General Principles Flashcards
Housing Ratio Formula
Housing Ratio = PITI / Gross Income
Needs to be < or = to 28%
PITI: principal+ interest + taxes + insurance
*formula with PITI aka mortgage use gross income!
Total Debt Ratio Formula
Total Debt Formula = PITI + monthly consumer debt / monthly gross income
Needs to be < or = to 36%
*formula with PITI aka mortgage use gross income!
Consumer Debt Ratio Formula
Consumer Debt Ratio Formula = Monthly Consumer Debt (non-housing) / Monthly Net Income
Who implements fiscal policy?
C for Congress
How does Congress implement fiscal policy?
taxation
government spending
deficit spending
if Congress increases tax rates it _________ disposable income
Reduces disposable income
if Congress decreases tax rates it _________ disposable income
Increases disposable income
Increases in government spending are used to…
stimulate economic growth
Who controls monetary policy?
The Federal Reserve Bank
What are the Fed’s 3 primary tools?
- discount rate: the rate at which member banks borrow from the government
- reserve requirement: % of deposits that must be held on reserve
- open market activities: Fed buys & sells securities in the open market
What are contractionary monetary policy actions?
- increase the discount rate
- increase the reserve requirements
- Fed sells securities, removes cash from the economy
Sell for SLOW
slows the pace of growth
What are expansionary monetary policy actions?
- decrease the discount rate
- decrease the reserve requirement
- Fed buys securities, add cash to the economy
increases pace of growth
What are the 5 components & %s of a credit score?
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
What are FICO score ranges?
Poor: < 580
Fair: 580-669
Good: 670-739
Very Good: 740-799
Exceptional: 800+
What is the GDP formula?
Y = C + I + G + (X-M)
or
Y = C + I + G + NE
What does C stand for in GDP formula?
C is for consumer spending
Private consumption of goods or services
What does I stand for in GDP formula?
I is for investment made by industry (fixed investment & change in private inventory)
industrial investment and government investment
What does G stand for in GDP formula?
G stands for government spending
What does X-M stand for?
Exports - imports
or
Net Exports
Does Chapter 7 bankruptcy discharge mortgages?
Yes, Chapter 7 bankruptcy eliminates the borrower’s responsibility for the mortgage loan
What is the primary purpose of Chapter 7 bankruptcy?
Liquidation: eliminates consumer’s debt by having trustee sell some of the debtor’s personal property to repay creditors
*for individuals & businesses
Can take 4-6 months
May be able to delay a foreclosure
What debts still remain if you file for Chapter 7 bankruptcy?
-child support
-alimony
-income taxes less than 3 years past due
-student loans
-secured debt
What is the purpose of Chapter 13 bankruptcy?
Repayment: allows debtors to keep their personal assets, but they are obligated to repay their debt in full over a period
*only for individuals
can take 3-5 years
can stop a foreclosure
How long does Chapter 7 bankruptcy stay on your credit report?
10 years
What is the purpose of Chapter 11 bankruptcy?
Reorganization: intended for business but also accommodates those who exceed Chapter 13 debt limitations or lack of regular income
can take 6 months - 2 years
How long does Chapter 13 bankruptcy stay on your credit report?
7 years
How long does Chapter 11 bankruptcy stay on your credit report?
10 years
Right to know costs and terms of credit
Consumer Credit Protection Act
Right to fair opportunity to obtain credit
Equal Credit Opportunity Act
Right to know what’s in your credit file
Fair Credit Reporting Act
Right to have billing mistakes resolved
Fair Credit Billing Act
Right to be protected from collection agencies
Fair Debt Collection Practices Act
Which bankruptcy is intended for businesses or individuals who exceed debt limitations or regular income?
Chapter 11
When a good responds greatly to a price change it is…
Elastic
ie: luxury goods
When a good responds little to price change it is…
Inelastic
ie: Gasoline
A mortgage in which a large portion of the borrowed principal is repaid in a single payment at the end of the loan period is known as
Balloon mortgage
What is FDIC insurance?
Protects depositors in the event of a bank failure up to $250,000
Are money market mutual funds covered by FDIC insurance?
NO
Covered by SIPC insurance
Money market deposit accounts are covered by…
FDIC
How much FDIC insurance does Brendan have?
BF checking = $350,000
BF JT with wife = $600,000
BF JT with son = $400,000
$500,000
$250,000 individual + $250,0000 JT
What type of mortgage should you advise when rates are low or the homeowner is going to stay in the home for a long period of time?
Fixed rate mortgage
What type of mortgage should you advise when rates are high (expected to go down) or the homeowner is not planning on keeping the home long-term?
Variable rate mortgage may make sense
If borrowers put down less than 20% of the value of a home they will be required to pay…
private mortgage insurance (PMI)
*PMI can often be eliminated after the homeowner reaches 20% equity, following a 2-year period of on-time payments
Various government mortgage programs are available through
- Federal Housing Administration
- Veterans Administration
- US Department of Agriculture
What are the 15 duties owed to clients for the CFP standards of conduct?
- Fiduciary Duty
- Integrity
- Competence
- Diligence
- Disclose & Manage Conflicts of interest
- Sound & Objective Professional Judgment
- Professionalism
- Comply with the Law
- Confidentiality & privacy
- Provide info to client
- Duties when communicating with a client
- Duties when representing compensation method
- Duties when recommending, engaging, and working with additional persons
- Duties when selecting, using, and recommending technology
- refrain from borrowing or lending money and commingling financial assets
When giving financial advice and financial planning your firm must always deliver…
the privacy policy in writing!
