Exam Tips and Other Notes Flashcards
Which college tax credits, account distributions and withdrawals cannot be combined (coordination rules)?
Cannot combine for same child, same expense:
- American Opportunity Credit (AOC)
- Lifetime Learning Credit (LLC)
- Coverdell withdrawal
- 529 (QTP) distribution
Which college funding strategies can be combined without restrictions?
Educational gifts, earnings, UGMA/UTMA/2503(c) funds, PLUS Loans
Fed Actions:
BEST and
Repo/Reverse Repo
BEST - Buy=Expansionary, Sell=Tighten
Repo - Repurchase or “Buy” - Expand
Reverse Repo - “Sell” - Tighten
Discount Rate vs Fed funds rate
The federal reserve sets the discount rate
Banks determine the fed fund rate for what they will lend to each other
Typically, discount rate is the better answer. If discount rate is not available, then choose fed funds rate.
Ch 7 Bankruptcy - Exempt property
- Homestead
- Limited amount of personal property and equity in a motor vehicle
- Wages due to head of family
- Pension and retirement plan rights (ERISA plans)
- Cash value of life insurance, proceeds of annuity contracts, disability benefits
Miscellaneous federal exemptions - civil service and railroad pensions, veterans benefits
Ch 7 Bankruptcy - Not Cancelable Debts
G-CATS
- Government loans
- Child support
- Alimony
- Taxes
- Student loans
Basically, government or ex-spouse
Implied Authority (Law of Agency, Insurance)
Is that which the public believes the individual holds and includes signage, rate books, etc.
Implied is actual authority that the agent has to carry out the principal’s business
Express Authority (Law of Agency, Insurance)
Written, explicit direction from principal to agent
Apparent Authority (Law of Agency, Insurance)
Arises out of negligence of the principal in allowing the agent to appear to have authority because of certain actions of the agent in the past. This typically affects terminated agents.
“A parent should supervise”
Paula Stone spent nearly a year and a half completing the CFP education courses, and finally passing the exam. Upon submittal of her paperwork, the CFP board found cause to suspend issuance of the CFP certification for two years. Will the board publish such a suspension?
Yes, suspensions are automatically published
Todd Hamm, CFP works for ABC Brokerage. ABC sells only commission base proprietary products. Todd is assigned a commission goal for the year and ABC’s bonus is paid on exceeding that goal. Without that bonus, the payout is less than Todd’s living expenses. A new investment product is being promoted by ABC to try to lock up a client’s total investment account by giving the client airline miles, low interest credit cards, and below market mortgage loans. What should Todd do?
Enter into agreements with all his clients disclosing compensation arrangements for the company’s proprietary products
On the test, what is the maximum home equity line amount available?
FMV minus debt (100% of your equity)
Tammy Jones, CFP, is meeting with a new client. What is the first step he should take?
A. Give the client his firms brochure.
B. Provide the client with written disclosure of all material information.
C. Ask the client for a written agreement as to his understanding of the planning process.
D. Review the client and objectives.
B. Provide the client with written disclosure of all material information.
Answer B is the first step. Answer D is the second step. The question does not indicate that Tommy is a Registered Investment Advisor, so A does not apply.
Why, Alan Alligator is a CFP professional, who operates his own financial planning firm. He has just been engaged by Mr. and Mrs. Thomas to provide financial pinning services. Which of the following items of information may provide to the Thomases either in writing or orally.
A. Material conflicts of interest.
B. The firms privacy policy.
C. Compensation to Alan and his firm.
D. Alan’s bankruptcy history, if any.
A. Material conflicts of interest.
The CFP board specifies it when a CFP professional is providing financial planning services, the material conflicts relating to the planner, and the firm may be provided either in writing or orally. The firm must provide in writing, how it will be compensated by the client, the terms of the engagement with the client and its Privacy Statement. It must also disclose in writing its services and any bankruptcy or disciplinary history relating to the firm or its principals.
Which of the following elements of the CFP® Code of Ethics is designed to dovetail with the steps in the financial
A. The seven Principles
В. The fifteen Duties
C. The Practice Standards
D. The fitness Standards
C. The Practice Standards
The practice standards, which are part of the CFP boards code of ethics are designed to address the responsibilities of the CFP professional as he performs each step of the financial planning process
Patsy Planner is proud of her success in passing the CFP® Exam. She has five years of experience in financial services but had declared bankruptcy five years after graduating from college fifteen years ago. Would she be considered to be a CFP® Professional at that point?
A. No, because she must complete the ethics declaration and satisfy the CFP Board’s fitness standards.
B. Yes, because she has completed the CFP® Exam successfully.
C. Yes, because she has not declared bankruptcy twice.
D. No, because she does not have ten years of experience in financial services.
A. No, because she must complete the ethics declaration and satisfy the CFP Board’s fitness standards.
Merely completing the CFP® Exam successfully does not entitle the successful candidate to use the CFP® Marks.
