Fundamentals & Insurance Flashcards

Question

Risk / Standard Deviation Benchmark

Answer 1

The benchmark / **standard deviation for a diversified portfolio** is **8-14%** Risk is measured using standard deviation (which is a measure of volatility and variability).

Answer 2

_Elastic:_ * An elastic demand curve is almost horizontal, sloping down and to the right. * When there’s a small change in price there’s a large change in quantity demanded. _Inelastic:_ * An inelastic demand curve is almost vertical, sloping down and to the right. * When there’s a small change in price there’s very little change in quantity demanded. \*Remember the “I” in Inelastic and that should help remember the shape of the inelastic demand curve.

Answer 3

_Expansion_ * The expansion phase is characterized by increasing GDP, inflation and interest rates. However, the unemployment rate is decreasing. _Peak_ * The peak phase is characterized by GDP being at its highest. * Inflation and interest rates are peaking and the unemployment rate is at its lowest levels. _Contraction/Recession_ * The contraction phase is characterized by GDP slowing. * Inflation and interest rates are also beginning to decline. * The unemployment rate begins to increase during the contraction phase. _Trough_ * A trough is characterized by GDP, inflation, and interest rates being at their lowest levels. * Unemployment is at its highest during a trough.

Answer 4

Consumer durables and capital goods.

Answer 5

A recession consists of six consecutive months (or two quarters) of declining GDP. A recession becomes a depression if the recession lasts for 18 months or six consecutive quarters.

Answer 6

* Deflation is the opposite of inflation, where prices are falling. * During periods of deflation, individuals prefer to hold cash because cash becomes more valuable as it can buy more goods and services and prices decrease.

Answer 7

* Disinflation is a decline or slowdown in the rate of inflation. * For example: If annual inflation has been running at 4% each year for the past three years, then slows to 3.0 – 3.5% that would be a slowdown in the rate of inflation.

Answer 8

1. Maintain long-term economic growth. 2. Maintain price levels supported by the economy. 3. Maintain full employment.

Answer 9

_1. Reserve Requirement (First Tool)._ * The reserve requirement is a percentage of deposits a bank must maintain in cash. * As the reserve requirement increases, there’s less cash available to lend, therefore the money supply decreases and interest rates increase. * As the reserve requirement decreases, there’s more cash available to lend, therefore the money supply increases and interest rates decrease.

Answer 10

_2. Discount Rate (Second Tool)._ * The discount rate is the overnight interest rate at which member banks can borrow from the Federal Reserve to meet their reserve requirements. * As the discount rate increases, short-term interest rates increase as well. * As the discount rate decreases, short-term interest rates decrease as well.

Answer 11

_3. Open Market Operations (Third Tool)._ * As the Federal Reserve buys or sells government securities, the money supply is influenced and places pressure on interest rates. * To increase interest rates the fed will sell government securities, effectively reducing the money supply. * To decrease interest rates the fed will buy government securities, effectively increasing the money supply.

Answer 12

_4. Excess Reserves (Fourth Tool)._ * Excess reserves are monies that a bank holds at the Federal Reserve (or central bank) in excess of the required reserve amount. * An increase in the excess reserves rate will cause more banks to hold excess reserves, which takes money out of the economy - this is contractionary. * A decrease in the excess reserves rate will cause fewer banks to hold excess reserves, which means they will have more money to lend into the economy - this is expansionary.

Answer 13

* Each depositor has a total of $250,000 of insurance per type of account ownership. * Four types of ownership: * Individual accounts. * Joint accounts. * Trust accounts. * Self-directed retirement accounts. * Accounts at separate banks each receive $250,000 of insurance. * Each person is deemed to own 50% of joint accounts.

Answer 14

* Below are examples of debts that are not discharged through Chapter 7: * Student loans * 3 years of back taxes * Alimony * Child support * Traditional and Roth IRA’s are assets that are exempt, up to $1 million (as indexed), from creditors. * Clearly identified rollover IRA’s have an unlimited exemption if not combined with other IRA money or contributions.

