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CFP Coursework > General Financial Planning - FP511 - Module 3 > Flashcards

General Financial Planning - FP511 - Module 3 Flashcards

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1
Q

A bank is an organization chartered by the federal or a state government to do any of the following:

A
  • accept deposits, and pay interest
  • make loans
  • invest customer funds in securities
  • honor instruments drawn on accts
  • issues cashier’s checks
  • provide safe deposit boxes
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2
Q

National banks are subject to regulation by:

A
  • Office of the Comptroller of the Currency
  • Federal Reserve Board
  • Federal Deposit Insurance Corporation
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3
Q

What is the function of the Office of the Comptroller of the Currency?

A

Charters, supervises, and regulates national banks and federal branches of foreign banks located in the US.

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4
Q

What is the function of the Federal Reserve Board?

A

Makes monetary policy

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5
Q

What is the function of the Federal Deposit Insurance Corporation?

A

Insures deposits in US banks and savings and loan associations against bank failures.

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6
Q

T/F: FDIC insurance only protects deposits that are payable in the US, but not overseas.

A

TRUE

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7
Q

What is the standard amount of FDIC coverage per depositor?

A

$250,000

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8
Q

What are the common ownership categories for FDIC coverage?

A
  • individual
  • joint
  • retirement
  • RLT
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9
Q

Define: Investment Bank

A

Securities broker-dealer that underwrites new issues.

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10
Q

Define: Brokerage Company

A

An intermediary that facilitates transactions involving sales of investments or real estate.

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11
Q

Brokers charge _____________.
Dealers charge _____________.

A
  • commission
  • markups
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12
Q

What is the job of a broker?

A

To arrange trades between buyers and sellers

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13
Q

What is the job of a dealer?

A

To buy and sell securities for their own account

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14
Q

What is the primary function of an insurance company?

A

To furnish insurance protection to businesses and consumers

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15
Q

Who regulates insurance companies?

A

Each state has its own department of insurance

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16
Q

What is the primary function of a mutual fund company?

A

To pool money from shareholders and invest the funds in various types of securities

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17
Q

What is the primary function of a savings and loan association?

A

Accept savings and provide home loans

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18
Q

T/F: Savings and loan associations are not permitted to provide demand deposit accounts.

A

TRUE
However, they can offer NOW (negotiable order of withdrawal) accounts.

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19
Q

What is the primary function of a trust company?

A

to manage estates and serve as the trustee for various types of trusts

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20
Q

Trust companies are typically owned by:

A
  • independent partnership
  • a bank
  • a law firm
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21
Q

A financial institution that allocates earnings from loan interest and investments to its members in the form of dividends is

A

a credit union.

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22
Q

What is the most significant disadvantage of using credit cards?

A

The high interest rates

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23
Q

When should credit cards be used?

A

If other more reasonable forms or borrowing are not available

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24
Q

Why should clients aim to use available savings or other funds to purchase a vehicle rather than finance the purchase?

A

because vehicles depreciate quickly

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25
Q

What are the advantages of borrowing from a 401(k)?

A
  • ease of borrowing
  • lower interest rates
  • simplicity of repayment
  • no effect on credit rating
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26
Q

What are the disadvantages of borrowing from a 401(k)?

A
  • no growth on borrowed amount
  • adverse tax treatment
  • possible adverse effect on retirement savings
  • tax issues at separation of service
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27
Q

Define: Secured Loan

A

A loan for which the creditor maintains a security interest in property, which serves as collateral for the debt.

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28
Q

Define: Unsecured Loan

A

A loan for which the clint merely promises to repay the debt in exchange for borrowed funds.

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29
Q

Define: Fixed Rate Loan

A

A loan with an interest rate that remains constat until paid in full.

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30
Q

Define: Variable Rate Loan

A

The interest adjusts at various intervals throughout the loan term.

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31
Q

Between fixed and variable loans, which one usually has the lower interest rate?

A

fixed

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32
Q

To qualify as a short-term loan, how long can the repayment term be?

A

Up to and including one year from the date of origination

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33
Q

What is the purpose of a bridge loan?

A

to provide short-term, temporary financing that is repaid in a lump sum with interest at the end of a term

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34
Q

What is the snowball technique for debt repayment?

A
  • smaller balances are paid off first
  • clients feel encouraged by their success and motivated to continue the process
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35
Q

What is the avalanche technique for debt repayment?

A
  • prioritize high-interest debt to save money
  • may take longer to get the first debt eliminated
  • works well for clients who feel successful when saving interest costs
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36
Q

What is the key to implementing any debt reduction technique?

A

developing a plan the client can commit to

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37
Q

What are the 5 credit score categories?

A

1- payment history
2- amounts owed
3- length of credit history
4- new credit
5- credit mix

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38
Q

How much weight is given to length of credit history?

A

15%

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39
Q

How much weight is given to new credit?

A

10%

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40
Q

How much weight is given to credit mix?

A

10%

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41
Q

How much weight is given to amounts owed?

A

30%

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42
Q

How much weight is given to payment history?

A

35%

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43
Q

Why is payment history given the most weight?

