Financial Fundamentals - Ch 15 Flashcards
1
Q
What is Microeconomics ?
A
Focuses on the decisions of individuals and firms, such as those that affect supply and demand and the resulting pricing of products and services.
2
Q
What is Macroeconomics ?
A
Entire or broader economy and uses measurements such as the Gross Domestic Product, inflation, unemployment, and investment in order to determine the performance of the overall economy
3
Q
What is GNP ?
A
Gross National Product (GNP)
Total final output by the citizens of a country, whether produced domestically or in a foreign country. GNP does not include the output of foreigners in a country.
4
Q
What is GDP ?
A
Gross Domestic Product (GDP)
Total final output of a country, by its citizens and foreigners in the country, over a period of time. GDP is typically measured on a quarterly and annual basis.
5
Q
What is Nominal GDP ?
A
Value of goods and services in current prices.
The disadvantage of nominal GDP is that if the price of goods and services increases, nominal GDP will increase even though there was not an increase in the amount of goods and services produced.
If the quantity of goods and services produced remains constant but the price increases, nominal GDP may be misleading because it reflects inflation rather than a quantitative increase in goods and services
6
Q
- What is Real GDP ?
- A recession is characterized by what ?
A
Value of goods and services at a base year price.
-Real GDP only changes when the quantity of goods and services produced changes, not when prices change.
-Better measure of economic output than nominal GDP since prices are held constant when calculating real GDP.
A recession is characterized by a decline in real GDP for at least six months (two quarters).
7
Q
- What is the GDP inflator ?
- Formula for GDP infaltor ?
A
- Measures the current price of goods and services (nominal GDP) relative to a base year (real GDP).
- Only measures price of goods and services produced domestically.
- It’s a measure of price increases or decreases.
-GDP deflator will change over time as the economic output of a country changes.
- Formula for :
Nominal GDP
——————– = GDP Defaltor
Real GDP
8
Q
What is inflation ?
A
Increase in the general level of prices of goods and services representing the economy as a whole over a period of time and without a corresponding increase in productivity.
The biggest risks is loss of purchasing power and price instability
9
Q
- What is the primary cause of inflation ?
- Who controls the money supply ?
A
- When the money supply increases faster than the growth in real GDP.
- Federal Reserve is responsible for controlling the money supply to keep inflation at reasonable levels, typically targeted at 2-3% / year
10
Q
What is disinflation ?
A
Slowdown in the rate of inflation or a slowdown in the rate of price increase of goods and services.
- Inflation is continuing, but at a declining rate
11
Q
- What is deflation ?
- Does the money supply increase or decrease during periods of deflation ?
- Will GDP increase or decrease as a result a period of deflation ?
A
- Decrease in overall price levels of goods and services.
-As a result of deflation, there is a transfer of wealth from borrowers (like homeowners) to holders of cash. - Periods of deflation, the real value of money INCREASES s as the dollars consumers hold are able to buy more goods and services as prices, such as homes, continue to decrease.
- A deflationary spiral is likely to lead to DECREASE GDP
12
Q
- What is CPI ?
- Does CPI measure good and services made overseas but sold in the US ?
A
- Measure of prices at the retail level relative to the price levels of the same ( FIXED BASKET ) basket of goods and services in some base year.
- YES> CPI measures changes in prices of goods manufactured overseas and sold in the U.S.
13
Q
What is the Producer Price Index ?
A
(PPI) measures the inflation rate for RAW MATERIALs used in the manufacturing process.
-Important measure of inflation, since inflation in the manufacturing process will likely lead to inflation at the retail level
14
Q
How is the inflation rate calculated ?
A
The inflation rate is calculated as follow:
P1 - P0
———- = Inflation rate
Po
P1 = current price
Po = prices during a prior period
15
Q
What is Nominal Interest Rate ?
A
Represents the “real rate of return “ plus an adjustment for anticipated future inflation.
- When lenders loan funds, the real rate of return represents their income.
Nominal Interest Rate - Inflation = Real Rate of Return
16
Q
- Do Interest rates influence the demand for he supply of loanable money ?
- What happens when excess money is no longer held ?
A
- Interest rates are influenced by the demand for and the supply of loanable funds.
- When excess money is NO longer held
- interest rates Fall
-consumers make purchases because the cost of borrowing (the interest rate) has decreased.
17
Q
How the “unemployed” defined within the unemployment measure?
A
- People 16 years of age and older who are NOT working
- Making an effort to seek employment.
- does NOT include those individuals who are underemployed (overqualified for a job such as a PhD waiting tables) or those who are discouraged and have discontinued their job search
18
Q
Economists have divided unemployment into three categories as follows ?
A
- Cyclical unemployment
- When there is an overall downturn in business activity and fewer goods are being produced causing a decrease in the demand for labor (related to changes in the business cycle).
- Frictional unemployment
- When people are voluntarily unemployed because they are seeking other job opportunities and they haven’t found the desired employment yet.
- Structural unemployment
-When there is inequality between the supply of adequately skilled workers and the demand for workers.
19
Q
What is full employment ?
A
full employment is defined as
-Rate of employment that exists when there is EFFICIENCY in the labor market.
-Full employment can include both frictional and structural unemployment when there is efficiency in the labor market that results in approximately 95 % employment.
20
Q
If product and labor markets are in balance, then the employment will be called________________________ rate of employment .
A
-economic policy is to sustain a natural rate of unemployment, being the lowest unemployment rate where labor and product markets are in balance.
-At the natural rate of unemployment both price and wage inflation is stable
21
Q
What is Utility in respect to company or individual financial resources ?
A
Utility is the benefit firms and consumers receive when allocating or spending financial resources.
Firms maximize their utility by making decisions on how to best use their resources to maximize profits. Firms are constrained by the capacity of their workforce, products they offer, and the level of competition
Consumers maximize their utility by making decisions on employment, spending for today, and saving
22
Q
How is Full employment defined ?
A
-Rate of employment that exists when there is efficiency in the labor market.
-Full employment can include both frictional and structural unemployment when there is efficiency in the labor market that results in approximately 95 % employment of the labor force
23
Q
How is natural Employment defined
A
-The lowest unemployment rate where labor and product markets are in balance.
-Both price and wage inflation is stable.
