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CFP Prep - Nipa > General > Flashcards

General Flashcards

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1
Q

Who issues new issues to the public

A

New issues are issued by SEC

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2
Q

What are the two financial markets

A

Money Market and Capital Markets

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3
Q

Money Markets

A

concentrate on short-term debt instruments

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4
Q

Secondary markets

A

Secondary market is where previously issued securities trade among investors.

The key differentiator is that the issuing company is NOT directly involved.

Secondary markets and issues are regulated by the Securities Act of 1934.

Secondary markets take two forms:
Organized exchange (i.e., New York Stock Exchange)
Over the Counter (OTC) market (i.e., NASDAQ)

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5
Q

Primary Market

A

Primary market is where new securities are issued and sold to the public for the first time
Securities are registered with the SEC and sold to clients through the initial public offering (IPO) process.
Issuing firm is the recipient of proceeds.
Primary markets and issues are regulated by the Securities Act of 1933.

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6
Q

Sec Act of 1933

A

registration of initial public offerings

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7
Q

Glass Steagall Act of 1933

A

prohibition of financial institution consolidation and offering any combination of traditional commercial banking, investment banking and insurance

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8
Q

Chapter 7 Bankruptcy - Primary purpose, who can file and eligibility requirements

A

Liquidation

Individuals and businesses

Income must be below a certain amount

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9
Q

Chpt 7 Bankruptcy - what must be repaid

A

Most debts are discharged after 115 days from the date of filing for Chapter 7, but certain obligations must still be repaid:

child support,
alimony,
income taxes less than three years past due,
student loans, and
secured debt.

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10
Q

Chapter 7 Bankruptcy - Unsecured debt, secure debt and impact to foreclosures

A

Unsecured Debt - Can be eliminated

Secure debt - nonexempt assets are sold to pay off secured debt

CANNOT stop foreclosure (but can delay it)

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11
Q

Chapt 7 Bankrupcy - timeline

A

takes 4-6 months

Most debts are discharged after 115 days from the date of filing for Chapter 7

stays on credit report for 10 yrs

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12
Q

Chapter 13 Bankruptcy - Primary purpose, who can file and eligibility requirements

A

Repayment in full over a period of time - a debtor will pay more every month to make payments on their overdue debt along with their current monthly payments.

individuals

debt must be below a certain amount - $419,275 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,257,850 in secured debts, which includes mortgages and car loans.

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13
Q

Chapter 13 Bankruptcy - Unsecured debt, secure debt and impact to foreclosures

A

Unsecured Debt - paid back over time through repayment plan

Secure Debt - paid back over time through the repayment plan

CAN Stop foreclosures

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14
Q

Chapt 13 Bankrupcy - timeline

A

takes 3-5 years

stays on credit report for 7 years

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15
Q

Chapter 11

A

Purpose: Reorganization

business but also accommodates those who exceed Chapter 13 debt limitations or lack regular income.

No minimum or max debt or income requirements

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16
Q

Chapter 11 - Debt and foreclosures

A

Unsecured debt - reorganized and paid back over time

secure debt - restructured and paid back over time

CAN stop forclosures

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17
Q

Chapter 11 - timeline

A

takes 6 months - 2 years

stays on credit report for 10 yrs

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18
Q

Right to know costs and terms of credit

A

Consumer credit protection act

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19
Q

Right to fair opportunity to obtain credit

A

Equal Credit Opportunity Act

Borrower must receive response from creditor in 30 says with approval or denial; if denied, creditor must give reason or explain your right to an explanation

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20
Q

Right to know what’s in your credit file

A

fair credit reporting act

If you are denied credit, the Fair Credit Reporting Act entitles you to a fair and accurate credit report.

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21
Q

right to have billing mistakes resolved

A

fair credit billing act

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22
Q

right to be protected from collection agencies

A

Fair debt collection practices act

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23
Q

lenders to disclose the true cost of consumer credit, explaining all charges, terms and conditions involved.