A

because lenders’ main concern is how individuals make payments

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44
Q

Why is amounts owed given 2nd highest weight?

A

It can indicate if an individual is close to being overextended

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45
Q

T/F: The longer the credit history, the better the score.

A

TRUE

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46
Q

T/F: It is generally better to have a mix of different types of credit accounts.

A

TRUE

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47
Q

The person or business that owns the asset and leases it to another is called the

A

lessor

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48
Q

The person who leases, or rents, an asset is called the

A

lessee

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49
Q

How are lease payments determined?

A

the amortized cost of the initial price of the asset minus the residual value expected at the end of the lease

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50
Q

A _____________ lease is one in which the lessee agrees to pay a stated monthly amount for a specified period of time, and can walk away from the asset at the end.

A

closed-end

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51
Q

At the end of a _____________ lease, the lessee may owe an additional amount of money.

A

open-end lease

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52
Q

T/F: A closed-end lease typically has a lower payment than an open-end lease.

A

FALSE

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53
Q

Regarding buying or leasing a home, what economic factors should be considered?

A
  • price of homes in the area and available interest rates
  • length of time expected to stay in the home
  • extent to which home prices are expected to increase or decrease while client expects to own the home
  • potential tax benefits
54
Q

T/F: Generally, the lower the client’s marginal income tax bracket, the greater the advantage to owning a home.

A

FALSE
higher tax bracket = more advantageous

55
Q

T/F: Principal and interest payments on an auto lease may be tax deductible if the auto is used for business purposes.

A

TRUE

56
Q

Why do most financial planners agree that using debt to purchase a home is a good choice?

A

Because in most markets, it is less expensive to own than to rent

57
Q

Why should careful analysis be done to determine the right amount to spend for a house?

A

Because a lender will often approve a much higher mortgage than would be prudent.

58
Q

What is a point equal to for mortgage loans?

A

1% of the amount borrowed

59
Q

Are points paid generally tax deductible?

A

yes

60
Q

Mortgages made to borrowers with good credit are referred to as

A

prime loans

61
Q

Mortgages made to borrowers of lower credit quality, or that have a lower-priority claim to collateral, are called

A

subprime loans

62
Q

What should be taken into consideration when discussing refinancing a mortgage?

A
  • interest rate
  • loan term
  • additional fees and costs
  • cash-out options
63
Q

T/F: With a HELOC the borrower receives a lump sum amount.

A

FALSE
This is true of a home equity loan. The HELCO gives an open line of credit to borrow from as needed.

64
Q

What standard calculation is used to determine the payback period for refinancing a home loan?

A

divide the total closing costs by the monthly savings

65
Q

What is a common refinancing pitfall?

A

To continually refinance to a 30 year term

66
Q

_____________ are a special type of home loan that allows senior citizens with limited income to stay in their homes.

A

Reverse mortgages

67
Q

What age must a borrower be to qualify for a reverse mortgage?

A

62+

68
Q

T/F: Reverse mortgages are nonrecourse loans.

A

TRUE

69
Q

When might someone be interested in a graduated payment mortgage?

A

they anticipate increases in income with some certainty

69
Q

What expenses are homeowners responsible for when they have a reverse mortgage?

A
  • homeowners and flood insurance
  • property taxes
  • HOA dues
  • property maintenance
  • utilities
70
Q

T/F: Clients should be very cautions when considering a graduated payment mortgage.

A

TRUE

71
Q

When might a balloon mortgage be appropriate?

A

when borrowers plan to sell their home before the fixed payment period is over

72
Q

With a _____________, the borrower makes fixed payments based upon an established interest rate for a short period of time, then the remainder of the mortgage is due in full.

A

balloon mortgage

73
Q

T/F: Interest only mortgages should be executed only by risk averse borrowers.

A

FALSE
risk aggressive

74
Q

Why are FHA loans appealing?

A
  • lower down payments
  • lower interest rates possible
  • available for individuals that may not qualify based on traditional U/W standards
75
Q

PMI is typically required for borrowers putting down less than

A

20%

76
Q

What are the benefits of a VA loan?

A
  • 100% financing available
  • no PMI
77
Q

Income, expenses, and spending patterns can be monitored and evaluated through the use of a

A

budget.

78
Q

A budget should be prepared using

A

actual historic information

79
Q

How is success of a budget measured?

A

By adding all of the pluses and minuses in each category and finding the outcome is near the budget projection

80
Q

What are the 7 steps in establishing a budget.

A

1- identify goals
2- estimate income
3- estimate expenses
4- compare income vs expenses
5- look for ways to reduce expenses or increase income
6- present each category of expense and income as a percentage of the total
7- review each month

81
Q

How many months of expenses should be set aside in an emergency fund for a single wage earner that has a second source of sizeable income?

A

3 months

82
Q

How many months of expenses should be set aside in an emergency fund for a married couple where both spouses are gainfully employed.

A

3 months

83
Q

How many months of expenses should be set aside in an emergency fund for a married couple where only one spouse is gainfully employed but a second source of considerable income is available?

A

3 months

84
Q

How many months of expenses should be set aside in an emergency fund for a single wage earner.

