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CFP Exam March 2023 > General Principles > Flashcards

General Principles Flashcards

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1
Q

Housing Ratio Formula

A

Housing Ratio = PITI / Gross Income

Needs to be < or = to 28%

PITI: principal+ interest + taxes + insurance

*formula with PITI aka mortgage use gross income!

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2
Q

Total Debt Ratio Formula

A

Total Debt Formula = PITI + monthly consumer debt / monthly gross income

Needs to be < or = to 36%

*formula with PITI aka mortgage use gross income!

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3
Q

Consumer Debt Ratio Formula

A

Consumer Debt Ratio Formula = Monthly Consumer Debt (non-housing) / Monthly Net Income

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4
Q

Who implements fiscal policy?

A

C for Congress

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5
Q

How does Congress implement fiscal policy?

A

taxation
government spending
deficit spending

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6
Q

if Congress increases tax rates it _________ disposable income

A

Reduces disposable income

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7
Q

if Congress decreases tax rates it _________ disposable income

A

Increases disposable income

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8
Q

Increases in government spending are used to…

A

stimulate economic growth

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9
Q

Who controls monetary policy?

A

The Federal Reserve Bank

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10
Q

What are the Fed’s 3 primary tools?

A
  1. discount rate: the rate at which member banks borrow from the government
  2. reserve requirement: % of deposits that must be held on reserve
  3. open market activities: Fed buys & sells securities in the open market
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11
Q

What are contractionary monetary policy actions?

A
  1. increase the discount rate
  2. increase the reserve requirements
  3. Fed sells securities, removes cash from the economy

Sell for SLOW
slows the pace of growth

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12
Q

What are expansionary monetary policy actions?

A
  1. decrease the discount rate
  2. decrease the reserve requirement
  3. Fed buys securities, add cash to the economy

increases pace of growth

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13
Q

What are the 5 components & %s of a credit score?

A
  1. Payment history: 35%
  2. Amounts owed: 30%
  3. Length of credit history: 15%
  4. New credit: 10%
  5. Credit mix: 10%
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14
Q

What are FICO score ranges?

A

Poor: < 580
Fair: 580-669
Good: 670-739
Very Good: 740-799
Exceptional: 800+

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15
Q

What is the GDP formula?

A

Y = C + I + G + (X-M)

or

Y = C + I + G + NE

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16
Q

What does C stand for in GDP formula?

A

C is for consumer spending

Private consumption of goods or services

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17
Q

What does I stand for in GDP formula?

A

I is for investment made by industry (fixed investment & change in private inventory)

industrial investment and government investment

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18
Q

What does G stand for in GDP formula?

A

G stands for government spending

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19
Q

What does X-M stand for?

A

Exports - imports

or

Net Exports

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20
Q

Does Chapter 7 bankruptcy discharge mortgages?

A

Yes, Chapter 7 bankruptcy eliminates the borrower’s responsibility for the mortgage loan

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21
Q

What is the primary purpose of Chapter 7 bankruptcy?

A

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

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22
Q

What debts still remain if you file for Chapter 7 bankruptcy?

A

-child support
-alimony
-income taxes less than 3 years past due
-student loans
-secured debt

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23
Q

What is the purpose of Chapter 13 bankruptcy?

A

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

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24
Q

How long does Chapter 7 bankruptcy stay on your credit report?

A

10 years

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25
Q

What is the purpose of Chapter 11 bankruptcy?

A

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

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26
Q

How long does Chapter 13 bankruptcy stay on your credit report?

A

7 years

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27
Q

How long does Chapter 11 bankruptcy stay on your credit report?

A

10 years

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28
Q

Right to know costs and terms of credit

A

Consumer Credit Protection Act

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29
Q

Right to fair opportunity to obtain credit

A

Equal Credit Opportunity Act

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30
Q

Right to know what’s in your credit file

A

Fair Credit Reporting Act

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31
Q

Right to have billing mistakes resolved

A

Fair Credit Billing Act

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32
Q

Right to be protected from collection agencies

A

Fair Debt Collection Practices Act

33
Q

Which bankruptcy is intended for businesses or individuals who exceed debt limitations or regular income?

A

Chapter 11

34
Q

When a good responds greatly to a price change it is…

A

Elastic

ie: luxury goods

35
Q

When a good responds little to price change it is…

A

Inelastic

ie: Gasoline

36
Q

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

A

Balloon mortgage

37
Q

What is FDIC insurance?

A

Protects depositors in the event of a bank failure up to $250,000

38
Q

Are money market mutual funds covered by FDIC insurance?

A

NO

Covered by SIPC insurance

39
Q

Money market deposit accounts are covered by…

A

FDIC

40
Q

How much FDIC insurance does Brendan have?

BF checking = $350,000
BF JT with wife = $600,000
BF JT with son = $400,000

A

$500,000

$250,000 individual + $250,0000 JT

41
Q

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?

A

Fixed rate mortgage

42
Q

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?

A

Variable rate mortgage may make sense

43
Q

If borrowers put down less than 20% of the value of a home they will be required to pay…

A

private mortgage insurance (PMI)

*PMI can often be eliminated after the homeowner reaches 20% equity, following a 2-year period of on-time payments

44
Q

Various government mortgage programs are available through

A
  1. Federal Housing Administration
  2. Veterans Administration
  3. US Department of Agriculture
45
Q

What are the 15 duties owed to clients for the CFP standards of conduct?

