General Flashcards
Who issues new issues to the public
New issues are issued by SEC
What are the two financial markets
Money Market and Capital Markets
Money Markets
concentrate on short-term debt instruments
Secondary markets
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)
Primary Market
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.
Sec Act of 1933
registration of initial public offerings
Glass Steagall Act of 1933
prohibition of financial institution consolidation and offering any combination of traditional commercial banking, investment banking and insurance
Chapter 7 Bankruptcy - Primary purpose, who can file and eligibility requirements
Liquidation
Individuals and businesses
Income must be below a certain amount
Chpt 7 Bankruptcy - what must be repaid
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.
Chapter 7 Bankruptcy - Unsecured debt, secure debt and impact to foreclosures
Unsecured Debt - Can be eliminated
Secure debt - nonexempt assets are sold to pay off secured debt
CANNOT stop foreclosure (but can delay it)
Chapt 7 Bankrupcy - timeline
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
Chapter 13 Bankruptcy - Primary purpose, who can file and eligibility requirements
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.
Chapter 13 Bankruptcy - Unsecured debt, secure debt and impact to foreclosures
Unsecured Debt - paid back over time through repayment plan
Secure Debt - paid back over time through the repayment plan
CAN Stop foreclosures
Chapt 13 Bankrupcy - timeline
takes 3-5 years
stays on credit report for 7 years
Chapter 11
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
Chapter 11 - Debt and foreclosures
Unsecured debt - reorganized and paid back over time
secure debt - restructured and paid back over time
CAN stop forclosures
Chapter 11 - timeline
takes 6 months - 2 years
stays on credit report for 10 yrs
Right to know costs and terms of credit
Consumer credit protection act
Right to fair opportunity to obtain credit
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
Right to know what’s in your credit file
fair credit reporting act
If you are denied credit, the Fair Credit Reporting Act entitles you to a fair and accurate credit report.
right to have billing mistakes resolved
fair credit billing act
right to be protected from collection agencies
Fair debt collection practices act
lenders to disclose the true cost of consumer credit, explaining all charges, terms and conditions involved.
Truth in Lending Act, 1968
Current Ratio
current asset / current liabilities
You want your current ratio to increase. It means your current assets are increasing and your current liabilities are decreasing
Values on Personal Balance Sheet
items on personal balance sheet are listed at FMV
What is an Asset and that are the 3 types?
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.
Are mortage refinance proceeds considered income?
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.
What are Investment Assets?
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.
Quick Ratio
It’s a liquidity ratio
current assets - inventories
______________________________
current liabilites
Current Ratio
Current Assets
_________________
Current Liabilities
Debt Ratio
Total Assets
Working Capital
Current Assets - Current Liabilities
Gross Profit Margin
Sales
Debt to Equity
Equity
Times Interest Earned
EBIT / Interest Expense
Times Interest Earned
EBIT / Interest Expense
Front End Ratio
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
Restrictive/Contractionary (Tight) monetary policy
Slows pace of growth.
Increases the discount rate which increases the cost of borrowing.
Increases reserve requirements.
Sells securities to the market.
Accommodative/Expansionary (Easy) monetary policy
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.
Monetary Policy
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)
Fiscal policy
Congress controls FisCal Policy
Refers to the taxation, expenditures, and debt management by Congress
FDIC
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
Credit score
tells lenders about a person’s creditworthiness (i.e., how likely they are to pay back a loan based on credit history)
FICO® Score Categories
Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
New credit (10%)
Credit mix (10%)
Amounts owned accounts for what % of an individual’s credit score?
30%
Credit utilization = amount credit used from amount of credit available. The more credit it utilized the more overall credit score will be lowered
How many years will it take for anything falls of the credit report?
7 Years
FICO Score - Poor Rating
< 580
Well below Avg.
Demonstrates to lenders that you are a risky borrower
FICO Score - Fair
580-699
Below Avg.
Many lenders will approve loans
FICO Score - Good
670 - 739
Near or slightly above avg.
Most lenders consider this a good score
FICO Score - Very Good
740 - 799
Above Avg.
Demonstrates to lenders you’re very dependable borrower
FICO Score - Exceptional
800+
well above avg.
exceptional borrower
Fixed Rate vs. Variable Rates for Mortgages
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
Mortgage Origination Points
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
What is PMI and when is it required?
PMI = Private Mortgage Interest
Required if down payment is less than 20% of the value of the home
Mortgage/debt $ amount for Jumbo loan
Mortgage below $766,500 = Conventional loan
Mortgage above $766,500 = jumbo loan
Balloon Mortage
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
Gov. Mortgage Programs
Federal Housing Administration
Veterans Administration
United States Department of Agriculture
Back-end Ratio
Total Debt Ratio or Debt Repayment Ratio
Formula = (PITI + Monthly Consumer Debt) ÷ Monthly Household Gross Income
PASS = ≤ 36%
Consumer Debt Ratio
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
20% 28% 36%
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
What is price inelasticity ?