A

6 months

85
Q

How many months of expenses should be set aside in an emergency fund for a married couple when only one spouse is gainfully employed?

A

6 months

86
Q

List examples of liquid assets

A
  • checking accounts
  • savings accounts
  • money market accounts
  • MM mutual funds
  • CDs <90 days to maturity
86
Q

A client’s emergency fund should typically be kept as what type of asset?

A

liquid

87
Q

T/F: Lines of credit should not be a substitute for available liquid assets in the event of a financial emergency.

A

TRUE

88
Q

What are some savings strategies you can share with clients?

A
  • be practical when using debit and credit cards
  • reduce credit card debt to save on financing charges
  • increase auto and home deductibles
  • explore cell data plans
  • forgo premium cable channels
89
Q

Why do planners use financial statements?

A

to identify existing or potential financial problems and opportunities

90
Q

A statement of financial position is also known as a

A

net worth statement

91
Q

What formula is used to calculate net worth?

A

net worth = assets - liabilities

92
Q

T/F: A statement of financial position is a profile of your client’s net worth on a specific date.

A

TRUE

93
Q

What are the 3 major asset categories?

A

1- cash and cash equivalents
2- invested assets
3- personal use assets

94
Q

What are some examples of cash and cash equivalent assets?

A
  • checking, savings, and money market accounts
  • CDs with a maturity <90 days
95
Q

What are some examples of invested assets?

A
  • stocks, bonds, and mutual funds
  • gems, gold and other precious metals
  • investment real estate
  • vested pensions
  • fine art and collectibles
96
Q

What are some examples of personal use assets?

A
  • primary residence
  • automobiles
  • furnishings
  • clothes and jewelry
97
Q

T/F: On the statement of financial position, assets are shown as fair market value.

A

TRUE

98
Q

Define: Fair Market Value

A

the price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller

99
Q

Footnote abbreviation S1

A

spouse 1

100
Q

Footnote abbreviation S2

A

spouse 2

101
Q

Footnote abbreviation JT

A

property that is held jointly with rights of survivorship

102
Q

Footnote abbreviation for CP

A

community property

103
Q

Define: Net worth

A

the difference between assets and liabilities

104
Q

What is the purpose of footnotes on a financial statement?

A

to clarify items in the statement or indicate values or circumstances not disclosed in the body of the statement

105
Q

T/F: The CFP board may refer to the statement of financial position as a personal balance sheet.

A

TRUE

106
Q

Does a cash flow statement serve as a snapshot of a specific day, or show a flow of receipts and disbursements?

A

flow of receipts and disbursements

107
Q

What does the inflows category of a cash flow statement consist of?

A
  • gross salaries
  • wages
  • interest and dividend income
  • rental income
  • tax refunds
  • any other amount received by the client
108
Q

What are fixed outflows on a cash flow statement?

A
  • loan payments
  • mortgage payments
  • insurance premiums
109
Q

What are variable outflows on a cash flow statement?

A
  • food
  • transportation
  • clothes
  • entertainment
110
Q

What should always head the list of outflows?

A

savings and investments

111
Q

What is the purpose of a pro forma cash flow statement?

A

to project the anticipated inflows and outflows for a future period

112
Q

What are pro forma cash flow projections based on?

A
  • established patterns
  • client’s goals
  • effects of implementing or not implementing a plan
113
Q

What is the formula for determining a client’s net-investment-assets-to-net-worth ratio?

A

net investment assets / net worth

114
Q

How is a net-investment-assets-to-net-worth ratio used?

A

to determine how well a client is moving towards their capital accumulation goals

115
Q

What percentage is expected of the net-investment-assets-to-net-worth ratio?

A

50% and increasing as a client reaches retirement

116
Q

What is the formula for calculating a client’s current ratio?

A

current assets / current liabilities

117
Q

T/F: A lower current ratio is preferable.

A

FALSE
a higher ratio is preferable
1 means they could pay off existing short term debt with existing short term assets

118
Q

What is the most commonly used debt management ratios?

A

consumer debt ratio

119
Q

How is a client’s consumer debt ratio calculated?

A

monthly consumer debt payments / monthly net income

120
Q

What percentage should a client’s consumer debt ratio not exceed?

A

20%

121
Q

How is a client’s housing cost ratio calculated?

A

monthly housing costs / monthly gross income

122
Q

What percentage should a client’s housing cost ratio not exceed?

A

28%

123
Q

T/F: The housing cost ratio is also known as the back-end ratio.

A

FALSE
it is known as the front-end ratio

124
Q

What all is included in housing costs when determining the housing cost ratio?

A
  • rent or monthly mortgage payment (PITI)
  • association fees
125
Q

T/F: When calculating the total debt ratio, it is important to use the minimum required debt payment.

A

TRUE

126
Q

How is a client’s total debt ratio calculated?

A

total monthly debt / monthly gross income

127
Q

What percentage should a client’s total debt ratio not exceed?

A

36%

128
Q

When calculating a client’s total debt ratio, what items are included as debt?

A
  • monthly housing costs
  • consumer debt payments
  • alimony
  • child support
  • maintenance payments
129
Q
A

CFP Coursework (12 decks)

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