General Principles

Question 1

What rate does the Fed set?

Answer 1

The Discount Rate - the rate the Federal Reserve charges its member banks to borrow to satisfy reserve requirements.

Question 2

What happens with a Repo

Answer 2

The Fed buys securities. Expansionary/Easy Money

Question 3

What happens with a Reverse Repo

Answer 3

The Fed sells securities. Contractionary/Tight Money

Question 4

What rate do commercial banks set?

Answer 4

The Prime Rate

Question 5

What is the book value of a business

Answer 5

Assets - Liabilities = Net Worth

Question 6

Valuing a business with Capitalization of Income

Answer 6

Present Value of the Projected Flow of Income from a business:
Annual Income / Capitalization Rate (given)

Question 7

How much should a family save?

Answer 7

5% - 8% of Gross Income

Question 8

Inflation-Adjusted Formula

Answer 8

(((1 + after-tax return) / (1 + inflation rate)) - 1) x 100

Question 9

What are the three federal agencies that regulate federally or nationally chartered banks?

Answer 9

1) Comptroller of the Currency
2) Federal Reserve
3) Federal Deposit Insurance Corporation

Question 10

What regulates Savings & Loans?

Answer 10

1) a branch of the FDIC

2) Federal Home Bank Board

Question 11

What regulates Trust companies?

Answer 11

State law

Question 12

What are the three steps of an Educational needs analysis?

Answer 12

1) Determine the cost of the first year of college (this is a straightforward future value calculation to calculate a payment amount)
2) Determine the amount that must be available when the child is 18 (four years of that payment earning an inflation-adjusted return is the present value of the lump sum)
3) Determine how much the parent needs to save either lump sum (PV) or yearly (PMT).

Question 13

How are Coverdell ESA contributions and distributions taxed?

Answer 13

1) Contributions are not deductible (limited to $2,000/year per student, regardless of the number of donors to the account)
* * Eligibility to contribute phases out between $190k & $220k MFJ.
2) Qualified distributions are tax free and penalty free but funds must be used before the student reaches age 30, with a 30-day grace period (funds can be rolled over to another family member of the original beneficiary)

Question 14

Rules about EE and I Bonds

Answer 14

1) Room and Board is not a qualified education expense
2) Bonds cannot be issued in the name of the child or a custodial account
3) They can be held in an UTMA account, but then they cannot qualify for the educational expense exclusion. If redeemed for college, interest is taxable.

Question 15

Which education credit is unavailable if the student has a felony drug conviction?

Answer 15

The American Opportunity Credit

Question 16

What is the maximum student loan interest deduction?

Answer 16

The deduction is equal to the amount of interest paid by the taxpayer, subject to a $2,500 maximum. Phased out between $140k and $170k MFJ.

Question 17

What is the Federal Funds Rate?

Answer 17

The charge for overnight loans from one bank to another bank (set by auction).

Question 18

What are the Leading Economic Indicators?

Answer 18

1) Avg weekly hours for mfg production workers
2) Initial Claims for Unemployment Insurance
3) New Mfg orders
4) Vendor performance measured by comapnies reporting slower deliveries
5) Contracts and orders for plans and equipment
6) New private housing units
7) Interest rate spread
8) Stock prices, 500 common stocks
9) Money supply
10) Index of consumer expectations

Question 19

What are the Coincident Indicators?

Answer 19

1) Number of employees on non-agricultural payrolls
2) Personal income less transfer payments (e.g. SS & welfare)
3) Industrial Production

Question 20

What are the Lagging Indicators?

Answer 20

1) Avg duration of unemployment
2) Avg prime rate charged by banks
3) Commercial & industrial loans outstanding
4) Ratio of consumer installment credit outstanding to personal income
5) Change in the consumer price index for services

Question 21

What is the leading indicator of inflation trends?

Answer 21

The Producer Price Index (PPI)

Question 22

At a trough, right before the economy begins to recover from a recession, which industries do well?

Answer 22

Cyclical (those with above average sensitivity) such as auto makers and appliance manufacturers. (Because people do not buy high ticket items during recessions.) Durable goods are cyclical.

Question 23

What industries will outperform cyclical industries when the economy enters a recession?

Answer 23

Defensive, such as food producers, pharmaceuticals and public utilities. Non-durable goods have a short life-span. They are defensive because people always need them.

Question 24

What is stagflation?

Answer 24

The combination of slow economic growth and high unemployment (stagnation) with rising prices.

Question 25

How do you calculate the amount of interest paid over the life of a loan/mortgage?

Answer 25

1) Calculate the payments using end mode (because the first payment isn’t due at the time you take the mortgage out but at the end of the month).
2) Calculate the total payments and subtract the principal.

Question 26

How do you calculate principal and interest for less than the life of the loan?

Answer 26

Use the amortization calculation. In this calculation, PV is positive (exception to the general rule) because PV is the amount of the loan received (an inflow) to buy the home.

Question 27

What are the steps to calculating amortization? (The amount of principal remaining after a certain number of payments have been made.)

Answer 27

1) Calculate the payments (using end mode).
2) Enter interest (annual divided by number of payments during the year)
3) Enter loan amount as positive PV
4) Enter payment (calculated in step 1) as a negative
5) Enter the number of payments made then f AMORT (for example 120 f AMORT)
6) Enter X <> Y to see how much principal was paid off during that time
7) Enter RCL PV to show the loan balance after that time

Question 28

Exceptions to filing as an Investment Adviser

Answer 28

1) Bank
2) Lawyer, Accountant, Engineer or Teacher whose advice is incidental
3) Broker whose advice is incidental
4) Publisher of a newspaper
5) Person whose advice is limited to securities issued and guaranteed by the U.S. government

Question 29

Exemptions to filing as an Investment Adviser

Answer 29

1) An intrastate adviser in unlisted securities
2) An adviser whose only clients are insurance companies
3) A family office

Question 30

What does an RIA need to do if its Brochure has materially changed since the last annual updating?

Answer 30

The RIA must deliver to each of its clients (unless exempted) a Material Change Summary within 120 days after the end of the fiscal year.

Question 31

Who files for Chapter 13 Bankruptcy?

Answer 31

Can only be filed by individuals with a stable income. It is a reorganization. Payments to creditors are typically reduced to be more manageable. Creditors cannot harass the debtor. In addition, the debtor generally is not required to relinquish assets.

Question 32

Who files for Chapter 11 Bankruptcy?

Answer 32

Any type of entity. No debt level limit or required income. Complex, so usually used by businesses that want to continue operating.

Question 33

Who files for Chapter 7 Bankruptcy?

Answer 33

Individuals who want to wipe out all their debt entirely. Chapter 7 has income limits that vary by state. the Bankruptcy Code permits a debtor to claim either the “federal” exemptions or the exemptions available under state law.
Chapter 7 is not an option if the debtor’s average monthly income for 60 months is greater than $10,000. If it is less than $6,000, filing under Chapter 7 is allowed.

Question 34

Are retirement plans exempt from Chapter 7?

Answer 34

SEPs, SIMPLE, ERISA plans and deferred compensation plans are generally exempt assets. Funds in a traditional or Roth IRA (contributory) are exempt up to $1 million. For a rollover IRA, the exemption is unlimited. However, if the IRA exceeds the debtor’s need, it is not exempt.