AFP Chapter 3- Asset and Liability Management

Question 1

How do you calculate GDS and TDS ratios?

Answer 1

GDS Ratio= mortgage/rent payment+ property tax+ heating costs+ 50% condo fees/gross annual income

TDS Ratio=mortgage/rent payment+ property tax+ heating costs+ 50% condo fees+ consumer debt payments/gross annual income

GDS 32% or lower is acceptable
TDS 40% or lower is acceptable

CC- 3% of total limit
LOC- 3% of total limit
Leased car payments use actual payment amount

Pitfall of the ratios is that it does not reflect a clients full financial picture

Question 2

What is APR?

What is EAR?

Answer 2

APR: The percentage of cost of the loan to the borrower on a yearly basis

EAR: The rate based on compounding that may be more frequent

Question 3

What debts are included in the debt-to-equity ratio?

Answer 3

Short tem debts
Long term debts
Bonds and Debentures

Question 4

Legislation refers to 3 types of credit, what are they?

Answer 4

Credit of sales on goods and services
–> does not apply for less than $50

Loan Agreements
–> not for loans to a corporation

Variable Credit

Question 5

Acceleration Clause

Answer 5

If you are in arrears the lender has the right to ask for the full amount of the loan (principle and interest) due immediately

Question 6

What is a Nominee Account

What is a Client Name Account

Answer 6

Nominee Account: mutual fund units registered in the dealer’s name

Client Name mutual fund units registered in the actual clients name

Question 7

“Loan-to-Value” Ratio

Answer 7

loan amount/home value

Question 8

Mortgage Market

Answer 8

1. Primary Market: Original granting of the loan
   ex. banks and credit unions are the 2 biggest in Canada
2. Secondary Market: Trading of existing mortgage instruments

Question 9

Blend and Extend

Answer 9

(old rate x remaining months) + (new rate x months of new term)/ total term

Question 10

What common criteria identifies a high net worth individual in the wealth management industry?

Answer 10

A high net worth individual or family that has investable assets over 1M

• Assets are liquid such as bonds/stocks
• does not include real estate or equity in a private company

Question 11

What is another name for a nominee account?

Answer 11

On-book account

Question 12

First-Time Home Buyers Incentive Program (FTHBI)

Answer 12

• no regular repayments are required
• loan is not portable and must be repaid if the original home is sold
• full amount must be repaid in 25 years or when the home is sold
• government is participating in the gains or losses, so payback is based on the current value of the home
• Appraisal might be required to determine how much is to be repaid

Question 13

What is the mortgagee

What is the mortgagor

Answer 13

mortgagee= lender 
mortgagor= borrower

Question 14

What are 3 reasons to do a projected cash flow statement?

What is a projected cash flow statement

Answer 14

1. Control Spending
2. Ensure liquidity
3. Create and implement the plan

A projected cash flow statement is a record of expected income and the allocation of expenses and savings over the next year