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CFP > CFP Deck 1 > Flashcards

CFP Deck 1 Flashcards

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1
Q

Muni Bonds: Private Activity

A

Used in the Construction of Private Activities (ex. Stadiums)

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2
Q

Muni Bonds: General Obligation

A

Backed by the full faith, credit, taxing authority of municipality

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3
Q

Muni Bonds: Revenue

A

Backed by revenue of specific project, no backed by full faith, credit, taxing authority of municipality

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4
Q

EMH: Strong

A

Price reflects all info; No advantage, “Market is efficient at adjusting prices; can’t beat market.”

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5
Q

EMH: Semi-Strong

A

Price reflects public info; Advantage gain through inside info

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6
Q

EMH: Weak

A

Price reflects historic data; advantage through fundamental analysis; Rejects technical analysis

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7
Q

Intrinsic Value Model

A

TO BE UPDATED

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8
Q

Geometric Average

A

Time-Weighted “Compounded rate of return”

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9
Q

Holding Period Return

A

HPR = Selling $ - Purchase $ +/- CF ÷ Purchase $ or Equity Invested… Not compounded, No considerations for time period

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10
Q

Holding Period Return

A

Not Compounded, No consideration for time period.

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11
Q

Arbitrage Pricing Theory

A

Pricing imbalances cannot exist for long; mult-factor model: inflation, risk premium, expected return

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12
Q

R^2

A

Coefficient of Determination

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13
Q

R^2

A

Calculate by Squaring the correlation coefficient

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14
Q

R^2

A

Measure of how much return (%) is due to market (Systematic Risk = Market Risk)

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15
Q

Variability of Asset Returns

A

Standard Deviation

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16
Q

Asset Classes

A

Capital, §1231, Ordinary Income

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17
Q

σ

A

Standard Deviation - 1 = 68%; 2 = 95%: 3 = 99%

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18
Q

Leptokurtic

A

High Peak, Fat tails

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19
Q

Platykurtis

A

Low peak, (think plateau), thin tails

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20
Q

Margin Call Formula

A

Loan ÷ (1 - Maintenance Margin)

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21
Q

Investor Policy Statement

A

Establishes client objectives, limitations on investment manager (RRTTLLU)

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22
Q

Investor Policy Statement Objectives:

A

Return Requirements, Risk Tolerance

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23
Q

Investor Policy Statement Constraints:

A

Time Horizon, Taxes, Liquidity, Laws and Regulations, Unique Circumstances

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24
Q

Russell 2000

A

Value Weighted Index of smallest 2000 stocks of Russell 3000

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25
Q

S&P 500

A

Value Weighted Index - incorporates market capitalization

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26
Q

Dow Jones Industrial Average

A

Price Weighted - 30 stocks

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27
Q

Money Market Security: Euro Dollars

A

Deposits in Foreign Banks that are denominated in USD (HINT: Euro = Foreign; Dollars = USD)

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28
Q

Money Market Security: Bankers Acceptance

A

Facilitates Imports/Exports, maturities of 9 months or less, can be held until maturity or traded

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29
Q

Money Market Security: Commercial Paper

A

Short terms loans between Corporations, Maturity 270 days or less, Does NOT have to be registered with SEC, $100,000 - Sold at Discount

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30
Q

Money Market Security: Treasury Bills

A

Maturities of 4, 13, 26, 52 Weeks, Denominations of $1,000

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31
Q

Insider Trading and Securities Fraud Enforcement Act of 1988

A

Insider = Anyone who trades on non-public info, cannot trade on non-public info

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32
Q

SIPC

A

Securities Investor Protection Corporation

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33
Q

Securities Protection Act of 1970

A

Established SIPC to protect investors from losses resulting from brokerage firm failures; does not protect from incompetence - bad investments

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34
Q

Investment Act of 1940

A

Required Investment Advisors to Register with the State or SEC

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35
Q

Investment Company Act of 1940

A

Authorized SEC to regulate investment companies

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36
Q

Investment Company - 3 types

A

Open, Closed, Unit Investment Trust

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37
Q

Investment Company: Open

A

Unlimited mkt cap, shares bought/redeemed from fund, shares trade at NAV (Ex. T. Rowe Price, Vanguard)

