CFP-MyPrep 1

Diminishing capacity - At what level is this?

"Does the client recognize property and loved ones, and understand what is being done in the plan?" Keep POA current and have agent in meetings

Split limits (auto insurance)

$100,000 (per person) / $300,000 (per accident) / $50,000 (property damage)

Elements for a valid contract

(CLOC): Competent Parties Legal Purpose Offer and Acceptance Consideration

(Top 10) - Fiscal Policy

(Congress and President) *level of economic activity* Restrict economic activity (tighten) Decrease government spending Increase taxes Stimulate economic activity (loosen) Increase government activity Decrease taxes

(Top 10) 6 Steps in Financial Planning Process

(EGADIM) Establish and define the relationship Gather client data, including goals and objectives Analyze information Develop the plan Implement the plan Monitor the plan

(Top 10) - Monetary Policy

(Federal Reserve) *money supply* Tighten money supply Raise reserve requirement Raise discount rate Sell government securities Loosen money supply Lower reserve requirement Lower discount rate Buy government securities

(Top 10) Tax Credits

(Top 10) Tax Credits - 1098-T form required from school -American Opportunity Tax Credit (go-to/use 1 per student) ---Up to $2,500 tax credit (dollar-for-dollar in your pocket) for at least $4,000 of qualifying education expenses ---Only eligible for first 4 years of college that qualifies for FA ---AGI phase-out starts at $80,000 and $160,000 for single and married -Lifetime Learning Credit (use 1 per tax return) ---Up to a $2,000 tax credit (20% up to $10,000) ---Doesn't need to be a full-time student ---AGI phaseout starts at $55,000 for single/$111,000 for married **Cannot use both for same student in same year but can for same tax return with siblings. **Coordination rules - A taxpayer cannot take tax-free distributions from an ESA and from a 529 for the same expense, and credits cannot be claimed for an expense paid by either ESA or 529 plan distributions ESA and 529 distributions can be taken in the same year or in the same year that AOTC or LLC is claimed (but for different expenses) **If parents are in phase-out, it might make more sense for child to to use the credit over the parents claiming the child as a dependent

Must register as an Investment Advisor with SEC if:

(all 3) A = Advice (securities) B = in the Business C = Compensation

Conviction

(not 'charged with,' 'pulled over,' or 'arrested') of a serious crime or professional suspension results in immediate suspension

(Top 10) Rule 2.2 - Disclosures

(oral or in writing if not financial planning / in writing if financial planning) 1. How CFP is compensated 2. Conflicts of interest 3. Contact information 4. Material information that can impact client's decision *Disclosures under form ADV may not satisfy ALL of the CFP Board's required disclosures

Separately Managed Accounts

-Account manager selects stocks to meet the individual client's investment goals and preferences -Investor actually owns the underlying shares of stock rather than shares of a mutual fund -Higher minimum investment required - $100,000 or higher -Higher investment advisor fees

Term Insurance

-Advantages - Cheap, temporary solution, can match needs for a fixed time period (until children graduate, mortgage is paid off -Disadvantages - No cash value, no permanent insurance, increasing premiums in future years.

Whole-Life Insurance

-Advantages - Permanent protection, forced savings, substantial flexibility due to the cash value (loans) -Disadvantages - premium payments for life, limited payment policy doesn't coincide with when an individual has maximum income, no hedge against inflation

Universal Life Insurance

-Advantages - Policy's cash value earns investment income on the basis of current market rates, tax-deferred investment income, premium flexibility -Disadvantages - Not the most competitive insurance -coverage or most competitive savings vehicle, lack of forced savings, temptation to change insurers looking for higher rates of return

Variable Life Insurance

-Advantages - Policyowner selects the investment allocation between funds, policy is part insurance/annuity and part security investment (inflation hedge) -Disadvantages - Actual rate of return may be lower than that of standard insurance policies

Calls

-An option to buy a specified number of shares during a specified time at a specified price -Bought by one who expects the stock price to rise -Written by one who expects the stock price to fall or remain steady

