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CFP BIF > General Principals > Flashcards

General Principals Flashcards

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1
Q

What is a balance sheet?

A

A point in time

Assets = Liabilities + Net Worth

Assets listed in order of liquidity. CKG on top

Purpose: Financial Position
Starting Point: Cash Balance
Ending Point: Retained Earnings

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2
Q

Personal Balance Sheet

A

Reported at FMV
Assets on Left.. Liabilities on right
Assets listed in order of liquidity
Liabilities listed in order of term.

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3
Q

Corporate Balance Sheet

A

Reported at the lower of cost and FMV

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4
Q

Cash Flow Statement

A

Period in time (1 month, year)
Purpose: Shows cash management
Measures: Increases & decreases in cash flow
Starting point: Net Income
Ending Point: Cash Balance

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5
Q

Current Ratio

A

Current Assets / Current Liabilities

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6
Q

Quick Ratio

A

Current assts - inventories / Current Liabilities

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7
Q

Working Capital Ratio

A

Current Assets - Current Liabilities

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8
Q

Debt to Equity Ratio

A

Total long-term debt / Equity

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9
Q

Times Interest Earned Ratio

A

EBIT / Interest Expense

Earnings Before Intereset & taxes

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10
Q
A
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11
Q

Debt Ratio

A

Total Debt / Total Assets

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12
Q

Front End Ratio

A

PITI / Gross Income

Principal, Interest, Taxes, Insurance

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13
Q

Back End Ratio

A

PITI + other debt / Gross Income

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14
Q

Inventory Turnover

A

Cost of Goods sold / Avg Inventory

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15
Q

Days to sell inventory

A

365 / Inventory turnover

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16
Q

Acct’s Receivable Turnover

A

Sales (credit) / Avg. Acct. Receivable

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17
Q

Receivable Collection Period

A

365 / Accts Rec. Turnover

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18
Q

Gross Profit Margin

A

Gross Profit / Sales

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19
Q

Operating Profit Margin

A

Operating Income / Revenue

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20
Q

Return on Assets (ROA)

A

EAT / Total Assets

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21
Q

Return on Equity (ROE)

A

EAT / Equity

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22
Q

Emergency Fund Ratio

A

Montetary Assets / Monthly Living Expenses

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23
Q

Emergency Fund

A

Single Earner: 6 Mo.
Two Earners: 3-6mo.
Must be liquid (easily converted to cash)
Must be marketable (bought or sold with ease)

cash, MMMF, T-Bills, CD’s, Cash Value LI, HELOC

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24
Q

Cross Purchase Plans

A

Method to transfer business interest among partners or owners using life insurance.
* tax free death benefit
* only good for low # of owners

If 4 partners, each would purchase 3 policies for a total of 12.

Nx(N-1)

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25
Q

Entity Purchase Agreements (or, Stock Redemption Plan)

A

Method of transfering business interest to business using life insurance policies.
* Good for multiple partners.
* Business buys a policy for each partner.
* Benefit passes tax free to business
* Business pays policy.
* Better for more owners

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26
Q

Wait & See Agreement

A

Method of transfering business interest that offers flexibility to both partners & business.
Step #1: Business has 1st option to buy deceased partners stock. or half
Step #2: Surviving partners have option to buy if business declined or if the business only bought half.
Step #3: Business is required to buy rest of shares

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27
Q

Over Confidence

A

Causes people to overestimate their knowledge and under estimate risk.

Factors leading to overconfidence: Choice, Task Familiarity, Info, Past success.

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28
Q

Prospect Theory

A

People suffer more greatly to losses than benefit from gain.

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29
Q

Disposition Effect

A

People seek pride and avoid regret.
- Sell winners too quickly
- Hold losers too long

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30
Q

When investors consider the past, they tend to suffer from…

A

House Money Effect: Take more risk. Maybe they won early and are playing with house money now.
Snakebite Effect: Take Less risk
Break-Evenitis - Take more risk to catch up.

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31
Q

Mental Accounting

A

Leads to naive diversification

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32
Q

Home Bias

A

Single stock concentration… maybe due to where they worked

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33
Q

Herd Mentality

A

Find comfort in groups/numbers. Tend to do what they do.

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34
Q

Optimism

A

Can be convinced of trends or patters that aren’t really there. Leads to market bubbles.

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35
Q

What are the feds goals?

A

Have a stable economy with…
2% inflation
4% unemployment

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36
Q

What are the feds tools?

There are three…

A

Discount Rate (rate banks borrow from government)

Reserve Requirement

Open Market Activities (buy/sell securities in open market)

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37
Q

“Tight” Policy or Contractionary Policy

A

Goal is to slow pace of growth & lower inflation.

