CFP - Fundamentals & Insurance Flashcards
Formula for NPV
Present value of the cash flows minus
Cost or Initial Investment
Internal Rate of Return (IRR)
Rate at which cash inflows and outflows are equal / Break even interest rate
IRR Decision Criteria
Investment to be accepted if the IRR is greater than, or equal to, the discount rate (r).
Advisor who has less than $100m under management must register with
The state
Advisor who has assets greater than $110m under management must register with
SEC
An advisor with assets between 100m and 110m can choose
To register with State or SEC
Investment advisor act of 1940 defines advisor as
Someone who
1. In the business
2. Of providing advice about securities
3. For compensation
ABC
Advice, Business & Compensation
ADV part 1
Contains investment business, ownership, clients, employees, business practices, affiliations and disciplinary events of advisor or its employees
RIA must electronically file a ADV part 1 and schedule I how often?
Annually , within 90 days of their fiscal year end
ADV part 2 contains
Compensation, fees, education, investment objectives conflicts of interest in the background of advisory personnel
ADV part 3 contains
Customer relationships summary
Most important exemptions to registration with the SEC
The exemption is that TABLEs are incidental, teachers, accountants, brokers, lawyers, and engineers
The following meet the definition of investment advisor, but are not required to register. They are subject to the anti-fraud provisions of the act.
VIPs are SaFe from exemptions
Venture capital
Insurance companies
Private funds less than $150m
Home State
Foreign Advisors
Securities not listed on a national Exchange
To be an accredited investor, you must meet the 1 or 2, 3 test
1 million or 200,000 of income if single, or 300,000 of spousal income
General obligation of Reg BI
Disclosure of obligation, care of obligation, conflict of interest, obligation, compliance, obligation
Financial planning process
Uber is a drunk person’s immediate motor vehicle:
Understanding
Identifying
Analyzing
Developing
Presenting
Implementing
Monitoring
Three - Panel Approach
All clients should have Big 3 documents
Will
Durable POA for Healthcare
Advanced Medical Directive
Business lifecycle
Characteristics of Expansion phase
- Increasing GDP, inflation and interest rates
- Decreasing unemployment rate
Investment should be short duration bonds & equities
Characteristics of Peak phase
1.GDP at its highest
2. Inflation and interest rates are peeking , unemployment rate is at its lowest
investments should be fine’s preferred stock and other high duration or fixed income assets
Gold & real estate tend to perform well in this environment
Characteristics of contraction/ recession phase
- GDP slowing
- Inflation & interest rates declining
- Unemployment rate increasing
Equity should be sold in reinvested into short term cash & bonds until market settles
Characteristics of trough cycle
- GDP inflation in interest rates at their lowest levels
- Unemployment at its highest.
High duration bonds will perform well stock purchase. The stock purchases late in the cycle should be considered.
Recession
6 months or ( 2 quarters) of declining GDP
Depression
If recession lasts 18 months or 6 quarters
Monetary Policy Effects
Debts not discharged in bankruptcy
Student and government loans
3 years back taxes
Alimony and child support
Monies owed due to malicious acts
Property exempt from Bankruptcy
Homestead
Life Insurance
Qualified plans
Chapter 11
Provides relief through reorganization for businesses or self employed
Chapter 13
Provides relief through adjusting debts
Securities act of 1933
Regulates new issues of securities in the primary market
Securities act of 1934
Regulates secondary markets
Established the SEC
Securities, investor protection act of 1970
Created securities investor protection corporation (SIPC)
Provides coverage if a broker dealer becomes insolvent, or if there is unauthorized trading in an investors account
Debt Ratios
1.Consumer Debt should not exceed 20% of net income