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38
Q

Investment Company: Closed

A

Have fixed mkt cap due to finite # of shares, trade at discount or premium

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39
Q

Investment Company: Unit Investment Trust

A

Equity or fixed income, typically fixed income, self liquidating, passive mgmt, “units” not shares, no trading of assets

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40
Q

Securities Act of 1934

A

Regulates trading of secondary market, created SEC

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41
Q

Securities Act of 1933

A

Regulates issuance of new securities

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42
Q

Ex-Dividend Date

A

Two days before date of record; window of time during which stocks trades without dividend

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43
Q

To receive dividend, one must by stock ___ days before date of record.

A

3 days

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44
Q

Morningstar

A

Mutual fund ranker - 5 Stars = Best; 1 Star = Lowest (ranking opposite of Valueline)

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45
Q

Valueline

A

Stock ranker - 1 = Best (buy); 5 = Low (sell)

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46
Q

Net Operating Income

A

Net Income + Noncash expenses (Interest, Depreciation)

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47
Q

CV = Par/CP x Ps

A

Convertible Bond Conversion Value - Value of stock bond can be converted into

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48
Q

Brochure Rule

A

Provide client with all info at meeting if given 5-days to change mind OR 48 hours prior to meeting

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49
Q

PLUS Loans

A

Parent Loan Undergraduate Student - Based on credit rating, not subsidized

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50
Q

Stafford Loan

A

Subsidized OR Unsubsidized; Primary type of FinAid

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51
Q

Pell Grant

A

Always available if student qualifies, need based to those without BA/BS or professional degree

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52
Q

Quarters or Coverage Need to be Fully Insured

A

40 (Quarter = 3 month period during which at least _ was taxed)

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53
Q

Medicare Part D

A

Provides prescription drug coverage benefits

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54
Q

Medicare Part B does not cover:

A

Routine physical exams, dental care, dentures, cosmetic surgery, hearing aids, eye exams

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55
Q

3 Ways to Reduce Social Security Benefits

A

Early Retirement, Too much income, Benefits taxed

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56
Q

Early Retirement SSB Reduction:

A

5/9 month first 3 years of early retirement;

5/12 month after 3 years

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57
Q

Balance Sheet Asset Categories

A

Cash and cash equivalents; Invested Assets, Personal Use assets

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58
Q

Categories of Ratios

A

Liquidity, Debt, Performance

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59
Q

Whole Life Dividend Options

A

Cash, accumulate at interest, reduce premiums, paid-up additions, one-year term extension

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60
Q

Authority (3 types)

A

Express, Implied, Apparent

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61
Q

Elements of Valid Contact

A

COALL = Competent Parties, Offer, Acceptance, Legal Consideration, Lawful Purpose

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62
Q

Subrogation Clause

A

Insured cannot receive benefit from both liable party and insurance company

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63
Q

Insurable Loss

A

CHAD = Catastrophic, Homogenous, Accidental, Determinable

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64
Q

Hazards (3 types)

A

Moral, Morale, Physical

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65
Q

Hazards: Moral

A

Character Flaw

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66
Q

Hazards: Morale

A

Indifference created because a person is insured - acting careless

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67
Q

Hazards: Physical

A

Tangible condition that increases probability of peril

68
Q

Code of Ethics: Practice Standards - EGADIM

A

Even God Admits Dat Its Memorizing

69
Q

Code of Ethics: Practice Standards 100

A

Establishing/Defining Client Relationship

70
Q

Code of Ethics: Practice Standards 200

A

Gathering Client Data

71
Q

Code of Ethics: Practice Standards 300

A

Analyze/Evaluate client financial status

72
Q

Code of Ethics: Practice Standards 400

A

Developing/Presenting financial plan

73
Q

Code of Ethics: Practice Standards 500

A

Implementing

74
Q

Code of Ethics: Practice Standards 600

A

Monitoring

75
Q

Code of Ethics: Rules of Conduct

A

The Rules of Conduct establish the high standards expected of certificates and describe the level of professionalism required of certificates. The Rules of Conduct are binding on all certificants, regardless of their title, position, type of employment or method of compensation, and they govern all those who have the right to use the CFP® marks, whether or not those marks are actually used.

