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CFP Exam > Business Cycles, Consumer Protection > Flashcards

Business Cycles, Consumer Protection Flashcards

1
Q

7 steps of the financial planning process

A
  1. understanding the client’s personal and financial circumstances
  2. identifying and selecting goals
  3. analyzing the client’s current course of action and potential alternative courses of action
  4. developing the financial planning recommendations
  5. presenting the financial planning recommendations
  6. implementing the financial planning recommendations
  7. monitoring progress and updating
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2
Q

examples of quantitative information

A

client’s age, dependents, other professional advisors, income, expenses, cash flow, savings, assets, liabilities, available resources, liquidity, taxes, employee benefits, government benefits, insurance coverage, estate plans, education and retirement accounts and benefits, capacity for risk

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3
Q

examples of qualitative information

A

client’s health, life expectancy, family circumstances, values, attitudes, expectations, earnings potential, risk tolerance, goals, needs, priorities, current course of action

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4
Q

life insurance risk benchmark

A

10-16 x gross income

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5
Q

health insurance risk benchmark

A

at least $1 million lifetime cap (pre-ACA)

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6
Q

disability insurance risk benchmark

A

if a client is paying premiums with after-tax dollars, then a policy paying about 60-70% of gross income is necessary

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7
Q

property insurance risk benchmark

A

policy that covers both home and auto for FMV

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8
Q

long-term care insurance risk benchmark

A

policy that provides a daily benefit for nursing home care, home health care or help with ADLs, with inflation protection

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9
Q

personal liability umbrella policy (PLUP) risk benchmark

A

$1-3 million in liability protection

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10
Q

emergency fund savings benchmark

A

3-6 months of non-discretionary expenses

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11
Q

housing ratio

A

a client’s primary mortgage (PITI) should not exceed 28% of gross income

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12
Q

housing plus all other debt ratio

A

a client’s primary mortgage (PITI) plus all other recurring debt payments should not exceed 36% of gross income

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13
Q

education funding savings benchmark

A

$3,000/year (for public state university), $6,000/year (for semi-private), or $9,000/year (for competitive private) savings for 18 years

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14
Q

retirement savings benchmark

A

at age 62-65, an individual should have 16 times the amount of income needed annually saved for retirement

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15
Q

savings rate towards retirement goal benchmark

A

an individual should save 10-12% towards a retirement goal assuming savings starts at an early age

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16
Q

return on investments benchmark

A

an investor should expect a return on investments of 8-10% assuming a long-term time horizon

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17
Q

standard deviation of diversified portfolio benchmark

A

8-14%

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18
Q

“big three” legacy documents

A
  1. will
  2. durable power of attorney for healthcare
  3. advanced medical directive
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19
Q

factors of economic environment

A

interest rates, taxes, inflation, unemployment, monetary and fiscal policy

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20
Q

demand

A

reflects the quantity of a good or service that consumers are willing to purchase

heavily dependent upon prices

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21
Q

as prices increase, demand … ?

A

as prices increase, demand decreases

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22
Q

as prices decrease, demand …?

A

as prices decrease, demand increases

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23
Q

quantity demanded

A

how much consumers are willing to demand at certain price levels

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24
Q

the demand curve will shift and thus create a change in demand due to an increase or decrease in … ?