A
  1. Fiduciary Duty
  2. Integrity
  3. Competence
  4. Diligence
  5. Disclose & Manage Conflicts of interest
  6. Sound & Objective Professional Judgment
  7. Professionalism
  8. Comply with the Law
  9. Confidentiality & privacy
  10. Provide info to client
  11. Duties when communicating with a client
  12. Duties when representing compensation method
  13. Duties when recommending, engaging, and working with additional persons
  14. Duties when selecting, using, and recommending technology
  15. refrain from borrowing or lending money and commingling financial assets
46
Q

When giving financial advice and financial planning your firm must always deliver…

A

the privacy policy in writing!

47
Q

When giving financial advice and financial planning your firm must deliver in writing or orally…

A

conflicts of interests

48
Q

What are the exceptions to borrowing or lending money and commingling financial assets?

A
  1. Can borrow $ when it’s a member of the family
  2. Can borrow $ when the lender is in the money lending business
49
Q

An individual whose conduct is deemed unacceptable is…

A

Permanently barred from becoming a CFP

50
Q

What is conduct that is deemed unacceptable and will always bar an individual from becoming certified?

A

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

51
Q

What conduct is presumed to be unacceptable?

A

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

52
Q

CFP disciplinary process…

A
  1. Hearing panel recommendations are issued
  2. DEC reviews the recommendations
  3. Final order is issued from the DEC
  4. Respondent can appeal to the Board of Directors Appeals committee
53
Q

What is a money script?

A

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

54
Q

What are the 4 categories of money scripts?

A
  1. Money avoidance
  2. Money vigilance
  3. Money worship
  4. Money status
55
Q

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?

A

illusion of control

*active involvement can increase the illusion of control

56
Q

What is the dunning-kruger effect?

A

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

57
Q

What is the disposition effect?

A

Bias that relates to the tendency of investors to sell shares when the price has increased, while holding assets that have dropped in value

58
Q

What is the house money effect?

A

Bias when an investor takes on significantly more risk following gains

59
Q

What is framing bias?

A

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

60
Q

What is the halo effect?

A

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

61
Q

The Fitness Standards for CFP apply to…

A

Current CFP professionals & professionals eligible for reinstatement

62
Q

Your personal bankruptcy information must be disclosed to a client within…

A

90 days

63
Q

When can a CFP borrow money from or lend money to a client?

A
  1. if the client is a member of CFP’s family
  2. if the lender is a business org or legal entity in the business of lending money
64
Q

What are the CFP Board’s forms of discipline?

A
  1. Private censure: unpublished written letter from DEC mailed to respondent
  2. Public censure: written letter published in a press release
  3. Suspension: respondent prohibited from using CFP marks for minimum of 90 days and maximum of 5 years
  4. Revocation: termination of respondent’s rights to use CFP marks, permanently barred from being a CFP
65
Q

What is the CFP board disciplinary hearing process after CFP delivers a complaint?

A
  1. settlement OR respondent answer due within 30 days
  2. hearing docs, written statements, and stipulations due within 45 days after complaint
    *witness list due within 30 days of delivery of complaint
  3. notice of hearing from CFP board counsel (due not less than 30 days before hearing)
  4. hearing before hearing panel
  5. hearing panel recommendations
  6. disciplinary and ethics commission (DEC) reviews hearing panel recommendation
  7. DEC final order
  8. appeal to board of directors appeals committee (must be filed within 30 days of issuance of DEC final order)
66
Q

Temporary bar and permanent bar only apply to…

A

respondents who are currently NOT CFP professionals!

67
Q

If CFP board counsel finds probable cause to believe that respondent violated code and standards, then the CFP board counsel must take which actions…

A
  1. letter of dismissal
  2. settlement offer
  3. complaint
68
Q

Which CFP committee reviews and decides all appeals?

A

The appeals committee

69
Q

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.

A

Truth in lending act

70
Q

What law provides individuals with the right to know the costs and terms of their credit?

A

Consumer credit protection act

71
Q

What bias leads investors to sell winners too quickly and hold on to losers for too long?

A

Disposition effect

72
Q

What are types of qualitative information obtained in step 1 of the financial planning process?

A

-risk tolerance
-health status
-life expectancy
-family circumstances
-values and attitudes
-expectations
-earnings potential
-goals, needs, priorities
-current course of action

73
Q

Capacity for risk is what type of information?

A

Quantitative!

74
Q

What are types of quantitative information obtained in step 1 of the financial planning process?

A

-age
-dependents
-other professional advisors
-income/expenses
-cash flow
-assets/liabilities
-taxes
-savings

75
Q

What asset transfer is used when assets are to be distributed equally amongst ALL survivors?

A

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

76
Q

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

A

Per Stirpes

defined as by the roots or the trunk

distribution follows the family tree

77
Q

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

A

Per Capita by Generation

78
Q

Real property is distributed according to the laws of the state where…

A

the land is located

AKA situs

79
Q

Personal property is distributed according the laws of the state…

A

of the decedent’s domicile

CFP Exam March 2023 (7 decks)

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