CFP - General Principles Flashcards
- Fiscal Policy
- Monetary Policy
- Fiscal / fed government = Taxation + Spending - Congress
- Monetary = Money + Credit - FRB influences money supply/credit
- Monetary policy is action taken by FOMC; such tools: open market operation, reserve requirement, discount rate.
FOR EXAM, monetary policy = discount rate NOT Prime rate
FOR EXAM, prime rate = banks control
REMEMBER - Fed sells = Contract/Tighten | Fed buys = Expand
REMEMBER = Federal Reserve wants to slow economy = Raise Prime Rate
Annie Washington wants to accumulate $70,000 in 6 years for her son’s college education.
She can deposit $800 at the beginning of every month for the next 6 years. She expects to
earn 8% compounded monthly on her investment. Will she be able to reach her goal?
Yes; she’ll have $74,111
How long would it take for $6,000 to triple at an annual rate of 7%?
Maria Conti wants to withdraw $2,100 at the beginning of each month from her $350,000
inheritance which she has deposited in a money market account earning 7%. How many
years will pass before her inheritance is exhausted?
Cathy and Jared plan to live on social security and withdrawals of $48,000 at the end of each
year from their retirement investments. If they can earn 8%, how much is needed in their
accounts at the beginning of retirement?
$600,000.
You do not need to use a financial calculator to solve this question as you do
not know the number of years. You are determining what starting amount would generate
$48,000 per year if earning 8% (48000 ÷ .08 = 600000). If the question noted the $48,000 was
needed at the beginning of retirement, the answer would be “D” or $648,000 (600000 + 48000).
Maria Torelli bought 200 shares of RLD for $47 per share. RLD paid dividends of
$0.38/share the first quarter; $0.61/share the second quarter/ $0.26/share the third and $0.71
the fourth quarter, she sold all her RLD holdings at $51 per share. What was the IRR on this
investment?
Edward Hayes purchased 12 zero coupon bonds for $250 each. The bonds will mature in 10
years. What is the IRR on this investment?
Cathie Michaels bought an 8-unit apartment building for a price of $560,000 with an $80,000
down payment. Because of necessary repair work, the net cashflow in the first year was a
negative $50,000. The following years showed a positive net cashflow of $28,000 in the
second year and $46,000 in the third year. In the third year, she sold the building for
$750,000. What was her IRR on this investment?
46.21%
Ken Montague owns a bond with a nominal rate of 6%, paid semi-annually. The bond
matures in 5 years and comparable bonds are yielding 5.5%. If Ken were to sell this bond,
what price should he receive?
$1,021.60
Colleen Abernathy is considering purchasing a Technotron bond with a coupon rate of 9.75%
payable semi-annually. The bond matures in 25 years. Comparable bonds with the same
maturity are yielding 8.5%. What price should colleen be willing to pay for this bond?
$1,128.71
Niles and Nora Nervous, a married couple, both age 45 do not want to run out of money
during their retirement years. They want to live off the interest income only and leave the
principal of their money to their children after they die. They believe they will need
$100,000 per year in their post-retirement years. Presuming they can earn an after-tax rate of
10% on their investments and that inflation will average 5% in both their pre-and postretirement
years, what lump-sum amount will they require at retirement given that they do
not wish to spend down their principal after they stop working?
Whenever the question indicates that investors want to live off interest income only, i.e., not
spend their principal, the calculation is simply the amount needed per year divided by the
expected rate of return. If the problem indicates that the amount is needed at the beginning of the
period, you will need to add the annual amount required to the lump-sum calculated by dividing
the annual amount by the rate of return. In this case:
Savannah Saver currently earns $90,000 per year as an independent interior designer. She is currently age 45. She expects that she will spend 80% of her current earnings in her post-retirement years which will begin when she reaches age 65. She expects that her Social Security retirement benefit will amount to $2,500 per month. As an investor with a relatively high-risk tolerance, Savannah expects to earn an after-tax rate of 10% on her investments. She and her financial planner have agreed to assume that inflation will average 3% in the future. She expects to live to age 85. Savanna is a disciplined saver who will make deposits at the end of each month to achieve the goal of adequate retirement income. How much should Savannah save at the end of every month?
$1,148 / mo.
Federal Securities Acts
“33 Starts the spree, 34 Opens the store, 40 Watches the score (funds galore), 40 Again—Advisors pen, 70 Protects when markets wreck.”
‘33 Starts the spree’ → Securities Act of 1933 (primary offerings)
‘34 Opens the store’ → Securities Act of 1934 (secondary market)
‘40 Funds galore’ → Investment Company Act of 1940 (regulates UITs and mutual funds)
‘40 Again—Advisors pen’ → Investment Advisers Act of 1940 (defines the role of advisors)
‘70 Protects when markets wreck’ → Securities Investor Protection Act of 1970 (established SIPC)
Financial Planning Process
Failure to appeal CFP Board Ruling within 30 days….
Ruling is permanent
Suspensions are published on
When NPR = 0,
Required Rate of Return = IRR
HELOC
Ex. Client bought home w/ $300k mortgage. The home is now worth $340k and mortgage balance is $260k. How much of a HELOC can be taken + interest deductible?
Interest deductible if line used for home renovations + HELOC debt can’t exceed home FMV - current mortgage/indebtedness
Ex. $80k and deductible if HELOC used for home renovations.
Client’s obtained a $100k 7.5% 15 yr. mortgage. How much interest will be paid over the life of the loan?
$66,862 - Solve for PMT * 12 * 180 = $166,862 - $100,000 (principal).
How much interest was paid for first 10 yrs. of a 30-year, $80k mortgage at 9.75% interest w/ monthly payments ?
$74,942.10
Step 1. Figure out monthly payment.
Step 2. Use AMORT Keystrokes
Roadmap - Education funding
Client has $6000 in tuition and course material for the year. They use $3000 from a 529 plan and $3000 from cash reserves. The client is eligible for the American opportunity tax credit. How much would they qualify for?
$2,250
Buy v. lease a car
The decision as to whether it is best to buy versus lease a car is often based on opportunity cost. First, determine the break even return on the investment. If investing can outperform the breakeven return, it makes sense to lease the car.
SOFR
Secured Overnight Financing Rate (SOFR) is the base rate used for many loans and financial derivatives
SEC registered advisers with AUM at least $100 million – are required to file annual updates to their ADV within _____ days of the end of their fiscal year.
90 days
Monica is age 13. She will not turn 14 until next year. She has an UTMA account set up by her grandfather. (His tax bracket is 24%.) He invests her money for her. This year the UTMA had the following income.
Municipal bond income of $500
LTCG of $600
Qualified dividends of $1,200
If her parents are in a 35% tax bracket, how much is her income tax?
Her taxable income is $1,800 ($600 plus $1,200). Her tax bracket is 10%, but the LTCGs and dividends in the 10% bracket are subject to a 0% tax. Age 14 did not matter. She is not subject to the kiddie tax as it starts at $2,600. ($1,300 free and $1,300 at 10%) Municipal bond income is tax-free income. That is why $1,800 is taxable.
According to the CFP® Board Rules of Conduct, what should the certificant do first if he or she cannot obtain the information necessary to fulfill his or her obligations relative to the process of financial planning?
- Inform the prospective client of any and all material deficiencies
- Limit the scope to specific activities that can be performed with the information available.