When giving financial advice and financial planning your firm must deliver in writing or orally…
conflicts of interests
What are the exceptions to borrowing or lending money and commingling financial assets?
- Can borrow $ when it’s a member of the family
- Can borrow $ when the lender is in the money lending business
An individual whose conduct is deemed unacceptable is…
Permanently barred from becoming a CFP
What is conduct that is deemed unacceptable and will always bar an individual from becoming certified?
Felony conviction for theft, embezzlement, or financially based crimes
Felony conviction for tax fraud or other tax related crimes
Revocation of financial professional license (unless administrative in nature)
Felony conviction of rape or murder
Felony conviction for any other violent crime within the last 5 years
What conduct is presumed to be unacceptable?
2 or more bankruptcies
Revocation or suspension of a non-financial license
Suspension of financial license
Felony conviction for nonviolent crimes within the last five years
Felony convictions for violent crimes other than rape and murder that occurred more than 5 years ago
CFP disciplinary process…
- Hearing panel recommendations are issued
- DEC reviews the recommendations
- Final order is issued from the DEC
- Respondent can appeal to the Board of Directors Appeals committee
What is a money script?
Learned behaviors and preferences that move you through the world, and they greatly impact your financial decisions
A person’s views, attitudes, and belief system about money shape the way they approach, discuss, and further their financial vision
What are the 4 categories of money scripts?
- Money avoidance
- Money vigilance
- Money worship
- Money status
Which illusion exists when decision makers exhibit over-confidence when they feel like they have control of an outcome, even when this is not the case?
illusion of control
*active involvement can increase the illusion of control
What is the dunning-kruger effect?
A cognitive bias whereby people with limited knowledge or competence in an intellectual or social domain greatly overestimate their own knowledge
Occurs when a person’s lack of knowledge and skills in a certain area causes them to overestimate their own competence
What is the disposition effect?
Bias that relates to the tendency of investors to sell shares when the price has increased, while holding assets that have dropped in value
What is the house money effect?
Bias when an investor takes on significantly more risk following gains
What is framing bias?
Bias that occurs when people decide based on the way information is presented, as opposed to just on the facts themselves
Framing can be used to elicit an outcome desired more by the presenter than the client
What is the halo effect?
Tendency to use your first overall impression of a person to evaluate specific traits that you haven’t actually observed
Cognitive impression someone makes of another person based on physical and emotional characteristics that then influence future interactions
The Fitness Standards for CFP apply to…
Current CFP professionals & professionals eligible for reinstatement
Your personal bankruptcy information must be disclosed to a client within…
90 days
When can a CFP borrow money from or lend money to a client?
- if the client is a member of CFP’s family
- if the lender is a business org or legal entity in the business of lending money
What are the CFP Board’s forms of discipline?
- Private censure: unpublished written letter from DEC mailed to respondent
- Public censure: written letter published in a press release
- Suspension: respondent prohibited from using CFP marks for minimum of 90 days and maximum of 5 years
- Revocation: termination of respondent’s rights to use CFP marks, permanently barred from being a CFP
What is the CFP board disciplinary hearing process after CFP delivers a complaint?
- settlement OR respondent answer due within 30 days
- hearing docs, written statements, and stipulations due within 45 days after complaint
*witness list due within 30 days of delivery of complaint - notice of hearing from CFP board counsel (due not less than 30 days before hearing)
- hearing before hearing panel
- hearing panel recommendations
- disciplinary and ethics commission (DEC) reviews hearing panel recommendation
- DEC final order
- appeal to board of directors appeals committee (must be filed within 30 days of issuance of DEC final order)
Temporary bar and permanent bar only apply to…
respondents who are currently NOT CFP professionals!
If CFP board counsel finds probable cause to believe that respondent violated code and standards, then the CFP board counsel must take which actions…
- letter of dismissal
- settlement offer
- complaint
Which CFP committee reviews and decides all appeals?
The appeals committee
What act requires lenders to disclose the trust cost of consumer credit, explaining all charges, terms and conditions involved? This act requires that consumer be provided with the total finance charge and annual % rate on the loan.
Truth in lending act
What law provides individuals with the right to know the costs and terms of their credit?
Consumer credit protection act
What bias leads investors to sell winners too quickly and hold on to losers for too long?
Disposition effect
What are types of qualitative information obtained in step 1 of the financial planning process?
-risk tolerance
-health status
-life expectancy
-family circumstances
-values and attitudes
-expectations
-earnings potential
-goals, needs, priorities
-current course of action
Capacity for risk is what type of information?
Quantitative!
What are types of quantitative information obtained in step 1 of the financial planning process?
-age
-dependents
-other professional advisors
-income/expenses
-cash flow
-assets/liabilities
-taxes
-savings
What asset transfer is used when assets are to be distributed equally amongst ALL survivors?
Per Capita
*everyone gets an equal share
defined as by the head, according to the number of individuals
distribution is based on the surviving family members
What asset transfer is used when a share of the decedent’s assets is to be transferred to a deceased beneficiary’s children and split evenly
Per Stirpes
defined as by the roots or the trunk
distribution follows the family tree
What asset transfer is used when the 2nd generation is set to receive their specified % share, with all heirs in the 3rd generation receiving an evenly split % of the remainder
Per Capita by Generation
Real property is distributed according to the laws of the state where…
the land is located
AKA situs
Personal property is distributed according the laws of the state…
of the decedent’s domicile
