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FPQP Certification > Business Ownership, Cash Management, and the Use of Debt > Flashcards

Business Ownership, Cash Management, and the Use of Debt Flashcards

1
Q

Interest rate on the mortgage may change periodically, which will increase or decrease the monthly payment amount.

A

Adjustable rate mortgage

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2
Q

The management of loan principal over time. The schedule is structured in such a way that more interest is being paid first, so over time the amount of principal being repaid increases, and the amount of interest being paid decreases.

A

Amortization

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3
Q

What a person owns. Includes cash and cash equivalents, invested assets, and use assets.

A

Assets

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4
Q

A financial statement listing a client’s assets, liabilities and net worth as of a specific point (snapshot) in time. Also called a statement of financial position or a net worth statement.

A

Balance sheet

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5
Q

An alternative for individuals who have accumulated too much debt and need a “fresh start.” There are two main types of bankruptcy, Chapter 7 (full) and Chapter 13 (wage earner’s plan). Certain debts cannot be eliminated in bankruptcy, including alimony and child support, certain tax claims, and government guaranteed student loans.

A

Bankruptcy

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6
Q

A financial statement listing expected income and expenses for a future period of time, used to keep spending under control.

A

Budget

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7
Q

Physical money, checking, and savings accounts.

A

Cash

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8
Q

Assets that can be quickly converted into cash, with little or no loss of principal. Examples include money market accounts and short-term certificates of deposit (CDs)

A

Cash equivalents

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9
Q

A personal financial statement that lists inflows and expenditures made by a person or family over a stated past period

A

Cash flow statement

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10
Q

A fixed-income investment available through banks and savings and loan associations. Interest rates and maturities are fixed at the time of purchase. Maturities vary from a few months to a few years, and early redemption may result in the payment of penalties. Because they are issued by banks and savings and loan associations, principal is usually insured through
either the FDIC (Federal Deposit Insurance Corporation) for banks, or the NCUA (National Credit Union Administration) for credit unions

A

Certificate of deposit (CDs)

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11
Q

When an asset is used to secure a debt, such as taking out an auto loan and using the auto as collateral for the loan. If the borrower stops making payments, then the car (i.e., the collateral) can be repossessed by the lender

A

Collateral

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12
Q

Short-term promissory notes issued by major, well established corporations. Is issued in large denominations.

A

Commercial paper

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13
Q

This type of mortgage involves only the borrower and the lender; there is no outside agency, such as GNMA, guaranteeing or insuring the mortgage.

A

Conventional mortgage

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14
Q

They are registered with a state and need an established set of bylaws. While C corporation profits are kept within the company, the S corporation has flow through of income into personal taxes like a partnership

A

Corporations.

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15
Q

The most common type of consumer credit. They are an example of open-end credit, and regular payments must be made, and the cardholder is not allowed to exceed a certain given level of credit

A

Credit Card

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16
Q

It will debit an individual’s bank account when a purchase is made (similar to writing a check).

A

Debit Card

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17
Q

Money borrowed by an individual or entity resulting in an obligation to repay the amount borrowed plus interest according to a set schedule.

A

Debt

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18
Q

A reserve of cash and/or cash equivalents (i.e., assets that could be quickly converted to cash without loss of principal) available to handle emergencies. Financial planners typically recommend an amount equal to three to six months of fixed and variable expenses.

A

Emergency Fund

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19
Q

The current value of an asset if it were sold by a willing seller to a willing buyer, with both behaving in their own best interests free of any undue pressure to trade.

A

Fair Market Value

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20
Q

Used by the vast majority of lenders to assess the credit worthiness of an individual. The score ranges from 300 to 850.

A

FICO Credit Score

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21
Q

Monthly payments are fixed at the outset of the loan and remain the same over the term of the loan. Typical terms are 15 or 30 years.

A

Fixed rate mortgage

22
Q

Government National Mortgage Association (“Ginnie Mae”). GNMAs are mortgages that are fully backed by the U.S. government.

A

GNMA

23
Q

This is a reverse mortgage program run by the Federal Housing Administration (FHA). Reverse mortgages enable homeowners over the age of 62 to receive (rather than make) payments. Amounts received must be repaid when the owner leaves the home

A

HECM

24
Q

Home equity line of credit. This is a credit line taken out using excess equity in the home as collateral. The HELOC would be second in line, with the primary mortgage having first rights to the property in the event of a foreclosure

A

HELOC.

25
Q

Pertains to the cash flow statement. An inflow is the dollars received by an individual during the period considered, such as dollars from salary, dividends, interest, rental income, alimony, child support, and investment
redemptions.

