PFL 2 Flashcards
Risk Profiling
the quantification of an investor’s overall risk tolerance
Risk Enhancement
a risk response strategy aimed at increasing the probability of a positive risk occurrence
Risk Acceptance
occurs when a business or individual acknowledges that the potential loss from a risk is not great enough to warrant spending money to avoid it
Risk Transference
handing the risk off to a willing third party
Risk Avoidance
seeks to avoid compromising events entirely
Risk Reduction
reduce the frequency or severity of losses
Auto Liability Coverage
mandatory in most states; Bodily injury liability may help pay for costs related to another person’s injuries if you cause an accident; Property damage liability may help pay for damage you cause to another person’s property while driving
Uninsured and Underinsured Motorist Coverage
helps pay for costs incurred by another uninsured or underinsured driver; required in some states
(Auto) Collision Coverage
helps cover damages to car or replace car if If you’re involved in an accident with another vehicle, or if you hit an object such as a fence
(Auto) Comprehensive Coverage
helps cover costs or replace car if it is damaged by a covered peril other than collisions (theft, fire, vandalism)
(Auto) Medical Payments Coverage
helps cover costs if If you, your passengers or family members who are driving the insured vehicle are injured in an accident
(Auto) Personal Injury Protection
helps pay for medical and other expenses incurred due to your injury such as childcare expenses or lost income
(Auto) Gap Coverage
helps pay off your auto loan if your car is totaled or stolen)
Renter’s Insurance
covers losses from theft, water backup damage, certain natural disasters, bodily injuries and more in a rented property
Worker’s Compensation
paid by employer who cannot require the employee to contribute to the cost of compensation
Disability Insurance
replaces some of a working person’s income when a disability (illness or injury) prevents them from working; It does not cover medical care or long-term care services
Long-Term Care Insurance
covers long-term care costs generally not covered by health insurance, Medicare, or Medicaid
Co-Payments
a set fee you pay for a doctor visit or a prescription; helps protect against moral hazard
Exclusions
types of damage that are not covered by your insurance
Underwriting
sign and accept liability under an insurance policy, thus guaranteeing payment in case loss or damage occurs
Global Insurance Program
a multinational insurance program with a coverage territory encompassing the entire world, including the country in which the insured is domiciled
COBRA/Consolidated Omnibus Budget Reconciliation Act
gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time (18 or 36 months) under certain circumstances (“qualifying acts”)
Insurance Agent
represents one or multiple insurance companies and sells their policies, usually for a commission; licenced professionals
Insurance Broker
an intermediary who sells, solicits, or negotiates insurance on behalf of a client for compensation; licenced professional
Insurance Agent Vs. Broker
Insurance agents represent the insurance provider that employs them and help sell policies from that single provider. Insurance brokers represent the consumers who use them and can help them shop for policies from multiple providers
Insurance Actuary
uses mathematics, statistics and financial theory to analyze the financial cost of risks
Principle of Subrogation
allows your insurer to recover the costs associated with a claim, such as medical bills, repairs costs, and your deductible, from the at-fault party’s
Rider
an addition to an existing life insurance policy that allows you to add specific insurance products to your basic coverage
Presumptive Disability
where a loss is presumed to be total and permanent due to loss of sight, hearing, speech or loss of two limbs
Health Insurance Portability and Accountability Act (HIPAA)
Required the creation of national standards to protect sensitive patient health information from being disclosed without the patient’s consent or knowledge
Asset
anything that has economic value
Asset Allocation
The blend of assets chosen for an investment portfolio
Bonds
pay interest on the investment, but the amount of money that is invested can be locked and inaccessible until the end of the bond period
Bond Maturity
the date when a bond’s principal is repaid with interest
short-term bond
matures within 1-3 years
long-term bond
maturity period greater than 10 years
capital gain/loss
selling an investment for more or less than you bought it for
Asset classes
cash, equities, fixed income/bonds, alternative investments/real estate
ETF/Exchange Traded Funds
fund that tracks a specific industry, commodity, or index; trade like stocks
Index Fund
measures the performance of a group of assets
Mutual Funds
pool of money gathered from many investors and invested in stocks, bonds and other assets by a professional manager; considered some of the safest investments in the market for retirement accounts to invest in because of the diversification in assets that many aim for
Real Estate
Property that consists of land or buildings
Retirement Account
tax-advantaged account used to finance retirement
Security
A stock, bond or other investment instrument that can be traded; sale of securities is regulated by the SEC
SEC/Securities and Exchange Commission
protects investors, maintains fair, orderly, and efficient markets, and facilitates capital formation
Stock