Fed will:
Raise discount rate (increase cost of borrowing)
Raise Reserve Requirement
Sell Securities (take $$ out of economy)

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38
Q

“Easy” Policy or Expansionary Policy

A

Goal is to encourage the economy to grow.

Lower Discount Rate (lowers cost to borrow $$)
Lower Reserve Requirement (makes banks hold less in reserve)
Buys Securities (puts $$ back into economy)

39
Q

Heuristic

A

Any approach to problem solving that employs a more practical method that’s not guaranteed to be optimal.

-Rules of thumb, trial & error, educated guesses.

40
Q

Anchoring

A

When an investor sets a value at initial point of purchase.
- usually the buy price
- they tend to think its the true value of the investment despite what the market says.

41
Q

Fiscal Policy Tools

A

Government Spending & Taxation
- When things are bad, congress will spend more to stimulate the economy and lower taxes.
- political in nature

42
Q

Fiscal Policy is implemented by…

A

Congress

43
Q

Monetary Policy is controlled by…

A

The Federal Reserve (the fed)

44
Q

Sharpe Ratio

A
  • measures risk adjusted return of a portfolio in terms of standard deviation.
  • ONLY appropriate when R2 is less than .7
  • Use to compare against other instruments sharpe ratio.

rp-rf/standard deviation

45
Q

Treynor Ratio

A

Measures risk adjusted performance of a portfolio manager.
Appropriate to use when R2 is greater than or equal to .7
useful when comparing to other investments.

46
Q

Capital Asset Pricing Model (CAPM)

A

Used to quantify expected return given a market return & a beta to the market.
- Used to quantify investors required rate of return.
- Used to plot security market line (efficient frontier)

47
Q

CAPM Formula

A

Formula is on CFP Sheet.
ri=rf+(rm-rf)Bi

(rm-rf)Bi = Stock Premium

(rm-rf) = Market Risk Premium

48
Q

Once CAPM prudces expected return, it can be subtracted from actual return to produce ALPHA

A
49
Q

Jenson’s Performance Index (ALPHA)

A

Measure that is used to evaluate the benefit of a portfolio manager.
- Absolute value
- Only valid if R2 is .70 or higher.
- Plot above or on the Security Mkt Line is good. Anything below is inefficient.

50
Q

ALPHA Formula

A

CAPM minus Expected Returns
Actual Return - Expected Return = Alpha

rp-[rf+(rm-rf)Bp]

51
Q

FDIC Insurance

A

A $250,000 insurance on bank deposits.
* Per person.
* Per Ownership Category
* Per institution

52
Q

Chapter 7 Bankruptcy

A

A liquidation type of bankruptcy that eleminates consumers debt.
Primary Purpose: Liquidation
Who?: Individuals & Businesses

Does not stop foreclosure, but can delay it

53
Q

How long does a bankruptcy stay on credit report?

A

10 years

54
Q

How long does a Chapter 7 Bankruptcy take to process?

A

4-6 Months

55
Q

What obligations must still be repaid after Chapter 7?

A
  • Child Support
  • Alimony
  • Income taxes less than 3 years past due
  • student loans
  • secured debt
56
Q

Chapter 13 Bankruptcy

A

The wage-earner plan.
Allows debtors to keep their personal assets, but they are obligated to repay their debt over a period.

Primary purpose: Repayment
Who: Individuals

Stops foreclosure

57
Q

How can you be eligible for Chapter 13?

A
  • Can have no more than $419,275 in unsecured debt.
  • Can have no more than $1,257,850 in secured debts.
58
Q

How long does Chapter 13 bankruptcy take?

A

3-5 years

59
Q

How long will Chapter 13 stay on your credit report?

A

7 Years

60
Q

Chapter 11 Bankruptcy

A

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

Primary Purpose: Reorganization
Who?: Businesses

Stops foreclosure

61
Q

How long does Chapter 11 take?

A

6 Months - 2 years

62
Q

How long is Chapter 11 on your credit report?

A

10 Years

63
Q

Consumer Credit Protection Act

A

Right to know costs and terms of credit

64
Q

Equal Credit Opportunity Act

A

Right to fair opportunity to obtain credit

65
Q

Fair Credit Reporting Act

A

Right to know whats in your credit file

66
Q

Fair Credit Billing Act

A

Right to have billing mistakes resolved

67
Q

Fair Debt Collecting Practices Act

A

Right to be protected from collection agencies

68
Q

What are the five categories that make up a FICO score?

