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
Hazards: Physical
Tangible condition that increases probability of peril
Code of Ethics: Practice Standards - EGADIM
Even God Admits Dat Its Memorizing
Code of Ethics: Practice Standards 100
Establishing/Defining Client Relationship
Code of Ethics: Practice Standards 200
Gathering Client Data
Code of Ethics: Practice Standards 300
Analyze/Evaluate client financial status
Code of Ethics: Practice Standards 400
Developing/Presenting financial plan
Code of Ethics: Practice Standards 500
Implementing
Code of Ethics: Practice Standards 600
Monitoring
Code of Ethics: Rules of Conduct
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.
Determinants of Financial Planning Engagement (4 elements):
1) Client understanding/intent. 2) Degrees of multiple FinPlan areas involved. 3) Comprehensiveness of data gathering. 4) Breadth/Depth of recommendations
Code of Ethics: Principles
I Can Obtain CFP Designation
Code of Ethics: Principles
Integrity, Competence, Objectivity, Confidentiality, Fairness, Professionalism, Diligence
American Opportunity Credit
4 years of Post Secondary - 100% of first $2,000; 25% of second $2,000 - $2,500 max per student/year
Lifetime Learning Credit
Undergrad, Grad, Professional, 20% of up to $10,000 qualified expenses, $2,000/family/year
Series EE Savings Bonds
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
Roth IRA Contribution Limit (2013)
Lessor or $5,500 ($6,500 if 50 or older) OR Taxable Compensation
Coverdale ESA
Considered Asset of parent for FinAid, Can be used for 1st/2nd private education,
Coverdale ESA 30 year old beneficiary rule
TO BE UPDATED
§529 Plan
Considered Asset of parent for FinAid, Post secondary education only, 5-year contribution consideration (2 x $14 x 5 years) = $70,000
Perkins Loan
Loan for very low EFC (Expected Family Contribution), Need based
Standard Deviation
Measure of Variability and Volatility, not, by itself, a risk adjusted performance indicator
Beta Coefficient (ß)
Measure of individual security’s volatility relative to that of the market, used to measure volatility of diversified portfolio
Unsystematic Risk Types
Accounting, Business, Country, Default, Executive, Financial, Government/Reg (HINT: ABCDEFG)
Systematic vs Unsystematic Risk
Nondiversifiable/Diversifiable; Market/Unique to Security; Economy based/Company Specific
Unsystematic Risk
Exists in a specific firm or investment that can be eliminated through diversification
Systematic Risk Types
Purchasing Power (Inflation), Reinvestment Rate, Interest Rate*, Market risk, Exchange Rate, (HINT: PRIME)
Systematic Risk
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
§1231
Used in trade or business; timber, coal, iron ore, certain livestock, unhavested crops; real depreciable props
Debenture
Debt instrument that is not secured by physical assets or collateral.
§1250
Governs recapture of depreciation on real §1231 assets, Business realty - buildings, real estate
§1245
Property that is/has subject to an allowance for depreciation/amortization, Tangible property, patents, Copyrights, NOT land/buildings
Imputed Interest on loans
Phantom Interest income attributed to lender
Imputed Interest: $0 ≤ $10,000
$0
Imputed Interest: $10,001 ≤ $100,000
Lessor of net investment income OR AFR Interest - Stated interest. (If borrower’s net investment income ≤ $1,000, $0 imputed interest)
Imputed Interest: > $100,000
AFR rate - stated loan rate
Annuity Inclusion Amount Formula
Monthly Payment x (Expected Total Payment-Basis)/Expected Total Payment
Yields on Bonds (High to Low)
Discounts (Highest to Lowest): YTC, YTM, CY, NY
intrinsic Value
Call (buy) Stock - Strike
Put (sell) Strike - Stock
Convexity
Measures the difference between durations estimate of bond price change and actual price change of bond
Bond Duration
Weighted average of maturity of all cash flows, moment investor is immunized from interest rate/reinvestment rate risk
Government Security: Non-Marketable
Series EE (no interest, discount); Series HH (interest semi-annually); Series I (inflation)
Government Security: Marketable
T-Bills (< year), T-Notes (210 years)
Red Herring
Preliminary Prospectus
MBIA
Municipal Bond Insurance Association
AMBAC
America Municipal Bond Assurance Corp.
