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CFP Flashcards - July 2021 Exam > General Principles Of FP > Flashcards

General Principles Of FP Flashcards

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1
Q

Emergency fund ratio

A

Cash & cash equivalents / MONTHLY non discretionary expenses = EFR

Ex) C&CE -> $40k; Ann. ND Exp -> $82,944 for a 2 income family

40,000 / 82,944 = 5.79 months (between 3-6 months, E. Fund is adequate)

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2
Q

What’s the difference between funding an UGMA vs an UTMA?

A

UGMA funding
- cash & equiv, securities, MF’s

UTMA funding
- cash & equiv’s, securities, MF’s, Real Prop/RE

Think “Title” for UTMA (as in title to Real Prop/Estate)

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3
Q

What are the deductibility rules around student loan interest?

A
  • Interest is tax deductible
  • $2,500 annual limit
  • expenses that qualify
    • tuition and enrollment fees
    • ROOM & BOARD (typically isn’t but it’s ok here)
    • “the kitchen sink” (transportation, necessary expenses) -> kitchen sink = stuff other than T/Enr fees
  • student must be at least half time in a degree program*
  • undergrad and grad programs*

PHASEOUTS
S -> 70,000-85,000
MFJ -> 140,000-170,000

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4
Q

What are the provisions of student loan forgiveness?

A

General Rule: the amount forgiven is taxable income

Exceptions to the rule

  • death
  • disability
  • cancellation due to loan provisions around certain work arrangements (aka work for x years/in a certain profession/etc)
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5
Q

Federal Student Loan Default rules

A

Loan is considered DELINQUENT on the FIRST DAY AFTER PAYMENT IS MISSED

No pmts after 270 days (9 months) -> loan is in default

When a loan defaults

  • entire balance is due
  • borrower is no longer eligible for federal student loans/grants
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6
Q

What does the fed control and afffect?

A

The fed controls monetary policy

The Fed uses

  • open market operations
  • raises & lowers discount rates and reserve requirements
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7
Q

Explain easy and tight monetary policy?

A

“BEST” - buy easy, sell tight

Easy -> the fed buys govt securities causing more $ to circulate, increases lending; lowering rates

Tight -> the fed sells govt securities, taking $ out of circulation, decreases lending; increasing rates

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8
Q

Explain who controls fiscal policy and how & with what?

A

Fiscal policy is controlled by POTUS/Congress

Pursue economic growth, price stability, and full employment

Expansionary policy (easy)
- govt buys G/S & creates a budget deficit 
Restrictive policy (tight)
- govt stops buying/sells and/or raises taxes
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9
Q

Describe the peak business cycle

A

Peak of expansion phase

Most biz’s operating at capacity & GDP growth is increasing rapidly/is at its highest point

Employment is at its peak

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10
Q

Explain the trough biz cycle

A

End of contraction phase

Biz’s operating at lowest capacity levels, GDP growth is at its lowest or is negative

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11
Q

Explain expansionary phase

A

Leads to peak phase

Biz sales rise, GDP grows, Unemployment declines

Aka recovery phase

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12
Q

Explain contraction phase

A

Leads to trough

Biz sales & GDP drops, unemployment rises

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13
Q

What are leading indicators?

A

Predict changes in biz cycle

Include

  • bond yields
  • housing starts
  • investor sentiment
  • durable good orders (greatest cyclical fluctuations)
  • STOCK CHANGES
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14
Q

What are coincident indicators?

A

Occur simultaneously with biz cycle & confirm current state of economy

Include

  • personal income
  • industrial production
  • amount of corporate profits
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15
Q

What are lagging indicators?

A

Change after economy has shifted

Include

  • average duration of unemployment
  • prime interest rate
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16
Q

What are non dischargeable debts for Chapter 7 bankruptcy

A
  • Back taxes (w/in 3 yrs)
  • “Bad Shit” (penalties for fraud, embezzlement, etc)
  • Alimony/Child Support
  • debts due to intentional torts
  • student loans
  • consumer debt above $650 for luxury goods/services to a single creditor w/in 90 days of order of relief
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17
Q

Describe who controls Fiscal policy and with what

A

Fiscal policy controlled by POTUS/Congress

Expansionary policy (easy)

  • govt buys g/s & keeps revenue constant
  • “money in” (rates down)

Restrictive policy (tight)

  • govt reduces expenditures &/or raises taxes
  • “money out” (rates rise)
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18
Q

What’s the current ratio?

A

CR = Current Assets / Current Liabilities

Represents the ability of a person to meet an emergency expenditure

Uses assets that are liquid ($/money market funds, etc) and debts maturing w/in 1 year

Ratio above 1.0 is preferred

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19
Q

What is the net investment assets to net worth ratio?