24
Q
What the 4 phases of the Economy’s business cycles ?
A
- Expansion
- Peak
- Contraction or Recession
- Trough
25
What are the characteristics when the economy is in Contraction ?
- Consumer spending slow down
- Firms have lower output
- GDP decreases
- Unemployment rate increases ( as firms reduce staff to offset the lower demand for their products and services.)
- Inflation begins to decrease (as consumers are demanding fewer goods and services, which may lead to lower prices )
- Interest rates decreasing
26
What are the characteristics when the economy is in the Trough Phase ?
- GDP reaches its LOWEST levels
- Unemployment reaches its highest point,
- Inflation lower
- Interest Rates are lower
27
What are the characteristics when the Economy is in the Expansion phase ?
- GDP increasing
- Unemployment Low, consumers have more money to spend
Consumer spending drives corporate earnings and corporate earnings drive equity prices and investment returns.
- Inflation Increasing
-Interest rates increasing
28
What are the characteristics when the Economy is in the PEAK phase ?
- GDP HIGH
- Inflation HIGH
- Interest Rates HIGH
- Unmployment LOW
29
What are the 3 types of economic indicators that describe the current and future economy and business cycle ?
* Index of Leading Economic Indicators
* Index of Lagging Economic Indicators
* Index of Coincident Economic Indicators
30
What are 10 data points within the The Index of Leading Economic Indicators that are relied on to predict changes in the economy ?
LEADING economic indicators :
* Average weekly hours, manufacturing
* Average weekly initial claims for unemployment insurance
* Manufacturers’ new orders, consumer goods and materials
* ISM® Index of New Orders (supplier deliveries, imports, production, inventories, new orders)
* Manufacturers’ new orders, non-defense capital goods
* Building permits, new private housing units
* Stock prices, 500 common stocks
* Leading Credit IndexTM (credit conditions, including yield curve data)
* Interest rate spread, 10-year Treasury bonds less federal funds
* Average consumer expectations for business conditions
31
What the Lagging economic indicators ?
LAGGING economic indicators: (summarizes past performance)
* Average duration of unemployment
* Inventories to sales ratio, manufacturing and trade
* Labor cost per unit of output, manufacturing
* Average prime rate
* Commercial and industrial loans
* Consumer installment credit to personal income ratio
* Consumer price index for services
32
What are the Index of Coincident Indicators ?
Coincident Indicators variables change along with the business cycle. - reflects where the economy is in the business cycle.
* Number of employees on non-agricultural payrolls (payroll employment)
* Index of Industrial Production or industrial output
* Level of manufacturing and trade sales which measures total spending in real dollars
* Personal income measured in real dollars, excluding transfer payments (Social Security)
33
What is the Monetary Policy ?
Intended influence on MONEY SUPPLY & INTEREST RATES by the Central bank of a country.
-Central bank is the Federal Reserve.which is composed of the Board of Governors and twelve regional Federal Reserve Banks.
- Monetary policy is established by:
* Chairman of the Federal Reserve and the Board of Governors,
* The Federal Open Market Committee (FOMC)
34
What are the Federal Reserve four tools that it uses to implement monetary policy ?
* Excess Reserve Deposit
* Discount Rate / Federal Funds Rate
* Open Market Operations
* Reserve Requirement
35
What is the Federal Reserve's Reserve Requirement ?
The Federal Reserve requires that banks maintain a certain percentage of their deposits on hand, in the form of cash known as their reserve requirement.
If Federal Reserve’s monetary policy is to tighten the money supply, -it can increase the reserve requirement which causes banks to maintain more deposits in the form of cash and have less funds available for loans. Since there are fewer funds available for loans, the money supply will decrease and interest rates will increase
36
1. What is the Federal Reserve's Discount rate ?
If monetary policy is to TIGHTEN is the discount rate increased or decreased ?
If monetary policy is to EASE is the discount rate increased or decreased ?
Interest rate that the Federal Reserve charges financial institutions for short-term loans.
Loan borrowing from the Federal Reserve institutions go to the discount window, which is the term used from when financial institutions would send a representative to the Federal Reserve’s bank window to borrow funds.
When the Federal Reserve tightens monetary policy, the discount rate increases.
If the Fed eases monetary policy, they are going to decrease the discount rate
37
What is the Federal Funds rate ?
What can can happen to federal funds rate if banks have low reserves?
What can happen to the federal funds rate if banks have high reserves ?
Does the Federal Reserve control the Federal Funds rate?
Bank to bank lending rate (also known as the overnight rate) set by the Federal Reserve.
if Banks have low reserves >the federal funds rate might increase since the demand for funds is higher than the supply.
If Banks have high reserves > the federal funds rate might decrease.
The Federal Reserve does not directly control the federal funds rate, because banks negotiate the federal funds rate between themselves
38
How does the Federal Reserve influence the open Market Operations ?
Federal Reserve will buy or sell U.S. Treasury securities such as T-bills, notes, and bonds. This process is done electronically.
39
What will the Federal Reserve do with US Treasuries if they want to TIGHTEN the economy ?
Sell U.S. Treasury securities & reduce the deposits held by banks at the Federal Reserve.
- Deposits decreased
- money supply decreases
- interest rates will increase
40
What will the Federal Reserve do with US Treasuries if they want to EASE the economy ?
If Federal Reserve’s monetary policy is to ease,
- Buy U.S. Treasury securities and increase the deposits held by banks at the Federal Reserve.
- Deposits increase
- Money supply increase
-interest rates will decrease.
41
1. What is Excess Reserves Deposits ?
2. What is the impact of the Federal Reserve paying interest on the Excess Deposits ?
3. If federal Reserve wants to EASE the economy what will they do with the rate on the Excess reserves ?
4. If federal Reserve wants to TIGHTEN the economy what will they do with the rate on the Excess reserves ?
1. Amount of cash or deposits with the Federal Reserve in excess of the minimum amount required.
2. financial institutions have an incentive to keep excess reserves on deposit with the Federal Reserve. The Federal Reserve now has the ability to increase or decrease the interest rate paid on excess reserves to help control the money supply
3. Decrease the interest rate paid on excess reserves. This creates an incentive for financial institutions to lend money and grow the money supply
4.Increase the interest rate paid on excess reserves. This creates an incentive for financial institutions to HOLD money and lower the money supply
42
What is the Congress Fiscal Policy ?