Answer 15

**TIP: Is there “RECourse?”** Yes, **R**educed paid-up, **E**xtended term, **C**ash value. * **Cash** Surrender Value * Insured receives the accumulated cash value when terminating the life insurance policy. The cash surrender value is the cash value less surrender charges. * **Reduced Paid-up** Insurance * Insured receives the cash value in the form of a paid-up policy with a smaller face amount. * **Extended Term** Insurance * The insured receives the cash value in the form of a paid-up term policy for a specified duration, with the same face amount as the original policy.

Answer 16

**TIP: “CRAP-O” C**ash, **R**educe premiums, **A**ccumulate at interest, **P**aid-up additions, **O**ne-year term. 1. Cash – clients receive the money and can use it or invest it as they wish. 2. Accumulate at Interest – the company invests the dividends and they are tax-free up to the client’s basis in the policy. Interest paid on the dividends is taxable. 3. Reduce Premiums – decreases the out of pocket expense for premiums. 4. Paid-up Additions – purchases additional insurance each year for insured regardless of health or occupation. 5. One-year Term – adds term insurance each year to the policy face amount equal to cash value of the policy. Also known as the 5th dividend option on the CFP® Exam!

Answer 17

**It is irrevocable.** A [_testamentary trust_](https://www.investopedia.com/terms/t/testamentarytrust.asp) (or will trust) is created when an individual dies and the trust is detailed in their last will and testament. Because the establishment of a testamentary trust does not happen **until death**, it is by nature **irrevocable once death occurs.**

Answer 18

**Solution:** The correct answer is B. The amount carried divided by the amount required (80% of current value) times the loss, minus the deductible equals the payment. One of the tricks on this one is that he purchased $80,000 of coverage initially (80% of the purchase price). So, the covered loss equals [$80,000 / (.80 × $160,000)] × $10,000 = $6,250. The insurer will pay $6,250 - $500 = $5,750.

Answer 19

**Solution:** The correct answer is B. (Face value ÷ coinsurance) × Loss - Deductible (insurance I have ÷ insurance I should have) x Loss - Deductible He has $400,000 of insurance. He should have 80% of 800,000 or 640,000. [400,000 ÷ (.80 × 800,000)] × 600,000 - 2,000 [(400,000 ÷ 640,000) × 600,000] - 2,000 (.6250 × 600,000) - 2,000 375,000 - 2,000 373,000 is what the insurance company will pay towards this loss.

Answer 20

Coverage A: **_A_**_ttached Structures_ Coverage B: _the space_ **_B_**_etween_ (covers detached garages) Coverage C: _covers my_ **_C_**_rap_ Coverage D: **_D_**_amage so bad I cannot live here_ (pays for housing elsewhere during repairs) Coverage E: **_EEEkkk_** _I am in trouble (liability) Liabiliteeeeeeee_ Coverage F: _someone_ **_F_**_ell and I owe them medical payments_. OR “**_F_**_eel better_” coverage

Answer 21

* list of assets and liabilities * dollar values * ownership information * contractual agreements

Answer 22

Form ADV - Must be filed annually Form ADV W - Used for withdrawal _Part 1A + B (for RIA)_ **_Part 2A + B (client brochure)_ - firm and advisor information - compensation and fees - education - investment objectives & strategies - conflicts of interest (proprietary funds)** _Part 3 (relationship summary / CRS)_

Answer 23

Written disclosure to every client including: * Advisory services/fees * Types of securities * Educaiton and business standards * Participation/interest in securities transactions * Conditions for managing accounts _This information must be given to the client at or before the time of entering into the contract_ _COMPLIANCE WITH THE BROCHURE RULE_ IS ACCOMPLISHED BY PROVIDING THE CLIENT WITH _ADV 2 (outlines fees)_ AN _RIA MIGHT REQUIRE CRS/ADV 3_ (CRS - Client Relationship Summary)