A

Truth in Lending Act, 1968

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24
Q

Current Ratio

A

current asset / current liabilities

You want your current ratio to increase. It means your current assets are increasing and your current liabilities are decreasing

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25
Q

Values on Personal Balance Sheet

A

items on personal balance sheet are listed at FMV

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26
Q

What is an Asset and that are the 3 types?

A

An asset is anything owned by a business or an individual that has market value.

There are three main types of assets:

Cash and Cash Equivalents.
Investment Assets.
Personal Use Assets.

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27
Q

Are mortage refinance proceeds considered income?

A

When you refinance you are essentially taking out a new loan and using the proceeds of that loan to pay off the existing loan. Loan proceeds received are not considered income.

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28
Q

What are Investment Assets?

A

Investment assets are usually purchased for the purpose of providing income or growth over time.

Investment assets include common stocks, bonds, mutual funds, exchange traded funds, cash value of life insurance, and deferred annuities.

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29
Q

Quick Ratio

A

It’s a liquidity ratio

current assets - inventories
______________________________
current liabilites

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30
Q

Current Ratio

A

Current Assets
_________________
Current Liabilities

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31
Q

Debt Ratio

A

Total Assets

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32
Q

Working Capital

A

Current Assets - Current Liabilities

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33
Q

Gross Profit Margin

A

Sales

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34
Q

Debt to Equity

A

Equity

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35
Q

Times Interest Earned

A

EBIT / Interest Expense

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36
Q

Times Interest Earned

A

EBIT / Interest Expense

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37
Q

Front End Ratio

A

aka Mortgage Debt Service Ratio or Housing Cost Ratio

For mortgage approvals

(Principle + Interest + Taxes + Insurance) / Gross Income

(Principle + Interest + Taxes + Insurance) = PITI
Pass <= 28% is good
If Greater than 28%, bad

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38
Q

Restrictive/Contractionary (Tight) monetary policy

A

Slows pace of growth.
Increases the discount rate which increases the cost of borrowing.
Increases reserve requirements.
Sells securities to the market.

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39
Q

Accommodative/Expansionary (Easy) monetary policy

A

Increases pace of growth.
Decreases the discount rate which lowers the cost of borrowing.
Decreases the reserve requirements, increasing the amount available to be lent out.
Buys securities from the market which puts money back into circulation.

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40
Q

Monetary Policy

A

Fed Controls Money = Controlled by the Federal Reserve Bank (the Fed)

Controls the money supply (Buy/Sell Treasure Securities),
influences lending rates (Discount Rates),
may slow down or stimulate the economy (controlling reserve reqs)

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41
Q

Fiscal policy

A

Congress controls FisCal Policy
Refers to the taxation, expenditures, and debt management by Congress

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42
Q

FDIC

A

Per Institution, Per Ownership Type AND Per person

First split by institution, then split/bucket by ownership type and than bucket by per person

Split the joint A/C Amount

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43
Q

Credit score

A

tells lenders about a person’s creditworthiness (i.e., how likely they are to pay back a loan based on credit history)

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44
Q

FICO® Score Categories

A

Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
New credit (10%)
Credit mix (10%)

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45
Q

Amounts owned accounts for what % of an individual’s credit score?

A

30%

Credit utilization = amount credit used from amount of credit available. The more credit it utilized the more overall credit score will be lowered

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46
Q

How many years will it take for anything falls of the credit report?

A

7 Years

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47
Q

FICO Score - Poor Rating

A

< 580

Well below Avg.
Demonstrates to lenders that you are a risky borrower

48
Q

FICO Score - Fair

A

580-699

Below Avg.
Many lenders will approve loans

49
Q

FICO Score - Good

A

670 - 739

Near or slightly above avg.
Most lenders consider this a good score

50
Q

FICO Score - Very Good

A

740 - 799

Above Avg.
Demonstrates to lenders you’re very dependable borrower

51
Q

FICO Score - Exceptional

A

800+

well above avg.
exceptional borrower

52
Q

Fixed Rate vs. Variable Rates for Mortgages

A

Fixed if interest rates are low and/or keeping the home for a long time

Variable if interest rates are high and/or not keeping the home for long

53
Q

Mortgage Origination Points

A

borrower can pay origination points to lower their rate or improve terms otherwise

points are % of the amount borrowed and can be added to the mortgage

54
Q

What is PMI and when is it required?