What are its goals ?
Congress uses the Fiscal Policy as a means of expanding or contracting the economy.
-Uses taxes & government spending to implement fiscal policy.
Same 3 goals the Federal Reserve:
* Employment - Maintain Full
* Growth - maintain long term
* Price Levels - maintain
43
What effect do raising Taxes have on the economy (expand and contract ?
Taxes decrease to expand the economy
Taxes Increase to contract the economy
44
What is Demand in microeconomics ?
Represents the quantity consumers are willing to purchase of a good or service, at a particular price.
The quantity consumers are willing to demand is known as the quantity demanded and is inversely related to price:
- As price increases, quantity demand decreases.
- As price decreases, quantity demand will increase.
45
1. What does the aggregate demand curve show ?
2. If consumers have more money to spend where does the demand curve shift ?
3. If consumers have less money to spend where does the Demand Curve shift ?
1. Graphical representation of the quantity of goods and services consumers are willing to BUY > at any given PRICE level.
2. Demand curve will shift up and to the right.
3. If consumers have less money to spend, the demand curve will shift down and to the left.
46
What are events that can cause the demand curve to shift up and to the left,,,when consumers have more money to spend ?
Below are events that cause the demand curve to shift up and to the right, which means consumers are willing to demand more of a good or service, at a higher price:
* Increase in disposable income * Decrease in tax rates
* Decrease in unemployment rate
* Decrease in savings rate
* Increase in price of a substitute product
* Decrease in price of a complement product
47
What are Substitutes and Complements products within the economy ?
-Substitutes are products that serve a similar purpose
-Complements are products that are consumed jointly.-
( like Peanut butter and Jelly )
-For substitutes and complements, when the price of one product changes, it will impact the quantity demand for both the original product and the substitute or complement product.
48
Can consumer demand change with price and how is this calculated?
The elasticity of demand is measured by the following formula:
Consumer demand will change with price. As price decreases, the quantity demanded will increase. The question is, how much will demand increase, based on changes in price?
% Change in Quantity Demanded
----------------------------------------------- = Elasticity
% change in price
-Demand is elastic if a small percentage change in price, results in a large percentage change in the quantity demanded.
-Anytime elasticity is greater than 1, demand is considered to be elastic. Like with a Luxury car.
49
What are the 3 factors that impact the "elasticity of demand " ?
Substitute products
Consumer income
TIme
50
What is supply ?
Supply represents the quantity firms are willing to produce and sell of a good or service, at a particular price.
-The quantity firms are willing to supply is known as the quantity supplied and is directly related to price,
- As price increases, quantity supplied increases.
- As price decreases, quantity supplied will decrease.
51
What is the Opportunity Cost ?
Represents the value of the best foregone alternative.
-What a resource could earn, using its best alternative use.
-Client’s opportunity cost is subjective
52
What is the law of diminishing demands in economic production ?
States, as more and more additional units of a variable input are applied to a fixed input, output will eventually increase by smaller and smaller amounts.
53
What are the 3 primary bankruptcy Laws ?
* Chapter 7 – For wage earners to DISCHARGE debts by liquidation
* Chapter 11 – For companies to REORGANIZE and adjust debts
* Chapter 13 – For wage earners to REPAY a portion of debts with income over the future 36 to 60 months
54
1. Are assets liquidated with a chapter 7 bankruptcy ?
2. What "means test" used to determine if the debtor qualifies for Chapter 7 ?
3. What assets are exempt for bankruptcy court and creditors ?
1. YES. Assets are liquidated to repay all or a portion of the debts. Can be voluntary or involuntary
2. “Means test” is applied by the bankruptcy court to determine if the debtor’s income is above or below the average income for their state. -If debtor’s income is BELOW the average income, can file bankruptcy under Chapter 7
- If the debtor’s income is above the average income, the debtor is typically not permitted to file under Chapter 7 and must file under Chapter 13.
3. Assets and property are exempt from bankruptcy court &creditors:
* Federal law limits the homestead exemption to $170,350 of equity if the home was purchased within 40 months of filing for bankruptcy.
* Traditional and Roth IRAs up to $1,362,800 (as indexed in 2019; indexed every three years).
* Rollover IRAs for an unlimited amount.
* Qualified retirement plans, certain types of deferred compensation, and certain tax–deferred annuities.
* Personal property including one car, one television, etc.
* Education funds in a Qualified tuition plan,
55
1. What is Chapter 11 Bankruptcy ?
2. Is a reorganization plan required to be filed ?
1. “Reorganization bankruptcy” for corporations, sole proprietorships, and partnerships. Can be voluntary or involuntary.
-The debtor is a “debtor in possession” of assets of the company.
- The debtor in possession is responsible for managing assets of the company and acting as fiduciary, which places the interest of the company ahead of the individual.
2. MUST file a "reorganization" plan with the courts, which must be approved by the creditors and bankruptcy court.
56
1. What is a Chapter 13 Bankruptcy ?
2. Does it require the debtor to attend classes ?
3. What is the repayment period for the debtor ?
4. The debtor must make repayment to whom ?
1. “wage earners plan,” is for individuals or self-employed workers who want to keep their assets and payoff a portion of their debts over time. Corporations and partnerships are not eligible to file Chapter 13.
2. Requires that before filing for a Chapter 13 bankruptcy, a debtor must attend a credit counseling program. and personal financial management course.
3. Debtor’s income is GREATER than the mean average for their state, the debtor’s “applicable commitment period” to repay all or a portion of their debts is 5 YEARS.
If the debtor’s income is LESS than the mean average for their state, the debtor’s “applicable commitment period” to repay all or a portion of their debts is 3 YEARS
4. Repayment is made by the debtor to the trustee.
-The trustee is responsible for allocating the payment to the creditors, according to the terms of the repayment plan
57
What is purpose of the FTC ?
The Federal Trade Commission (FTC) was created in 1914.
-FTC mission is to protect the consumer and prevent unfair, anti-competitive business practices.
58
What is the FPLA ?
Fair Packaging and Labeling Act (FPLA)
- help consumers compare the value of products and to prevent unfair or deceptive packaging and labeling of many household items
59
What is the Equal Opportunity ACT ?
