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KB CFP March 2024 > General Principles > Flashcards

General Principles Flashcards

1
Q

Producer Price Index (PPI)

A
  • leading indicator of inflation
  • does not include services
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2
Q

Durable Goods

A
  • dishwasher
  • car, etc.
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3
Q

Nondurable Goods

A
  • paper towels
  • toilet paper, etc.
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4
Q

Leading and Coincidental Indicators Going Up, Not the Lagging

A
  • recovery to expansion
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5
Q

All Leading, Coincidental, and Lagging Indicators Going Up

A
  • expansion to peak
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6
Q

Variable Outflows

A
  • where everything goes with children
  • if client does not know, ask how much they make and how much is left at the end of the month, and solve for the difference
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7
Q

Capitalized Value Formula

A
  • capitalized value = annual income / capitalization rate
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8
Q

Pro Forma Statement

A
  • budget, revisit every year, project out for 12 months
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9
Q

Emergency Funds (When to Use)

A
  • second source of income = 3 months
  • one source of income = 6 months
  • if working at same company = 6 months
  • if pregnant/expecting to have children = 6 months

NOTE: if checking account is included in emergency savings, subtract out current month expenses, cannot go below 0

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10
Q

Insurable Deposits (FDIC)

A
  • checking account
  • savings account
  • money market deposit accounts
  • CDs

NOTE: trusts have $250k coverage PER beneficiary

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11
Q

Not Insurable Deposits (FDIC)

A
  • stock investments
  • bond investments
  • mutual funds (including money market)
  • u.s. treasury bills, bonds, and notes
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12
Q

Qualified Tuition Programs (529s)

A
  • allowed to change once a year
  • limited investment choices
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13
Q

College Savings 529

A
  • market based
  • risk tolerant
  • open enrollment
  • includes graduate school
  • no restrictions on tuition and fees
  • includes room and board
  • available for out of state
  • no guarantee
  • choice of school doesn’t matter
  • refunds subject to 10% penalty
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14
Q

Prepaid Tuition 529

A
  • tracks tuition inflation
  • risk adverse
  • specified enrollment
  • may be limited to undergraduate
  • restricted to tuition and fees (no room and board)
  • may restrict out of state costs
  • choice of school impacts investments
  • refunds are investments + low rate of interest
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15
Q

529 Rollover

A
  • if the benefit is for same beneficiary the rollover is not considered a distribution
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16
Q

529 Advantages over UTMA/UGMA

A
  • parent asset
  • beneficiaries do not control at age of maturity
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17
Q

Coverdell ESAs

A
  • would never want to use
  • eligible for k-12 expenses and college
  • assets not used for education cannot be reclaimed
  • $2,000 per year total (not per donor)
  • contributions cannot be made after 18
  • account must be distributed by 30
  • student loan repayments not allowed
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18
Q

Job Change or Loss

A
  • revise budget
  • refinance mortgage
  • use retirement funds for current needs
  • health insurance considerations
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19
Q

Monetary Windfalls

A
  • structured settlement = tax-free
  • compensatory damages = principal tax-free, interest taxable
  • punitive damages = taxable

NOTE: c = free, p = pay

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20
Q

Prizes and Awards Taxation

A
  • taxed at what you get in a given year
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21
Q

Basic Economics

A
  • supply = willing to sell
  • demand = willing to buy
  • fiscal policy = taxes and spending to achieve full employment, price sustainability, and growth in economy
  • monetary policy = federal reserve, to influence growth of money supply
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22
Q

Easy Money/Loose/Expansionary

A
  • reduce reserve requirements
  • lower the discount rate (not prime)
  • repo/buy bond securities
  • decrease margin percentage required
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23
Q

Tight Money/Contractionary Policy

A
  • increase reserve requirements
  • raise discount rate
  • reverse repo/sell bond securities
  • increase margin requirements
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24
Q

Leading Economic Indicators

A
  • initial claims for unemployment
  • new manufacturing orders
  • new private housing units
  • stock prices, s&p 500
  • index of consumer expectations
25
Q

Coincidental Indicators

A
  • industrial production
26
Q

Deflation

A
  • reverse of inflation
  • decline in prices or goods
27
Q

Stagflation

A
  • slow economic growth and high unemployment
  • rising prices
28
Q

Disinflation

A
  • slow down of price increases
29
Q

Yield Curve

A
  • inverted is when short-term rates are better than long-term rates
  • relate time to maturity and yield to maturity, so same tax status and quality
30
Q

Long-Term Debt Examples

A
  • home equity line of credit
  • 30-year home mortgage
31
Q

Balloon Payments (Mortgage)

A
  • have to pay off every 5-7 years
  • unpaid balances must be paid off or refinanced
32
Q

Calculating Interest Paid Over Life of the Loan

A
  • step 1 = calculate payments using time value of money
  • step 2 = take payments and multiply by months during loan
  • step 3 = subtract out principle from step 2
33
Q