Which securities have default risk? Corp. or Gov
Corporation
Prudent Man Rule
A fiduciary must act in the same manner that a prudent person would in same situation
§2503 (c) Trust
(c) = cuts off, Trust for minor, qualifies for annual exclusion, income accumulation, gifts partially excludable, must terminate
§2503 (b) Trust
(b) Trust for minor, qualifies for annual exclusion, must have income distributions, gifts partially excludable, lifetime
Codicil
Supplements to a will, used to modify, explain, or amend a will
Testate vs. Intestate
Dying Testate - with will; Dying Intestate - without will
Disclaimer Clause
Functions to remind any heirs that they can disclaim/forego a bequest
Rules to disclaim will
Disclaimer party cannot benefit, cannot direct future interest, disclaim within 9 months, must be in writing
Ademption
Extinction of Legacy assets - Legatees do not receive originally intended assets
Abatement
Reduction of Legatee Provisions
Ascertainable Standard
Not Included in Gross Estate - Health, Educational, Maintenance, Support (HEMS - §2041)
Probate Process
Legal process of retitling outstanding assets, serves to prove validity of will, assure heirs of clear title, protect creditors
Crummy Provision
Explicit Right of Trust Beneficiary to withdraw some, or all, of any contribution to trust for a limited time (~30 days), Power of appointment
Power of Appointment
Power to name who will enjoy or own property
Marriage Property
Tenancy by the Entirety (automatic transfer); Common Property (No automatic right of survivorship)
Gross Estate
FMV of all interests owned by decedent at time of death
ILIT
Irrevocable Life Insurance Trust
QPRT
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
GRAT
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
Private Annuity
Transaction between two unrelated parties, seller/annuitant sells asset to buyer in exchange for unsecured promissory note, annuity term = life expectancy of seller
SCIN
Self Canceling Installment Note
Self Canceling Installment Note
Classified for income tax as installment sale, interest is tax deductible, buyer’s basis = agreed upon purchase price regardless of payments
Profit Sharing Plans
Deferral of Compensation, No mandatory funding, 25% covered compensation limit
Profit Sharing Plans (7 types)
Profit Sharing, Stock Bonus, Employee Stock Ownership Plan (ESOP), 401(k), Thrift, Age-based Profit, New Comparability Plans
Target Benefit Plans
Type of Money Purchase plan, actuary at onset, try to target an ending benefit value, usefulness diminished
Money Purchase Plan Defined Contribution Plan
- Fixed % of employee compensation; 25% covered compensation deductible, 100% of Employee Salary of $251,000, 2-6 year vest of 3 year cliff
CODA
Cash or Deferred Arrangement - fancy name for 401(k) plan
Defined Benefit Plan Terminations
Standard (sufficient to pay out benefits), Distress (financial difficulty - unable to continue), Involuntary (initiated by PBGC to limit exposure)
ISO
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
Rabbi Trust
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
NQSO
Non-Qualified Stock Option - Taxable at exercise, FMV - Exercise price), becomes basis
Secular Trust
No substantial risk of forfeiture, No tax deferral, employer gets current tax deduction, funded, protected from bankruptcy because no risk of forfeiture
Retirement Plans Limits: Covered Compensation
$255,000
Retirement Plans Limits: Defined Benefit Max Limit
$205,000
Retirement Plans Limits: Defined Contribution Max Limit
$51,000
Retirement Plans Limits: 401(k), SARSEP, 403(b) Limit
$17,500
Retirement Plans Limits: PBGC Monthly Benefit Age 65
$4,790
Retirement Plans Limits: PBGC Yearly Benefit Age 65
$57,477
Retirement Plans Limits: Social Security Base Wage
$113,700
Retirement Plans Limits: Highly Compensated Employee
$115,000
Retirement Plans Limits: Key Employee (greater than)
$165,000
QDRO
Qualified Domestic Relations Order
Qualified Plans: Avoid 10% Penalty
Mess at DQ - Medical expenses, Equal Periodic Payments, Separation from Service, Age, Tax Levies, Death and Disability, QDRO
Child & Dependent Care Credit
Lessor of 20% of eligible costs or $3,000 limit for one child, $6,000 limit for two or more.
Child Tax Credit
$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)
Sources of Tax Law
1st = Statutory; 2nd = Administrative Sources; 3rd = Judicial Sources
Sources of Tax Law: Administrative
Regulations, Revenue Rulings, Revenue Procedures, Private Letter Ruling, Determination Letter, Technical Advice Memorandum
Annuity Exclusion Ratio
= Investment in Contact/Expected Total Return
Qualifying Child
Relationship test, Abode test (1/2 year), Age test (under 19, under 24 if student), Support test (1/2),
ACID Assets
Non-Capital: A/R, Copyrights, Inventory, Depreciable Property
What is the strongest determinant as to what should be added to portfolio?
Correlation of new securities to the portfolio.
Characteristics of Warrants
Written by Corp, Long-term Expiration (5-10 years), Warrants are NOT standardized.
Characteristics of Options
Written by Investors, Short-term Expiration (9 months or less), Options are standardized.
Dividend Payout Ratio
Common Stock Dividend/EPS
Return on Equity (ROE)
Net Income/Equity OR EPS/Stockholders Equity per share