Equal Credit Opportunity Act
- prohibits discrimination, when evaluating a decision to
Grant Consumer Credit.
60
1. What is the most popular method for determining a credit score ?
2. What are the 3 major credit reporting agencies ?
3, What are the ranges with a FICO score ?
1. Fair Isaac Credit Organization (FICO) method. A FICO score is used to evaluate the creditworthiness of a borrower.
2. The three major credit reporting agencies Equifax, Experian, and TransUnion track an individual’s credit history, amount of credit available, amount of credit used, timeliness of payments, credit inquiries, and more to determine a credit or FICO score.
3. A FICO score will range from 300 – 850. The higher the credit score, the more likely a borrower is to qualify for credit, at the lowest interest rates available. The national average FICO score was 706 in 2019.
61
What are the key factors affecting our credit score ?
* Pay all bills on time (payment history is 35% of the score)
* Avoid having payments go into collections
* Keep outstanding balances low on revolving credit accounts (amount of debt/utilization is 30% of the score)
* Don't close old unused credit cards (length of credit history is 15% of the score)
* Do rate shopping within a short period of time (hard inquiries of the same type, such as from several mortgage companies, within a 14-to 45-day period are treated as a single inquiry)
* Types of debt on your report, for example, credit card, installment loan, or mortgage loan (type of credit is 10% of the score)
62
1. What does Fair Credit Reporting Act protect ?
2. Does it entitles consumers to a free credit report and if so how often ?
1. Fair Credit Reporting Act protects Consumer’s Information collected by the major credit bureaus (Equifax, TransUnion, and Experian).
- Info. contained in a credit report can only be provided to a person who has a specific purpose that is detailed in the Act, such as a potential employer considering making a job offer, a creditor considering extending credit, or an insurance company evaluating an insurance application
2. Entitles consumers to one free credit report each year from each of the major credit reporting bureaus.1
63
What does the Fair Debt Collection Practices Act prevent ?
The Fair Debt Collection Practices Act
- prevents third-party debt collectors from using deceptive or abusive methods to collect debts.
64
What does the Truth in Lending Act do for consumers ?
Truth in Lending Act
- Protect consumers so that they fully UNDERSTAND the terms of a loan. Regulation Z of the Truth in Lending Act outlines the specific requirements of lenders.
- Must state interest rate using the ANNUAL PERCENTAGE RATE.
- Requires that debtors be provided with “3-day right of recession” for loans that are secured by the debtor’s primary residence.
- Regulates how creditors may advertise loan and financing costs
65
1. What is the Fair Credit Billing ACT ?
2. What steps must consumers take to dispute a charge ?
3. What type of loans does the act apply to ?
1.Fair Credit Billing Act
-requires timely, written verification to a consumer disputing a billing error. The creditor must provide a written acknowledgment of the consumer dispute within 30 days of being notified.
2. Consumers must take the following steps to dispute a billing error:
- Notify the creditor, in writing, within 60 days of receiving the bill
- The creditor must notify the consumer in writing, within 30 days of receiving the notification.
- The creditor has 90 days to resolve the billing dispute, after receiving notification from the consumer.
3. Applies to credit cards and revolving charge accounts that are typically issued by big chain stores. Does NOT apply to loans a consumer repays over a period of time
66
What does the CARD Act of 2009 do ?
CARD Act of 2009 :
-prevents credit card companies (and banks) from charging hidden fees and extraordinary interest rates as well as promoting easy to understand statements.
- Prevent certain rate increase practices - Credit card companies can no longer increase interest rates on a credit card at any time for any reason, or no reason at all.
- Prevent hidden fees and confusing payment due dates
- Easy to understand disclosures
- Protection for young adults
- Payment in excess of the min. payment amount must be applied in favor of the cardholder
67
1. is th FDIC ?
2. What are its 3 main goals ?
3. What account types does FDIC apply to ?
1. Federal Deposit Insurance Corporation (FDIC) was formed in 1933, as a result of the bank failures that occurred in the 1920’s and 1930’s.
2. The 3 goals of the FDIC:
* Insure deposits
* Manage receiverships
* Supervise financial institutions for financial stability and consumer protection
3. Applies to deposit accounts. Deposit accounts include: checking accounts, savings accounts, money market deposit accounts, and certificates of deposit.
68
1. What are the FDIC limits ?
2. How is the account balance divided with joint owner account ?
1. FDIC insures up to $250,000
per Depositor,
per legal Account ownership
per Financial Institution
2. With Joint account the balance is divided 50/50 between the two account owners. If there are three owners on a joint account, the account balance is divided evenly - one-third for each owner
69
1. What is SPIC :
2. What does it cover ?
1. Securities Investor Protection Corporation (SIPC) was formed in 1970 as a statutorily created nonprofit membership corporation funded by its member securities broker-dealers, with the goal of returning cash and securities to investors,
2. in the event a brokerage firm becomes insolvent. SIPC covers cash, stocks, bonds, and investment company shares (mutual funds). The SIPC does not cover annuity contracts, gold, silver, or futures contracts.
70
What are the limits of SPIC ?
$500,000 in securities.
The $500,000 limit includes up to $250,000 in cash.
Money market mutual funds held within a brokerage account are securities and are covered under the $500,000 limit.
When a brokerage customer has multiple accounts, SIPC coverage applies based on each “separate capacity.” Separate capacities include:
* individual accounts, * joint accounts (joint accounts with different co-owners are covered separately), *corporate accounts, *trust accounts, *traditional IRAs, *Roth IRAs, * accounts held by estate executors, and * custodial accounts for minors
71
What does the Securities act of 1933 do ?
Requires that any new security be registered with the Securities and Exchange Commission (SEC) by filing a registration statement with the SEC.
- Regulates the primary market. This Act requires disclosure of financial and other significant information regarding new securities and prohibits deceit, misrepresentations, and fraud in the sale of new securities
72
What does the Securities Act of 1933 require with the registration of a new security ?
-Discloses information such as a description of the company, the security and information about management.
- This Act also requires a prospectus that contains information in the registration statement, and is provided to prospective investors
for making well-informed investment decisions.