Patsy must complete the Application for CFP® Certification. In the certification application, she must agree to abide by CFP Board’s Terms and Conditions. The conditions require Patsy to agree to comply with, and to be bound by, CFP Board’s Code of Ethics and Standards of Conduct as they are currently presented and as modified in the future. The application further requires Patsy to sign the Ethics Declaration, which contains a series of questions that require her to disclose information that is relevant to the fitness standards that required of CFP® Professionals.
Patsy must further pass the CFP Board’s Background Check. The Board will review Patsy’s responses on the Ethics Declaration, any regulatory disclosures that are available, including regulatory databases such as FINRA’S BrokerCheck and the SEC’s Investment Adviser Public Database, and public records.
Ultimately the Board will review the results of the background check and determine whether Patsy’s conduct satisfies the fitness standards for candidates for CFP® certification.
What agency regulates brokerage companies?
FINRA - the SEC regulates brokerage companies through FINRA
Which of the following is true concerning a pro forma statement?
A. It illustrates the sources and amounts of gross income received by the client.
B. Illustrates the solvency ratio of the client.
C. Illustrate future financial statements are expected to show.
D. It illustrates what has occurred in the past.
C. Illustrate future financial statements are expected to show.
A pro forma statement projects the expected result of the next year or longer
Sandy has earned her Series 6 and all applicable state license. She may not sell which of the following investments?
A. Variable annuity.
B. Variable life insurance.
C. Mutual fund traded on a major exchange.
D. UIT (initial offering).
C. Mutual fund traded on a major exchange.
Mutual funds do not trade on stock, exchanges, but closed-end funds do. To sell closed-end funds, Sandy needs a Series 7 license. A Series 6 license allows a representative to sell an initial UIT offering.
College funding options
UGMA/UTMA: Subject to Kiddie Tax for children under age 24.
EE Education Bonds: Parents own bonds, so will not work in a UGMA/UTMA
Coverdell Education Savings Plan (ESA): Limited to $2,000/year contribution total
Section 529 Plan (QTP):
- Available in 2 types: College Saving or Prepaid Tuition
- $17,000 contribution per year per child times 5 years $85,000
American Opportunity Credit (AOC)
• $2,000 + 25% of next $2,000 of expenses (max $2,500 tax credit)
• MAGI Phase outs on tax sheet
• First four years of college only
Funding Strategies in College Years
”Wealthy”
Parent Loan Undergraduate Students
Wealthy parents are a PLUS
Poorish (less than $60k)
- Pell Grants
- Supplemental Education Opportunity Grant
- Subsidized Stafford Student Loans
Lifetime Learning Credit
• $2,000 max
• Any higher learning institution (undergrad, grad, continuing ed)
• MAGI Phase outs on tax sheet
Coverdell ESAs
- Eligible for grades K through 12 expenses as well as college
- Contribution limits are phased out for higher-income contributors.
- Assets not used for educational expenses cannot be reclaimed irrevocable gift).
- $2,000 per year total limit (not per donor), and no 5-year averaging is available.
- Contributions may not be made after the beneficiary is age 18.
- Account must be distributed upon the beneficiary reaching age 30.
Generally considered an asset of the parent (even if the parent is not the donor). - Student loan payments not allowed.
Dump Sheet Item #1 - Yield Ladder
DISCOUNT BOND
Y - Yield to Call
M - Yield to Maturity
C - Current Yield
A - —Nominal Yield Annual Coupon Rate
C - Current Yield
M - Yield to Maturity
Y - Yield to Call
PREMIUM BOND
Tax Treatment of TIPS
- The investor is taxed annually on the interest payment plus the appreciation in face value.
- The increase in face value is only nominal or “phantom” income that is not collectable until the bond is sold or matures. However, this income is taxable in the year it is accrued. TIPS interest is not subject to state and local taxes.
TIPS create partially Phantom Income
- interest is received now and is taxable now
- The increase in face value is phantom (but it increases the basis)
How many payments per year and bond calculations?
Two
REIT Types and Definitions
Equity REITs invest mainly in operating rental properties (for growth). The net income from the property (rents less operating expenses) should exceed the REIT’s borrowing costs, producing income for the shareholders.
Mortgage REITs invest mainly in mortgages and construction loans. The interest earned on the mortgages and construction loans should exceed the REIT’s borrowing costs.
Mortgage REITs are highly leveraged. They make their income from the “spread” between the lending rate and borrowing rate. Inflation is bad for mortgage REITs.
