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CFP Exam > Business Cycles, Consumer Protection > Flashcards

Business Cycles, Consumer Protection Flashcards

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CFP® 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
Q

what makes the demand curve shift up and to the right?

A

anything that causes discretionary income to increase

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26
Q

what makes the demand curve shift down and to the left?

A

anything that causes discretionary income to decrease

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27
Q

supply

A

reflects the quantity of a good or service that businesses are willing to supply at a given price

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28
Q

the higher the price, supply … ?

A

the higher the price, the more suppliers are willing to supply

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29
Q

the lower the price, supply … ?

A

the lower the price, the less suppliers are willing to supply

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30
Q

the supply curve will shift to the left or right because of a change in … ?

A

technology, competition, anything other than price

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31
Q

what makes the supply curve shift down and to the right?

A

anything that causes production to improve

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32
Q

what makes the supply curve shift up and to the left?

A

anything that causes production to decrease (anything that increases production costs)

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33
Q

equilibrium

A

the price at which the quantity demanded equals the quantity supplied

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34
Q

substitutes

A

products that serve similar purposes

a price change in one product changes the quantity demanded for another product

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35
Q

complements

A

products that are consumed jointly

a price change in one product changes the quantity demanded for another product

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36
Q

elastic demand

A

quantity demanded responds SIGNIFICANTLY to changes in price

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37
Q

examples of elastic demand

A

airline tickets, movie tickets, alcohol, luxury goods

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38
Q

shape of elastic demand curve

A

almost horizontal, sloping down and to the right

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39
Q

inelastic demand

A

quantity demanded changes VERY LITTLE to changes in price

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40
Q

examples of inelastic demand

A

milk, gasoline, insulin

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41
Q

shape of inelastic demand curve

A

almost vertical, sloping down and to the right

42
Q

expansion phase of business life cycle

A

increasing GDP, increasing inflation, increasing interest rates, decreasing unemployment rate

43
Q

peak phase of business life cycle

A

GDP at its highest, inflation at its highest, interest rates at their highest, unemployment rate at its lowest

44
Q

recession phase of business life cycle

A

GDP slowing, inflation decreasing, interest rates decreasing, unemployment rate increasing

45
Q

trough phase of business life cycle

A

GDP at its lowest, inflation at its lowest, interest rates at their lowest, unemployment rate at its highest

46
Q

4 phases of business life cycle

A
  1. expansion
  2. peak
  3. recession
  4. trough
47
Q

what does GDP stand for?

A

Gross Domestic Product

48
Q

what does GDP measure?

A

measures the amount of goods and services produced in the US, regardless of ownership

49
Q

what does GNP stand for?

A

Gross National Product

50
Q

what does GNP measure?

A

measures the amount of goods and services produced by a country’s citizens, regardless of where the goods and services are produced

51
Q

recession definition

A

6 consecutive months (2 quarters) of declining GDP

52
Q

depression definition

A

18 months (6 quarters) of consecutive declining GDP

53
Q

inflation definition

A

an increase in prices

a loss of purchasing power is the risk that inflation impacts

54
Q

moderate inflation

A

when prices are slowly increasing

1-2% per year

55
Q

galloping inflation

A

when money loses value very quickly

56
Q

deflation

A

the opposite of inflation, where prices are falling

57
Q

disinflation

A

a decline or slowdown in the rate of inflation

58
Q

what does CPI stand for?

A

Consumer Price Index

59
Q

what does CPI measure?

A

measures the price changes in a basket of goods and services at the retail level

historically 2-3% per year

60
Q

what does PPI stand for?

A

Producer Price Index

61
Q

what does PPI measure?

A

measures price changes in the wholesale and manufacturing sectors

62
Q

monetary policy

A

the policy and means by which the Federal Reserve controls the money supply and influences interest rates

63
Q

3 goals of the Federal Reserve

A
  1. maintain long-term economic growth
  2. maintain price levels supported by the economy
  3. maintain full employment
64
Q

how does the Federal Reserve ease monetary policy?