A
  • Payment History (35%)
  • Amounts Owed (30%)
  • Length of credit history (15%)
  • New Credit (10%)
  • Credit mix (10%)
69
Q

Poor credit rating…

A

Below 580 is poor

70
Q

Fair credit rating

A

580-669 is fair

71
Q

Good credit rating

A

670-739 is good

72
Q

Very Good credit rating

A

740-799 is very good

73
Q

Exceptional Credit Rating

A

800+

74
Q

What is considered a Conventional Mortgage?

A

Any mortgage under $726,200 are considered a conventional mortgage.

  • Downpayment: 3-20%
  • Terms: 15-30 years
  • Insurance: Applies if downpayment is under 20%
  • Can be fixed or variable rates
75
Q

What is considered a Jumbo Mortgage?

A

Any mortgage over $726,200 will be considered a jumbo mortgage and will carry a higher interest rate.

76
Q
A
77
Q

What is a balloon mortgage?

A

A mortgage in which a large portion of the borrowed principal is repaid in a single payment at the end of the laon period.

Shaped like a balloon. Less at first and grows.

78
Q

FHA Mortgage?

A

Downpayment: 3.5% - 20%
Terms: 15-30 Years
Insurance: Always, for 11 years or life of loan

79
Q

USDA Morgage

A

Downpayment: 0%
Terms: 15-30 Years
Insurance: None
Rate: Fixed only
Funding Fees: 1% fee upfront, annual fee of .35%

80
Q

VA Mortgage

A

Down payment: 0%
Terms: 15-30 years
Insurance: None
Funding Fees: 2.3% - 3.6% waived for disabled veterans

81
Q

Housing Cost Ratio
(Front-end ratio)
(Mortgage Debt Services Ratio)

A

PITI / Gross Household Income

28% an under = PASS

82
Q

Total Debt Ratio
(Back-End Ratio)
(Debt Repayment Ratio)

A

(PITI + Monthly Consumer Debt) / Monthly household Gross Income

Pass = under 36%

83
Q

Consumer Debt Ratio

A

Monthly COnsumer Debt (non-housing) / Monthly net household income

Pass = Under 20%

84
Q

529 ABLE Plans

A

Acct. may be established if blindness or disability occurred before age 26.

Balances of 100k or less are disregarded from FAFSA.

Contributions are considered gifts, 17k annual exclusion amount.

85
Q

Student Owned Acct.
FAFSA Expected Family Contribution (EFC)

A

Students assets are included at 20%

86
Q

4 Types of Student Aid

A

Grants - based on financial need
Scholarship - money is awarded based on accomplishments
Loans - Must be paid back
Work-Study - A job that lets you earn money while in school.

87
Q

Grants

A

Pell Grants : Awarded to undergraduate students who have exceptional financial need.

Federal Supplemental Educational Opportunity Grant (FSEOG): For Undergrads with exception financial needs. Students with lowest EFC’s priority to students who receive Pell Grants.

88
Q

Loans

A

Direct Subsidized Loans - Need Based - Dept of Ed pays interest while you’re at school.

Direct Unsubsidized Loans - Non Need Based. students pay interest on loans during all periods

89
Q

FAFSA (Free Application for Federal Student Aid)

A
  • 2 Year Lookback for reported income.
  • Used to determine Financial Aid.
90
Q

Expected Family Contribution (EFC)

A

Income (Parent & Student) + Assets (Parent & Student)

91
Q

EFC Formula =

A

Income (22% Parent to 47%, 50% Student) + Assets (5.64% Parents, 20% Students)

Income…
Parents = AGI minus an allowance for taxes + Living Expenses.

Students= Amount over protected amt $7,600

Assets…
IRA’s and Home Equity are omitted

92
Q

Financial Needs Formula =

A

Cost of Attendance (COA) - EFC = Financial Need

93
Q

American Opportunity Tax Credit (AOTC)

A
  • Up to $2,500 per eligible student
  • 40% Refundable (only $1,000 max can go to refund, rest decreases taxes)
  • 180k MAGI limit for MFJ
  • 90k MAGI limit for all other filers
  • 4 Tax Years per eligible students
  • Can use BOTH credits but cannot overlap expenses
  • Must be at least half time.

First 4 Years of post-secondary education
Tuition, required enrollment fees, materials needed for study.

4k of Qualifying Expenses:
1st $2,000 = 100% inclusion
2nd $2,000 = 25% inclusion

94
Q

Lifetime Learning Credit (LLC)

A
  • Up to $2,000 credit per return
  • Not Refundable (only decreases taxes)
  • 180k MAGI Limit for MFJ
  • 90k MAGI limit for all other filers
  • Unlimited # of tax years.
  • Can use BOTH credits but cannot overlap expenses

Post secondary education studies
Tuition and fees required for attendance only.

20% of $10,000 of qualifying expenses.

CFP BIF (6 decks)

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