CFP Deck 1 Flashcards
(166 cards)
1
Q
Muni Bonds: Private Activity
A
Used in the Construction of Private Activities (ex. Stadiums)
2
Q
Muni Bonds: General Obligation
A
Backed by the full faith, credit, taxing authority of municipality
3
Q
Muni Bonds: Revenue
A
Backed by revenue of specific project, no backed by full faith, credit, taxing authority of municipality
4
Q
EMH: Strong
A
Price reflects all info; No advantage, “Market is efficient at adjusting prices; can’t beat market.”
5
Q
EMH: Semi-Strong
A
Price reflects public info; Advantage gain through inside info
6
Q
EMH: Weak
A
Price reflects historic data; advantage through fundamental analysis; Rejects technical analysis
7
Q
Intrinsic Value Model
A
TO BE UPDATED
8
Q
Geometric Average
A
Time-Weighted “Compounded rate of return”
9
Q
Holding Period Return
A
HPR = Selling $ - Purchase $ +/- CF ÷ Purchase $ or Equity Invested… Not compounded, No considerations for time period
10
Q
Holding Period Return
A
Not Compounded, No consideration for time period.
11
Q
Arbitrage Pricing Theory
A
Pricing imbalances cannot exist for long; mult-factor model: inflation, risk premium, expected return
12
Q
R^2
A
Coefficient of Determination
13
Q
R^2
A
Calculate by Squaring the correlation coefficient
14
Q
R^2
A
Measure of how much return (%) is due to market (Systematic Risk = Market Risk)
15
Q
Variability of Asset Returns
A
Standard Deviation
16
Q
Asset Classes
A
Capital, §1231, Ordinary Income
17
Q
σ
A
Standard Deviation - 1 = 68%; 2 = 95%: 3 = 99%
18
Q
Leptokurtic
A
High Peak, Fat tails
19
Q
Platykurtis
A
Low peak, (think plateau), thin tails
20
Q
Margin Call Formula
A
Loan ÷ (1 - Maintenance Margin)
21
Q
Investor Policy Statement
A
Establishes client objectives, limitations on investment manager (RRTTLLU)
22
Q
Investor Policy Statement Objectives:
A
Return Requirements, Risk Tolerance
23
Q
Investor Policy Statement Constraints:
A
Time Horizon, Taxes, Liquidity, Laws and Regulations, Unique Circumstances
24
Q
Russell 2000
A
Value Weighted Index of smallest 2000 stocks of Russell 3000
25
S&P 500
Value Weighted Index - incorporates market capitalization
26
Dow Jones Industrial Average
Price Weighted - 30 stocks
27
Money Market Security: Euro Dollars
Deposits in Foreign Banks that are denominated in USD (HINT: Euro = Foreign; Dollars = USD)
28
Money Market Security: Bankers Acceptance
Facilitates Imports/Exports, maturities of 9 months or less, can be held until maturity or traded
29
Money Market Security: Commercial Paper
Short terms loans between Corporations, Maturity 270 days or less, Does NOT have to be registered with SEC, $100,000 - Sold at Discount
30
Money Market Security: Treasury Bills
Maturities of 4, 13, 26, 52 Weeks, Denominations of $1,000
31
Insider Trading and Securities Fraud Enforcement Act of 1988
Insider = Anyone who trades on non-public info, cannot trade on non-public info
32
SIPC
Securities Investor Protection Corporation
33
Securities Protection Act of 1970
Established SIPC to protect investors from losses resulting from brokerage firm failures; does not protect from incompetence - bad investments
34
Investment Act of 1940
Required Investment Advisors to Register with the State or SEC
35
Investment Company Act of 1940
Authorized SEC to regulate investment companies
36
Investment Company - 3 types
Open, Closed, Unit Investment Trust
37
Investment Company: Open
Unlimited mkt cap, shares bought/redeemed from fund, shares trade at NAV (Ex. T. Rowe Price, Vanguard)
38
Investment Company: Closed
Have fixed mkt cap due to finite # of shares, trade at discount or premium
39
Investment Company: Unit Investment Trust
Equity or fixed income, typically fixed income, self liquidating, passive mgmt, "units" not shares, no trading of assets
40
Securities Act of 1934
Regulates trading of secondary market, created SEC
41
Securities Act of 1933
Regulates issuance of new securities
42
Ex-Dividend Date
Two days before date of record; window of time during which stocks trades without dividend
43
To receive dividend, one must by stock ___ days before date of record.
