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CFP - RL Flash cards > CFP - Fundamentals & Insurance > Flashcards

CFP - Fundamentals & Insurance Flashcards

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1
Q

Formula for NPV

A

Present value of the cash flows minus
Cost or Initial Investment

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2
Q

Internal Rate of Return (IRR)

A

Rate at which cash inflows and outflows are equal / Break even interest rate

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3
Q

IRR Decision Criteria

A

Investment to be accepted if the IRR is greater than, or equal to, the discount rate (r).

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4
Q

Advisor who has less than $100m under management must register with

A

The state

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5
Q

Advisor who has assets greater than $110m under management must register with

A

SEC

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6
Q

An advisor with assets between 100m and 110m can choose

A

To register with State or SEC

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7
Q

Investment advisor act of 1940 defines advisor as

A

Someone who
1. In the business
2. Of providing advice about securities
3. For compensation

ABC
Advice, Business & Compensation

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8
Q

ADV part 1

A

Contains investment business, ownership, clients, employees, business practices, affiliations and disciplinary events of advisor or its employees

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9
Q

RIA must electronically file a ADV part 1 and schedule I how often?

A

Annually , within 90 days of their fiscal year end

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10
Q

ADV part 2 contains

A

Compensation, fees, education, investment objectives conflicts of interest in the background of advisory personnel

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11
Q

ADV part 3 contains

A

Customer relationships summary

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12
Q

Most important exemptions to registration with the SEC

A

The exemption is that TABLEs are incidental, teachers, accountants, brokers, lawyers, and engineers

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13
Q

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.

A

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

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14
Q

To be an accredited investor, you must meet the 1 or 2, 3 test

A

1 million or 200,000 of income if single, or 300,000 of spousal income

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15
Q

General obligation of Reg BI

A

Disclosure of obligation, care of obligation, conflict of interest, obligation, compliance, obligation

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16
Q

Financial planning process

A

Uber is a drunk person’s immediate motor vehicle:
Understanding
Identifying
Analyzing
Developing
Presenting
Implementing
Monitoring

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17
Q

Three - Panel Approach

A
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18
Q

All clients should have Big 3 documents

A

Will
Durable POA for Healthcare
Advanced Medical Directive

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19
Q

Business lifecycle

A
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20
Q

Characteristics of Expansion phase

A
  1. Increasing GDP, inflation and interest rates
  2. Decreasing unemployment rate

Investment should be short duration bonds & equities

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21
Q

Characteristics of Peak phase

A

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

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22
Q

Characteristics of contraction/ recession phase

A
  1. GDP slowing
  2. Inflation & interest rates declining
  3. Unemployment rate increasing

Equity should be sold in reinvested into short term cash & bonds until market settles

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23
Q

Characteristics of trough cycle

A
  1. GDP inflation in interest rates at their lowest levels
  2. Unemployment at its highest.

High duration bonds will perform well stock purchase. The stock purchases late in the cycle should be considered.

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24
Q

Recession

A

6 months or ( 2 quarters) of declining GDP

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25
Q

Depression

A

If recession lasts 18 months or 6 quarters

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26
Q

Monetary Policy Effects

A
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27
Q

Debts not discharged in bankruptcy

A

Student and government loans
3 years back taxes
Alimony and child support
Monies owed due to malicious acts

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28
Q

Property exempt from Bankruptcy

A

Homestead
Life Insurance
Qualified plans

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29
Q

Chapter 11

A

Provides relief through reorganization for businesses or self employed

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30
Q

Chapter 13

A

Provides relief through adjusting debts

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31
Q

Securities act of 1933

A

Regulates new issues of securities in the primary market

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32
Q

Securities act of 1934

A

Regulates secondary markets
Established the SEC

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33
Q

Securities, investor protection act of 1970

A

Created securities investor protection corporation (SIPC)

Provides coverage if a broker dealer becomes insolvent, or if there is unauthorized trading in an investors account

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34
Q

Debt Ratios

A

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

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35
Q

Stanford Loans

A

Subsidized is need based
Unsubsidized is Not need bases

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36
Q

Parent Loans (PLUS)

A

Not need based
For parents to pay their children studies
Not subsidized

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37
Q

Grad PLUS loan

A

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

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38
Q

Federal Perkins Loan

A

Program expired Sept 30th 2017
For students with exceptionally low EFC amounts
Need Bases