A

PMI = Private Mortgage Interest

Required if down payment is less than 20% of the value of the home

55
Q

Mortgage/debt $ amount for Jumbo loan

A

Mortgage below $766,500 = Conventional loan

Mortgage above $766,500 = jumbo loan

56
Q

Balloon Mortage

A

mortgage in which a initial payments are lower and payments get larger as the time goes on.

best if for shot-term/temporary housing scenarios

large portion of the borrowed principal is repaid in a single payment at the end of the loan period

57
Q

Gov. Mortgage Programs

A

Federal Housing Administration

Veterans Administration

United States Department of Agriculture

58
Q

Back-end Ratio

A

Total Debt Ratio or Debt Repayment Ratio

Formula = (PITI + Monthly Consumer Debt) ÷ Monthly Household Gross Income

PASS = ≤ 36%

59
Q

Consumer Debt Ratio

A

Formula = Monthly Consumer Debt (Non-Housing) ÷ Monthly Net Household Income

PASS = ≤ 20%

Note: Consumer Debts (non-housing) include:
Auto loans
Student Loans
Credit Cards
Unsecured Debts

60
Q

20% 28% 36%

A

20% = Consumer Debt Ratio pass rate

28% = House Cost Ration /Front End Ratio pass rate

36% = Total Debt Ratio or Debt Repayment Ratio (Back-end ratio) pass rate

61
Q

What is price inelasticity ?

A

When prices change significantly, the demand does not react/fluctuate significantly

62
Q

Law of Demand

A

as the price increases, the demanded will decrease and vice-versa

63
Q

GDP Formula

A

GDP (Y) = C + I + G + (X – M)

C is consumer spending
I is investment made by industry (indisutrial investments)
G is government spending
X-M is excess of exports over imports (you may see this listed as ‘NE’ for Net Exports)

The GDP formula would be listed as C + I + G + NE

64
Q

GDP

A

measures the total market value of a country’s income and output of goods and services produced by all the people (labor), property and companies in the U.S

65
Q

ST and LT under normal economic conditions

A

Under normal economic conditions, SHORT-TERM rates are LOWER than LONG-TERM rates

66
Q

Coverdell ESA

A

A savings account is set up to pay the qualified education expenses of a designated beneficiary.

67
Q

Who can have a Coverdell ESA?

A

Any beneficiary who is under age 18 or is a special needs beneficiary.

68
Q

Who can contribute to a Coverdell ESA?

A

Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return).

69
Q

Are distributions tax-free?

A

Yes, if the distributions are not more than the beneficiary’s adjusted qualified education expenses for the year.

70
Q

Coverdell Education Savings Account (CESA) max funding

A

$2000 per beneficiary, per year combined from all sources

71
Q

529 funding for Tuition cost for K-12

A

529 account funds can be used for up to $10,000 of annual tuition costs associated with K-12 education

The remainder of expenses must be covered from other funding sources (i.e., CESAs, savings accounts, scholarships, grants, loans)

72
Q

Who can contribute to a UGMA/UTMA account?

A

Anyone can contribute to a UGMA or UTMA. They are taxable investment accounts with no contribution limits.

Kiddie tax rules may apply to unearned income generated by the investments.

73
Q

Standard Deduction (Dependents)

A

The standard deduction for an individual who can be claimed as a dependent on another person’s tax return is generally limited to the LARGER of:

$1,300, or
The individual’s earned income plus $450, but not more than the regular standard deduction for filing Single (generally $14,600 in 2024)

74
Q

What is a Series EE/Series I bond?

A

Special savings bonds through which an exclusion from taxation on interest is available when used for qualifying educational expenses.

75
Q

Who can purchase and own a Series EE/Series I bond?

