General Principles Flashcards
Elasticity
Luxury items
Can find substitutes
Lower prices will increase overall revenues
If the maximum loan-to-value ratio on a $100,000 home is 85%, this means that the lender would accept:
A minimum down payment of $15,000 plus closing costs.
Rationale
The correct answer is “A.” Closing costs are not included in the loan-to-value ratio calculations of the lender.
Periods of increasing employment and increasing output?
Expansion.
Rationale
The correct answer is “C”. An expansion is indicated by rising employment and output. When employment and output are no longer rising, the cycle is in its peak. If employment and output begins to decrease, this indicates a recession. Finally, when employment and output are no longer decreasing, the cycle has reached a trough.
Inelastic
Consumer staples - demand does not change when price changes.
An increase in the price would lead to an increase in the total amount spent on purchases of the product.
The fiduciary standard required of CFP® professionals providing financial advice or financial planning is based upon which of the following?
Meeting duties of loyalty, care and following client instruction
What should a CFP® Professional disclose to a financial planning client at the first meeting?
The CFP® professional’s areas of expertise
Rationale
The planner should disclose areas of expertise to help define the scope of any engagement. The planner’s expertise (or lack of expertise) could reasonably be expected to materially affect the client’s decision to engage the certificate.
Diligence
After analyzing and evaluating the client’s information to understand financial circumstances, an evaluation should be made to determine the client’s goals, relevant personal, and economic assumptions. By undertaking this task in a responsible prompt and thorough matter, a practitioner is adhering to which of the following Code of Ethics Principles? Diligence
When should you provide your client with Form ADV?
As part of the financial planning engagement disclosures.
Form ADV is appropriate to be part of multiple written documents governing the financial planning services that will be provided, as part of the engagement letter.
The Consumer Confidence Index
The Consumer Confidence Index measures how secure individuals are feeling with regard to future economic expectations.
The duty of competence requires:
The duty of competence requires the planner to either refer the client to an expert or bring an expert into the engagement. Preparing the plan with the help of an expert is acceptable under the code standards.
When you are establishing an engagement for financial planning with a client, what information may you provide orally?
Material Conflicts of Interest.
Adjustable-Rate Mortgage (ARM)
Interest rates fluctuate with interest rates in the economy
As rates vary, payments change
Usually carry lower initial interest rate because of the greater degree of uncertainty
Balloon Payments
Payments based on a long-term mortgage at a given interest rate
For example: after a 5-year period, the unpaid balance must be either paid off or refinanced
How much interest was paid during the life of an $80,000 loan at 9.75% interest and a 30 year-term?
Step 1 - calculate the payments
i = 9.75 /12
pv = (80,000)
n = 30 x 12
solve for PMT = $687.32
Step 2 - Calculate total payments and subtract the prin.
$687.32 x 360 = $247,435.20
less principle - 80,000
Interest paid = $167,435.2
Reverse Mortgage
- Means of accessing equity in a home
- Funds may be received as a lump sum, on going payments or a line of credit
- Repayment triggered upon death of owner or (longest living spouse)
- Generally not counted as income for Medicaid eligibility as long as SPENT same months as received
- Could potentially be counted as income for SSI whether or not spend within month received
Robert has a 30 yr, $100,000 mortgage at 11% annual interest with monthly payments. If the client is in a 28% tax bracket, what is the net after-tax mortgage payment for the first year?
PV = $100,000
N = 30 x 12 = 360
i = 11/12 = .9167
Solve for PMT = $952.32
952.32 x 12 = $11,428 —- payments for the year
ROUND DOWN TO ESTIMATE AMOUNT THAT IS INTEREST
$11,000
$11,000 x .28 = $3,000 — amount deductible
$11,428 - $3,080 = $8,348 - approximate total of after-tax payments for the first year.