a security that represents a share of ownership in a company; may also be called shares or equities
Bear Markets
stock prices are falling, and investing is risky but potentially very rewarding. Bear markets tend to occur during an economic downturn
Bull Markets
stock prices are rising, so investments aren’t as risky but don’t provide the same opportunity for a large reward. Bull markets tend to last longer than bear markets
Common Stock
voting rights, dividends fluctuate depending on current profit levels, more volatility
Preferred Stock
no voting rights, dividends are set, more stable (preferred stock dividends are prioritized over common stock dividends)
Stock Market Index
an index that measures the performance of a stock market, or of a subset of a stock market
Share
unit of ownership
Liquidity
how easily an asset converts to cash
Real estate investment trusts/REIT
mutual fund that invests in real estate
Ask
the amount a seller is willing to accept for a security
Bid
the amount an investor is willing to pay for a security
Balance Sheet
information about a company’s assets (left) and liabilities (right), and the shareholders’ equity that results
Income Statement
shows the company’s revenues and expenses during a particular period
Cash Flow Statement
a financial statement that shows how cash entered and exited a company during an accounting period
ISA/Individual Savings Account
savings account you NEVER pay tax on; restriction on how much you can invest in a given year
Pension
a fund into which amounts are paid regularly during the individual’s working career, and from which periodic payments are made to support the person’s retirement from work
Revolving Credit
lets you borrow up to a predetermined credit limit. At the end of each billing cycle, you can either repay what you’ve borrowed in full or carry over (“revolve”) a balance to the next month, making only a minimum payment
Home-Equity Loans
allows you to borrow against the value of your home
Term Life Insurance
lower cost, covers holder in case of death during a predetermined time period, doesn’t accrue cash value
Whole Life Insurance
lasts your entire lifetime, builds cash value, higher premiums
Universal Life Insurance
allows you to adjust premiums, builds cash value, variable death benefit and cash value growth
Variable Life Insurance
cash value growth is tied to investments accounts such as mutual funds and bonds, fixed premiums, (guaranteed death benefit remains constant while the variable death benefit fluctuates)
Cash Value of Life Insurance
While premiums are paid and interest accrues, the cash value builds over time; can be borrowed against, cash can be withdrawn from it but this will reduce the death benefit
Unit Trust
a type of mutual fund where money from many investors (called “unit holders”), is managed by a fund manager to achieve a specific return
Open-Ended Investment Company
regular mutual fund
Closed-Ended Fund
has a fixed number of shares offered by an investment company through an initial public offering
Settlement
final step in the transfer of ownership involving the physical exchange of securities or payment; after settlement, the obligations of all the parties have been discharged and the transaction is considered complete
Investment Trust
a fund that is a public limited company
Hedge Fund
actively managed fund with freer rein to invest aggressively in a wider variety of financial products than most mutual funds; typically open-ended
Primary Market
the issuance and sale of securities to purchasers directly by the issuer (where governments and businesses offer new securities for the first time); most buyers are institutional investors
Secondary Market
Trades take place on the secondary market between other investors and traders rather than from the companies that issue the securities; typically associated with the stock market
Pig Market
investors assume high degrees of risk with a singular focus on short-term profit
Total Return
capital appreciation + income received on the portfolio in the form of interest, capital gains, dividends
Capital Gain
the profit earned on the sale of an asset which has increased in value over the holding period
Bond Duration
measures the bond’s sensitivity to interest rate changes
Futures Contract
a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future
Derivative
a contract that derives its value from the performance of an underlying entity
Options
a derivative that conveys to the purchaser (the option holder) the right, but not the obligation, to buy or sell a set quantity or dollar value of a particular asset at a fixed price by a set date
Swap
derivative contract in which one party exchanges or swaps the values or cash flows of one asset for another
Floating Interest Rate
does not have a fixed rate of interest over the life of the instrument
Arbitrage
the practice of taking advantage of a difference in prices in two or more markets
Embezzlement
a trusted individual taking advantage of their position to steal funds or assets, most commonly over a period of time
Annuity
a series of payments made at equal intervals (regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments)
Top 3 U.S. Indexes
S&P 500, Dow Jones, Nasdaq
Short-Selling
selling a borrowed security and buying it back at a lower price profit from the decrease in its price
Long-Selling
buying then selling assets to profit from an increase in the asset’s price; less risky
Descriptive Vs. Analytic Information
Descriptive research classifies, describes, compares, and measures data. Meanwhile, analytical research focuses on cause and effect.