A

The purchaser/owner must be at least 24 years old before the bond’s issue date.

The bond must be issued either in one parent’s name (as the sole owner) OR

in the name of both parent and spouse (as co-owners).

76
Q

Are Series EE/I bond distributions tax-free?

A

When used for qualifying educational expenses and the owner’s MAGI is below certain limits, interest from bonds is tax-free.

77
Q

Kiddie Tax Treatment

A

Gross Income = Earned Income + Unearned Income

Total Tax Due =
((unearned income - 1300) x 0.10) + ((unearned Income - 2600) x parent’s margin tax rate) + (Gross Income - SD for Dependents x child’s tax rate of 0.10)

78
Q

EFC

A

Expected Family Contribution

is the amount of money your family will be expected to contribute to your education

79
Q

Withdrawal from Traditional IRA for qualified educational expenses

A

If funds withdrawn before 59 1/2 for qualified educational expenses - taxed ordinary income, no 10% penalty;

If funds withdrawn after 59 1/2, tax free (no penalty)

80
Q
A
81
Q

Pell Grant - Eligibility

A

A Pell Grant is awarded to undergraduate students who have exceptional financial need and who have not earned a bachelor’s, graduate, or professional degree.

82
Q

Pell Grant - Eligible Schools

A

Schools have to participate in the program to provide the grant; each school participating in the program receives enough funds each year from the U.S. Department of Education to pay the Federal Pell Grant amounts for all its eligible students.

83
Q

Distributions from following accounts ARE considered INCOME for financial aid

A

Distributions from student-owned Coverdell ESA account are counted as income.

Roth IRA distributions are considered income on the FAFSA, as well.

84
Q

Withdrawals from which accounts are NOT added back as income on student’s financial aid application?

A

Withdrawals from

parent-owned or dependent student-owned 529 plans
parent-owned or third-party owned Coverdell ESAs

85
Q

529 ABLE

A

a tax-favored savings account that can accept contributions for an eligible individual with a disability or who is blind (blindness or disability occurred before age 26)

The disabled person must be the designated beneficiary and owner of the account.

ONLY ONE 529 ABLE Account per disable bene

86
Q

529 ABLE - Qualified disability expenses

A

include any expenses incurred at a time when the designated beneficiary is an eligible individual.

The expenses must relate to blindness or disability, including expenses for maintaining or improving health, independence, or quality of life.

87
Q

529 ABLE - Contributions

A

ARE NOT TAX DEDUCTIBLE (are limited to the annual gift tax exclusion amount ($18,000 for 2024)

MUST BE IN cash or cash equivalents.

88
Q

529 ABLE - Earnings

A

Earnings in an ABLE account are not taxed unless a distribution exceeds a designated beneficiary’s qualified disability expenses.

89
Q

529 ABLE - Rollover from 529 ACs

A

Rollovers may be made without penalty from a Section 529 tuition account to a Section 529A ABLE account if the beneficiary of the ABLE account is the designated beneficiary of the tuition account or is an eligible family member.

90
Q

529 ABLE - Exclusion from EFC

A

If the 529 ABLE Account is less than $100K, it is EXCLUDED from the EFC calculations

91
Q

FAFSA

A

Free Application for Federal Student Aid

Used to determine eligibility for Federal Financial Aid
2-Year lookback for reported income.

92
Q

Assets Counted Towards EFC

A

Cash, savings, checking accounts, money market funds, and CDs

Investments (e.g., mutual funds, stocks, stock options, bonds, commodities)

Rental real estate equity, businesses, investment farms, and trust funds

College savings plans, CESAs and 529s

93
Q

Financial Need Formula

A

Cost of Attendance (COA) – EFC = Financial Need

94
Q

EFC Income

A

Parents = (AGI) minus an allowance for taxes + living expenses.

Students = Amount over ‘protected amount’ ($9,410 for 2024-25 academic year).

