Investment Planning Flashcards
2 steps to time value of money problems
1) Draw timeline, 2) Write TVM variables in order of my calc (N, I, PV, PMT, FV)
How to do quarterly or anything but annual periods
Quarterly compounding Nx4, i divided by 4.
How to determine future value when payment and compounding periods differ
NEED TO LEARN HOW TO SOLVE
CAREFUL AS EXAMPLE IN BOOK IS UNCLEAR
Use the nominal rate based on the number of payments per year
To get nominal rate need to use the annual effective interest rate based on the frequency of compounding.
How to calc IRR?
Discount rate when NPV =O
Use to decide the break even discount rate
Requires any returns be reinvested at the discount rate (can’t be done with bonds for example)
What to do when the investment and expense are growing at two different rates when calculating NPV type problems
Use the inflation adjusted rate of return
((1+Rn)/(1+inflation)) -1] x100
When a mortgage interest rate is shown what is the assumed period
Annual. So if calc monthly payment need to convert to monthly both N and i
Careful this is unclear. For multiple choice try monthly and annual
How to calc interest paid in a current or future year or any period on a mortgage or loan
Put number of periods you want interest for and then hit amortization. To get principal paid in that time us x<>y
NPV formula and when to accept project
NPV=PV of future cash flows - cost or initial investment
Do project if NPV is 0 or positive
Difference between annuity due and ordinary annuity and what types of payments is each used for.
Annuity due begins on t=0. The calc must be in begin mode and is used for education payments, retirement income and rent payments
Ordinary t=1calc in end mode. For debt payments like mortgage and car
Form ADV - Part 1
• This form contains the investment business, ownership, clients, employees, business practices, affiliations, disciplinary events of the adviser or its employees..
• A Registered Investment Advisor (RIA) must electronically file ADV Part 1 and Schedule I annually, withi days of their fiscal year end.
Form ADV - Part 2
advisor’s compensation, fees, education, investment objectives, conflicts of interest, and the background of advisory personnel.
* A Registered Investment Advisor (RIA) must promptly update the ADV Part 2 if any information becomes materially inaccurate. Otherwise the changes may be made annually.
Adv part 3
ContainsForm CRS (Customer Relationship Summary).
* Provides a retail investor succinct information about the relationship and service the firm offers including fees, costs, specified conflicts of interest, standard of conduct, and disciplinary history among other things.
Exceptions from registering with sec
TABLEs are incidental! -> Teachers, Accountants, Brokers, Lawyers, and Engineers.
Exemptions from registering with SEC
Exam Tip
Remember that “VIPs are SaFE from exemptions” -> Venture capital, Insurance companies, Private funds less than $150 million, home State, Eoreign advisors, and securities not on a national Exchange
Exam Tip
I
Make sure you distinguish between exceptions to registration and exemptions from registration. The examiners could easily ask, “Which of the following is an exemption?” and then provide you with three exceptions and an exemption.
Always keep in mind, an exception or exemption does not exempt anyone from the anti-fraud provisions of the Uniform Securities Act of 1956.
Federal Perkins Loan Program.
NEED BASED (very low EFC) ,expired 2017.
Federal Pell Grant.
Stafford Loans (also known as Federal Direct Loans)
. Subsidized versus Unsubsidized).
- Federal Pell Grant. NEED BASED grant,and cannot have a bachlor or professional degree to qualify from the US Department of Education.
Stafford loans
subsidized has interest paid during school is need based, unsub is not
Available to undergrad and graduate students.
Stafford Loans are not appropriate if the parents intend to repay the loans.
Parent Loans for Undergraduate Students (PLUS).
Grad PLUS loan for Graduate Students (PLUS Direct)
- The PLUS loan is a loan for parents to pay for their children’s undergrad studies.
The PLUS loan is NOT need based but depends on the parent’s credit score.
PLUS loans are not subsidized
PLUS loans are appropriate for parents who can afford to make a loan payment, but may not have saved anything for education.
Grad PLUS loan for Graduate Students (PLUS Direct)
A graduate or professional student enrolled at least half-time at an eligible school in a program Icading to a graduate or professional degrec or certificate.
Dependent on student credit score.
Maximum PLUS loan amount you can borrow is the cost of attendance minus any other financial assistance you reccive.
Begin making payments six months after you graduate, leave school, or drop below half-time enrollment.
Interest accrues as you go, you can pay it as you go or let it be added to your balance.
How to find an effective annual interest rate when compounded n times per year
5% interest with quarterly compounding has an effective annual yield of (1 + . 05/4)^4
How to calculate holding period return
(Selling Price - Purchase Price +/- Cashflows)
Divided by
Purchase Price or Equity Invested
The examiners will typically not give you a straight holding period return because it is very straight forward.
Items that make the computation more difficult include:
Dividends received - make sure to add them to the numerator.
Margin interest paid - make sure to subtract from the numerator.
Taxes paid - only do this if the question asks for the after-tax gain or loss. The taxes will be computed based on the dividends received and any capital gains on the sale (short-term versus long-term). Taxes, like margin interest, are subtracted from the numerator.
Purchased the securities on margin - in the numerator make sure to subtract any interest paid. Also, in the numerator you will include the total cost of the securities as a subtraction from the sales proceeds.
In the denominator you only include your equity in the trade.
What does 60% margin mean?
I borrowed 40%
