates a consumer’s debt by having a trustee sell some of the debtor’s personal property.
Chapter 7 Bankruptcy
Young Adult (__-__) -> Family Formation (__-__) -> Family Development (__-__) -> Family Maturity (__-__) -> Retirement (___+)….What ages?
Young Adult (18-25) -> Family Formation (26-35) -> Family Development (36-49) -> Family Maturity (50-60) -> Retirement (60+)
Young Adult (__-__) -> Family Formation (__-__) -> Family Development (__-__) -> Family Maturity (__-__) -> Retirement (___+)….What ages?
Young Adult (18-25) -> Family Formation (26-35) -> Family Development (36-49) -> Family Maturity (50-60) -> Retirement (60+)
22-47% EFC
Parents Income
5.0%-5.64% EFC
Parent Assets
50% EFC
Student Income
20% EFC
Student Assets
Awarded to students based on financial need, from $3,500 to $5,500 depending on grade level. The government pays the interest on the loan while students attend school, and students don’t begin making payments until six months after graduation.
A Subsidized Loan
Awarded not based on financial need and students can borrow amounts starting at $2,000 up to the annual loan limit of $12,500 creating a total borrowing for both types of loans to $31,000 (only up to $23,000 can be subsidized).
A Unsubsidized Loan
Applies to tuition, books, and fees but NOT room and board.
The credit is calculated by taking 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses, for a maximum credit of $2,500 per child.
American Opportunity Tax Credit
Annual credit up to $2,000 per family (20% of the first $10,000 paid for qualified tuition and expenses).
Lifetime Learning Tax Credit
Special Needs Trust can fund…
NOT Room & Board
Medical/Dental Expenses
Annual Checkups
Transportation & Vehicle Purchase
Equipment
Training Programs
Education
Insurance
Rehab
Vacations
Home Health Aide
What act applies to the PRIMARY market (IPO). Requires that investors receive financial and other significant information concerning securities being offered for public sale
Securities Act of 1933
What act creates the SEC and empowering them to regulate the SECONDARY market overseeing (brokerage firms, transfer agents, clearing agencies, and Self-Regulatory Organizations (FINRA, NYSE).
Securities Act of 1934
What act regulates companies, including mutual funds, that engage in investing, reinvesting, and trading of securities, and whose securities are offered to the investing public. Disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations.
Investment Act of 1940
Requires only a notice filing with the state….
Registration by Notification, Coordination or Qualification?
Registration by Notification
Available where there is registration under the Securities Act in which the state coordinates with the SEC…
Registration by Notification, Coordination or Qualification?
Registration by Coordination
Requires a full review of the transaction by the state…
Registration by Notification, Coordination or Qualification?
Registration by Qualification
The _______ Act of ______ extends the powers of the SEC listed in the 1934 Act.
The Sarbanes-Oxley Act of 2022 extends the powers of the SEC listed in the 1934 Act.
Does a CFP have to disclose conflicts of interest in writing or verbally?
Either is fine
Bonds pay interest every __ months
6
Changes in the quantity of a good or service supplied by the producers result in a move _______ the supply curve.
along
Chapter __ Bankruptcy requires the debtor and an attorney to draw up a repayment plan
13
The _____ _____ rate is a lagging indicator/coincident indicator
Average Prime Rate