A

Net investment assets / net worth

Compares value of investment assets EXCLUDING THE HOME with net worth

Should be at least 50%

  • can be lower for younger people
  • should be higher for older people
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20
Q

What is the process for calculating IRR?

A
  • $, +/- (outflow only), CFj
  • 0, CFj (if no in/outflow)
  • X, Nj (# of yrs repeating the same in/outflow)
  • SHIFT, IRR (when finished)

If there’s an inflow/outflow the year of the sale, net them out before calculating IRR

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21
Q

How to calculate the PV and NPV on uneven cash flows? (Ex - purchase price is $100k, can sell $40k at end of 5yrs. CF earned is expected to be $25k, $30k, $20k, $15k, and $10k. If opportunity cost is 8%, what’s NPV?)

A
  • $100,000 +/- CFj
  • $25k, CFj
  • $30k, CFj
  • $20k, CFj
  • $15k, CFj
  • $50k (10k inflow, 40k sale), CFj
  • 8, i/yr
  • SHIFT NPV -> +$9,799.5652

Investor will earn an additional ~$9,800 on this investment

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22
Q

What is price elasticity? What do the terms “inelastic” and “elastic” mean?

A

Elasticity -> The degree of movement in the quantity demanded in response to price changes

Inelastic (thick rubber band, tough to move)
- demand for necessities (food/water) responds very little to price changes

Elastic (thin rubber goods, easily moved)
- demand for luxuries (fancy cars) responds relatively more to price changes

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23
Q

What is the equilibrium price?

A

The intersection of supply and demand curves

Prices should always move to equilibrium unless restricted by outside sources

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24
Q

What is chapter 13 bankruptcy?

A

The “adjusting” of debts

Applies to individuals with regular income

Pmts are restructured/sometimes reduced so they are more manageable for the debtor

Debtor isn’t typically required to relinquish any assets in payment if creditors

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25
Q

What is chapter 7 bankruptcy

A

An individuals personal unsecured debts are generally canceled

Significantly restricted following bankruptcy protection act of 2005

26
Q

What are some exemptions for Ch 7 bankruptcy?

A
  • ones homestead
  • a certain amount of personal property
  • pension/ERISA plans
  • existing cash value life insurance
  • annuity contract proceeds
  • disability income payments
  • property held as Tenants by the Entirety
27
Q

Why is chapter 11 bankruptcy?

A

The reorganization of debts

For individual/biz/corporate debtors who are elective for ch 7 bankruptcy
- excluding stock/commodity brokers, railroads

Voluntary/involuntary petitions may be filed and automatic stay and entry, or order for relief provisions will apply

Debtors will remain in possession of, and continue operating, their business

28
Q

What is disinflation?

A

The reduction in the inflation rate

29
Q

What is deflation?

A

A decline in general price levels

30
Q

What best describes consumer debt?

A

Short term debt used to acquire consumer goods

31
Q

What is the “economic & resource” approach to financial counseling?

A

The financial planner is an agent of change, focus is on obtaining and analyzing quantitive data reports (cash flow summary, etc) and making rational decisions

Clients are assumed to be rational and will change to most favorable behavior if given appropriate counseling

32
Q

What is the “classical economics” approach to financial counseling?

A

Clients choose among alternatives based on objectively defined cost-benefit and risk-return trade offs

Increase financial resources/reducing financial expenditures result in improved outcomes

33
Q

What is the “strategic management” approach to financial counseling?

A

Clients goals and values drive the client-planner relationship

FP conducts SWOT analysis and acts more as a consultant than an agent of change

“Phil SWOT loves the STRATEGIC MANAGEMENT approach”

34
Q

What is the “cognitive behavioral” approach to financial counseling?

A

FP attempts to substitute clients negative beliefs with positive attitudes so that they may achieve better financial results

Essentially the cognitive behavioral approach is an “attitude adjustment”

35
Q

What are the purposes of the Fed?

A
  • influencing and monitoring the flow of capital

- maintaining steady economic growth w/ moderate inflation

36
Q

What WOULDNT be on a statement of financial position?

A
  • mortgage payments
  • investment income
  • adjusted tax basis of real estate

it WOULD include

  • FMV of owned assets
  • principal balances of liabilities
37
Q

What is the equation to determine the remaining equity in ones home?

A

1) Determine the amount of principal paid off
— 1, input, X months paid, shift AMORT; press “=“ x1

2) subtract principal paid from step 1 from the original mortgage loan amount
3) subtract result from step 2 from the current FMV of the home

38
Q

What can budgeting help you accomplish if close to retirement?

A

Determine your wage replacement ratio for capital needs analysis

39
Q

How can consumer debt best be described as?

A

Short term debt used to acquire consumer goods

40
Q

What are some statements regarding budgeting?

A
  • plans for the expected, the recurring, and the unexpected
  • projects, monitors, adjusts, and controls future income and expenditures
  • can be used to determine wage replacement ratio for retirement capital needs analysis
41
Q

Can an employee get educational assistance from their employer? If so to what extent ($ & benefits)?

A

Yes an employer can reimburse an employees certain GRADUATE AND UNDERGRADUATE expenses

  • tuition & enrollment fees
  • books, supplies, equipment
  • NOT room & board

These benefits are EXCLUDED FROM GROSS INCOME to an extent of $5,250 per year

CANNOT claim the AOTC/LLC credits for the same expenses

42
Q

What is “mental accounting”?

A

Aka “money jar mentality” - a COGNITIVE bias

The tendency of individuals to put their money into separate accounts (“money jars”) based on the function of these accounts
- money may be earmarked for savings, investments, debt reduction, etc

If client sets money aside for a future vacation while being in significant debt

43
Q

What is loss aversion theory?

A

An EMOTIONAL bias

Client values gains and losses separately, and will make decisions based on perceived gains rather than perceived losses

If presented with 2 equal opportunities, the client will select by the option based on potential gains rather than potential losses

44
Q

What is overconfidence?

A

An EMOTIONAL bias

Consider their abilities are better than they actually are

Take credit for any financial decisions that have positive results, and blame 3rd parties/external sources for negative results

45
Q

What is prospect theory?

A

An EMOTIONAL bias

Clients fear losses much more than value gains & will avoid the smaller of two potential gains if it means avoiding losses

46
Q

What is self-attribution bias?

A

A COGNITIVE bias

Client exhibits an ego defense mechanism that helps them avoid having to admit they made a mistake

47
Q

What’s conservatism bias?

A

A COGNITIVE bias

Clients initially assume a rational view but refuse to change it as new information becomes available

48
Q

What is hindsight bias?

A

A cognitive bias

“Selective memory”

Clients look to past events to support their decisions

Clients tend to remember the their correct views and tend to forget their incorrect views

49
Q

What is illusion of control bias?

A

A Cognitive bias

When clients think they can influence outcomes but they can’t

Is often combined with the EMOTIONAL biases

  • overconfidence bias (an unwarranted belief you’re correct)
  • self attribution bias (you think you did something but you didn’t)
  • illusion of knowledge (you think know something you don’t)
50
Q

What is affinity bias?

A

An EMOTIONAL bias

The tendency to favor things one can identify with emotionally because they’re familiar
- ethic, religious, alumni affiliations

51
Q

What is endowment bias?

A

An EMOTIONAL bias

An asset is deemed special due to the fact it’s already owned

52
Q

What is regret aversion bias?

A

An EMOTIONAL bias

When a client refuses to do anything out of fear their decision will be wrong

53
Q

What is visual learning?

A

When a client responds well to visual objects
- graphs, charts, pictures

Includes visuals in data collection software or presentations

54
Q

What is auditory learning?

A

When the client retains information by hearing or speaking

FP process will be more effective if the needs, priorities, and goals of a client are discussed prior to writing them down

55
Q

What is kinesthetic learning?

A

Clients understand concepts rather better using a hands on approach
- writing goals & objectives with bullet points

56
Q

Calculate the emergency fund ratio and explain what the result means

A

EFR = current assets / NONDISCRETIONARY MONTHLY EXPENSES
• ex) current assets of $17,500, nondis m exp of $27,000
• $17,500 / $27,000 = 0.70
• client has 0.7 months of expenses covered

57
Q

What is quantitative data?

A

Objective data that’s measurable or expressed as a quantity or number

Examples

  • assets & liabilities
  • copies of wills and trusts
  • a list of current investments
  • risk capacity***
58
Q

What is qualitative data?

A

Subjective data that is related the quality of a clients life. A clients subjective feelings, opinions, and attitudes.

Examples

  • goals and objectives
  • health status
  • family circumstances
  • risk tolerance***
59
Q

When can a debtor in Chapter 7 bankruptcy be granted an order of relief?

A

An order of relief will be granted if the petition is proper and if the debtor has not been discharged in bankruptcy within the past SIX YEARS

60
Q

Do debtors need to be insolvent in Chapter 7 bankruptcy?

A

No, UNLESS it is a Partnership

CFP Flashcards - July 2021 Exam (8 decks)

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