76
Q

Determinants of Financial Planning Engagement (4 elements):

A

1) Client understanding/intent. 2) Degrees of multiple FinPlan areas involved. 3) Comprehensiveness of data gathering. 4) Breadth/Depth of recommendations

77
Q

Code of Ethics: Principles

A

I Can Obtain CFP Designation

78
Q

Code of Ethics: Principles

A

Integrity, Competence, Objectivity, Confidentiality, Fairness, Professionalism, Diligence

79
Q

American Opportunity Credit

A

4 years of Post Secondary - 100% of first $2,000; 25% of second $2,000 - $2,500 max per student/year

80
Q

Lifetime Learning Credit

A

Undergrad, Grad, Professional, 20% of up to $10,000 qualified expenses, $2,000/family/year

81
Q

Series EE Savings Bonds

A

Purchased 1/2 Face value, may be rolled into 529 or Coverdell Plan, If used for educational expenses no fed tax on interest, Redemption must occur in same year as expense

82
Q

Roth IRA Contribution Limit (2013)

A

Lessor or $5,500 ($6,500 if 50 or older) OR Taxable Compensation

83
Q

Coverdale ESA

A

Considered Asset of parent for FinAid, Can be used for 1st/2nd private education,

84
Q

Coverdale ESA 30 year old beneficiary rule

A

TO BE UPDATED

85
Q

§529 Plan

A

Considered Asset of parent for FinAid, Post secondary education only, 5-year contribution consideration (2 x $14 x 5 years) = $70,000

86
Q

Perkins Loan

A

Loan for very low EFC (Expected Family Contribution), Need based

87
Q

Standard Deviation

A

Measure of Variability and Volatility, not, by itself, a risk adjusted performance indicator

88
Q

Beta Coefficient (ß)

A

Measure of individual security’s volatility relative to that of the market, used to measure volatility of diversified portfolio

89
Q

Unsystematic Risk Types

A

Accounting, Business, Country, Default, Executive, Financial, Government/Reg (HINT: ABCDEFG)

90
Q

Systematic vs Unsystematic Risk

A

Nondiversifiable/Diversifiable; Market/Unique to Security; Economy based/Company Specific

91
Q

Unsystematic Risk

A

Exists in a specific firm or investment that can be eliminated through diversification

92
Q

Systematic Risk Types

A

Purchasing Power (Inflation), Reinvestment Rate, Interest Rate*, Market risk, Exchange Rate, (HINT: PRIME)

93
Q

Systematic Risk

A

Lowest level of risk one could expect in a fully diversified portfolio, inherent in the “system” as result of the unknown element in the existing security that have no guarantees

94
Q

§1231

A

Used in trade or business; timber, coal, iron ore, certain livestock, unhavested crops; real depreciable props

95
Q

Debenture

A

Debt instrument that is not secured by physical assets or collateral.

96
Q

§1250

A

Governs recapture of depreciation on real §1231 assets, Business realty - buildings, real estate

97
Q

§1245

A

Property that is/has subject to an allowance for depreciation/amortization, Tangible property, patents, Copyrights, NOT land/buildings

98
Q

Imputed Interest on loans

A

Phantom Interest income attributed to lender

99
Q

Imputed Interest: $0 ≤ $10,000

A

$0

100
Q

Imputed Interest: $10,001 ≤ $100,000

A

Lessor of net investment income OR AFR Interest - Stated interest. (If borrower’s net investment income ≤ $1,000, $0 imputed interest)