3 days
44
Morningstar
Mutual fund ranker - 5 Stars = Best; 1 Star = Lowest (ranking opposite of Valueline)
45
Valueline
Stock ranker - 1 = Best (buy); 5 = Low (sell)
46
Net Operating Income
Net Income + Noncash expenses (Interest, Depreciation)
47
CV = Par/CP x Ps
Convertible Bond Conversion Value - Value of stock bond can be converted into
48
Brochure Rule
Provide client with all info at meeting if given 5-days to change mind OR 48 hours prior to meeting
49
PLUS Loans
Parent Loan Undergraduate Student - Based on credit rating, not subsidized
50
Stafford Loan
Subsidized OR Unsubsidized; Primary type of FinAid
51
Pell Grant
Always available if student qualifies, need based to those without BA/BS or professional degree
52
Quarters or Coverage Need to be Fully Insured
40 (Quarter = 3 month period during which at least _ was taxed)
53
Medicare Part D
Provides prescription drug coverage benefits
54
Medicare Part B does not cover:
Routine physical exams, dental care, dentures, cosmetic surgery, hearing aids, eye exams
55
3 Ways to Reduce Social Security Benefits
Early Retirement, Too much income, Benefits taxed
56
Early Retirement SSB Reduction:
5/9 month first 3 years of early retirement;
| 5/12 month after 3 years
57
Balance Sheet Asset Categories
Cash and cash equivalents; Invested Assets, Personal Use assets
58
Categories of Ratios
Liquidity, Debt, Performance
59
Whole Life Dividend Options
Cash, accumulate at interest, reduce premiums, paid-up additions, one-year term extension
60
Authority (3 types)
Express, Implied, Apparent
61
Elements of Valid Contact
COALL = Competent Parties, Offer, Acceptance, Legal Consideration, Lawful Purpose
62
Subrogation Clause
Insured cannot receive benefit from both liable party and insurance company
63
Insurable Loss
CHAD = Catastrophic, Homogenous, Accidental, Determinable
64
Hazards (3 types)
Moral, Morale, Physical
65
Hazards: Moral
Character Flaw
66
Hazards: Morale
Indifference created because a person is insured - acting careless
67
Hazards: Physical
Tangible condition that increases probability of peril
68
Code of Ethics: Practice Standards - EGADIM
Even God Admits Dat Its Memorizing
69
Code of Ethics: Practice Standards 100
Establishing/Defining Client Relationship
70
Code of Ethics: Practice Standards 200
Gathering Client Data
71
Code of Ethics: Practice Standards 300
Analyze/Evaluate client financial status
72
Code of Ethics: Practice Standards 400
Developing/Presenting financial plan
73
Code of Ethics: Practice Standards 500
Implementing
74
Code of Ethics: Practice Standards 600
Monitoring
75
Code of Ethics: Rules of Conduct
The Rules of Conduct establish the high standards expected of certificates and describe the level of professionalism required of certificates. The Rules of Conduct are binding on all certificants, regardless of their title, position, type of employment or method of compensation, and they govern all those who have the right to use the CFP® marks, whether or not those marks are actually used.
76
Determinants of Financial Planning Engagement (4 elements):
1) Client understanding/intent. 2) Degrees of multiple FinPlan areas involved. 3) Comprehensiveness of data gathering. 4) Breadth/Depth of recommendations
77
Code of Ethics: Principles
I Can Obtain CFP Designation
78
Code of Ethics: Principles
Integrity, Competence, Objectivity, Confidentiality, Fairness, Professionalism, Diligence
79
American Opportunity Credit
4 years of Post Secondary - 100% of first $2,000; 25% of second $2,000 - $2,500 max per student/year
80
Lifetime Learning Credit
Undergrad, Grad, Professional, 20% of up to $10,000 qualified expenses, $2,000/family/year
81
Series EE Savings Bonds
Purchased 1/2 Face value, may be rolled into 529 or Coverdell Plan, If used for educational expenses no fed tax on interest, Redemption must occur in same year as expense
82
Roth IRA Contribution Limit (2013)
Lessor or $5,500 ($6,500 if 50 or older) OR Taxable Compensation
83
Coverdale ESA
Considered Asset of parent for FinAid, Can be used for 1st/2nd private education,
84
Coverdale ESA 30 year old beneficiary rule
TO BE UPDATED
85
§529 Plan
Considered Asset of parent for FinAid, Post secondary education only, 5-year contribution consideration (2 x $14 x 5 years) = $70,000
86
Perkins Loan
Loan for very low EFC (Expected Family Contribution), Need based
87
Standard Deviation
Measure of Variability and Volatility, not, by itself, a risk adjusted performance indicator
88
Beta Coefficient (ß)
Measure of individual security's volatility relative to that of the market, used to measure volatility of diversified portfolio
89
Unsystematic Risk Types
Accounting, Business, Country, Default, Executive, Financial, Government/Reg (HINT: ABCDEFG)
90
Systematic vs Unsystematic Risk
Nondiversifiable/Diversifiable; Market/Unique to Security; Economy based/Company Specific
91
Unsystematic Risk
Exists in a specific firm or investment that can be eliminated through diversification
92
Systematic Risk Types
Purchasing Power (Inflation)*, Reinvestment Rate*, Interest Rate*, Market risk, Exchange Rate, (HINT: PRIME)
93
Systematic Risk
Lowest level of risk one could expect in a fully diversified portfolio, inherent in the "system" as result of the unknown element in the existing security that have no guarantees
94
§1231
Used in trade or business; timber, coal, iron ore, certain livestock, unhavested crops; real depreciable props
95
Debenture
Debt instrument that is not secured by physical assets or collateral.