Principal and Interest for less than Life of the Loan

A
  • step 1 = calculate payment using TVM
  • step 2 = enter mortgage amount as PV (+), enter annual interest/12 as i, enter payment from step 1 as pmt (-)
  • step 3 = multiply years by 12 and click f AMORT (amount of interest)
  • step 4 = click x<>y (amount of principal
  • step 5 = click RCL PV (loan balance remaining)
34
Q

Mortgage Net After Tax Payment Shortcut

A
  • step 1 = solve for payment
  • step 2 = multiply payment by 12
  • step 3 = take annual interest multiplied by original loan and multiply by tax rate
  • step 4 = subtract step 3 from step 2
  • step 5 = choose next higher
35
Q

Statement of Financial Position Mortgage Reporting

A
  • paying down mortgage increases net worth
36
Q

Key Issues when Evaluating if a Client should Refinance

A
  • length of time expected to stay in home
  • cash flow capacity

Reasons to Refinance:
- obtain lower interest rate
- consolidate debt
- change term of loan
- raise extra cash

37
Q

Reverse Mortgage

A
  • only available if 62+ and in condo/single family home
  • no income qualifications
  • borrowers retain title
  • no monthly mortgage payments during life of the loan
  • tax-free and can be used for any purpose
  • not repaid until borrower moves out
  • doesn’t have to be owned outright
    -if home is sold to satisfy reverse mortgage, remaining cash is not protected and can cause loss in Medicaid
38
Q

Definition of Investment Advisor

A
  • must meet all 3; advice, business, compensation
  • SEC defines compensation as “receipt of economic benefit”
39
Q

Form ADV

A
  • part 1 = general information
  • part 2 = brochures; fees, services, conflicts of interest, etc.
  • must update brochures if materially changed within 120 days of end of fiscal year
  • if item is not relevant must be specifically stated

NOTE: ADV-W ceases operations

40
Q

Form CRS

A
  • discloses succinct and relevant information to retail investors
41
Q

Sell of Variable Contracts

A
  • must hold BOTH series 6/7 and variable state life insurance
42
Q

Contracts

A
  • must have offer and acceptance
  • value must be exchanged
  • principal must have legal capacity (minors only for necessities, incompetent or intoxicated have none)
  • must be a lawful purpose
43
Q

Law of Agency

A
  • agent = loyal to company
  • broker = loyal to client
  • express authority = written direction from principal to agent
  • implied authority = public believes
  • apparent authority = arises of negligence
44
Q

Conditional Receipt

A
  • if applicant were to die before policy is issued, company must pay death benefit as if it has been
45
Q

Bankruptcy

A
  • chapter 11 - individuals who do not qualify for chapter 13 because they exceed debt limitations
  • chapter 13 - unlucky, have to pay some debts
  • chapter 7 - lucky, pays no debt except student and government loans, wage withholdings and income taxes, child support and alimony
46
Q

Fair Credit Reporting Act

A
  • one free credit report a year, can review at any time
  • if denied credit, has right to see report
  • information retained for 7 years
  • only interested parties can access the file
47
Q

Consumer Credit Protection Act

A
  • interest must be reported as annual percentage rate (APR)
  • credit terms must be disclosed
  • lost or stolen credit cards have limited liability of $50 per card
48
Q

Commingling of Funds

A
  • cannot be commingled with personal funds
  • can be commingled in a common client investment account
49
Q

Financial Planning vs Advice

A
  • financial planning is broader and more in-depth than advice. Both require fiduciary manner and disclosures.
50
Q

Buy vs Leasing a Home

A
  • concept: think time and taxes to make recommendation
51
Q

College Savings Investments

A
  • 12 and under = equity (high growth)
  • 13-17 = fixed income (less risky)
  • 18-19 = CDs of money market (very conservative)
52
Q

Fiscal Policy

A
  • government
  • raises and lowers taxes, spends money
  • seeks full employment, price stability, and sustained growth
53
Q

Federal Open Market Committee (FOMC)

A
  • reviews financial conditions and determines appropriate stance on monetary policy
54
Q

Monetary Policy

A
  • action taken by federal reverse to influence the growth of the money supply
55
Q

Discount Rate

A
  • fed sets level of money reserve that member banks must maintain
  • rate the federal reserve charges member banks to borrow to satisfy reserve
  • raising rate is tightening
  • lowering rate is easing
56
Q

Open Market Operations

A
  • repo = repurchase
  • expansionary = fed gives cash in return for temporary pledge of government securities
  • contractionary = fed gives dealer temporary pledge of government securities in return for cash
  • buying increases money supply
  • increasing bank reserves is contractionary
57
Q

Fair Credit Reporting Act

A
  • one free report per year
  • if denied right to receive
  • info retained up to 7 years
  • only interested persons can access
58
Q

Consumer Credit Protection (Truth in Lending)

A
  • interest is represented in APR
  • credit terms must be disclosed
  • lost of stolen credit cards have limited liability of $50/ card

KB CFP March 2024 (8 decks)

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