- After filing registration statements with the SEC, there is a 20-day cooling off period. During this cooling off period, the security’s issuer may distribute a red herring prospectus.
- Red herring prospectus does not include the price of the security or the amount of the security being sold.
- Once the registration with the SEC is complete, the security can be bought and sold
73
What securities are exempt from filing with the SEC ?
* Securities of a municipal, state, or federal government.
* Intrastate offerings where the investors and issuers are residents of the same state where the issuer performs most activities.
* Commercial paper with a maturity of 270 days or less.
* Securities issued by a bank, savings institution, common carrier, or farmers’ cooperative and subject to other regulatory legislation.
* Stock dividends, stock splits, and securities issued in connection with corporate reorganizations.
* Insurance, endowment, and annuity contracts.
74
What is Regulation A process for businesses ?
Process for small businesses to sell shares through an initial public offering.
- Less stringent registration process for small issues, less than $75,000,000 during a 12 month period.
- Tier 1 offerings up to $20 million follow more relaxed rules while Tier 2 offerings up to $75 million have additional rules and reporting requirements. Tier 2 offerings may be sold to accredited investors (as defined below) without limitation; however, non-accredited investors in Tier 2 offerings are subject to limitations on the amount of the investment
75
What is Regulation D with respect to security registration ?
What is it called ?
Regulation D provides two exemptions to registration for small issues, such as:
- Rule 504: Securities of up to $10,000,000 in a 12 month period to investors who receive restricted securities, that may not be resold without registration or meeting an exemption.
- Rule 506: Sales of any amount of securities to accredited investors or up to 35 other purchasers
that have a sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment. The shares must be restricted and investors cannot freely trade the securities in the secondary markets.
76
1. What is the SEC ?
2. What does it regulate ?
3. What companies must disclose financial statements ?
1. Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC)
2. provides SEC with the authority to regulate the secondary market. The secondary market includes the subsequent trading of securities, after their initial public offering. The SEC has the power to regulate brokerage firms, stock market exchanges [(New York Stock Exchange, National Association of Securities Dealers Automated Quotations (NASDAQ))] and self regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA).
3. Requires companies with more than 500 shareholders and $10 million in assets to file and disclose financial statements with the SEC.
-Requirements include quarterly financial statements (10Q) and audited annual financial statements (10k).
77
Does the SEC require shareholder materials etc to be filed with the SEC prior to distribution to shareholders ?
YES. Requires that information such as shareholder proxy materials soliciting shareholder votes be filed with the SEC prior to distribution to shareholders.
78
What is Regulation T ?
Provides the Federal Reserve with the authority to set the margin trading requirements. T
The Federal Reserve has set the minimum initial margin to 50 percent, which requires investors who borrow from the broker to enter a securities transaction to contribute at least 50 percent equity and borrow up to 50 percent of the transaction total.
79
What standards are set by the Investment Company Act ?
Regulate investment companies such as open-end, closed-end, and unit investment trusts.
- Investment companies are more broadly thought of as mutual funds, which pool investor resources and purchase securities in anticipation of earning a return for the investors
80
1. What does the Investment Act of 1940 require ?
2. What defines an Investment Advisor ?
What is the 3-pronged test to determine who is an Investment Advisor ?
1. Investment Advisers Act of 1940 requires investment advisers to register with their state or the SEC.
2. Anyone who “receives compensation" engages in the business of "advising others" either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities
The Act can be broken down into a three-pronged test to determine who is an investment adviser.
1. Does the person provide ADVICE or analysis regarding securities?
2. Does the person hold themselves out as “ IN THE BUSINESS ?”
3. Does the person receive COMPENSATION for their advice? Compensation can be in the form of commissions, flat rate, or a fee for a financial plan where investment advice is a part of the overall plan and services provided by the planner
81
1. What does a Investment Advisor register as with the SEC ?
2. Exceptions to registering with the SEC ?
1. Adviser who meets all three of the three-pronged test must register as a Registered Investment Adviser (RIA) with their state or the SEC, Investment advisers with assets in excess of $110,000,000 are required to register with the SEC.
2. Unless the adviser meets an exception.
-BELOW $100,000,000 Advisors are required to register with their state.
- Between $100 and $110 million of client funds, he or she may elect to register with the SEC or with his or her state.
82
Must all investment abide by SEC Release IA-770 and IA-1092 ?
A later release, IA-1092 in 1987, reaffirmed the content of IA-770 and made it clear that
_ ALL investment advisers, not just those subject to registration with the SEC, are subject to the anti-fraud provisions of the 1940 Act. IA-1092 also imposed on investment advisers a fiduciary responsibility to their clients.
83
Once you are deemed an Investment Advisor what are the duties ?
Once an adviser is deemed an investment adviser, they have certain duties under the Investment Advisers Act of 1940.
Some of the duties include:
* Register as an Investment Adviser
* No Fraudulent Activities
* Disclosure to Prospective and Current Clients (Brochure Rule)
* Prohibits the Assignment of Advisory Contracts
* Proper Use of the Term “Registered Investment Adviser” * Books and Records to be Maintained
84
1.What form must be filed with the state and Sec to be an Investment Advisor ?
2. What are the 3 parts to the ADV form ?
1. To file as an investment adviser with the SEC or state, Form ADV must generally be filed electronically through the IARD website.
3 parts to Form ADV:22____________________________
* Part 1 adviser’s business and disciplinary HISTORY within the last ten years.
* Part 2 adviser’s SERVICES, fees, investment strategies, education and background, disciplinary actions, and conflicts of interest.
* Part 3 Client Relationship Summary (CRS) designed to provide retail customers with information to assist them with the decision-making process regarding the establishment or termination of an investment advisory relationship and/or engaging a particular firm or financial processional
85
1. The investment Advisor ACT of 1940 requires a Registered Investment Advisor to provide a _____ prior to entering a advisory contract ?
2. What must the Investment Advisor disclose ?
1. WRITTEN DISCLOSURE prior to entering an advisory contract.
2. The requirement is for registered investment advisers to disclose their
Education background,
services provided, fees,
business practices
disciplinary action, within the last 10 years,
This disclosure requirement is known as the “brochure rule.” The registered investment adviser must provide the written disclosure before or at the time of the signing of an investment advisory contract
86
What are the main provisions of the Investment Advisor Act of 1940 ?
