COURSE 101 Flashcards
(114 cards)
1
Q
Financial planning
A
The process of determining when and how you can meet goals with proper financial management
2
Q
Financial planning process
A
Overview situation, set and analyze goals, develop plan, follow plan
3
Q
Financial planning engagement
A
Any type of mutually agreed upon financial planning services
4
Q
Letter of engagement
A
Defines legal relationship between planner and client
5
Q
Asset accumulation phase
A
Up to age 45 ish, defined by high debt with low cash flow and net worth
6
Q
Conservation or protection phase
A
45-60 cash flow and net worth are increasing and debt is decreasing
7
Q
Distribution or gifting phase
A
60 to death, net worth and cash flow high, debt low, distribution strategies
8
Q
Discretionary expense
A
Non essential like club dues, vacation, entertainment
9
Q
Non discretionary expense
A
Essentials like mortgage or rent
10
Q
Budgeting
A
Process of projecting, monitoring, adjusting, and controlling future inflows and outflows
11
Q
Consumer debt ratio
A
Monthly debt payments to monthly income, shouldn’t exceed 20%
12
Q
Housing cost ratio
A
Rent or mortgage, including interest and taxes, to income. Should not exceed 28%
13
Q
Total debt ratio
A
All debt including housing and consumer debt payments. Should not exceed 36%
14
Q
Current ratio
A
Divide amount of current assets by current liabilities. No accepted rule of thumb but >1.0 is good
15
Q
Secured loan
A
Creditor maintains security interest in property, which serves as collateral. Lender can repossess if if debtor fails to pay
16
Q
Unsecured or signature loan
A
Promise to repay debt in exchange for borrowed funds. Lender can take legal action, usually settle for less
17
Q
Fixed rate loan
A
Loan with constant interest rate until paid in full. Offer more security because rates will not increase
18
Q
Variable or adjustable rate loan
A
Interest rate varies and is riskier. Initial rate typically lower than fixed
19
Q
Short term loan
A
Less than a year
20
Q
Long term loan
A
Year or greater
21
Q
Installment loan
A
Borrows in lump, repaid with interest at stated interval. Most common
22
Q
Single payment or bridge loan
A
Short term temporary financing which is repaid with interest in one lump at end of term. Often used for short period, like purchase of one house then subsequent sale of another.
23
Q
Conventional rate mortgage
A
Have a level interest rate for term of the loan and a fixed payment amortization. Amortization schedule details portion of payment to principle and interest. Good for current and future stable cash flow
24
Q
ARMs
A
Adjustable rate. Can change monthly based on a benchmark, like 10 year treasury. Many have a cap to which the interest and payments can reach. Good for purchaser who may want shorter term
25
FHA loan
Federal housing administration. Lower down payment and interest given federal guarantee of repayment.
26
Mortgage insurance
Protects lenders from losses that result from defaults. FHA requires insurance for down payments of less than 20%
27
VA mortgage
Veterans administration. For service members. Often no down payment and no mortgage insurance.
28
Interest only mortgage
Homeowner keeps mortgage payment at minimum and aims for value of home to exceed principal amt at sale. Risky
29
Reverse mortgage
Payment stream is reversed. Seniors with limited income. Retains title but incurs increasing amount of debt to be repaid by sale usually at death
30
Home equity line of credit
Second mortgage that uses current equity in home to provide cash in lump sum or line of credit to be drawn as needed.