96
§1250
Governs recapture of depreciation on real §1231 assets, Business realty - buildings, real estate
97
§1245
Property that is/has subject to an allowance for depreciation/amortization, Tangible property, patents, Copyrights, NOT land/buildings
98
Imputed Interest on loans
Phantom Interest income attributed to lender
99
Imputed Interest: $0 ≤ $10,000
$0
100
Imputed Interest: $10,001 ≤ $100,000
Lessor of net investment income OR AFR Interest - Stated interest. (If borrower's net investment income ≤ $1,000, $0 imputed interest)
101
Imputed Interest: > $100,000
AFR rate - stated loan rate
102
Annuity Inclusion Amount Formula
Monthly Payment x (Expected Total Payment-Basis)/Expected Total Payment
103
Yields on Bonds (High to Low)
Discounts (Highest to Lowest): YTC, YTM, CY, NY
104
intrinsic Value
Call (buy) Stock - Strike
| Put (sell) Strike - Stock
105
Convexity
Measures the difference between durations estimate of bond price change and actual price change of bond
106
Bond Duration
Weighted average of maturity of all cash flows, moment investor is immunized from interest rate/reinvestment rate risk
107
Government Security: Non-Marketable
Series EE (no interest, discount); Series HH (interest semi-annually); Series I (inflation)
108
Government Security: Marketable
T-Bills (< year), T-Notes (210 years)
109
Red Herring
Preliminary Prospectus
110
MBIA
Municipal Bond Insurance Association
111
AMBAC
America Municipal Bond Assurance Corp.
112
Which securities have default risk? Corp. or Gov
Corporation
113
Prudent Man Rule
A fiduciary must act in the same manner that a prudent person would in same situation
114
§2503 (c) Trust
(c) = cuts off, Trust for minor, qualifies for annual exclusion, income accumulation, gifts partially excludable, must terminate
115
§2503 (b) Trust
(b) Trust for minor, qualifies for annual exclusion, must have income distributions, gifts partially excludable, lifetime
116
Codicil
Supplements to a will, used to modify, explain, or amend a will
117
Testate vs. Intestate
Dying Testate - with will; Dying Intestate - without will
118
Disclaimer Clause
Functions to remind any heirs that they can disclaim/forego a bequest
119
Rules to disclaim will
Disclaimer party cannot benefit, cannot direct future interest, disclaim within 9 months, must be in writing
120
Ademption
Extinction of Legacy assets - Legatees do not receive originally intended assets
121
Abatement
Reduction of Legatee Provisions
122
Ascertainable Standard
Not Included in Gross Estate - Health, Educational, Maintenance, Support (HEMS - §2041)
123
Probate Process
Legal process of retitling outstanding assets, serves to prove validity of will, assure heirs of clear title, protect creditors
124
Crummy Provision
Explicit Right of Trust Beneficiary to withdraw some, or all, of any contribution to trust for a limited time (~30 days), Power of appointment
126
Power of Appointment
Power to name who will enjoy or own property
127
Marriage Property
Tenancy by the Entirety (automatic transfer); Common Property (No automatic right of survivorship)
128
Gross Estate
FMV of all interests owned by decedent at time of death
129
ILIT
Irrevocable Life Insurance Trust
130
QPRT
Qualified Personal Residence Trust, Specific form of GRAT, transfers home to trust instead of annuity receives right to use home until death, end of term property passes to remainderman
131
GRAT
Grantor Retained Annuity Trust - Grantor Transfers Assets during term, receives income (stated $ or % of initial FMV) during term, end of term property passes to remainderman
132
Private Annuity
Transaction between two unrelated parties, seller/annuitant sells asset to buyer in exchange for unsecured promissory note, annuity term = life expectancy of seller
133
SCIN
Self Canceling Installment Note
