General Principles Flashcards
Elasticity
Luxury items
Can find substitutes
Lower prices will increase overall revenues
If the maximum loan-to-value ratio on a $100,000 home is 85%, this means that the lender would accept:
A minimum down payment of $15,000 plus closing costs.
Rationale
The correct answer is “A.” Closing costs are not included in the loan-to-value ratio calculations of the lender.
Periods of increasing employment and increasing output?
Expansion.
Rationale
The correct answer is “C”. An expansion is indicated by rising employment and output. When employment and output are no longer rising, the cycle is in its peak. If employment and output begins to decrease, this indicates a recession. Finally, when employment and output are no longer decreasing, the cycle has reached a trough.
Inelastic
Consumer staples - demand does not change when price changes.
An increase in the price would lead to an increase in the total amount spent on purchases of the product.
The fiduciary standard required of CFP® professionals providing financial advice or financial planning is based upon which of the following?
Meeting duties of loyalty, care and following client instruction
What should a CFP® Professional disclose to a financial planning client at the first meeting?
The CFP® professional’s areas of expertise
Rationale
The planner should disclose areas of expertise to help define the scope of any engagement. The planner’s expertise (or lack of expertise) could reasonably be expected to materially affect the client’s decision to engage the certificate.
Diligence
After analyzing and evaluating the client’s information to understand financial circumstances, an evaluation should be made to determine the client’s goals, relevant personal, and economic assumptions. By undertaking this task in a responsible prompt and thorough matter, a practitioner is adhering to which of the following Code of Ethics Principles? Diligence
When should you provide your client with Form ADV?
As part of the financial planning engagement disclosures.
Form ADV is appropriate to be part of multiple written documents governing the financial planning services that will be provided, as part of the engagement letter.
The Consumer Confidence Index
The Consumer Confidence Index measures how secure individuals are feeling with regard to future economic expectations.
The duty of competence requires:
The duty of competence requires the planner to either refer the client to an expert or bring an expert into the engagement. Preparing the plan with the help of an expert is acceptable under the code standards.
When you are establishing an engagement for financial planning with a client, what information may you provide orally?
Material Conflicts of Interest.
Adjustable-Rate Mortgage (ARM)
Interest rates fluctuate with interest rates in the economy
As rates vary, payments change
Usually carry lower initial interest rate because of the greater degree of uncertainty
Balloon Payments
Payments based on a long-term mortgage at a given interest rate
For example: after a 5-year period, the unpaid balance must be either paid off or refinanced
How much interest was paid during the life of an $80,000 loan at 9.75% interest and a 30 year-term?
Step 1 - calculate the payments
i = 9.75 /12
pv = (80,000)
n = 30 x 12
solve for PMT = $687.32
Step 2 - Calculate total payments and subtract the prin.
$687.32 x 360 = $247,435.20
less principle - 80,000
Interest paid = $167,435.2
Reverse Mortgage
- Means of accessing equity in a home
- Funds may be received as a lump sum, on going payments or a line of credit
- Repayment triggered upon death of owner or (longest living spouse)
- Generally not counted as income for Medicaid eligibility as long as SPENT same months as received
- Could potentially be counted as income for SSI whether or not spend within month received
Robert has a 30 yr, $100,000 mortgage at 11% annual interest with monthly payments. If the client is in a 28% tax bracket, what is the net after-tax mortgage payment for the first year?
PV = $100,000
N = 30 x 12 = 360
i = 11/12 = .9167
Solve for PMT = $952.32
952.32 x 12 = $11,428 —- payments for the year
ROUND DOWN TO ESTIMATE AMOUNT THAT IS INTEREST
$11,000
$11,000 x .28 = $3,000 — amount deductible
$11,428 - $3,080 = $8,348 - approximate total of after-tax payments for the first year.
Amortization example:
$80,000 Mortgage
30 yr term
9.75% annual interest
Monthly payments
i = 9.75/ 12
PV = (80,000)
N = 360
PMT = $687.32
Amortization keystrokes
i = 9.75/12
PV = 80,000 (enter as positive)
PMT (687.32) - enter as negative
120 f AMORT -74,942 – first 10 years interest 120 months
x
Rules of reverse mortgage
- Homeowners 62 or older and living in condominiums and Single family homes
- No income qualifications
- Can still live in home for as long as they choose
- Proceeds tax free
- Not repaid until move out of home permanently
- Remaining equity once repaid goes to borrower or borrowers estate
- DOES not have to be owned free and clear to qualify for a reverse mortgage
Refinance Key Considerations
- Length of time expected to stay in the home
- Cash flow capacity