REIT Tax Rules to Achieve Conduit Status
75/15/90/20
75% income must come from real estate investments
- 15% can come from securities, like GNMAs
If min 90% of net investment income or more, it only pays tax on the undistributed portion.
If fails to distribute 90%, then all the net investment income is taxable to the REIT as an entity
Qualified Business Income (QBI/199A) deduction of up to 20% of that income.
- Because REITs generally operate as pass-through arrangements
Taxability of Covered Call (Lapse/Exercise)
Lapse - Premium received is short-term gain.
Exercise - Premium received is added to the sale price (becomes long-term gain if underlying security was held more than 12 months; otherwise, short-term gain).
Funding strategies in graduate degree years
- Fulbright scholarship
- Stafford loan
- 529 distribution or Coverdell withdrawal (same coordination rules as above above apply)
Tax Equivalent Yield shortcut
Interest
TEY = ——————————————
1 - (the taxes you don’t pay)
Tax Form Schedules
Schedule A - “Allowances” - Itemized Deductions
Schedule B - “Bank” - Ordinary Divs and Taxable Interest
Schedule C - “Career” - Business Income
Schedule D - “Gains=delightful, Losses=dreadful” - Cap Gains/Losses
Schedule E - “Real Estate”
Gross Income
Inclusions - Wages, Salaries, Tips
Inclusions pay for a TRIP TO CUBA
T - Taxable interest
R - Real estate
I - IRA distributions
P - Pensions/Punitive Damages
T - Taxable SS
O - Ordinary Divs
C - Capital Gains/Losses
U - Unemployment Inclme
B - Business Income/Loss
A - Alimony pre-2019
Gross Income
Exclusions
IMG CWC
Inheritance
Muni Bond Interest
Gifts
Child Support
Workers comp
Compensatory Damages
Adjustments FOR/TO AGI
“Above the Line”
SMASH KITE
S - Self-employed health insurance
M - Moving Expenses (active military)
A - Alimony Paid (pre-2019)
S - Student Loan Interest (up to $2500)
H - HSA Contributions
K - Keogh or SEP Contributions
I - IRA Contributions
T - Tax - 1/2 of SE Tax (0.07065%)
E - Early Withdrawal Penalties
Deductions FROM AGI
“Below the line”
Med
Fed
Chair
MINT
SALT
C - Charitable Giving
U - Unreimbursed medical, dental, LTC (> 7.5% AGI)
T - Tax (SALT up to $10k)
I - Interest Paid (mortgage, margin)
G - Government Declared Disaster (Federal)
Dump Sheet Item #2 - Financial Planning Process
Uber Is A Drunk Person’s Immediate Motor vehicle
U - Understand the client’s personal and financial circumstances
I - Identify and select goals
A - Analyze clients current course of action and potential alternatives
D - Develop the financial planning recommendations
P - Present the financial planning recommendations
I - Implement the financial planning recommendations
M - Monitor progress and update
Dump Sheet #3 - Checkpoint Times
Q1 - 90 minutes (100 if a case)
Q2 - Do not submit until you are fully rested (lunch clock will start)
Q3 - 90 minutes (100 if a case)
Duration vs Yields
Duration is inversely related to yields (like Bond prices are inversely related to yields)
- Yields go up, duration goes down
- Yields go down, duration goes up
Duration of Zero Coupon Bond
Duration = Maturity
No reinvestment risk
Capital Market Line
Applies only to portfolios, not single securities
Risk is based on Standard Deviation (variability)
Capital market line improves on efficient frontier because it includes the risk free rate and leverage
Intersection of CML and Axis - the Risk Free rate or Rf. 100% T Bills (0 standard deviation)
Point A - (bottom left, between Rf and tangent) - combination of risk free and risky assets
Point B - (middle) Tangent of the CML, the optimal risky portfolio, the Markowitz Efficient Frontier
Point C - (top right) 100% risky assets leveraged with margin
Markowitz Model (Efficient Frontier)
Efficient Frontier
On the curve - Highest Return per risk assumed
Inefficient (attainable)
Inside the curve. Attainable but not on the efficient frontier
Not Feasible (unattainable)
Outside the curve. Low risk and high return are unlikely over time
Indifference Curves
Each investor has one
- Low Risk investors have STEEP curves
- High Risk have SHALLOW curves
- The point where the indifference curves meets the efficient frontier is the optimal portfolio for that investor
Security Market Line
Risk vs Return of an asset (for a stock or portfolio)
Risk is based on Beta (volatility)
Does not matter if diversified or not
Formula is same as required rate of return - AKA the CAPM (capital asset pricing model):
- r = rf + (Erf - rf) B
Expected return must exceed required return to recommend buying
Anomalies to EMH
- P/E effect
- Small-firm effect
- January effect
- Neglected-firm effect
- Value line