31
Herd mentality
Behavioral term following large group
32
Anchoring
Irrational decision based on information which has no influence on decision at hand
33
Overconfidence
Consider their ability is much better than they actually are
34
Prospect theory
Investors who fear losses more than they value Gaines
35
Confirmation bias
Investors who pay more attention to information that supports their preconceived notion’s and poorly made decisions
36
Mental accounting
Investors who put their money into separate accounts based on the function of these accounts
37
Framing effect
Investors are given a frame of reference, a set of beliefs or values, when they used to interpret facts or conditions as they make decisions
38
Risk tolerance
The trade-off is that clients are willing to make between potential risks and Ward’s
39
Risk perception
The clients assessment of the magnitude of the risks being traded off
40
Risk capacity
The degree to which a clients financial resources can cushion risks
41
Loss aversion
Clients valuing gains and losses differently and as a result will make decisions based on perceived gains rather than perceived losses
42
Economic and resource approach
Clients are assumed to be rational and will change to the most favorable behavior if given the appropriate counseling
43
Classical economics approach
Clients choose among alternatives based on objectively defined cost benefit in risk return trade-offs
44
Strategic management approach
A clients goals and values drive the client plannner relationship based on a swot analysis
45
Cognitive behavioral approach
Clients attitudes beliefs and values influence their behavior
46
Psycho analytic approach
Based on the psychoanalytic theory such as Freudian or gestalt approach not widely used
47
Statement of financial position
Personal balance sheet or net worth statement, provides a snapshot of a clients net worth on a given date. Separate from a cash flow statement
48
Net worth
Assets minus Liabilities equals net worth. Equation may also be assets equals liabilities plus net worth
49
Current liabilities
Those due less than one year from the statement date
50
Long-term liabilities
Those do one year or more from the statement date
51
Statement of cash flow’s
Summarizes the items of income that were actually received and the expenditures actually made during the specific period.
52
Cash inflows
Salary wages, rental income, capital gains, interest, alimony and child support, trust income, inheritance, and gifts.
53
Cash outflows
Fixed, which include mortgage auto insurance and taxes. Variable which include food clothing utilities and travel.
54
Investment advisors act of 1940
Requires person who fall within the definition of investment advisor to register with the SEC or with states in which they do business. Small advisors equals less than 25 million assets under management. Midsize advisors those between 25 million and 100 million. Large advisors those with more than 100 million. Small and midsize advisers are regulated by states. Large advisers must register with the SEC and less exemption is available
55
Criteria for an investment advisor
ABC. Providing advice or issuing reports or analysis regarding securities. Being in the business of providing such services. Being compensated for such services.
56
Broker dealer exception
Exempt from registering with the SEC if advice given is solely incidental to conduct of his business as a broker dealer and does not receive any special compensation
57
The securities act of 1933
The paper act. Requires the registration of new issues of securities or issues in the primary securities market and provides applicable procedures for issuing an IPO
58
The securities exchange act of 1934
The exchange act. Extended the regulation of securities to the secondary market or exchanges
59
The McCarron Ferguson act of 1945
Federal legislation that made it clear that insurance was to be regulated at the state level
60
The securities investor protection act of 1970
Establish the SIPC coverage
61
Insider trading in securities fraud enforcement act of 1988
Specified what constitutes insider trading in Stephen penalties
62
Malone act of 1938
Brought the over the counter market under the SEC and called for self regulation
63
Federal bankruptcy act of 1938
Requires a court appointed trustee to oversee the affairs of a farm for which bankruptcy charges have been filed
64
FINRA
A self regulatory organization. Unlike the SEC, which has primary authority regarding the registration of investment advisors, any plan or broker dealer who wishes to sell securities must register with FINR
65
Bank
Organization chartered by the federal or state government that can except deposits and pay interest; make various types of loans; invest customer funds and securities; other instruments turn on accounts; issue cashiers checks; provide safe deposit boxes
66
Credit union
Owned by its members. Except deposits and makes loans. Loans are typically offered at reduced interest rates. Earnings from loan interest and investments are allocated in dividends.
67
Brokerage company
Intermediary that facilitates transactions involving sales of investments or real estate
68
Insurance company
Primarily engaged in the business of furnishing insurance protection to businesses and consumers
69
Mutual fund company
Pools money from shareholders and invest the funds in various types of securities
70
Savings and loan associations (thrift institutions)
Except savings and provide home loans. S & L’s are not permitted to provide demand deposits but can offer interest-bearing now accounts
71
Trust company
Typically owned by one of three entities: an independent partnership, the bank, or a law firm, each of which specializes in managing the states and serving as trustee
72
Future value of an Annuity
Accumulation of funds to meet a future financial goal
73
Annuity due
Series of payments is made at the beginning of each period (lease payment)
74
Ordinary annuity
Payments made at end of each period (mortgage)
75
Fixed payment
Unchanged over entire period
76
Serial payment
Payment increases each year (by inflation to calculate real dollar amount)
77
Rule 72
Calculates number of years for an investment to double in value - divide 72 by the annual interest
78
Net present value
Amount determined by discounting investments cash inflows at the rate of return required by the investor and subtracting the original investment/cash outflow
79
Discounting
Value today of a single amount that will be received in the future when discounted for number of periods at given rate
80
Internal rate of return
Discount rate that - when applied to cash flow of an investment - equates the net cash flows to net outflows
81
Serial payment
Payment tat increases at constant rate -inflation - protect purchasing power
82
Amortization
Principal vs interest allocation
83
Supply
The amount of a good or service available for purchase by suppliers at a given price. In general the higher the price that can be obtained for the good or service the higher the quantity supplied
84
Demand
Quantity of goods and services consumers want t purchase at a given price
85
Substitution effect
Price of good rises, consumers switch to similar lower priced goods
86
Income effect
Price of good rises, reduces use unless income rises in unison
87
Price elasticity
Responsiveness of the quantity of a good demanded to changes in a goods price. Necessities are inelastic while luxuries are elastic
88
Equilibrium
Price of a good or service and how much will be produced is indicated at intersection of s and d curves
89
GDP
Total monetary value of all goods and services produced in given year including income generates domestically by foreign firm
90
GNP
GDP but by us residents labor and property
91
Monetary policy
Fed, raising or lowering short term interest rates because they affect consumer spending or demand
92
Fiscal policy
Congress, influences demand thru things like taxation
93
Discount rate
Fed directly controls, banks borrow from fed
94
Fed funds rate
Interest charged on short term borrowing between banks
95
Prime rate
Commercial bank rate to best customers
96
Business cycle
Movements in economic activity
97
Recession
GDP decreases two consecutive quarters
98
Depression
GDP decrease six quarters
99
Leading indicators
Housing starts, new unemployment claims, bond yields, orders for durable goods, investor sentiment change
100
Coincident indicator
Industrial production, personal income, corporate profits
101
Lagging indicator
Prime rate , change in CPI, loans outstanding , duration of unemployment
102
Chapter 13 bankruptcy
The adjustment of deaths of an individual with regular income. Payments are restructured
103
Chapter 7 bankruptcy
His store Ikelea the most popular filed because an individuals personal unsecured debts are generally canceled. However recently the availability of chapter 7 filing’s have been significantly restricted
104
Chapter 11 bankruptcy
Re-organization. Maybe filed and the automatic stay in entry or order for Lee provisions will apply. The debtor remains in possession may continue to operate the debtors business
105
Bankruptcy act of 2005
Forces those who can afford to file under chapter 13 rather than 7. Consumer use of 7 is limited to liq of credit card bills or unsecured loans. 7 requires credit counseling. Lenders have to warn consumers abt dangers of minimum payments on credits.
106
Obligations not dischargeable under chap 7
Student and government loans, child support and alimony due, recent federal income tax due
107
Consumer credit protection act
TIL act, lenders must disclose APR and other terms. Limits consumer liability for lost or stolen card.
108
Fair credit billing act
Consumers notify creditor in writing of billing errors within 60 days, 30 to respond and 90 to resolve
109
Consumer credit reporting reform act
Credit reports include accurate relevant and recent info on financial situation of applicants. Those denied must be advised why.
110
Equal opportunity act
Prohibits racial religion etc discrimination. Can’t base decision off govt assistance.
111
Fair debt collection act
Collectors can’t harass or contact at employer etc.....no false or misleading practices.
112
Credit card disclosure act
Enable consumers better understand credit transactions
113
Privacy act
Written disclosure required from individual for personal information use. Agencies must follow reasonable procedures to protect confidentiality and accuracy of credit info
114
FACTA
Free report once per year. Consumer info disposed of in secure manner.