95
Q

EFC Formula

A

Expected Family Contribution = Income + Asset

Parent Income = 22% - 47%
Student Income = 50% (above $9410)

Parent Assets = 5.64%
Student Assets = 20%

96
Q

Financial aid availability and the EFC Relationship

A

have an inverse relationship.

With a higher EFC, there is less financial aid awarded.

With a lower EFC, there is more financial aid awarded.

As the EFC increases, the available Financial Aid award decreases.

97
Q

Assets NOT counted towards the EFC

A

Retirement assets and home equity

98
Q

Accounts counted towards EFC

A

Accounts Held-by:
Parents or in dependent child’s name: Parent Assets

Independent students/spouses: Student Assets

Others (e.g., aunts or grandparents): Excluded

99
Q

Student Income and Assets for EFC

A

Student Income = 50% (OVER $9410)
Student Assets = 20%

100
Q

Parent Income and Assets for EFC

A

Parent Income = 22% - 47%
Parent Assets = 5.64%

101
Q

When should the funds from college savings owned by relatives/others should be distributed?

A

“If others will contribute more… wait until years 3 & 4.”

Distributions from accounts owned by relatives and others in Years 3 and 4 maximize the potential for Financial Aid.

This is due to the two-year lookback on the FAFSA form for income.

By waiting until Years 3 and 4 of the child’s college enrollment, the family will not have the distributions factored into their Financial Aid.

102
Q

Grants - need and repayment

A

Based on financial need

Don’t have to be repaid

103
Q

Pell Grants

A

Awarded to undergraduate students who have exceptional financial need and who have not earned a bachelor’s, graduate, or professional degree.

104
Q

FSEOG

A

Federal Supplemental Educational Opportunity Grant

A FSEOG is for undergraduates with exceptional financial needs (i.e., students with the lowest EFCs) and gives priority to students who receive Federal Pell Grants.

An FSEOG does not have to be paid back.

105
Q

Scholarship - tax treatment

A

Generally, a scholarship is tax-free if you are a full- or part-time candidate for a degree at accredited post-secondary institutions.

106
Q

Direct Subsidized Loans

A

Federal loans; need-based; undergrad ONLY

have slightly better terms to help students with financial needs.

The U.S. Department of Education pays the interest on a Direct Subsidized Loan
while you’re in school at least half-time
for the first six months after you leave school (referred to as a grace period) during a period of deferment (a postponement of loan payments).

107
Q

Direct Unsubsidized Loans

A

non-need-based;
undergrad, grad, & professional student

Students are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.

108
Q

Direct PLUS Loan

A

non-need-based;
undergrad, grad, & professional student

109
Q

Direct PLUS Loan - AKA

A

Parent PLUS loan when made to a parent

Grad PLUS loan when made to a graduate or professional student.

110
Q

Direct PLUS Loan - Lender and Credit History

A

The U.S. Department of Education is the lender.

Cannot have an adverse credit history.

The maximum PLUS loan: (cost of attendance - any other financial aid received)

111
Q

Work-study Programs

A

Work-study is funded by federal, state, and/or institutional allocations.

Employers must match the federal and state monies.

A school’s office of financial aid administers work-study programs.

112
Q

The Financial aid option that provides most advantageous interest rate and repayment terms

A

Direct Subsidized Loan as the interest is paid for by the U.S. Department of Education while the undergraduate student is attending college at least half-time

113
Q

LLC

A

NON-REFUNDABLE - NO MONEY BACK
LIFE time learning credit - 20% of qualified expenses upto $2K per TAX RETURN

ROOM & BOARD does NOT count as qualified expenses

You may have multiple people qualifying for LLC, but can only take ONE deduction of $2K per tax year

114
Q

AOTC

A

PARTIALLY REFUNDABLE = If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.

MAX Credit: $2500 PER qualifying person

First $2K at 100%; Remaining at $25% of next $2K

ROOM & BOARD does NOT count as qualified expenses

115
Q

529 and Scholoarships

A

You can take same amount from 529 as the awarded scholarship each year

116
Q
A

CFP Prep - Nipa (10 decks)

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