Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFP 1 - General Planning > 101-4 Cash Flow Management & Financing > Flashcards

101-4 Cash Flow Management & Financing Flashcards

You may prefer our related Brainscape-certified flashcards:
CFP® flashcards
1
Q

Current Ratio

A

Current Assets / Current Liabilities

Current assets: cash and cash equivalents

Current liabilities: current debts (those due within one year

Target: 1.0 to 2.0
Higher is preferable
Ratio >1 indicates the client can pay off existing, short-term liabilities with readily available liquid assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Emergency Fund time frame

A

3-6 months

Cash and cash equivalents

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Emergency Ratio

A

Liquid assets / non discretionary monthly expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Housing Payment Ratio

A

All monthly nondiscretionary housing costs (PITI) / monthly gross income

Target: Less than or equal to 28%

PITI: principal interest taxes and insurance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Total Payments Ratios

A

All monthly debt payments + housing costs / gross monthly income

Target: Less than or equal to 36%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Solvency Ratio

A

Total assets / total debt

Target: greater than or equal to 1.1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Savings Ratio

A

Savings per year / gross income

Target: 8-25% depending on age

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Debt-to-income ratio

A

Annual debt payment / gross income

Target: less than or equal to 30%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Discretionary expense

A

Recurring or nonrecurring expense for an item that is either nonessential or more expensive than necessary

Examples:
Vacations
Club dues
Entertainment
Gifts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Nondiscretionary expense

A

Recurring or nonrecurring expense that is essential for an individual to maintain his lifestyle

Examples:
Rent
Mortgage payments
Loan repayments
Food
Utilities
Taxes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Emergency fund

A

An amount equal to 3 to 6 months of fixed and variable monthly expenses is considered adequate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Consumer debt ratio

A

The ratio of monthly consumer debt payments to monthly income

Net income = gross income - taxes

Does not include mortgage

Should not exceed 20%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Housing cost ratio

A

Should not exceed 28% of gross monthly income

Includes rent or monthly mortgage payment, principal and interest payments on the mortgage, property taxes, homeowners insurance premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Total debt ratio

A

Includes monthly housing costs and consumer debt payments

36% of gross monthly income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Secured loan

A

A loan for which the creditor maintains a security interest in property, such as personal property, which serves as collateral for the debt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Unsecured (signature) loan

A

A loan for which the client merely promises to repay the debt in exchange for borrowed funds

In the event of default, lenders can take legal action but most often will attempt to settle the debt for less than the amount owed. However, this will negatively affect an individual’s credit rating.

17
Q

Fixed rate loan

A

A loan with an interest rate that remains constant until paid in full

Initial interest rates are higher than those of variable (adjustable) rate loans

18
Q

Variable (adjustable) rate loan

A

The interest rate on this type of loan adjusts at various intervals throughout loan term; thus, they are riskier

19
Q

Short-term loan

A

A loan that is due in less than 1 year

20
Q

Long-term loan

A

A loan due one year or more from a specified date

21
Q

Installment loan

A

A loan for which the client borrows a single amount of money and repays the balance with interest at a stated interval

22
Q

Single payment (bridge) loan

A

A loan which provides short-term, temporary financing which is repaid with interest in one lump sum at the end of the term

Example: for the purchase of one house and the subsequent sale of another

23
Q

Conventional fixed-rate mortgage

A

Have a level interest rate for the term of the loan (the shorter the loan term, the higher the monthly payment) and a fixed payment amortization schedule

24
Q

Adjustable rate mortgages (ARMs)

A

The initial rate and payment may change every month, quarter, year, 3 years, or 5 years
Interest rate changes are usually tied to a specific index such as the one-year LIBOR (London Inter-Bank Offer Rate)

Good for a client who wants lower initial monthly payments and does not anticipate remaining in the home for a long time

25
Q

Federal Housing Administration (FHA) mortgage loans

A

Guaranteed by federal government

Very low initial down payment and, sometimes, a lower interest rate

26
Q

Mortgage insurance

A

A policy that protects lenders against losses that result from defaults on home mortgages

27
Q

Veterans Administration (VA) mortgages

A

Feature the same federal guarantee of repayment as that if FHA mortgages

For service members and veterans of the US armed services, their spouses, and other eligible beneficiaries

28
Q

Interest-only mortgages

A

The homeowner tries to keep the mortgage payments at a minimum while hoping that the fair market value of the home will increase so that the principal amount will be paid off by the sale proceeds

29
Q

Reverse mortgages

A

Special type of home loan where the payment stream is reversed (the lender pays the homeowner a stream of income secured by the considerable amount of equity in the home)

Available to borrowers age 62+

30
Q

Home equity loans and lines of credit

A

Essentially second mortgages that use the current equity in the homeowner’s primary residence to provide money for home improvements and other purposes

A HELOC provides a set amount of credit from which funds may be drawn as needed
Borrowers make payments only on the amount they actually borrow, not the full amount available

31
Q

Loan-to-value ratio (LTV)

A

The % of the value of the collateral real estate that is loaned to the borrower

The lower the LTV, the higher the borrower’s equity in the property

32
Q

Prime loans

A

Mortgages with higher LTV ratios, made to borrowers with good credit

33
Q

Subprime loans

A

Mortgages to borrowers of lower credit quality, or that have a lower-priority claim to the collateral in the event of default

34
Q

Loan amortizations calculated using END mode

A

(E.g. mortgages, auto loans) calculated using end mode because the interest on the principal balance is accruing from payment to payment on the balance of the debt

CFP 1 - General Planning (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions