General Principles Flashcards
What rate does the Fed set?
The Discount Rate - the rate the Federal Reserve charges its member banks to borrow to satisfy reserve requirements.
What happens with a Repo
The Fed buys securities. Expansionary/Easy Money
What happens with a Reverse Repo
The Fed sells securities. Contractionary/Tight Money
What rate do commercial banks set?
The Prime Rate
What is the book value of a business
Assets - Liabilities = Net Worth
Valuing a business with Capitalization of Income
Present Value of the Projected Flow of Income from a business:
Annual Income / Capitalization Rate (given)
How much should a family save?
5% - 8% of Gross Income
Inflation-Adjusted Formula
(((1 + after-tax return) / (1 + inflation rate)) - 1) x 100
What are the three federal agencies that regulate federally or nationally chartered banks?
1) Comptroller of the Currency
2) Federal Reserve
3) Federal Deposit Insurance Corporation
What regulates Savings & Loans?
1) a branch of the FDIC
2) Federal Home Bank Board
What regulates Trust companies?
State law
What are the three steps of an Educational needs analysis?
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).
How are Coverdell ESA contributions and distributions taxed?
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)
Rules about EE and I Bonds
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.
Which education credit is unavailable if the student has a felony drug conviction?
The American Opportunity Credit
What is the maximum student loan interest deduction?
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.
What is the Federal Funds Rate?
The charge for overnight loans from one bank to another bank (set by auction).
What are the Leading Economic Indicators?
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
What are the Coincident Indicators?
1) Number of employees on non-agricultural payrolls
2) Personal income less transfer payments (e.g. SS & welfare)
3) Industrial Production
What are the Lagging Indicators?
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
What is the leading indicator of inflation trends?
The Producer Price Index (PPI)
At a trough, right before the economy begins to recover from a recession, which industries do well?
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.
What industries will outperform cyclical industries when the economy enters a recession?
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.
What is stagflation?
The combination of slow economic growth and high unemployment (stagnation) with rising prices.
How do you calculate the amount of interest paid over the life of a loan/mortgage?
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.
How do you calculate principal and interest for less than the life of the loan?
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.
What are the steps to calculating amortization? (The amount of principal remaining after a certain number of payments have been made.)
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
Exceptions to filing as an Investment Adviser
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
Exemptions to filing as an Investment Adviser
1) An intrastate adviser in unlisted securities
2) An adviser whose only clients are insurance companies
3) A family office
What does an RIA need to do if its Brochure has materially changed since the last annual updating?
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.
Who files for Chapter 13 Bankruptcy?
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.
Who files for Chapter 11 Bankruptcy?
Any type of entity. No debt level limit or required income. Complex, so usually used by businesses that want to continue operating.
Who files for Chapter 7 Bankruptcy?
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.
Are retirement plans exempt from Chapter 7?
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.
