Review Flashcards
Ted purchased a home. He took out a mortgage of $300,000 (30-year at 8%). When mortgage rates declined 2 years later, he re-financed the remaining principal. To refinance at 6% for 30 years, a fee of $1,000 was added to the new loan. What principal will be remaining after the 6th year of the new loan? $270,337 $278,230 $282,193 $293,008
Explanation 1st The payment on the $300,000 loan is $2,201.29. 2nd After 2 years*, the loan principal is $294,780. *The input is for 2 years. 3rd You must add $1,000 to the 2nd answer ($294,780) to get the new payment of $1773.35. 12C 295,780 CHS PV, 6 ÷ 12 I, 12 x 30n 4th You then use the amortization keystrokes to get the end of the 6th year ($270,337). This input is for 6 years.
A yield curve compares interest rates on debt instruments having which of the following? The same coupon The same maturities The same tax status The same quality The same nominal rate I, III II, IV, V III, IV IV, V
Explanation Yield curves relate time to maturity and yields to maturity (not coupon or nominal rates) for bonds of the same risk class. III, IV
A young couple purchased their home 2 years ago. They used a 30-year ARM and put 20% down on their home. The interest rate was 6% annually for the first and second years. The principal remaining after the second year is $77,974. What was the original cost of the home? $79,122 $80,000 $80,454 $100,000
NOTE: If you want to use the following keystrokes, you must use 1PY/YR for the 10B. If you would rather use 12P/YR for the 10B, then you will have to rewrite the keystrokes. The keystrokes are monthly for all calculators. 1st Calculate remaining payments $77,974 CHS PV, 336 n, .5 i = $479.64 PMT 2nd Calculate original mortgage $77,974 FV, 24* n, .5 i, $479.64 PMT = $80,000 PV 3rd Calculate original home price $80,000 : 80% = $100,000 Think simply - The question asks the original cost of the home not the original cost of the loan. If the loan was roughly $80,000, the cost of the home had to be $100,000 (20% down). * 1st and 2nd years only - 24 months
Mr. and Mrs. Adams took out a $120,000 30-year mortgage 10 years ago. The interest rate at that time was 12% with monthly payments of $1,234.34. They have been making 2 extra payments each year to shorten the note. They may refinance their remaining note, but it will cost them $3,000 in points. They decide to add the points to the refinanced note. How much will their monthly payment be if they refinance the remainder of their loan at 7-1/2% with monthly payments for 20 years? No solution $861.98 $1,091.43 :
Explanation There is no solution except the following. This is a case type question. Go to the financial statement to get the remaining mortgage (liabilities at FMV $104,000, for example) and then add the points ($3,000) and use 20 years. 12C 107,000 PV, 7.5 : 12 i, 12 x 20 n = $861.98
Which of the following is a true statement? Disclosure of material information relative to the professional relationship must be written. Referral fees received, since not paid by the client, do not have to be disclosed. There is no need to state the CFP® certificant’s principles of financial planning in the CFP® certificant disclosure form. A CFP® certificant disclosure form should include the CFP® certificant’s educational background and employment history. It is not necessary to list professional designations and licenses held on the CFP® certificant’s disclosure form. I, II, IV, V I, III, IV I, IV III, IV, V II, V
Explanation I, IV Answers II, III, and V are false. Answer III says there is “no” need to state the CFP® principles. It makes sense you should have to disclose your principles when you do a plan.
Which rules set forth the ethical obligations for the first step in the financial planning process? 1.1 1.2 1.3 2.2 I, II I, II, III I, II, IV II, IV III
Explanation I,II,IV Rules 1.1, 1.2 and 2.2 of the Rules of Conduct set forth the ethical obligations for the first step of the financial planning process. Rule 1.1 states, “The certificant and the prospective client or client shall mutually agree upon the services to be provided by the certificant,” and Rules 1.2 and 2.2 outline information that is important for the potential client to understand in order to make an educated agreement with the financial planner. That information includes such things as conflicts of interest, the obligations of each party, compensation arrangements and an identification of all parties that will be involved in delivering the services made part of the agreement. Those disclosures are currently required by CFP Board’s current Code of Ethics
Which of the following investment vehicles are most appropriate for an emergency fund for a family with $12,000 a year discretionary income? Balanced mutual fund Line of credit Money market mutual funds
Laddered CDs set to mature every 6 months III, IV Explanation Is a line of credit an investment vehicle? Some people treat a line of credit as an emergency fund. It is not usable as such. The investment instruments chosen as an emergency fund should be safe and liquid. Other examples include savings accounts, short-term CDs, T-bills, and even laddered CDs.