Demand Deposit Account
a bank account from which deposited funds can be withdrawn at any time, without advance notice
Prospectus
a disclosure document that describes a financial security for potential buyers
Trustee Vs. Executor
an executor administers the estate of the person who died, while a trustee administers a trust for the benefit of the named beneficiaries
Trust Fund
legal arrangements that allow individuals to place assets in a special account to benefit another person or entity
Income Stock
equity financial securities that pay regular and predictable dividends. They are purchased with the purpose of generating a steady stream of dividend flows.
Over-the-counter Stock
securities that are not listed on a major exchange in the United States and are instead traded via a broker-dealer network, usually because many are smaller companies and do not meet the requirements to be listed on a national exchange.
Growth Stock
publicly traded share in a company expected to grow at a rate higher than the market average
Value Stock
a stock that tends to trade at a lower price relative to its fundamentals. The idea behind value investing is that stocks of good companies will bounce back in time if and when the true value is recognized by other investors.
Commercial Paper
short-term unsecured promissory notes issued by companies
Wrap Account
an investment account where a “wrapped” fee or fees cover all of the management, brokerage and administrative expenses for the account
Declaration Date
the date on which the board of directors of a company announces the next dividend payment
Record Date
the last date in which shareholders are eligible to receive a dividend or distribution
FSA/Flexible Spending Account
a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money.
Living Will
Advanced Healthcare Directive; a written statement detailing a person’s desires regarding their medical treatment in circumstances in which they are no longer able to express informed consent
Intestate
a person who has died without having made a will.
Probate
legal process in which a will is reviewed to determine whether it is valid and authentic; happens after you die
How are dividends taxed?
Qualified dividends are taxed at a capital gains rate, while ordinary dividends are taxed at the standard federal/state rate
larceny
theft of personal property.
White Collar Crime
financially motivated, nonviolent or non-directly violent crime committed by individuals, businesses and government professionals
Coercion
persuading someone to do something by using force or threats
Arbitrator
As impartial third parties, they hear and decide disputes between opposing parties
Mediation vs. Arbitration
The main distinction between the two is who makes the final decision. With mediation, the final decision is a reached agreement between the two conflicting parties, while arbitration calls on an arbitrator to analyze the case details and reach a verdict
Notarization
an identity-based, anti-fraud measure performed by a government-authorized person called a notary
S Corp vs. C Corp
The C corporation is the standard (or default) corporation under IRS rules. The S corporation is a corporation that has elected a special tax status with the IRS and therefore has some tax advantages, but is limited to 100 share holders and is typical of smaller businesses.
General Partnership vs. Limited Partnership
general partners have full operational control of a business and unlimited liability. Limited partners have less liability and do not take part in day-to-day business operations.
Conglomerate
multi-industry company that consists of several different and unrelated business entities that operate in various industries under one corporate group
Skimming/skim pricing
a pricing strategy that sets new product prices high and subsequently lowers them as competitors enter the market
FTC/Federal Trade Commision
protecting the public from deceptive or unfair business practices and from unfair methods of competition
market penetration strategy
when a company works towards a higher market share by tapping into existing products in existing markets
Consideration
a legal term used to describe the benefit each party to a contract receives
Required elements of valid contracts
mutual assent; adequate consideration; capacity; and legality.
Void Contract
a contract that isn’t legally enforceable, starting from the time it was created
Voidable Contract
a valid contract which may be either affirmed or rejected at the option of one of the parties
Unenforceable Contract
a contract that is valid but one that a court chooses not to enforce
Undue Influence
involves one person taking advantage of a position of power over another person; puts the free will of one of the parties entering the contract into question, and therefore leads to the contract being unenforceable and voidable by the victim party.
What is the minor rule in a contract?
minors are considered not to have the legal capacity to enter into the contract, which is why contracts involving minors can be voided. Only the minor, however, has the right to void the contract or decide to honor it.
Statute of Frauds
requires that certain kinds of contracts be memorialized in writing
UCC/Uniform Commercial Code
a comprehensive set of laws governing all commercial transactions in the United States. It is not a federal law, but a uniformly adopted state law
Agency Relationships
is created when one person (the principal) consents to another person (the agent) acting on his behalf
Power of Attorney
WRITTEN/express authorization to represent or act on another’s behalf
Broker
a person or firm who arranges transactions between a buyer and a seller
Testator
a person who has made a will
Trustee
In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary
Bailee
a person or party to whom goods are delivered for a purpose, such as custody or repair, without transfer of ownership (storage company, dry cleaner)
Employment-at-will
an employment agreement stating that employment is for an undefined period of time and may be terminated either by employer or employee.