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39
Q

Federal Pell Grant

A

Strictly need based and dependent on EFC amount
EFC determines student’s eligibility
Only students that have not received bachelors or professional degree

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40
Q

Insurable Risks are CHAD

A

Not Catastrophic, Homogeneous exposure units, Accidental and Measurable and Determinable

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41
Q

A legal contract required COALL

A

Competent parties, Offer and Acceptance, Legal consideration and Lawful purpose

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42
Q

Actual Cash Value (ACV)

A

ACV is essentially replacement costs, less depreciation
ACV can impose serious financial burden on the insured
Almost all auto policies are ACV

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43
Q

National Association of Insurance Commissioners (NAIC)

A

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

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44
Q

Six Steps of Risk Management ( DIE DIE)

A

Determine objectives
Identify risks
Evaluate the identified risks
Determine Alternatives for managing risk
Implement the program
Evaluate, Monitor and review

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45
Q

Financial Planning Process

A
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46
Q

Life insurance Dividends are a CRAP-O

A

Cash option, Reduce Premiums, Accumulate at interest, Paid - up additions and Term ( One Year)

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47
Q

Life Insurance Nonforfeiture Options

A

Cash surrender value
Reduced paid up insurance
Extended term insurance

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48
Q

Taxation of annuities

A

Annuities after 1982 and premature withdrawals receive LIFO tax treatment. Any annuity prior to 1982 receives FIFO tax treatment

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49
Q

Annuity Exchanges and taxation

A
50
Q

HSA catch up

A

Age 55 and older - $1000

51
Q

HSA Distributions for non qualified medical expenses are subject to income tax and 20% penalty if taken before age

A

65

52
Q

COBRA coverage based on qualifying event

A
53
Q

Taxation of Disability Insurance

A

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

54
Q

Social security benefit increases by how much each year retiree delays benefit

A

8%

55
Q

Not covered by Medicare plan B

A

Dental Care, dentures
Cosmetic Surgery
Hearing AIDS
Eye Exams

56
Q

Homeowner’s Insurance

A

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

57
Q

Exceptions to registration

A

TABLE
Teachers, accountants, Banks, Lawyers and Engineers

58
Q

VIP’s are SaFE from exemptions

A

Venture capital
Insurance Carrier
Private funds
Soley in home sate
Foreign advisors
Not traded on Exchange

59
Q

Monetary Policy - buying securities

A

Increase money supply/ Decrease Interest rates

60
Q

Monetary Policy- Sell securities

A

Decrease money supply and increase interest rates

61
Q

Fiscal Policy - 3 goals

A

Maintain economic growth
Maintain price stability
Full employment

62
Q

Congress tools to influence fiscal policy

A

Taxation
Spending
Debt Management

63
Q

Housing Ratio

A

Less than or equal to 28%
p I T I / monthly gross income

64
Q

Housing Ratio 36%

A

Monthly housing costs plus recurring debt / monthly gross income

65
Q

Expected Family Contribution - College

A

Students are considered independent if :
Over age 23
Have legal dependents other than spouse
Married
Orphan or ward
Working on masters
Veteran

66
Q

Needs Based Financial Aid

A

Federal Pell Grant
Subsidized Stanford

67
Q

Not needs based financial aid

A

Unsubsidized Stanford loan
PLUS Loan

68
Q

Financial Aid subsidized vs. Unsubsidized

A
69
Q

Campus Based Financial Aid

A

Federal supplemental Education Opportunity Grant - low EFC / only paid if funds are available.