Provisions of the Investment Advisors ACT of 1940
-Test that determines if Investment Advisor
- SEC release IA-770 and IA 1092 subject to the anti-fraud provisions
- Exclusions and exemptions
- Registering as Investment Advisor
- No Fraudulent Activists
-Disclosure to prospective and current clients (Brochure rule)
-Prohibits the assignment of Advisory Contracts
- Proper use of the term "Registered Investment Advisor"
- Books and records maintained
-Enforcement
87
1. What are the Advisors called if they are registered under the Investment Advisor Act of 1940 ?
2. Can it be abbreviated as RIA ?
1. Proper Use of the Term “Registered Investment Adviser” Advisers who are registered under the Investment Advisers Act of 1940 are Registered Investment Advisers (RIAs).
2. NO. The term Registered Investment Adviser must be spelled out and the adviser is not permitted to use the letters “RIA” after their name,
88
How many years must an advisor keep records and books ?
A registered investment adviser is required to maintain accurate and current financial statements, ledgers, journals, copies of instructions from clients regarding purchases and sales of securities,
advertisements, reports, or other investment advisory services sent to more than 10 persons.
The registered investment adviser is generally required to keep records for at least 5 years
89
What is the penalty for violation of the Regulations of the Investment Advisor Act of 1940 ?
fines up to $10,000, imprisonment up to five years, or both
Any of the rules and regulations of the Investment Advisers Act are not followed, the SEC has the authority to investigate, to compel submission of books and records, and to levy fines for failure to cooperate.
90
What is FINRA ?
2. Who must register with FINRA ?
3. What form is used to register ?
1. Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization for all security firms doing business in the United States. FINRA was created in July 2007 by the merging of the National Association of Security Dealers (NASD) and the enforcement functions of the New York Stock Exchange.
2. Person who sells securities must register with FINRA under the sponsorship of a broker-dealer. Representatives of broker-dealers and investment advisers register with their state and the Financial Industry Regulatory Authority (FINRA) by filing Form U4.
3. Filing with a U4 form. This form is disclosing background information about representatives and investment advisers with the industry’s self-regulatory organization, which is FINRA. In addition to filing Form U4, an individual must pass the appropriate securities licensing exam(s).
91
What is the Series 3 exam ?
What is the Series 6 ?
* Series 3 – Permits an individual to sell futures contracts.
* Series 6 – Permits an individual to sell investment company products such as a mutual fund or unit investment trust and variable life and variable annuities
92
What is the series 7 ?
Series 7 – General Securities Registered Representative – Permits an individual to sell stocks, bonds, government
and municipal bonds, options, REITS and investment company products. It does not permit the selling of futures. This is the most comprehensive and most common of the registered representative exams
93
What is the Series 24 ?
Series 24 – General Securities Principal
94
What is the Series 26 ?
Series 26 - Investment Company Products/Variable Contracts Limited Principal
- This examination qualifies an individual who will function as a principal for the solicitation of products.
95
What is the series 63 ?
Series 63 – Uniform Securities Agent State Law Exam
– Most states require an individual to pass the Series 63 exam before being registered with the state. The Series 63 exam tests primarily state laws and regulations, often referred to as blue sky laws. B
96
What is the Series 65 ?
Series 65 – Uniform Investment Adviser Law Exam
– This license is required for an individual to register as an Investment Advisor Representative (IAR) with the state.
-Most states do not require the Series 65 exam if an individual already passed the Series 7 and Series 66 exams
97
What is the series 66 exam ?
Series 66 – Uniform Combined State Law Exam - This exam combines the Series 63 and 65 exams into one exam. Passing this exam qualifies for registering as an Investment Adviser Representative (IAR) with all 50 states.
98
Why was the Sarbanes-Oxley Act of 2002 passed into law ?
Sarbanes-Oxley Act of 2002 was passed in response to accounting scandals at firms like Enron
Established the Public Company Accounting Oversight Board, to provide independent oversight of public accounting firms providing audit services.
* Established standards for external auditor independence
99
What does Regulation FD do for the public?
Regulation Full Disclosure (or Regulation FD) was implemented in October 2000 by the SEC to level the playing field between investment analysts and the general public.
100
Why was the Dodd-Frank law passed ?
The Dodd-Frank Act was passed
- to prevent a collapse of major financial institutions, promote transparency, and to protect consumers from abusive financial services practices
101
Did the Dodd Frank give the SEC the authority to require broker dealers to abide by a fiduciary standard ?
YES . The Dodd-Frank Act also gave the SEC the authority to require broker-dealers to abide by a fiduciary standard duty of care, rather than the long-standing suitability standard applied to broker-dealers.
This objective was accomplished in 2019 when the SEC adopted a new rule-making package including Regulation Best Interest (Regulation BI) and the Form CRS Relationship Summary
102
What is Regulation Best Interest ?
Broker-dealers were required on June 30, 2020 to begin compliance with Regulation Best Interest (BI),
Requires that broker-dealers (and their representatives) “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interest of the retail customer
Regulation BI does NOT apply to services that are distinct from making these types of recommendations; for example, when executing an UNSOLICITED transaction for a retail customer
103
Is a Fiduciary Duty of care required by Registered Investment Advisors ?
What is a fiduciary standard of care?
YES> fiduciary duty of care is required by Registered Investment Advisers (RIAs) and CFP® professionals which requires both to put their client's interest ahead of their own and to always act in the best interest of the client.
A fiduciary duty of care requires the adviser to consider the overall impact to a client's investment portfolio before recommending an investment and generally applies on an ongoing basis
104
What are the 4 main parts to Regulation Best interest ?
Regulation BI includes the general obligation to act in the customer's best interest and avoid placing the broker-dealer's or representative's interests ahead of the customer's interest. In addition, broker-dealers are charged with upholding several other obligations, including:
* Disclosure Obligation
* Care Obligation
* Conflict of Interest Obligation
* Compliance Obligation
105
What is the SEC required CRS form ?
SEC's Form CRS Relationship Summary requirements apply to both broker-dealers and registered investment advisers
Form CRS includes information about services, fees and costs, conflicts of interest, legal standard of conduct, financial professionals’ compensation, disciplinary history, and how to obtain additional information
CRS affords greater transparency to retail investors
106
What is ERISA ?
