CFP Deck 1 Flashcards
Muni Bonds: Private Activity
Used in the Construction of Private Activities (ex. Stadiums)
Muni Bonds: General Obligation
Backed by the full faith, credit, taxing authority of municipality
Muni Bonds: Revenue
Backed by revenue of specific project, no backed by full faith, credit, taxing authority of municipality
EMH: Strong
Price reflects all info; No advantage, “Market is efficient at adjusting prices; can’t beat market.”
EMH: Semi-Strong
Price reflects public info; Advantage gain through inside info
EMH: Weak
Price reflects historic data; advantage through fundamental analysis; Rejects technical analysis
Intrinsic Value Model
TO BE UPDATED
Geometric Average
Time-Weighted “Compounded rate of return”
Holding Period Return
HPR = Selling $ - Purchase $ +/- CF ÷ Purchase $ or Equity Invested… Not compounded, No considerations for time period
Holding Period Return
Not Compounded, No consideration for time period.
Arbitrage Pricing Theory
Pricing imbalances cannot exist for long; mult-factor model: inflation, risk premium, expected return
R^2
Coefficient of Determination
R^2
Calculate by Squaring the correlation coefficient
R^2
Measure of how much return (%) is due to market (Systematic Risk = Market Risk)
Variability of Asset Returns
Standard Deviation
Asset Classes
Capital, §1231, Ordinary Income
σ
Standard Deviation - 1 = 68%; 2 = 95%: 3 = 99%
Leptokurtic
High Peak, Fat tails
Platykurtis
Low peak, (think plateau), thin tails
Margin Call Formula
Loan ÷ (1 - Maintenance Margin)
Investor Policy Statement
Establishes client objectives, limitations on investment manager (RRTTLLU)
Investor Policy Statement Objectives:
Return Requirements, Risk Tolerance
Investor Policy Statement Constraints:
Time Horizon, Taxes, Liquidity, Laws and Regulations, Unique Circumstances
Russell 2000
Value Weighted Index of smallest 2000 stocks of Russell 3000
S&P 500
Value Weighted Index - incorporates market capitalization
Dow Jones Industrial Average
Price Weighted - 30 stocks
Money Market Security: Euro Dollars
Deposits in Foreign Banks that are denominated in USD (HINT: Euro = Foreign; Dollars = USD)
Money Market Security: Bankers Acceptance
Facilitates Imports/Exports, maturities of 9 months or less, can be held until maturity or traded
Money Market Security: Commercial Paper
Short terms loans between Corporations, Maturity 270 days or less, Does NOT have to be registered with SEC, $100,000 - Sold at Discount
Money Market Security: Treasury Bills
Maturities of 4, 13, 26, 52 Weeks, Denominations of $1,000
Insider Trading and Securities Fraud Enforcement Act of 1988
Insider = Anyone who trades on non-public info, cannot trade on non-public info
SIPC
Securities Investor Protection Corporation
Securities Protection Act of 1970
Established SIPC to protect investors from losses resulting from brokerage firm failures; does not protect from incompetence - bad investments
Investment Act of 1940
Required Investment Advisors to Register with the State or SEC
Investment Company Act of 1940
Authorized SEC to regulate investment companies
Investment Company - 3 types
Open, Closed, Unit Investment Trust
Investment Company: Open
Unlimited mkt cap, shares bought/redeemed from fund, shares trade at NAV (Ex. T. Rowe Price, Vanguard)
Investment Company: Closed
Have fixed mkt cap due to finite # of shares, trade at discount or premium
Investment Company: Unit Investment Trust
Equity or fixed income, typically fixed income, self liquidating, passive mgmt, “units” not shares, no trading of assets
Securities Act of 1934
Regulates trading of secondary market, created SEC
Securities Act of 1933
Regulates issuance of new securities
Ex-Dividend Date
Two days before date of record; window of time during which stocks trades without dividend
To receive dividend, one must by stock ___ days before date of record.
3 days
Morningstar
Mutual fund ranker - 5 Stars = Best; 1 Star = Lowest (ranking opposite of Valueline)
Valueline
Stock ranker - 1 = Best (buy); 5 = Low (sell)
Net Operating Income
Net Income + Noncash expenses (Interest, Depreciation)
CV = Par/CP x Ps
Convertible Bond Conversion Value - Value of stock bond can be converted into
Brochure Rule
Provide client with all info at meeting if given 5-days to change mind OR 48 hours prior to meeting
PLUS Loans
Parent Loan Undergraduate Student - Based on credit rating, not subsidized
Stafford Loan
Subsidized OR Unsubsidized; Primary type of FinAid
Pell Grant
Always available if student qualifies, need based to those without BA/BS or professional degree
Quarters or Coverage Need to be Fully Insured
40 (Quarter = 3 month period during which at least _ was taxed)
Medicare Part D
Provides prescription drug coverage benefits
Medicare Part B does not cover:
Routine physical exams, dental care, dentures, cosmetic surgery, hearing aids, eye exams
3 Ways to Reduce Social Security Benefits
Early Retirement, Too much income, Benefits taxed
Early Retirement SSB Reduction:
5/9 month first 3 years of early retirement;
5/12 month after 3 years
Balance Sheet Asset Categories
Cash and cash equivalents; Invested Assets, Personal Use assets
Categories of Ratios
Liquidity, Debt, Performance
Whole Life Dividend Options
Cash, accumulate at interest, reduce premiums, paid-up additions, one-year term extension
Authority (3 types)
Express, Implied, Apparent
Elements of Valid Contact
COALL = Competent Parties, Offer, Acceptance, Legal Consideration, Lawful Purpose
Subrogation Clause
Insured cannot receive benefit from both liable party and insurance company
Insurable Loss
CHAD = Catastrophic, Homogenous, Accidental, Determinable
Hazards (3 types)
Moral, Morale, Physical
Hazards: Moral
Character Flaw
Hazards: Morale
Indifference created because a person is insured - acting careless