2. Housing Debt should be less than or equal to 28% of gross income
3. Housing plus all other recurring should be less than or equal to 36% of gross income
Stanford Loans
Subsidized is need based
Unsubsidized is Not need bases
Parent Loans (PLUS)
Not need based
For parents to pay their children studies
Not subsidized
Grad PLUS loan
Grad students
Dependent on credit score
Max PLUS loan is cost of attendance minus any other aid
Payments start 6 months after graduation
Interest accrues as you go
Federal Perkins Loan
Program expired Sept 30th 2017
For students with exceptionally low EFC amounts
Need Bases
Federal Pell Grant
Strictly need based and dependent on EFC amount
EFC determines student’s eligibility
Only students that have not received bachelors or professional degree
Insurable Risks are CHAD
Not Catastrophic, Homogeneous exposure units, Accidental and Measurable and Determinable
A legal contract required COALL
Competent parties, Offer and Acceptance, Legal consideration and Lawful purpose
Actual Cash Value (ACV)
ACV is essentially replacement costs, less depreciation
ACV can impose serious financial burden on the insured
Almost all auto policies are ACV
National Association of Insurance Commissioners (NAIC)
Provides watchlist of insurance companies based upon financial ratio analysis
No regulatory power over insurance industry
Issues “ model legislation “
Ratios measure financial health of insurance companies
Six Steps of Risk Management ( DIE DIE)
Determine objectives
Identify risks
Evaluate the identified risks
Determine Alternatives for managing risk
Implement the program
Evaluate, Monitor and review
Financial Planning Process
Life insurance Dividends are a CRAP-O
Cash option, Reduce Premiums, Accumulate at interest, Paid - up additions and Term ( One Year)
Life Insurance Nonforfeiture Options
Cash surrender value
Reduced paid up insurance
Extended term insurance
Taxation of annuities
Annuities after 1982 and premature withdrawals receive LIFO tax treatment. Any annuity prior to 1982 receives FIFO tax treatment
Annuity Exchanges and taxation
HSA catch up
Age 55 and older - $1000
HSA Distributions for non qualified medical expenses are subject to income tax and 20% penalty if taken before age
65
COBRA coverage based on qualifying event
Taxation of Disability Insurance
If Employee pays the premium with After Tax Dollars
- premiums are Not Deductible
- Benefits are Tax Free
If Employer pays the premium
- Premiums Are Deductible to Employer
- Benefits to Employee Are Taxed
If Employee pays premium with Pre-Tax dollars
- Benefits to employee Are Taxed
Social security benefit increases by how much each year retiree delays benefit
8%
Not covered by Medicare plan B
Dental Care, dentures
Cosmetic Surgery
Hearing AIDS
Eye Exams
Homeowner’s Insurance
HO-1 non- existent basic coverage
HO-3 special form coverage with open peril on coverage A and B
HO-4 renters coverage
HO-5 comprehensive form coverage
Exceptions to registration
TABLE
Teachers, accountants, Banks, Lawyers and Engineers
VIP’s are SaFE from exemptions
Venture capital
Insurance Carrier
Private funds
Soley in home sate
Foreign advisors
Not traded on Exchange
Monetary Policy - buying securities
Increase money supply/ Decrease Interest rates
Monetary Policy- Sell securities
Decrease money supply and increase interest rates
Fiscal Policy - 3 goals
Maintain economic growth
Maintain price stability
Full employment
Congress tools to influence fiscal policy
Taxation
Spending
Debt Management
Housing Ratio
Less than or equal to 28%
p I T I / monthly gross income
Housing Ratio 36%
Monthly housing costs plus recurring debt / monthly gross income
Expected Family Contribution - College
Students are considered independent if :
Over age 23
Have legal dependents other than spouse
Married
Orphan or ward
Working on masters
Veteran
Needs Based Financial Aid
Federal Pell Grant
Subsidized Stanford
Not needs based financial aid
Unsubsidized Stanford loan
PLUS Loan
Financial Aid subsidized vs. Unsubsidized
Campus Based Financial Aid
Federal supplemental Education Opportunity Grant - low EFC / only paid if funds are available.
Federal Work Study
Programs to reduce student loans
529 Able
Bene must be entitled to SS disability
Only 1 ABLE account per bene
Over $100k will suspend SSI
Arbitrage Pricing Theory
APT asserts that pricing imbalances cannot exist for any significant period of time, otherwise investors will exploit the price imbalance until the market prices are back to equilibrium
ApT is a multi factor model
APT attempts to take advantage of pricing imbalances
Standard deviation and beta are not inputs
What returns do mutual funds use when reporting 5 year historical return
Time weighted
Standard deviation is a measure
Of total risk
Beta measures
How portfolio returns in relationship to the market. How did our portfolio change when the market changed. How much market risk
If required rate of return decreases
The stock price will increase
If required rate of return increases
Stock will decrease
If divided is expected to increase
Stock will increase
Dividend payout ratio
Common stock divided by earnings per share
Return on Equity
Earnings per share divided by stockholders equity per share
Dividend yield formula
Dividend divided by stock price
Fundamental Analysis
Balance sheet / income statement
Economic data
Stock price driven by financial performance of firm
Investors can determine reliable estimates of a stocks future price behavior
Technical Analysis
Charting and plotting trading volume and price movements
Supply and demand drive stocks
Tools of technicians
Charting
Market volume
Short interest
Odd lot trading
Dow theory
Breadth of market
Three forms of Efficient Market Hypothesis
Weak form - historical information will not help/ rejects tech analysis/ security prices reflect all price and volume data
Semi Strong - both historical and public information will not help / rejects tech and fundamental analysis- inside info will lead to positive results
Strong Form - historical, public and private info will not help
Suggests stock prices reflect all available info and even insider info can not help
All three forms of Efficient Market Hypothesis reject
Technical Analysis
EE Bonds are not
Marketable securities
T bills, T Notes and T Bonds
T Bills - less than 1 year, discounted yield
T notes - 2- 10 years, interest paid semi annually
T bonds - greater than 10 years, interest paid semi annually
Strips
Highly liquid and appropriate for investors looking for low risk, high liquidity with specific time horizon
Agency bonds are not backed by full faith and credit of US Government
Exception GNMA - Ginnie Mae
Unsecured Corporate Bonds
Debentures
Subordinated Debentures
Income Bonds
Bond rating agencies
Moody’s and Standard & Poor
Higher rating lower yield
Moody’s ratings Aaa - C
Standard & Poor - AAA -D
Muni Bonds
General Obligation - backed by full faith and credit of municipality
Revenue Bonds - backed by revenue of project
Private Activity - used to finance a stadium
American municipal Bond assurance and municipal bond insurance association insure bonds
Coupon Rate or Nominal Yield
Annual payment amounts in dollars divided by the par value
Coupon payment / par
Current yield
Coupon payment divided by price of the bond
Yield Ladder - discount
Call Mom’s Cell Now!
Yield to Call
Yield to Maturity
Current Yield
Nominal Yield
Yield Ladder Premium
Opposite of Call Mom’s Cell Now
Nominal Yield
Current Yield
Yield to Maturity
Yield to Call
Bond Duration
The bigger the duration, the more price sensitive or volatile the bond is to interest rate changes
A bond portfolio should have a duration equal to investors time hotizon
Net operating Income
Calculate net income and add back depreciation and financing activities
Convexity
Measures the difference between duration estimate of bonds price change and the actual price change of a bond
UIT
Passively managed and self liquidating
ADR’s
Represent foreign stocks held in domestic banks
They do not eliminate exchange rate risk
Dividends are paid in US dollars
Options
Which option will provide the investor with the maximum gains if stock option appreciates
Buying a call
Which option will maximize gains if stock price falls
Buying a put
Intrinsic Value call option
Stock price - Strike Price
Intrinsic Value
Strike Price - stock price
Calculating Gain or Loss using options
STOPs
Stock gain or loss
Options gain or loss
premium paid or received
Shared controlled or owned
Option used to protect profits or lock in gains
Buying a put
Black/ Scholes
Used to determine the value of a call option
Put/ Call Parity
Attempts to value a PUT option based on the value of corresponding call option
Binomial Procing Model
Attempts to value an option based on the assumption that a stock can only move in one of two directions
Capital goods and consumer hood would be most affected by
Recession - they are cyclical and fluctuate directly with economy and GDP
HO coverages
Coverage A - attached structures
Coverage B - space Between ( detached garages)
Coverage C - covers my crap ( contents)
Coverage D - Damage so bad I can’t live there ( pays for housing elsewhere)
Coverage E - EEEkk I’m in trouble ( Liability)
Coverage F - someone fell and I owe them medical payments
LTC ADL
Bed to Chair
Bathing, Eating, Dressing, Transferring from Bed to Chair, toilet and Continence
Basic names Perils
Fire
Lighting
Windstorm
Hail
Riot
Aircraft
Vehicles
Smoke
Vandalism
Explosion
Theft
Volcano
Broad named perils
Falling objects
Weight of ice,snow, sleet
Accidental overflow of water
Sudden bursting of appliances
Freezing of system or appliance
Damage from electrical current
Open peril policy
Protects against all perils except for exclusions
General Exclusions for all HO policies
Summary of HO Forms
Reduction of SS Retirement Benefits
Reduced by 5/9 for each month, for first 3 years that a worker retires
Reduced by 5/12 for each month beyond 3 years
Taxation of SS Benefits