Amortization example:
$80,000 Mortgage
30 yr term
9.75% annual interest
Monthly payments
i = 9.75/ 12
PV = (80,000)
N = 360
PMT = $687.32
Amortization keystrokes
i = 9.75/12
PV = 80,000 (enter as positive)
PMT (687.32) - enter as negative
120 f AMORT -74,942 – first 10 years interest 120 months
x
Rules of reverse mortgage
- Homeowners 62 or older and living in condominiums and Single family homes
- No income qualifications
- Can still live in home for as long as they choose
- Proceeds tax free
- Not repaid until move out of home permanently
- Remaining equity once repaid goes to borrower or borrowers estate
- DOES not have to be owned free and clear to qualify for a reverse mortgage
Refinance Key Considerations
- Length of time expected to stay in the home
- Cash flow capacity
Personal Lines of Credit
Considered short term debt
Chapter 11
- Generally for individuals
- Cannot file for chapter 13 because of debt limitations
Chapter 13
- Reorganization
- Creditors cannot harass the debtor
- Advantage: Debtor generally does not need to relinquish assets
Debts that cannot be cancelled
- Student loans
- Child support
- Alimony
Debts that cannot be cancelled
- Student loans
- Child support
- Alimony
- Wage withholding & FICA obligations / recent income taxes due
Chapter 7 Means Test
- Debtors monthly net income for 60 months is > $10,000 Ch. 7 is NOT an option
- Monthly net income for 60 months is < $6,000 7 is allowed
- If monthly net income is between $10,000 and $6,000 then debtor can file Ch. 7. If monthly net income is <25% of all non-priority unsecured debts
Suspension
Not less than 90 Days
Not greater thank 5 years
Temporary Bar
Period where person is not a CFP is prohibited from applying or obtaining CFP
Censure
- Written approach
- Can be private – less severe
- Public — more serious
Investment Advisors Act 1940
SEC regulates advisors and their practices
ABC
Advice, Business, Compensation
1934 Act
Secondary Issues
Created SEC
1933 Act
New Issues
Primary offerings
Full and Fair disclosure
Investment Company Act 1940
SEC to regulate UIT’s, closed end funds and open end funds
Separate accounts that operate in variable life insurance and variable annuities
Securities Investors Protection Act of 1970
Established SIPC to supervise securities firms and that get into financial difficulty
SIPC — insures against losses arising from failure of brokerage firm, not bad investing
Savings Strategies
Save at least 5% - 8% of gross income
Serial Payments
Inflation adjusted payments rather than fixed payments
ADV Part 1
Updates annually
- applicant
- location
- background
- form or biz
- disciplinary action
- investment philosophy
American Opportunity Credit
Tax credit reducing federal income tax $1 for $1 on 100% of first $2,000 plus 25% on next $2,000 of tuition, fees and course materials
NOT ROOM AND BOARD
NO pairing with Lifetime learning credit
Reverse Mortgage
- 62 and older
- Accessing equity in home
- Lump sum, line of credit, on going payments
- Payments not counted as income for medicaid eligibility
- May be counted as income for SSI
Form CRS
Intended to enhance investor protection by providing sufficient relevant information
“Relationship summary”
More simplified than ADV part 2
ADV Part 2
Longer word doc
- fees
- services
- structure and relationship
- investment strategies & analysis
- conflicts of interest
- material changes – 120 days after end of fiscal year
- 48 hours in advance of entering advisory agreement
Consumer Debt
< 20% Net Income
Total Monthly Debt
< 36% Gross Income
PITI
Principle, interest, taxes, insurance
<28% Gross Income
College Planning 3 Step Calc
- Inflate — solve for FV
- Solve for PV
- step one answer becomes pmt
- BEG Mode
- Lump sum - solve for PV
or yearly amount solve for PMT
Days to notify clients of suspension
45 Days
Appealing DEC Rulings
30 Days
FDIC Insurance
per person, per bank, per type of account
250k indv
250k IRA/Keogh
250k Revocable Trust
250k Joint acct per person
Income to Save For Retirement
Save 10% - 12%
Coverdell Ages
Contribute up to age 18
Empty Coverdell or change beneficiary by 30