A

incomes, taxes, savings rate, disposable income

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25
what makes the demand curve shift up and to the right?
anything that causes discretionary income to increase
26
what makes the demand curve shift down and to the left?
anything that causes discretionary income to decrease
27
supply
reflects the quantity of a good or service that businesses are willing to supply at a given price
28
the higher the price, supply ... ?
the higher the price, the more suppliers are willing to supply
29
the lower the price, supply ... ?
the lower the price, the less suppliers are willing to supply
30
the supply curve will shift to the left or right because of a change in ... ?
technology, competition, anything other than price
31
what makes the supply curve shift down and to the right?
anything that causes production to improve
32
what makes the supply curve shift up and to the left?
anything that causes production to decrease (anything that increases production costs)
33
equilibrium
the price at which the quantity demanded equals the quantity supplied
34
substitutes
products that serve similar purposes a price change in one product changes the quantity demanded for another product
35
complements
products that are consumed jointly a price change in one product changes the quantity demanded for another product
36
elastic demand
quantity demanded responds SIGNIFICANTLY to changes in price
37
examples of elastic demand
airline tickets, movie tickets, alcohol, luxury goods
38
shape of elastic demand curve
almost horizontal, sloping down and to the right
39
inelastic demand
quantity demanded changes VERY LITTLE to changes in price
40
examples of inelastic demand
milk, gasoline, insulin
41
shape of inelastic demand curve
almost vertical, sloping down and to the right
42
expansion phase of business life cycle
increasing GDP, increasing inflation, increasing interest rates, decreasing unemployment rate
43
peak phase of business life cycle
GDP at its highest, inflation at its highest, interest rates at their highest, unemployment rate at its lowest
44
recession phase of business life cycle
GDP slowing, inflation decreasing, interest rates decreasing, unemployment rate increasing
45
trough phase of business life cycle
GDP at its lowest, inflation at its lowest, interest rates at their lowest, unemployment rate at its highest
46
4 phases of business life cycle
1. expansion 2. peak 3. recession 4. trough
47
what does GDP stand for?
Gross Domestic Product
48
what does GDP measure?
measures the amount of goods and services produced in the US, regardless of ownership
49
what does GNP stand for?
Gross National Product
50
what does GNP measure?
measures the amount of goods and services produced by a country's citizens, regardless of where the goods and services are produced
51
recession definition
6 consecutive months (2 quarters) of declining GDP
52
depression definition
18 months (6 quarters) of consecutive declining GDP
53
inflation definition
an increase in prices a loss of purchasing power is the risk that inflation impacts
54
moderate inflation
when prices are slowly increasing 1-2% per year
55
galloping inflation
when money loses value very quickly
56
deflation
the opposite of inflation, where prices are falling
57
disinflation
a decline or slowdown in the rate of inflation
58
what does CPI stand for?
Consumer Price Index
59
what does CPI measure?
measures the price changes in a basket of goods and services at the retail level historically 2-3% per year
60
what does PPI stand for?
Producer Price Index
61
what does PPI measure?
measures price changes in the wholesale and manufacturing sectors
62
monetary policy
the policy and means by which the Federal Reserve controls the money supply and influences interest rates
63
3 goals of the Federal Reserve
1. maintain long-term economic growth 2. maintain price levels supported by the economy 3. maintain full employment
64
how does the Federal Reserve ease monetary policy?
increasing money supply and decreasing interest rates
65
how does the Federal Reserve tighten monetary policy?
decreasing money supply and increasing interest rates
66
4 tools the Federal Reserve uses to influence the money supply and interest rates
1. reserve requirement 2. discount rate 3. open market operations 4. excess reserves
67
reserve requirement
a percentage of deposits a bank must maintain in cash
68
what happens when the reserve requirement is increased?
there's less cash available (bank must keep a higher amount deposited), therefore there's less cash to lend and the money supply decreases and interest rates increase
69
what happens when the reserve requirement is decreased?
there's more cash available (banks don't need to hold as much deposited), therefore there's more cash to lend and the money supply increases and interest rates decrease
70
discount rate
the overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements
71
what happens when the discount rate increases?
short-term interest rates increase
72
what happens when the discount rate decreases?
short-term interest rates decrease
73
open market operations
as the Federal Reserve buys/sells government securities, the money supply is influenced and places pressure on interest rates
74
what happens when the Federal Reserve buys treasuries?
money supply increases and interest rates decrease
75
what happens when the Federal Reserve sells treasuries?
money supply decreases and interest rates increase
76
excess reserves
monies that a bank holds at the Federal Reserve (or central bank) in excess of the required reserve amount
77
fiscal policy
the policy and means by which Congress controls spending and taxation, which influences the money supply and interest rates
78
3 goals of Congress related to fiscal policy
1. maintain economic growth 2. maintain price stability 3. maintain full employment
79
3 tools Congress uses to influence fiscal policy
1. taxation 2. spending 3. debt management
80
impact of increasing tax rates on money supply and interest rates
increasing tax rates will reduce money available for spending thereby increasing interest rates
81
impact of decreasing tax rates on money supply and interest rates
decreasing tax rates will increase money available for spending thereby decreasing interest rates
82
how does government spending impact the money supply and interest rates?
through government spending, Congress can increase the money supply and decrease interest rates
83
how does government cutting spending impact the money supply and interest rates?
Congress can cut spending which increases interest rates and decreases the money supply
84
deficit spending
when Congress spends more than tax revenues that are collected
85
what happens as Congress borrows money to continue deficit spending?
the amount of dollars available to be lent decreases, placing pressure on interest rates
86
yield curve
diagram that plots the current interest rates against the term to maturity for similar securities (such as treasuries)
87
how does expansionary policy impact the yield curve
will result in a normal yield curve
88
how does contractionary policy impact the yield curve?
will result in an inverted yield curve
89
Chapter 7
provides relief through liquidation
90
debts not discharged through Chapter 7
student and government loans, 3 years of back taxes, alimony and child support, monies owed due to malicious acts, drunk driving, criminal fines and penalties, or embezzlement
91
property exempt from Chapter 7
homestead, life insurance, qualified plans
92
how much exemption is there on qualified plans and IRA rollovers?
unlimited exemption
93
how much exemption is on Traditional IRAs and Roth IRAs
$1,362,800
94
Chapter 11
provides relief through reorganization for businesses or the self-employed
95
Chapter 13
provides relief through adjusting debts
96
what is the max number of weeks someone can receive unemployment compensation?
39 (26 weeks of regular benefits, plus 13 additional weeks in periods of high unemployment)
97
what does ERISA do?
protects retirement plans of employees
98
Securities Act of 1933
regulates new issues of securities in the primary market
99
primary market
securities market where new issues are sold to the public for the first time (IPOs)
100
Securities Act of 1934
regulates secondary markets, established the SEC
101
secondary markets
buying/selling of securities that were previously sold in the primary markets
102
Securities Investor Protection Act of 1970
created Securities Investor Protection Corporation (SIPC), provides coverage if a broker-dealer becomes insolvent or if there is unauthorized trading in an investor's accounts

CFP Exam (24 decks)

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