Fundamental Considerations In Wealth management

Question 1

What are the 6 components of the financial planning process?

Answer 1

.savings and budgeting
.investment planning
.insurance planning
.income tax planning
.retirement planning
.estate planning

Question 2

What are the 3 phases of the financial life cycle

Answer 2

1) accumulation
2) conservation / protection
3) distribution / gifting

Question 3

What is the accumulation phase

Answer 3

Early to middle years of career with limited funds to invest. Have low net worth. Short term goals would including saving for a house. Long term would be saving for college or implementing a retirement plan.

Question 4

What is the conservation / preservation phase

Answer 4

Typically past midpoint of career. They have decreased debt, higher cash flow, higher net worth. Short term goals would be paying for college. Long term would be saving more for retirement and preserving principal.

Question 5

What is the distribution / gifting phase?

Answer 5

People entering retirement. Concerned with maintaining current life style. Long term goal would be estate planning.

Question 6

How is net worth calculated?

Answer 6

Assets - liabilities.

Question 7

What is an investment policy statement?

Answer 7

A written document that lists a client’s financial objectives. It provides a framework for discipline within the wealth management process.

Question 8

What are the 3 types of traditional investments?

Answer 8

Cash and cash equivalents
Bonds (lending investments)
Stocks (ownership investments)

Question 9

What are types of cash and cash equivalents?

Answer 9

• CDs
• savings account
• money market account
• money market mutual funds
• US treasury bills

Question 10

US treasury bill interest is subject to what kind of tax?

Answer 10

Only Federal income tax. Not state or local income tax.

Question 11

Who can issue bonds?

Answer 11

US Government
Corporations
Municipalities

Question 12

What is the par value of a bond?

Answer 12

$1000

Question 13

What are investment grade bonds rated?

Answer 13

BBB- or higher

Question 14

What are high yield bonds also known as and what are they rated?

Answer 14

Junk bonds
BB+ or lower

Question 15

What are debenture bonds?

Answer 15

Unsecured bonds backed by the general credit of issuing corporation. In other words, no collateral is pledged to cover.

Question 16

What is a coupon and how is it taxed?

Answer 16

It is the semi annual interest payment on a bond. It is subject to federal state and local income tax.

Question 17

What is the difference between a treasury note and a treasury bond?

Answer 17

Notes have maturities up to 10 years
Bonds mature in 30 years.

Question 18

What 2 types of municipal bonds are issued?

Answer 18

-General Obligation (GO)
-Revenue Bonds

Question 19

What is the taxable equivalent yield?

Answer 19

The yield a corporate bond (taxable) must return in order to equal that of a municipal (tax-free) bond.

Question 20

How is taxable equivalent yield calculated? (TEY)

Answer 20

Tax exempt yield
—————————
1 - marginal tax rate

Question 21

Name the 6 types of common stock

Answer 21

Growth
Income
Value
Blue Chip
Defensive
Cyclical

Question 22

What is an open-end investment company more commonly known as?

Answer 22

Mutual fund

Question 23

What are growth funds?

Answer 23

Companies that a growing quickly, usually do not pay dividends because the money is invested back into the company. These more commonly generate capital gains.

Question 24

What are income stock funds?

Answer 24

The fund emphasizes income over growth. Generally have stocks of companies with long history of dividend payments.

Question 25

What are corporate bond funds?

Answer 25

They seek a high level of income by investing 2/3+ in corporate bonds.

Question 26

What kind of bond funds would an investor that wants safety and income purchase?

Answer 26

US government bond funds

Question 27

What is the difference between closed-end and open-end mutual funds?

Answer 27

Closed trade at either a discount or premium relative to NAV. They are also subject to supply and demand.

Question 28

Explain an EFT

Answer 28

For investors who want to invest in an industry without having individual securities, can be bought on margin and can be sold short. It is a low cost tax efficient portfolio.