Puts

-An option to sell a specified number of shares during a specified time at a specified price (strike or exercise price) -Bought by one who expects the stock price to fall -Written by one who expects the stock price to rise or remain steady

Grounds for Discipline

-Any act or omission that violates the provisions of the Code of Ethics and/or Rules of Conduct -Any act or omission that fails to comply with the Practice Standards -Any act or omission that violates the criminal laws of any State or of the US or of any province, territory, or jurisdiction of any other country, provided that conviction thereof in a criminal proceeding shall not be a prerequisite to the institution of disciplinary proceedings, and provided further, that acquittal in a criminal proceeding shall not bar a disciplinary action -Any act that is the proper basis for professional discipline, provided professional discipline shall not be a prerequisite to the institution of disciplinary proceedings, and that dismissal of charges in a professional discipline proceeding shall not necessarily bar a disciplinary action -Any act or omission that violates these Disciplinary Rules or that violates an order of discipline -Failure to respond to a request by CFP Board staff, or obstruction of the DEC, or any panel therof, or CFP Board staff in the performance of its or their duties -Any false or misleading statement made to the CFP Board

Risk Management Techniques

-Avoidance - Don't take it on, or if necessary, get rid of it (no swimming pool). High severity and high frequency. -Retention - Keep it, in whole or in part (increase deductible). Low severity and low frequency. -Noninsurance transfer - Shift it to someone else, other than insurance company (hold-harmless agreement in a lease, where tenant accepts all responsibility). Low severity and high frequency. -Reduction - Lower the probable loss frequency (burglar-proof windows) or probable loss severity (sprinkler system). Low severity and high frequency. -Insurance (transfer) - Pooling plus transfer to an insurance company. High severity and low frequency.

Ginnie Maes

-Backed by the full faith of the U.S. gov't -Pool of FHA/VA guaranteed mortgages -Pay interest and principal monthly -Fully taxable - federal, state, and local

Original Issue Discount Bond (OID)

-Bond is discounted from par value at the time of issue -Most are zero-coupon sold far below par value and paying not interest until maturity. -Each year the portion of the discount that has been "earned" is included as taxable interest income, and the bond's basis is increased. OID on tax-exempt obligations is not taxable and on a sale or redemption gain attributed to the OID is tax-exempt. -This refers only to the original bond issue, not secondary market discounts. -Tax-exempt OIDs purchased after issue (secondary market) can be subject to income tax when sold.

(Top 10) 529 Plans

-Can set aside larger amounts of money for college savings -Can be taken out tax-free if used too pay qualified education expenses, including tuition, room and board, travel (to college), and computer (if institution requires it). -Moneys withdrawn for purposes other than education are taxable and carry a 10% penalty tax -If the child named as a beneficiary of the plan elects not to go to college, the money can be rolled over to a 529 plan for another child (if it started as UGMA/UTMA, the money is for that child so will need permission from child) -No phase-out limits - contribution limits high and set by state

(Top 10) ESAs

-Coverdell ESA must be rolled over or distributed by age 30 (529 has no age limit) -Tax-free for qualified education expenses at private elementary and secondary schools. No other tax-advantaged plan applies to these levels of schooling. $2,000/year/child (phase-out $190,000-$220,000 for married) -Contributions made until age 18 (after 18 for special needs) -Contributions can be made in same year as 529 contributions

Modified Endowment Contracts

-Created to eliminate single-premium life insurance purchased for income tax deferral after 06/01/1988 -7-pay test - If at any time during the first 7 years of a life insurance policy, the cumulative premiums exceed the 7-pay premium times the number of years since the issue of the contract, it becomes a MEC. If it becomes a paid-up policy in the first 7 years. -Once a MEC, always a MEC

Cross-Purchase Vs Entity

-Cross-Purchase will assure greater equity of results: --If there is a disproportionate amount of ownership interest held by one participant --If there is a wide difference in the ages of the owners -Stock-redemption plan (entity agreement) preferred if: --Several owner-participants --Younger participants may be unable or unwilling to pay the sizable premiums for life insurance coverage for the older owners