Federal Work Study

70
Q

Programs to reduce student loans

A
71
Q

529 Able

A

Bene must be entitled to SS disability
Only 1 ABLE account per bene
Over $100k will suspend SSI

72
Q

Arbitrage Pricing Theory

A

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

73
Q

What returns do mutual funds use when reporting 5 year historical return

A

Time weighted

74
Q

Standard deviation is a measure

A

Of total risk

75
Q

Beta measures

A

How portfolio returns in relationship to the market. How did our portfolio change when the market changed. How much market risk

76
Q

If required rate of return decreases

A

The stock price will increase

77
Q

If required rate of return increases

A

Stock will decrease

78
Q

If divided is expected to increase

A

Stock will increase

79
Q

Dividend payout ratio

A

Common stock divided by earnings per share

80
Q

Return on Equity

A

Earnings per share divided by stockholders equity per share

81
Q

Dividend yield formula

A

Dividend divided by stock price

82
Q

Fundamental Analysis

A

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

83
Q

Technical Analysis

A

Charting and plotting trading volume and price movements
Supply and demand drive stocks

84
Q

Tools of technicians

A

Charting
Market volume
Short interest
Odd lot trading
Dow theory
Breadth of market

85
Q

Three forms of Efficient Market Hypothesis

A

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

86
Q

All three forms of Efficient Market Hypothesis reject

A

Technical Analysis

87
Q

EE Bonds are not

A

Marketable securities

88
Q

T bills, T Notes and T Bonds

A

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

89
Q

Strips

A

Highly liquid and appropriate for investors looking for low risk, high liquidity with specific time horizon

90
Q

Agency bonds are not backed by full faith and credit of US Government

A

Exception GNMA - Ginnie Mae

91
Q

Unsecured Corporate Bonds

A

Debentures
Subordinated Debentures
Income Bonds

92
Q

Bond rating agencies

A

Moody’s and Standard & Poor
Higher rating lower yield
Moody’s ratings Aaa - C
Standard & Poor - AAA -D

93
Q

Muni Bonds

A

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

94
Q

Coupon Rate or Nominal Yield

A

Annual payment amounts in dollars divided by the par value

Coupon payment / par

95
Q

Current yield

A

Coupon payment divided by price of the bond

96
Q

Yield Ladder - discount

A

Call Mom’s Cell Now!
Yield to Call
Yield to Maturity
Current Yield
Nominal Yield

97
Q

Yield Ladder Premium

A

Opposite of Call Mom’s Cell Now

Nominal Yield
Current Yield
Yield to Maturity
Yield to Call

98
Q

Bond Duration

A

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

99
Q

Net operating Income

A

Calculate net income and add back depreciation and financing activities

100
Q

Convexity

A

Measures the difference between duration estimate of bonds price change and the actual price change of a bond

101
Q

UIT

A

Passively managed and self liquidating

102
Q

ADR’s

A

Represent foreign stocks held in domestic banks
They do not eliminate exchange rate risk
Dividends are paid in US dollars

103
Q

Options

A
104
Q

Which option will provide the investor with the maximum gains if stock option appreciates

A

Buying a call

105
Q

Which option will maximize gains if stock price falls

A

Buying a put

106
Q

Intrinsic Value call option

A

Stock price - Strike Price

107
Q

Intrinsic Value

A

Strike Price - stock price

108
Q

Calculating Gain or Loss using options

A

STOPs
Stock gain or loss
Options gain or loss
premium paid or received
Shared controlled or owned

109
Q

Option used to protect profits or lock in gains

A

Buying a put

110
Q

Black/ Scholes

A

Used to determine the value of a call option

111
Q

Put/ Call Parity

A

Attempts to value a PUT option based on the value of corresponding call option

112
Q

Binomial Procing Model

A

Attempts to value an option based on the assumption that a stock can only move in one of two directions

113
Q

Capital goods and consumer hood would be most affected by

A

Recession - they are cyclical and fluctuate directly with economy and GDP

114
Q

HO coverages

A

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

115
Q

LTC ADL

A

Bed to Chair
Bathing, Eating, Dressing, Transferring from Bed to Chair, toilet and Continence

116
Q

Basic names Perils

A

Fire
Lighting
Windstorm
Hail
Riot
Aircraft
Vehicles
Smoke
Vandalism
Explosion
Theft
Volcano

117
Q

Broad named perils

A

Falling objects
Weight of ice,snow, sleet
Accidental overflow of water
Sudden bursting of appliances
Freezing of system or appliance
Damage from electrical current

118
Q

Open peril policy

A

Protects against all perils except for exclusions

119
Q

General Exclusions for all HO policies

A
120
Q

Summary of HO Forms

A
121
Q

Reduction of SS Retirement Benefits

A

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

122
Q

Taxation of SS Benefits

A

CFP - RL Flash cards (5 decks)

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