134
Self Canceling Installment Note
Classified for income tax as installment sale, interest is tax deductible, buyer's basis = agreed upon purchase price regardless of payments
135
Profit Sharing Plans
Deferral of Compensation, No mandatory funding, 25% covered compensation limit
136
Profit Sharing Plans (7 types)
Profit Sharing, Stock Bonus, Employee Stock Ownership Plan (ESOP), 401(k), Thrift, Age-based Profit, New Comparability Plans
137
Target Benefit Plans
Type of Money Purchase plan, actuary at onset, try to target an ending benefit value, usefulness diminished
138
Money Purchase Plan Defined Contribution Plan
- Fixed % of employee compensation; 25% covered compensation deductible, 100% of Employee Salary of $251,000, 2-6 year vest of 3 year cliff
139
CODA
Cash or Deferred Arrangement - fancy name for 401(k) plan
140
Defined Benefit Plan Terminations
Standard (sufficient to pay out benefits), Distress (financial difficulty - unable to continue), Involuntary (initiated by PBGC to limit exposure)
141
ISO
Incentive Stock Option, $100,000 rule, no regular income at exercise, Long-term cap gains, 1 year grant date, 1 year exercise holding period requirement
142
Rabbi Trust
Do not provide security against employee bankruptcy or a current tax deduction for employee, participants have security against employer's unwillingness to pay, tax deferral for participants
143
NQSO
Non-Qualified Stock Option - Taxable at exercise, FMV - Exercise price), becomes basis
144
Secular Trust
No substantial risk of forfeiture, No tax deferral, employer gets current tax deduction, funded, protected from bankruptcy because no risk of forfeiture
145
Retirement Plans Limits: Covered Compensation
$255,000
146
Retirement Plans Limits: Defined Benefit Max Limit
$205,000
147
Retirement Plans Limits: Defined Contribution Max Limit
$51,000
148
Retirement Plans Limits: 401(k), SARSEP, 403(b) Limit
$17,500
149
Retirement Plans Limits: PBGC Monthly Benefit Age 65
$4,790
150
Retirement Plans Limits: PBGC Yearly Benefit Age 65
$57,477
151
Retirement Plans Limits: Social Security Base Wage
$113,700
152
Retirement Plans Limits: Highly Compensated Employee
$115,000
153
Retirement Plans Limits: Key Employee (greater than)
$165,000
154
QDRO
Qualified Domestic Relations Order
155
Qualified Plans: Avoid 10% Penalty
Mess at DQ - Medical expenses, Equal Periodic Payments, Separation from Service, Age, Tax Levies, Death and Disability, QDRO
156
Child & Dependent Care Credit
Lessor of 20% of eligible costs or $3,000 limit for one child, $6,000 limit for two or more.
157
Child Tax Credit
$1,000 for each dependent child under 17 (US Citizen, claimed as dependent, if parents married must file MFJ, subject to phaseout, include foster/step children)
158
Sources of Tax Law
1st = Statutory; 2nd = Administrative Sources; 3rd = Judicial Sources
159
Sources of Tax Law: Administrative
Regulations, Revenue Rulings, Revenue Procedures, Private Letter Ruling, Determination Letter, Technical Advice Memorandum
160
Annuity Exclusion Ratio
= Investment in Contact/Expected Total Return
161
Qualifying Child
Relationship test, Abode test (1/2 year), Age test (under 19, under 24 if student), Support test (1/2),
162
ACID Assets
Non-Capital: A/R, Copyrights, Inventory, Depreciable Property
163
What is the strongest determinant as to what should be added to portfolio?
Correlation of new securities to the portfolio.
164
Characteristics of Warrants
Written by Corp, Long-term Expiration (5-10 years), Warrants are NOT standardized.
165
Characteristics of Options
Written by Investors, Short-term Expiration (9 months or less), Options are standardized.
166
Dividend Payout Ratio
Common Stock Dividend/EPS
167
Return on Equity (ROE)
Net Income/Equity OR EPS/Stockholders Equity per share