Function, Purpose and Regulation of Financial Institutions Mrs. Able has the following assets at one FDIC-insured bank: Asset Ownership Balance Various Certificates of Deposit Mrs. Able $300,000 Money Market Deposit Account Mrs. Able $50,000 IRA Rollover Mrs. Able $200,000 Passbook Savings Joint with son $100,000 Checking Account Joint with daughter $100,000 Savings Account Joint with husband $400,000 How much is currently insured? $800,000 $950,000 $975,000 $1,000,000
Explanation $1M The joint accounts are handled as follows: Asset Mrs. Patrick Other party Joint with son $50,000 $50,000 Joint with daughter $50,000 $50,000 Joint with husband* $150,000 $200,000 $250,000 $300,000 $250,000 single + $200,000 IRA + $250,000 + $300,000 = $1,000,000 *With the $150,000 she has the maximum of $250,000 in joint accounts. Her husband gets 1/2 of $400,000. The remaining $50,000 is not insured. Remember FDIC insurance is per titling, not per account.
Function, Purpose and Regulation of Financial Institutions The main purpose of depository institutions is which of the following? To insure against loss For safety of principal Store liquid assets until needed To provide the maximum return for the least risk
Store liquid assets until needed
Personal and Business Financial Statements Harry is single and 35. He has a small money market account with a balance of $4,500. He recently received a 30 day contract on some vacant land for $10,000. He will have a gain of $2,000. He has $30,000 in an IRA account and $10,000 in corporate bonds. He recently borrowed $5,000 on a 30-day note and has $2,000 in credit card debt. What is Harry’s current ratio? 2.9 3.2143 3.5 7.25
Explanation (Money market + Account receivable (land) + Corporate bonds) / (30-day note + Credit card debt + Current liabilities) NOTE: 2.07 is not an answer ($14,500 / 7,000), which means you must use the land as a current asset. Taxes are not a factor because no tax rate was given.
Personal and Business Financial Statements Mr. and Mrs. Delay are approaching retirement. Their statement of financial position shows limited retirement assets. Although Mr. Delay has worked all his life, his income earnings have always been below the maximum Social Security threshold. As a result, Social Security benefits for both he and his wife will be about half the maximum available at NRA (Normal Retirement Age). His pension benefits available through a prior employer are also minimal. Since he has been working almost for 40 years, he wants to retire early (before NRA). What would you do if Mr. Delay approaches you to do a financial plan? Tell him he cannot retire until at least NRA. Do a risk tolerance survey to see if his investments could produce better returns. Decline him as a client. Have the client keep a budget to determine current cash flow needs and potential savings. Suggest he get a better job or a second job for the next few years to increase his savings and get higher Social Security benefits.
Explanation Have him keep a budget The budget will determine both their current situation and their potential needs at retirement. This is the best starting point. A budget is a means to the end. There is no reason to decline him as a client. He needs help, that is what we do.
Personal Financial Planning Mr. and Mrs. T (ages 31 and 30 respectively) have the following assets and liabilities. What is their current ratio? Account Balance Checking $5,000 Money Market $10,000 IRA Mutual Fund $20,000 Government Bonds $10,000 Doll Collection $10,000 Cred Card debt $15,000 1.0 1.667 2.333 3.667
Explanation (Checking / Money Market / Bonds) / Credit Card debt NOTE: Doll collection would count if it were a business. 1.667
Time Value of Money Bonnie will have to make payments of $10,000 per year 6 years from now. She will have to make a series of 5 yearly payments at the beginning of the 6th year. She feels she can make an 10% after-tax return on a fund she sets aside now. How much does she have to put into the fund today to make future payments? $21,398 $23,538 $25,892 $29,747
Explanation How much does she need to make the payment? Begin mode, $10,000 PMT, 10 i, 5 n = $41,699 PV She needs to make the payments at the beginning of the 6th year; that means she only has 5 years to fund the $41,699, not 6 years. $41,699 FV, 10 i, 5 n = $25,892 PV
Time Value of Money Portfolio XYZ has a market value of $100,000 in the beginning of year 1. The following capital withdrawals occur: End of year 1 End of year 2 End of year 3 $4,000 $5,000 $6,000 The market value at the end of year 3 is $120,000. Based on the information outlined above, the dollar weighted rate of return is which of the following? 1.57% 1.67% 10.92% 12.00%
Explanation Withdrawals are positive cash flow. A withdrawal from a fund becomes a deposit into the client’s checkbook. You must solve for IRR. Calculator keystrokes: HP 12C HP 10B HP 17BII 100,000 CHS g CFo 100,000 + CFj CFLO, clear data, yes, #T? off, 100,000 + input 4,000 g CFj 4,000 CFj 4,000 input 5,000 g CFj 5,000 CFj 5,000 input 126,000 g CFj 126,000 CFj 126,000 input f IRR gold IRR/YR Exit, calc., IRR NOTE: The $126,000 is the $120,000 plus the $6,000 at the end of year 3.
Helen and John want to fund a college education for their son, William, age 2. William will attend 4 years of college starting at age 18. They feel that the cost of college will be $12,500/yr in today’s dollars. They fell they can achieve an 8% after-tax yield on their investments and that inflation will be 5% over the next 20 years. What is the amount need now to fund William’s education?
$30,555
Cost $12,500 —> 16 @ 5% —> $27,285.93 for first year
2.871 (interest rate 1.05/1.08 delta key)
4n during college
Deposit Now $30,555 <——– 16 28% ——- $104,679.76