A

Inflow

26
Q

Closed-end credit with specific terms and payments. Examples would include home mortgages and auto loans.

A

Installment credit

27
Q

Pertains to the statement of financial position. They are not for the personal use of the individual/family and that cannot be readily converted to cash without the possibility of loss of principal. These include such items as common and preferred stocks, bonds, mutual funds, investment real estate, vested pension benefits, and so on.

A

Invested asset

28
Q

A contractual agreement under which a person makes monthly payments for the use of property over a set period of time, such as leasing an apartment or a car. At the end of the lease the property reverts back to the owner

A

Lease

29
Q

Pertains to a balance sheet. They are what an individual or family owes at the time of measurement. They are typically listed as the principal balance of a debt amount. Typical liabilities include a mortgage note balance, an auto loan balance, and the balances on credit cards

A

Liabilities

30
Q

State-registered and combines the advantages of the limited liability of corporations with the flow-through tax
treatment of other forms. Members of the LLC decide on and file for an IRS tax form of business, commonly a partnership or S corporation. Even a sole proprietor could start an LLC and then be taxed as a disregarded entity on the owner’s tax return.

A

Limited liability companies (LLCs)

31
Q

The ability to convert an asset quickly and easily to cash with little or no loss to principal.

A

Liquidity

32
Q

Available through savings and loan associations and banks. Earnings rates are determined by the institution, and they tend to be lower than rates for money market funds. They are FDIC insured, up to $250,000 per ownership category. Check writing privileges are typically available, although they may be restricted.

A

Money market deposit account

33
Q

A debt instrument on real estate where the lender obtains a lien on the property as security for repayment of a loan

A

Mortgage

34
Q

The situation that results from making smaller periodic payments than are necessary to pay the interest on a loan. The unpaid interest is added to the loan balance, causing the balance due to be greater than the original principal balance

A

Negative amortization

35
Q

An individual’s take-home pay, which is arrived at by taking the gross income amount and subtracting any income taxes and Social Security taxes.

A

Net Income

36
Q

Pertains to the cash flow statement. It is the residual amount after subtracting outflows from inflows. It is the amount that the individual or family has not yet allocated to savings or expenses.

A

Net Inflow

37
Q

The residual value after liabilities are subtracted from assets. It represents the amount that is owned by the individual or family, unencumbered by debt.

A

Net worth

38
Q

Another name for the statement of financial position (balance sheet).

A

Net Worth Statement

39
Q

Expenditure or use of cash

A

Outflow

40
Q

The right to use, possess, enjoy, and dispose of property

A

Ownership

41
Q

Must have a business purpose and at least two owners. This form of business should register with the partnership’s state. A ______ declares profits and losses, and the net profit or loss flows through to the
individual partners for income tax purposes, using Schedule K-1.

A

Partnerships

42
Q

A needs-based federal grant for postsecondary education. Grants, unlike loans, do not have to be repaid

A

PELL grants

43
Q

Financial information that has been organized into a form that is easily read and analyzed. The statement of financial position shows assets, liabilities, and net worth, while the cash flow statement shows
inflows and outflows over a specified period in the past.

A

Personal financial statements

44
Q

All property that is not land or items attached to the land

A

Personal Property

45
Q

Parent loans to undergraduate students allow parents to borrow for their children’s undergraduate studies

A

PLUS loans.

46
Q

Land and property that is attached to land (such as homes and buildings). Also referred to as realty

A

Real Estate Property

47
Q

Open-ended credit such as credit cards or a home equity line of credit (HELOC) on a home.

A

Revolving Credit

48
Q

Highly safe and liquid vehicle available through banks, credit unions, and savings and loan associations. It features low rates of interest compared with other vehicles

A

Savings Account

49
Q

Bonds issued by the U.S. government through banks and credit unions that pay either a fixed rate of interest semiannually (HH bonds) or earn
variable rates of interest (EE bonds)

A

Savings Bond

50
Q

No formal organizational documents or annual registrations are required, and all profits and losses flow directly through to the owner as income for income tax purposes.

A

Sole proprietorship

51
Q

Also called the Consumer Credit Protection Act. It requires that full disclosure be made concerning the cost of borrowing including the annual percentage rate (APR).

A

Truth in Lending Act

52
Q

Pertains to the statement of financial position. Is one that is intended primarily for the personal use or enjoyment of the family, such as personal property, a residence, and automobiles.

A

Use of asset

FPQP Certification (10 decks)

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