A

increasing money supply and decreasing interest rates

65
Q

how does the Federal Reserve tighten monetary policy?

A

decreasing money supply and increasing interest rates

66
Q

4 tools the Federal Reserve uses to influence the money supply and interest rates

A
  1. reserve requirement
  2. discount rate
  3. open market operations
  4. excess reserves
67
Q

reserve requirement

A

a percentage of deposits a bank must maintain in cash

68
Q

what happens when the reserve requirement is increased?

A

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
Q

what happens when the reserve requirement is decreased?

A

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
Q

discount rate

A

the overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements

71
Q

what happens when the discount rate increases?

A

short-term interest rates increase

72
Q

what happens when the discount rate decreases?

A

short-term interest rates decrease

73
Q

open market operations

A

as the Federal Reserve buys/sells government securities, the money supply is influenced and places pressure on interest rates

74
Q

what happens when the Federal Reserve buys treasuries?

A

money supply increases and interest rates decrease

75
Q

what happens when the Federal Reserve sells treasuries?

A

money supply decreases and interest rates increase

76
Q

excess reserves

A

monies that a bank holds at the Federal Reserve (or central bank) in excess of the required reserve amount

77
Q

fiscal policy

A

the policy and means by which Congress controls spending and taxation, which influences the money supply and interest rates

78
Q

3 goals of Congress related to fiscal policy

A
  1. maintain economic growth
  2. maintain price stability
  3. maintain full employment
79
Q

3 tools Congress uses to influence fiscal policy

A
  1. taxation
  2. spending
  3. debt management
80
Q

impact of increasing tax rates on money supply and interest rates

A

increasing tax rates will reduce money available for spending thereby increasing interest rates

81
Q

impact of decreasing tax rates on money supply and interest rates

A

decreasing tax rates will increase money available for spending thereby decreasing interest rates

82
Q

how does government spending impact the money supply and interest rates?

A

through government spending, Congress can increase the money supply and decrease interest rates

83
Q

how does government cutting spending impact the money supply and interest rates?

A

Congress can cut spending which increases interest rates and decreases the money supply

84
Q

deficit spending

A

when Congress spends more than tax revenues that are collected

85
Q

what happens as Congress borrows money to continue deficit spending?

A

the amount of dollars available to be lent decreases, placing pressure on interest rates

86
Q

yield curve

A

diagram that plots the current interest rates against the term to maturity for similar securities (such as treasuries)

87
Q

how does expansionary policy impact the yield curve

A

will result in a normal yield curve

88
Q

how does contractionary policy impact the yield curve?

A

will result in an inverted yield curve

89
Q

Chapter 7

A

provides relief through liquidation

90
Q

debts not discharged through Chapter 7

A

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
Q

property exempt from Chapter 7

A

homestead, life insurance, qualified plans

92
Q

how much exemption is there on qualified plans and IRA rollovers?

A

unlimited exemption

93
Q

how much exemption is on Traditional IRAs and Roth IRAs

A

$1,362,800

94
Q

Chapter 11

A

provides relief through reorganization for businesses or the self-employed

95
Q

Chapter 13

A

provides relief through adjusting debts

96
Q

what is the max number of weeks someone can receive unemployment compensation?

A

39 (26 weeks of regular benefits, plus 13 additional weeks in periods of high unemployment)

97
Q

what does ERISA do?

A

protects retirement plans of employees

98
Q

Securities Act of 1933

A

regulates new issues of securities in the primary market

99
Q

primary market

A

securities market where new issues are sold to the public for the first time (IPOs)

100
Q

Securities Act of 1934

A

regulates secondary markets, established the SEC

101
Q

secondary markets

A

buying/selling of securities that were previously sold in the primary markets

102
Q

Securities Investor Protection Act of 1970

A

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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