Full vs. Limited Warranty
“Full Warranty” means the coverage meets the federal minimum standards for comprehensive warranties, while “Limited Warranty” means the coverage does not
Negotiable Instruments
a signed document that promises a payment to a specie person or assignee (personal checks, money order, CDs, promissory notes)
Primary vs. Secondary Parties
Primary liability refers to an obligation for which a party is directly responsible. Secondary liability, on the other hand, refers to an obligation that is the responsibility of another party if the party that is directly responsible fails to satisfy the obligation.
Lein
a legal claim against assets that can be used as collateral to repay debt
Chapter 7 Bankruptcy
liquidation; most common for individuals; liquidation of all your assets to pay off debts, any remaining unsecured debt is erased
Chapter 11 Bankruptcy
large reorganization; used to reorganize a business or corporation; the come up with a plan for how the business will operate while paying off its debts, both the court and creditors must approve
Chapter 12 Bankruptcy
family farm; similar to chapter 13, allows family farmers and fishermen to avoid having to sell all their stuff
Chapter 13 Bankruptcy
repayment plan; court reorganizes debt and puts you on a strict repayment plan of both secured and unsecured debt
Deed vs. Title
deed is evidence of a specific event of transferring the title of the property from one person to another. A title is the legal right to use and modify the property how you see fit
Personal Representative
executor; administers the estate of another person
Increasing vs. Decreasing Term Insurance
Increasing: death benefit payout increases every year
Decreasing: death benefit payout decreases every year
Mediation Vs. Negotiation
negotiation involves only the parties, and mediation involves the intervention and assistance of a third party (the mediator)
Rate of Return
the net gain or loss of an investment over a specified time period
High-Yield Savings Account
higher APY, but often, you won’t earn enough over the long-term to account for inflation; rates fluctuate, withdrawal limits, minimum deposit requirements; there are better choices for long term investments
APY/Annual Percentage Yield
the total interest you earn on money in an account over one year
Compounding Period
the time intervals between when interest is added to the account (annually, semi-annually, quarterly, monthly, daily)
APY Vs. Interest Rate
APY is the total interest you earn on money in an account over one year, whereas interest rate is simply the percentage of interest you’d earn on a savings account, investment or loan. In other words, the interest rate of an account is just one component of the account’s APY, which also factors in how often your interests compounds.
Money Market Accounts
combine features of a regular savings account with features of a checking account
Fair Credit Reporting Act
regulate the collection of credit information, which is frequently used to determine mortgage and lending rates. The law limits who can access a consumer’s credit history, and prohibits lenders from providing outdated or inaccurate information. The law also allows consumers to read their own credit reports, and to contest any inaccurate information
Fair Debt Collection Practices Act (FDCPA)
limits the actions of third-party debt collectors when attempting to collect debts on behalf of another person or entity
CAN-SPAM Act
governs email communication; Recipients have the right to stop being contacted
Gramm-Leach-Bliley Act (GBLA)
requires all U.S. financial institutions to reveal in writing how they handle, share, and protect consumers’ information
Children’s Online Privacy Protection Act
governs what information websites directed to children under 13 years of age can collect from their visitors
Fair Housing Act
protects buyers and renters of housing from being discriminated against by sellers, landlords, or financial institutions
Dodd-Frank Act
sweeping reform of U.S. financial regulations
IRAs vs. 401(k)
401(k)s are offered through employers, whereas IRAs are opened by individuals through a broker or a bank
When should you receive your W-2 from your employer?
January 31
When is the deadline to file your taxes?
April 15; an extension will give you an extra 6 months to October
How many federal income tax brackets are there? What is the range?
7 brackets ranging from 10% to 37%
Venture Capital
capital invested in a project in which there is a substantial element of risk, typically a new or expanding business
Fiduciary
someone who manages money or property for someone else; must manage money for benefit of other party and not your own
Consumer Report
contain information on an individual that is not in their credit report, including their “character, general reputation, personal characteristics, or mode of living” and are most often used by employers to check on job applicants
Express Warranty
when a seller makes a guarantee to the buyer that the product/service being offered has certain qualities
Implied Warranty
a guarantee that is not written down or explicitly spoken
General Liability Insurance
property damage and/or injuries to another person caused by an accident in which you’re at fault
Property Insurance
provides financial reimbursement to the owner or renter of a structure and its contents in case there is damage or theft—and to a person other than the owner or renter if that person is injured on the property
Retail Bank
offer members of the general public financial products and services such as bank accounts, loans, credit cards and insurance
Commercial Banks
concentrate on supporting businesses
Cooperative Banks
typically local or community-based associations whose members help determine how the business is operated. They’re run democratically and they offer loans and banks accounts, among other things.
