Book 1 (continued)

Question 1

Describe the steps for initial registration to be able to sell certain equity-based products

Answer 1

1) Associate w/ a broker-dealer
2) Register w/ FINRA on Form U-4
3) Pass exams
4) Receive a CRD number

Question 2

What does “Business Activity Ages” mean?

Answer 2

Economy is at a PEAK.
The public stops buying because they have enough of everything they need

Question 3

Fiscal Policy Activities

Congress

Answer 3

1) Gov’t expenditures
2) Taxation
3) Debt management

Question 4

When a question only indicates one expense (tuition), only use one of the four programs as an answer

Answer 4

Only 1 of these 4 can be in the answer:
AOC
Lifetime Learning
Coverdell distribution
529 distribution

Question 5

What is a “qualified expense” for AOC and LLC programs

Answer 5

Tuition, Fees, Supplies, Books & Equipment
NOT Room & Board

Question 6

What are the steps to calculate educational funding TVM?

Answer 6

Diagram:
Solve for FV
FV becomes negative PMT (4yr)
Solve for PV
PV becomes FV
Solve for PV

Question 7

IRR > Required rate of return

Answer 7

NPV is positive
=> the investment will earn more than the client’s required rate of return

Question 8

IRR = Required rate of return

Answer 8

NPV is 0

Question 9

For questions about net worth changes, what keywords should you look for?

Answer 9

1) “From cash flow…”
2) “Investments grew…”
3) “Reduced mortgage principal…”

These would be increases in net worth

Think logically for decreases in net worth

Question 10

Housing Expense

PITI

Answer 10

Principal
Interest
Tax (Property)
Insurance (Property)

PITI < 28% of gross income

Question 11

Emergency Fund

Answer 11

3mo vs. 6mo of $$ needed to cover Fixed & Variable expenses

Ex) If monthly expenses are $8,000 and the client only has $6,000 in their checking account, then the checking account can’t be allocated for the emergency fund.

Question 12

Effective method for implementing a savings plan

Answer 12

“pay yourself first”
(allocate money away before you spend it each month)

Question 13

Total amount of savings & investments formula

Answer 13

Savings & Investments = Inflows - Outflows - Taxes

Question 14

Priority of savings

Answer 14

According to CFP Board…
1) Life Insurance (if none)
1.1) Have a proper emergency fund (unless you have way too much debt to even establish it)
2) Reduce debt

Question 15

TVM

Keywords to look for in unequal CF scenarios

Answer 15

Find PV = start with 0 CF0

Find IRR = Solve for I/YR

Find NPV = start with initial investment CF0

Question 16

IRR < Required rate of return

Answer 16

NPV is negative

The investment will generate less than the client’s required rate of return

Question 17

What keywords are used when a TVM problem wants you to use a real rate of return?

Answer 17

“in today’s dollars”

Question 18

Synonym for IRR

Answer 18

Dollar weighted rate of return

Question 19

What is an aggressive investor unlikely to have?

Answer 19

Liquid cash equivalents for an emergency fund

Question 20

TVM

When are PMTs considered negative?

Answer 20

When money is moved out of clients checking account.
1) Investments into mutual funds, stocks, bonds, or IRAs
2) A repair is made to investment property
3) Pension or 401(k) contributions made by employer (not considered positive because the money isn’t going to the client’s account until he take a distribution)

Question 21

Besides…
Checking acct
Savings acct
Money Market Deposit Acct (MMDA)
CD’s
…what other investment is likely to be insured?

Answer 21

Securities held in a brokerage account.
The SIPC insures investors against losses arising from a failed brokerage firm.

Question 22

Investment Company Act of 1940

Advisor Act was also in 1940

Answer 22

Authorized SEC to regulate Unit Investment Trusts (UITs), investment companies, and mutual funds

Question 23

For insurance company regulations, how does the Fed have any influence?

3 ways

Answer 23

1) HIPAA related to health coverage continuation
2) Standardization of Medicare policies
3) Taxation of various insurance policies

State handles remaining regulations, including determining the meaning of a policy’s terms

Question 24

What goes into an UGMA/UTMA account?

Answer 24

UGMA
Cash-type investments

UTMA
Cash-type investments
+
real estate or limited partnerships

Question 25

Quaifying Alimony:
Required to pay $1,000/month until child reaches 18. Then, payments reduced to $400/month.

Answer 25

$400 = Qualified alimony

$600 = tied to child support which is nondeductible no matter what

Question 26

Acronym for the important leading economic indicators

Answer 26

Stock prices (S&P 500)
New private housing units
New manufacturing orders
Index of consumer expectations
Initial claims for unemployment insurance

Question 27

When can an individual satisfy the “means test” for Ch. 7 bankruptcy?

Answer 27

When debtor’s average monthly net income for 60mo. is <$6,000
(still required to complete consumer credit counseling program prior to filing)

Question 28

SOFR

Answer 28

Secured Overnight Financing Rate
Benchmark rate used for adjustable-rate mortgage loans (ARMs)

Question 29

FHA

Answer 29

Federal Housing Administration:
loans from insurance companies that are guaranteed by the gov’t.
- Helps individuals from low-middle class

Question 30

TVM

When is the PV of a mortgage value entered as a positive

Answer 30

ONLY IF
1) The money is borrowed
2) You are calculating the amortization of the loan

Question 31

What are some advantages of a reverse mortgage?

Answer 31

• No income qualifications
• Retain title
• No monthly mortgage payments
• Proceeds are tax-free

Question 32

What are “points” in mortgages?

Answer 32

“Points” are extra fees that you pay upfront to a lender to get a lower interest rate on the loan (makes loans cheaper over time)

Question 33

When refinancing, what is the difference between “adding a fee” and “paying points”

Answer 33

“Adding a fee” = to the new loan would increase the mortgage principal balance
Ex) 381k + 2k fee = 383k new principal balance

“Paying points” are paid upfront, not refinanced

Question 34

Mortgage Calculation

Facts:
* $80k mortgage
* 30-year term
* 9.75% interest
* Monthly payments

Answer 34

PV = 80,000 (enter as positive)
N = 30 x 12mo = 360
I/YR = 9.75/12mo = 0.8125
FV = 0
PMT = calculated (make sure to calc this before amortization!)

1 INPUT 120 (the 10th year)
GOLD -> AMORT
=
=