101
Q

Imputed Interest: > $100,000

A

AFR rate - stated loan rate

102
Q

Annuity Inclusion Amount Formula

A

Monthly Payment x (Expected Total Payment-Basis)/Expected Total Payment

103
Q

Yields on Bonds (High to Low)

A

Discounts (Highest to Lowest): YTC, YTM, CY, NY

104
Q

intrinsic Value

A

Call (buy) Stock - Strike

Put (sell) Strike - Stock

105
Q

Convexity

A

Measures the difference between durations estimate of bond price change and actual price change of bond

106
Q

Bond Duration

A

Weighted average of maturity of all cash flows, moment investor is immunized from interest rate/reinvestment rate risk

107
Q

Government Security: Non-Marketable

A

Series EE (no interest, discount); Series HH (interest semi-annually); Series I (inflation)

108
Q

Government Security: Marketable

A

T-Bills (< year), T-Notes (210 years)

109
Q

Red Herring

A

Preliminary Prospectus

110
Q

MBIA

A

Municipal Bond Insurance Association

111
Q

AMBAC

A

America Municipal Bond Assurance Corp.

112
Q

Which securities have default risk? Corp. or Gov

A

Corporation

113
Q

Prudent Man Rule

A

A fiduciary must act in the same manner that a prudent person would in same situation

114
Q

§2503 (c) Trust

A

(c) = cuts off, Trust for minor, qualifies for annual exclusion, income accumulation, gifts partially excludable, must terminate

115
Q

§2503 (b) Trust

A

(b) Trust for minor, qualifies for annual exclusion, must have income distributions, gifts partially excludable, lifetime

116
Q

Codicil

A

Supplements to a will, used to modify, explain, or amend a will

117
Q

Testate vs. Intestate

A

Dying Testate - with will; Dying Intestate - without will

118
Q

Disclaimer Clause

A

Functions to remind any heirs that they can disclaim/forego a bequest

119
Q

Rules to disclaim will

A

Disclaimer party cannot benefit, cannot direct future interest, disclaim within 9 months, must be in writing

120
Q

Ademption

A

Extinction of Legacy assets - Legatees do not receive originally intended assets

121
Q

Abatement

A

Reduction of Legatee Provisions

122
Q

Ascertainable Standard

A

Not Included in Gross Estate - Health, Educational, Maintenance, Support (HEMS - §2041)

123
Q

Probate Process

A

Legal process of retitling outstanding assets, serves to prove validity of will, assure heirs of clear title, protect creditors

124
Q

Crummy Provision

A

Explicit Right of Trust Beneficiary to withdraw some, or all, of any contribution to trust for a limited time (~30 days), Power of appointment

126
Q

Power of Appointment

A

Power to name who will enjoy or own property

127
Q

Marriage Property

A

Tenancy by the Entirety (automatic transfer); Common Property (No automatic right of survivorship)

128
Q

Gross Estate

A

FMV of all interests owned by decedent at time of death

129
Q

ILIT

A

Irrevocable Life Insurance Trust

130
Q

QPRT

A

Qualified Personal Residence Trust, Specific form of GRAT, transfers home to trust instead of annuity receives right to use home until death, end of term property passes to remainderman

131
Q

GRAT

A

Grantor Retained Annuity Trust - Grantor Transfers Assets during term, receives income (stated $ or % of initial FMV) during term, end of term property passes to remainderman

132
Q

Private Annuity

A

Transaction between two unrelated parties, seller/annuitant sells asset to buyer in exchange for unsecured promissory note, annuity term = life expectancy of seller

133
Q

SCIN

A

Self Canceling Installment Note

134
Q

Self Canceling Installment Note

A

Classified for income tax as installment sale, interest is tax deductible, buyer’s basis = agreed upon purchase price regardless of payments

135
Q

Profit Sharing Plans

A

Deferral of Compensation, No mandatory funding, 25% covered compensation limit

136
Q

Profit Sharing Plans (7 types)

A

Profit Sharing, Stock Bonus, Employee Stock Ownership Plan (ESOP), 401(k), Thrift, Age-based Profit, New Comparability Plans