Employee Retirement Income Security Act (ERISA) of 1974 was designed to protect employee retirement savings accounts from creditors and from plan sponsors.
107
Who is deemed to be responsible for ERISA retirement plans ?
Through ERISA, fiduciary responsibility was established and made applicable to
(1) Exercise discretionary authority or control over the management of a retirement plan, (
2) Exercise any authority or control over the management or disposition of retirement plan assets,
(3) Offer investment advice for a fee or other compensation with respect to plan funds or property, and
(4) Have any discretionary authority or responsibility in a retirement plan's administration
108
1. What is workers compensation?
2, Are workers comp taxable ?
1. Designed to protect employees if they are injured while at work. -
- Provides income replacement if the employee is unable to work.
- Provides medical expense coverage if the employee is injured while at work and it can provide a death benefit to an employee’s beneficiary
2. Benefits received under workers’ compensation are not subject to income tax.
109
Unemployment benefits ?
-Provide income for a period of time.
-Offered jointly by the state and federal governments through unemployment insurance premiums paid by employers.
-State and federal government have an unemployment tax paid by employers.
-As a condition of receiving unemployment benefits, the worker must be unemployed and also actively seeking work. Unemployment benefits are taxable income to the recipient
110
What is OSHA ?
OSHA (Occupational Safety and Health Administration)
- created by Congress under the Occupational Safety and Health Act of 1970 P
Promote safe and healthy working conditions for workers by providing training, outreach, education, and assistance.
111
" Registered Representative of a broker-dealer"
Exam required :
Relationship with client ?
Investors pay ?
Permitted to use the Term Advisor ?
Standard of care ?
Series 6 or 7
Matches buyers and sellers of securities
Commission paid
Only When Registered as a "Invested Advisor Representative
Regulation BI
112
" Registered Investment Advisor Representative "
Exam required :
Relationship with client ?
Investors pay ?
Permitted to use the Term Advisor ?
Standard of care ?
Series 65 or 66
Provides Investment Advice
Fee Based
YES can use Advisor
Fiduciary
Investment Ac tof 1940
113
What the 3 primary goals of the Federal Reserve ?
EGP
* E mployment - Maintain Full
* G rowth - maintain long term
* P rice Levels - maintain
114
4 tools for Monetary Policy ?
Monetary policy is established by: Chairman of the Federal
Reserve and the Federal Open Market Committee (FOMC).
4 tools that it uses to implement monetary policy : " R E D O "
-------------------------------------------------------------------------------------------------
Reserve Requirement - Banks % of holdings held in Cash
Excess Reserve Deposits - Banks hold cash in excess of min
Discount Rate - Fed charges Banks for short term
Federal Funds Rate BANK to BANK Overnight Rate
Open Market Operations - buy / sell us treasuries
115
Fiscal Policy - 3 goals
3 Tools
FISCAL POLICY
* Congress has the same 3 goals:
1. Maintain price levels
2. Maintain long-term economic growth
3. Maintain full employment
Tools -
* Taxes
* Spending
* Deficit Management (borrowing money )
116
Fed Funds rate
also called the _ ________Rate ?
Discount Rate
Fed Funds rate-
- BANK to BANK Overnight Rate
- Negotiated between Banks, ( Fed only sets a target )
- If banks have low reserves the rate is likely to increase
Discount Rate -
- Fed charges Banks for short term
- Rates charged on cash to meet their reserve re'qmt.
- Tighten Monetary Policy - Increase rate
- Ease Monetary Policy - Decrease rate
117
Re: Bankruptcy Laws : ___________________________
What debts are discharged in bankruptcy ?
What are NOt discharged ?
DISCHARGED - Exempt from the bankruptcy and creditors:
* $170,350 of equity if the HOME was purchased within 40 months
of filing for bankruptcy. However, if the debtor has resided in the
state for longer than 40 months, the state’s laws prevail.
* Traditional and Roth IRAs up to $1,362,800 (as indexed in 2019;
indexed every three years).
* Rollover IRAs for an unlimited amount.
* Qualified retirement plans, certain types of deferred
compensation, and certain tax–deferred annuities.
* Some personal property including one car, one television, etc.
* Education funds - contributed to a qualified tuition plan, although
there are limits based on the timing and amounts of the
contributions.
__________________________________________________________________
NOT discharged in bankruptcy: ( MUST PAY BACK )
* Alimony
* Child support
* Fraud related debts - Debts obtained through fraud
* Inherited IRA
* Property liens
* 3 years of back taxes
* Student loans - most
118
When the Federal Reserve tightens and Eases , what do they do to the different tools ?
Tighten Ease
______________________________________________________
Reserve Req'mt x
Excess Reserves x
Discount Rate x
Open Market operations
Us Treasuries
_____________________________________________________
Interest Rates
money supply
----------------------------Tighten Ease
"REDO"----------------------------------------------
R eserve Req'mt UP DOWN
E xcess Reserves UP DOWN
D iscount Rate UP DOWN
O Pen Market Operations
Us Treasuries SELL BUY
more cash in market
_____________________________________________
Interest Rates UP DOWN
money supply DOWN UP
119
Business Cycle
What is increasing, Decreasing and at HIGH and Low
Expansion Peak Contraction Through
-----------------------------------------------------------------------------------------------
GDP
Inflation
Interest rates
Unemployment
---------------------Expansion Peak Contraction Through
--------------------------------------------------------------------------------------------------
GDP increasing HIGH decreasing LOW
Inflation increasing HIGH decreasing LOW
Interest rates increasing HIGH decreasing LOW
Unemployment decreasing LOW Increasing HIGH
120
What causes a SHIFT in the Demand curve ?
How does money in consumers pocket affect the curve with ,,,,
More money?
Less money ?
price I
I
I
I
I________________________
Quantity
Consumers have MORE MONEY in their pocket to spend,
the demand curve will shift up and to the right.
consumers willing to demand more of goods at a higher price:
Income UP
Taxes and unemployment DOWN
Savings Rate DOWN
Complement Price DOWN
Substitute Price UP
THE AGGREGATE DEMAND CURVE :
price I
I
I
I
I________________________
Quantity
Consumers have LESS MONEY to spend,
the demand curve will shift down and to the left.
