Exam 2

Question 1

4 reasons Why IG Bonds?

Answer 1

1. 12-year high yield = u.s treasury yield + compensation for additional risk the bonds offer
2. They can withstand a recession = relationship between upgrades and downgrades
3. investors can earn more by taking on credit risk
4. IG bonds can withstand slow economic growth

Question 2

Upgrades and downgrades

Answer 2

• upgrade = A:AAA
• high yield debt downgrades are higher than upgrades
• downgrades=upgrades in the investment grade sector
• if you want credit risk best place in the sector is when they are equal
• downgrades are going up and upgrades are going down

Question 3

Best place to invest on the yield curve?

Answer 3

between three months to one year since there is compensation for assuming credit risk

Question 4

Credit risk

Answer 4

the risk that an insurer may default or downgrade resulting in a drop in bond price

Question 5

Financial planning steps

Answer 5

1. establish and write out goals
2. obtain relevant data
3. analyze data
4. pursue client to implement the plan
5. 6. monitor and revise the plan

Question 6

Why did dow drop and by how much?

Answer 6

$1000 because inflation was more than expected

Question 7

Barbee’s opinion on dow dropping

Answer 7

no matter what dow was due to drop the question was when

Question 8

what accounts for long-term favorable returns?

Answer 8

growth and reinvestment of dividends

Question 9

why do people procrastinate?

Answer 9

• instant gratification
• people don’t see the connection between today and 20 years from now

Question 10

which has the lower price? bid or ask

Answer 10

bid

Question 11

what happens when the maturity of a bond is extended?

Answer 11

interest rate goes up

Question 12

why would someone be willing to assume such high-interest risk?

Answer 12

because the expect rates to drop

Question 13

Reasons against IG bonds

Answer 13

• interest rate risk
• low compensation for credit risk

Question 14

how do you measure credit risk?

Answer 14

• the yield on bond - the yield on treasury

Question 15

how does the government pay off debt

Answer 15

• create more money
• raise taxes

Question 16

Individual bonds

Answer 16

• less diversification
• the risk of downgrades
• broker markup
• bid ask difference

Question 17

advantages of mutual funds

Answer 17

• diversification

Question 18

disadvantages of mutual funds

Answer 18

• fees (load) compensation to brokerage financial planner
• managing and operating expenses as a percent of net asset value

Question 19

front end load

Answer 19

price - NAV

Question 20

Hidden loads examples

Answer 20

12-b-1 or deferred redemption fee

Question 21

hidden loads

Question 22

is load the same as compensation

Answer 22

no load is paid by investors compensation is paid by the brokerage firm

Question 23

why is the fed raising short-term rates

Answer 23

to combat inflation

Question 24

mutual fund

Answer 24

investment of stocks and bonds

Question 25

how do mutual funds perform

Answer 25

underperform an unmanaged index

Question 26

close end fund

Answer 26

• has a fixed number of shares
• is sector specific ie. gas and oil

Question 27

what are the 4 close end fund advantages

Answer 27

• diversification
• discount to NAV
• intraday liquidity (buy and sell at any time)
• when investors are pessimistic there will be a high discount

Question 28

ETF advantages

Answer 28

• diversification
• low expenses as % of NAV, 0.1%

Question 29

common financial issues individuals have

Answer 29

1. estate planning
2. financial independence
3. accomplishment of goals

Question 30

three c’s

Answer 30

capacity - ability to pay off debts
character - creditworthiness
collateral - asset pledged to creditor until debt is paid

Question 31

debt takes

Answer 31

7.5 years to leave your record

Question 32

credit score

Answer 32

35% payment history
30% outstanding debt
15% credit history
10% type of credit
10% pursuit of new credit

Question 33

Credit law

Answer 33

can be charged for score but not report

Question 34

avg net worth of the black community is?

Answer 34

17k

Question 35

emergency fund

Answer 35

should cover 3-6 months of expenses

Question 36

best way to improve credit score

Answer 36

secured credit card

Question 37

1 cause of divorce

Answer 37

money

Question 38

what card does the speaker not carry

Answer 38

macy’s credit card

Question 39

what type of insurance should you get when you are old

Answer 39

long term care insurance
if you get it while you are young it’s cheaper

Question 40

series 6 financial advisor

Answer 40

not licensed to offer all securirties

Question 41

series 7 financial advisor

Answer 41

offer all securities

Question 42

Marketing yourself as a financial advisor

Answer 42

have to be a series 65 if not and you call yourself that there is a fee from SEC

Question 43

what does estate planning include

Answer 43

settlement of estate
who are beneficiaries

Question 44

when is having an estate most important

Answer 44

being a single parent

Question 45

what did speaker two say about attorneys

Answer 45

the more competent the more expensive

Question 46

why should you get an estate planning attorney

Answer 46

laws constantly change and its their area of expertise

Question 47

annuity

Answer 47

the only vehicle you can buy that will guarantee income

Question 48

most stable annuity

Answer 48

life insurance

Question 49

current economic outlook

Answer 49

jobs are opening up but people aren’t applying

Question 50

3 types of saving

Answer 50

reserve - do not touch
replacement - put and take
long term - personal long term not 401k or pension