Bank vs. Credit Union
banks are typically for-profit institutions while credit unions are not-for-profit and distribute their profits among their members
Wealth Management
an investment advisory service that combines other financial services to address the needs of affluent clients
Check Register
used to record financial transactions in cash
Bank Statement
a list of all transactions for a bank account over a set period, usually monthly
Components of a Credit/FICO Score
payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%)
Credit Bureau
companies that compile and sell credit reports; Equifax, Experian, and TransUnion
Debt Consolidation
a form of debt refinancing that entails taking out one loan to pay off many others
Debt Avalanche vs. Snowball
Avalanche: Pay off your highest-interest debt first; pay less overall
Snowball: Pay off your smallest balances first; builds motivation
Truth in Lending Act
ensures that creditors provide complete and honest information
Equal Credit Opportunity Act
prevents creditors from discriminating against individuals
Fair Debt Collection Practices Act
established rules for debt collectors
Credit Card Statement
A summary of the transactions on your account—your payments, credits, purchases, balance transfers, cash advances, fees, interest charges, and amounts past due
Credit Rating vs. Credit Score
Credit ratings are expressed as letter grades and used for businesses and governments. Credit scores are three-digit numbers used for individuals and some small businesses
Credit Rating
an evaluation of the credit risk of a prospective debtor;
Escrow
Funds or assets held in escrow are temporarily transferred to and held by a third party, usually on behalf of a buyer and seller to facilitate a transaction. “In escrow” is often used in real estate transactions whereby property, cash, and the title are held in escrow until predetermined conditions are met
How does credit availability change with the business cycle?
Peak=high availability
Trough=contractionary phase/low availability
Tax Deductions Vs. Credits
Deductions can reduce the amount of your income before you calculate the tax you owe. Credits can reduce the amount of tax you owe or increase your tax refund.
HMO/Health Maintenance Organization
delivers all health services through a network of healthcare providers and facilities; least freedom to choose providers; require referal to see a specialist
PPO/Preffered Provider Organization
A moderate amount of freedom to choose your health care providers – more than an HMO; you do not have to get a referral from a primary care doctor to see a specialist; Higher out-of-pocket costs if you see out-of-network doctors vs. in-network providers
POS/Point of Service Plan
blends features of an HMO with a PPO; requires referrals; You can see out-of-network doctors, but you’ll pay more.
Gated Vs. Non Gated
Refers to the need to obtain a referral from your primary care physician before seeing a specialist. With a “Gated” plan, you need a referral, with a “Non-Gated” plan, you don’t.
5 Cs of Credit
Most lenders use the five Cs—character, capacity, capital, collateral, and conditions—when analyzing individual or business credit applications
Exemption Vs. Deduction
both reduce your taxable income; The number of exemptions you can claim depends on your filing status and the number of dependents you have. The kinds of deductions you can claim, however, depend on your expenses.
Bonds Vs. Debentures
Bonds are debt financial instruments issued by financial institutions, big corporations, and government agencies having the backing of collaterals and physical assets. Debentures are debt financial instruments issued by private companies but are not backed by any collaterals or physical assets.
Bibliography
a detailed list of all the sources consulted and cited in a research paper or project
Warranty vs. Guarantee
A guarantee is a promise that something is of good quality and will perform the way it is intended to. A warranty is an assurance issued to the consumer, which is attached to a product.
Commercial Bank vs. Investment Bank
investment banks typically raise money by selling securities (like stocks and bonds). On the other hand, commercial banks use consumer deposits to fund loans and mortgages, and the interest on those loans becomes profit for the bank.
Ownership Investments
things you buy while expecting an appreciation in value; stocks, real estate, precious objects, and businesses
Lending Investments
debts you buy, expecting to be repaid; bonds, certificates of deposit, and Treasury Inflation-Protected Securities (TIPS)
Good Debt
debt the helps put you in a better position; taking out a mortgage, buying things that save you time and money, buying essential items, investing in yourself by borrowing for more education or to consolidate debt
Store-Value Card
gift card
Human Capital
the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country
money
any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context
elements of capitalism
private ownership, the motive for profit, the ability for businesses to compete in the free market, and minimal intervention in government
voluntary exchange
the act of buyers and sellers freely and willingly engaging in market transactions
equity
or economic equality, is the concept or idea of fairness in economics, particularly in regard to taxation or welfare economics
factors of production
land, labor, capital, entrepreneurship
market value
how much something is worth in a competitive marketplace
CPI
consumer price index; measures inflation and purchasing power; measures the average change in price over time of a market basket of consumer goods and services
components of GDP
consumption, investment, government expenditure, net exports
“Investment” in GDP
purchase of new capital goods