Consumers are willing to demand less of goods at a lower price:
Income DOWN
Taxes and unemployment UP
Savings Rate UP
Complement Price UP
Substitute Price DOWN
121
How do changes in PRICE affect DEMAND or quantity ?
Consumer demand will change with price.
As price decreases, DEMAND will increase.
As price increases, DEMAND will decrease.
How much will demand increase, based on changes in price? This question is answered by looking at the price elasticity of demand.
122
Money Supply vs Interest rats
How does the money supply affect interest rates: ?
Up or down
Money supply impact on Interest rates
_________________________________________________
up DOWN
Down UP
123
Supply Curve represents what ?
What causes the Supply curve to shift UP and to the LEFT ?
What causes the Supply Curve to shift DOWN and to the RIGHT ?
The Supply Curve represents the quantity firms are willing to produce and sell of a good or service at a particular PRICE.
Cause the supply curve to shift UP and to the LEFT, which means firms are supplying less of a good or service, at a higher price:
* Decreased competition
* Outdated technologies
* Increased price of an input used in the manufacturing process
I *
I *
Price I *
I *
I ___________________
Quantity
Cause the supply curve to shift DOWN and to the RIGHT, which means firms are willing to supply more of a good or service, at a lower price:
* Increased competition
* Improved technology to increase efficiency
* Decreased price of an input used in the manufacturing process
-There are shifts along the Supply curve
-Anytime something other than price changes, the supply curve will shift, either up and to the left or down and to the right.
- A change in price is movement along the supply curve, impacting the quantity supplied.
124
1. What is the Equilibrium Price ?
2. What happens when the money supply shifts up and decreases ?
3. What happens when the Money Supply shifts down and Increases ?
1. PRICE at which the quantity demanded = the quantity supplied.
2. As money supply shifts up (decreases) from S0 to S1, a new equilibrium price will be established, which is higher price (interest rates). As a result, businesses and consumers will demand less money at the higher interest rates.
3. As the money supply shifts down (increases) from S0 to S2, businesses and consumers will demand more money as the money supply increases and a new equilibrium price is established, which is lower price (interest rates).
125
1. Price Elasticity of Demand is measured by what formula ?
2. Demand i said to be ___________ if a small % change in price results in a Large % change in quantity demanded.
Anytime its greater then _________, demand is considered to be Elastic.
3. Demand is _________________ if a small % change in price results in a small % change in the quantity demanded. When elasticity is less than one, demand is relatively _______________.
4. Consumer Demand will change with _________. ?
1. Elasticity of demand is measured by the following formula:
% change in Quantity Demanded
Elasticity = --------------------------------------------------------------
% change in Price
2. Demand is elastic if a small percentage change in price, results in a large percentage change in the quantity demanded. Anytime elasticity is greater than 1, demand is considered to be elastic.
3. Demand is inelastic if a small percentage change in price results in a small percentage change in the quantity demanded. When elasticity is less than one, demand is relatively inelastic.
4. Consumer demand will change with price.
As price decreases, the quantity demanded will increase. The question is, how much will demand increase, based on changes in price? This question is answered by looking at the price elasticity of demand.
Some products like Gas changes in price will result in a relatively small change in the quantity demanded within a given range of prices
For other products, such as luxury goods, a small change in price may lead to a relatively large change in the quantity demanded.
126
Elasticity
1. If a one percent change in price leads to a one percent change in quantity demanded, then elasticity is = _______, which is defined as unit ____________.
2. If demand is perfectly ___________, regardless of what happens to price, the quantity demanded will not change.
3. If demand is perfectly ___________, given a small price change, consumers will demand an unlimited amount of the good or service.
1. If a one percent change in price leads to a one percent change in quantity demanded, then elasticity is one, which is defined as unit elasticity.
2. If demand is perfectly inelastic, regardless of what happens to price, the quantity demanded will not change.
3. If demand is perfectly elastic, given a small price change, consumers will demand an unlimited amount of the good or service.
127
The elasticity of demand is impacted by what 3 primary factors. ?
SUBSTITUTES
-Small price increase for one product will lead to lower demand and increase the demand for the substitute product. Substitute products lead to elastic demand. IE: If the price of steak increases and consumers substitute chicken instead of steak, the demand for steak will decrease.
CONSUMERS INCOME
- If prices increase and consumer’s income remains constant, then consumer’s are going to demand less of the good or service. Whether the demand is elastic or inelastic will depend on the percentage change in the quantity demanded.
TIME
- If consumers don’t have a substitute product in the short-term, demand is likely to be inelastic. However, over time as consumers find substitute products, demand will become more elastic.
128
Which of the following statements concerning supply and/or demand is/are true?
A. If demand increases and supply simultaneously decreases, equilibrium price will fall.
B. There is no relationship between price and quantity demanded.
C. If demand decreases and supply simultaneously increases, equilibrium price will fall.
D. If demand decreases and supply remains constant, equilibrium price will rise.
C. If demand decreases and supply simultaneously increases, equilibrium price will fall.
129
Which of the following is true regarding demand?
1. The average income or standard of living is a key determinant of demand.
2. Downward sloping demand indicates that if the price is decreased, the quantity demanded will fall.
A. Only statement I is correct.
B. Only Statement II is correct.
C. Statements I and II are both correct.
D. Neither Statements I or II are correct
Solution: The correct answer is A.
Statement I is a true statement.
Demand for products will be greater when disposable income is greater.
Statement II is a false statement. The correct version of the statement is: Downward sloping demand curve indicates that as price decrease, quantity demanded will INCREASE.
130
Which of the following is not correct regarding the Federal Reserve?
A> The Bank Borrowing Rate is the overnight lending rate between member banks.
B. The Federal Reserve discount rate is the rate at which member banks can borrow funds from the Federal Reserve to meet reserve requirements.
C> The reserve requirement for a member bank of the Federal Reserve is the percent of deposit liabilities that must be held in reserve.
D. Open market operations is the process by which the Federal Reserve purchases and sells government securities in the open market.
The correct answer is A.
The Fed controls the overnight or discount rate. T
Federal Funds Rate Overnight rate is a BANK to BANK lending.