137
Q

Target Benefit Plans

A

Type of Money Purchase plan, actuary at onset, try to target an ending benefit value, usefulness diminished

138
Q

Money Purchase Plan Defined Contribution Plan

A
  • Fixed % of employee compensation; 25% covered compensation deductible, 100% of Employee Salary of $251,000, 2-6 year vest of 3 year cliff
139
Q

CODA

A

Cash or Deferred Arrangement - fancy name for 401(k) plan

140
Q

Defined Benefit Plan Terminations

A

Standard (sufficient to pay out benefits), Distress (financial difficulty - unable to continue), Involuntary (initiated by PBGC to limit exposure)

141
Q

ISO

A

Incentive Stock Option, $100,000 rule, no regular income at exercise, Long-term cap gains, 1 year grant date, 1 year exercise holding period requirement

142
Q

Rabbi Trust

A

Do not provide security against employee bankruptcy or a current tax deduction for employee, participants have security against employer’s unwillingness to pay, tax deferral for participants

143
Q

NQSO

A

Non-Qualified Stock Option - Taxable at exercise, FMV - Exercise price), becomes basis

144
Q

Secular Trust

A

No substantial risk of forfeiture, No tax deferral, employer gets current tax deduction, funded, protected from bankruptcy because no risk of forfeiture

145
Q

Retirement Plans Limits: Covered Compensation

A

$255,000

146
Q

Retirement Plans Limits: Defined Benefit Max Limit

A

$205,000

147
Q

Retirement Plans Limits: Defined Contribution Max Limit

A

$51,000

148
Q

Retirement Plans Limits: 401(k), SARSEP, 403(b) Limit

A

$17,500

149
Q

Retirement Plans Limits: PBGC Monthly Benefit Age 65

A

$4,790

150
Q

Retirement Plans Limits: PBGC Yearly Benefit Age 65

A

$57,477

151
Q

Retirement Plans Limits: Social Security Base Wage

A

$113,700

152
Q

Retirement Plans Limits: Highly Compensated Employee

A

$115,000

153
Q

Retirement Plans Limits: Key Employee (greater than)

A

$165,000

154
Q

QDRO

A

Qualified Domestic Relations Order

155
Q

Qualified Plans: Avoid 10% Penalty

A

Mess at DQ - Medical expenses, Equal Periodic Payments, Separation from Service, Age, Tax Levies, Death and Disability, QDRO

156
Q

Child & Dependent Care Credit

A

Lessor of 20% of eligible costs or $3,000 limit for one child, $6,000 limit for two or more.

157
Q

Child Tax Credit

A

$1,000 for each dependent child under 17 (US Citizen, claimed as dependent, if parents married must file MFJ, subject to phaseout, include foster/step children)

158
Q

Sources of Tax Law

A

1st = Statutory; 2nd = Administrative Sources; 3rd = Judicial Sources

159
Q

Sources of Tax Law: Administrative

A

Regulations, Revenue Rulings, Revenue Procedures, Private Letter Ruling, Determination Letter, Technical Advice Memorandum

160
Q

Annuity Exclusion Ratio

A

= Investment in Contact/Expected Total Return

161
Q

Qualifying Child

A

Relationship test, Abode test (1/2 year), Age test (under 19, under 24 if student), Support test (1/2),

162
Q

ACID Assets

A

Non-Capital: A/R, Copyrights, Inventory, Depreciable Property

163
Q

What is the strongest determinant as to what should be added to portfolio?

A

Correlation of new securities to the portfolio.

164
Q

Characteristics of Warrants

A

Written by Corp, Long-term Expiration (5-10 years), Warrants are NOT standardized.

165
Q

Characteristics of Options

A

Written by Investors, Short-term Expiration (9 months or less), Options are standardized.

166
Q

Dividend Payout Ratio

A

Common Stock Dividend/EPS

167
Q

Return on Equity (ROE)

A

Net Income/Equity OR EPS/Stockholders Equity per share

CFP (3 decks)

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