When prices change significantly, the demand does not react/fluctuate significantly
Law of Demand
as the price increases, the demanded will decrease and vice-versa
GDP Formula
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
GDP
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
ST and LT under normal economic conditions
Under normal economic conditions, SHORT-TERM rates are LOWER than LONG-TERM rates
Coverdell ESA
A savings account is set up to pay the qualified education expenses of a designated beneficiary.
Who can have a Coverdell ESA?
Any beneficiary who is under age 18 or is a special needs beneficiary.
Who can contribute to a Coverdell ESA?
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).
Are distributions tax-free?
Yes, if the distributions are not more than the beneficiary’s adjusted qualified education expenses for the year.
Coverdell Education Savings Account (CESA) max funding
$2000 per beneficiary, per year combined from all sources
529 funding for Tuition cost for K-12
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)
Who can contribute to a UGMA/UTMA account?
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.
Standard Deduction (Dependents)
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)
What is a Series EE/Series I bond?
Special savings bonds through which an exclusion from taxation on interest is available when used for qualifying educational expenses.
Who can purchase and own a Series EE/Series I bond?
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).
Are Series EE/I bond distributions tax-free?
When used for qualifying educational expenses and the owner’s MAGI is below certain limits, interest from bonds is tax-free.
Kiddie Tax Treatment
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)
EFC
Expected Family Contribution
is the amount of money your family will be expected to contribute to your education
Withdrawal from Traditional IRA for qualified educational expenses
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)
Pell Grant - Eligibility
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.
Pell Grant - Eligible Schools
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.
Distributions from following accounts ARE considered INCOME for financial aid
Distributions from student-owned Coverdell ESA account are counted as income.
Roth IRA distributions are considered income on the FAFSA, as well.
Withdrawals from which accounts are NOT added back as income on student’s financial aid application?
Withdrawals from
parent-owned or dependent student-owned 529 plans
parent-owned or third-party owned Coverdell ESAs
529 ABLE
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
529 ABLE - Qualified disability expenses
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.
529 ABLE - Contributions
ARE NOT TAX DEDUCTIBLE (are limited to the annual gift tax exclusion amount ($18,000 for 2024)
MUST BE IN cash or cash equivalents.
529 ABLE - Earnings
Earnings in an ABLE account are not taxed unless a distribution exceeds a designated beneficiary’s qualified disability expenses.
529 ABLE - Rollover from 529 ACs
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.
529 ABLE - Exclusion from EFC
If the 529 ABLE Account is less than $100K, it is EXCLUDED from the EFC calculations
FAFSA
Free Application for Federal Student Aid
Used to determine eligibility for Federal Financial Aid
2-Year lookback for reported income.
Assets Counted Towards EFC
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
Financial Need Formula
Cost of Attendance (COA) – EFC = Financial Need
EFC Income
Parents = (AGI) minus an allowance for taxes + living expenses.
Students = Amount over ‘protected amount’ ($9,410 for 2024-25 academic year).
EFC Formula
Expected Family Contribution = Income + Asset
Parent Income = 22% - 47%
Student Income = 50% (above $9410)
Parent Assets = 5.64%
Student Assets = 20%
Financial aid availability and the EFC Relationship
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.
Assets NOT counted towards the EFC
Retirement assets and home equity
Accounts counted towards EFC
Accounts Held-by:
Parents or in dependent child’s name: Parent Assets
Independent students/spouses: Student Assets
Others (e.g., aunts or grandparents): Excluded
Student Income and Assets for EFC
Student Income = 50% (OVER $9410)
Student Assets = 20%
Parent Income and Assets for EFC
Parent Income = 22% - 47%
Parent Assets = 5.64%
When should the funds from college savings owned by relatives/others should be distributed?
“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.
Grants - need and repayment
Based on financial need
Don’t have to be repaid
Pell Grants
Awarded to undergraduate students who have exceptional financial need and who have not earned a bachelor’s, graduate, or professional degree.
FSEOG
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.
Scholarship - tax treatment
Generally, a scholarship is tax-free if you are a full- or part-time candidate for a degree at accredited post-secondary institutions.
Direct Subsidized Loans
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).
Direct Unsubsidized Loans
non-need-based;
undergrad, grad, & professional student
Students are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.
Direct PLUS Loan
non-need-based;
undergrad, grad, & professional student
Direct PLUS Loan - AKA
Parent PLUS loan when made to a parent
Grad PLUS loan when made to a graduate or professional student.
Direct PLUS Loan - Lender and Credit History
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)
Work-study Programs
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.
The Financial aid option that provides most advantageous interest rate and repayment terms
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
LLC
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
AOTC
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
529 and Scholoarships
You can take same amount from 529 as the awarded scholarship each year