Treasury Notes and Bonds

-Direct debt obligations of the federal gov't --U.S. Treasury notes mature in 1 to 10 years --U.S. Treasury bonds mature in 10 to 30 years -$1,000 face amount -Semiannual coupon payments -Actively traded in secondary market

Series Bonds

-EE: Issued at discount, interest rate fixed for at least 20 years, interest income not taxed until redeemed (may be excluded if used to pay for college expenses post-1989 and AGI is within limits) -HH: Discontinued as of 08/31/04, issued at par in exchange from EE bonds, interest paid semiannually -I: Issued at par, interest is adjusted every 6 months for inflation

Nonqualified Deferred Compensation Plans - Life Insurance

-Employee has no rights or security interest in the life insurance -Policy is owned by the employer. -Premiums not deductible by the employer -CV grows tax-deferred and the basis can be recovered tax-free -Employer is the beneficiary -DB paid to the employer not taxable as income to the employer -Premiums paid with after-tax dollars -Benefits paid to the employee are a deductible expense to the employer as paid as long as they represent reasonable compensation for services rendered. -If the employee dies, the benefits received by the covered employee's family member are fully taxable when constructively received. -The PV of Das to be paid to surviving beneficiaries in includible in the employee's gross estate. -Section 162 Insurance - a direct bonus made to an insurance company to pay the premium on a policy owned by the employee. They cause phantom income. A 162 "double bonus" is an additional bonus to the employee to pay the tax on the bonus. This is not a funded NQDC plan.

Foreign Bonds

-Foreign gov't bonds are not guaranteed, but are generally safer than foreign corporate debt -Investment risks: 1. Exchange rate risk 2. Political risk -To reduce risk, they are denominated in dollars (Yankee bonds are issued in the U.S. by foreign banks denominated in U.S. dollars)

Freddie Macs and Fannie Maes

-Historically, not guaranteed by the U.S. gov't -Pool of mortgages -Pay higher interest rates than Ginnie Maes -Fully taxable - federal, state, and local

Transfer-for-Value

-If a policy is sold, the death benefit in excess of the amount paid for the transfer, including subsequent premiums, is received as ordinary income. They do not create a problem when made to the following persons or entities: --The insured (ER buys key-person on you) --A company in which the insured is an officer of shareholder (buy-sell agreement) --A partnership in which the insured is a partner (buy-sell agreement) --A business partner of the insured (buy-sell agreement) --Anyone who received the policy with the same basis as the insured (gift to a spouse or a child and a property settlement in a divorce)

Exchange-Traded Funds (ETFs)

-Index-type shares that offer investors the ability to invest in a basket of stocks that mirror closely an underlying benchmark (ex: NASDAQ 100) -They trade daily just like stock shares - priced in real time throughout the trading day

Taxation of Disability Insurance

-Individual policy - premiums are not deductible. Benefits are free of income tax. -For partnership, S corporation, over-2% shareholder - deductible by business. Amount of premiums paid will be added to taxable income of partner or shareholder. Benefits paid will not be subject to income tax. -Employee owns policy, employer pays premium - Premiums are deductible for employer. Benefits taxable to employee. -Business expense policy and business pays premium - Premiums deductible and benefits are taxable -Policy to fund buy-sell agreement - Premiums aren't deductible and benefits aren't taxable

Mutual Fund Prospectus

-Information found in the prospectus --The fund's investment objectives or goals - strategies for achieving those goals --The principal risks of investing in the fund --The fund's fees and expenses --The fund's past performance - year-to-date, 1-year, 3-year, 5-year, 10-year, and since inception --Information relating to the fund's investment advisers and portfolio managers --Details on how to purchase and redeem shares -Advisors are not permitted to write in, highlight, or put any other markings in the prospectus -Must be delivered at or before the confirmation of sale - if you don't have prospectus, you can still put in the sale, it just has to be before the confirmation (at the end of the day).

Privately Managed Accounts

-Investor actually owns the underlying shares of stock rather than shares of a mutual fund -Higher min investment required - $100,000 or higher -Higher investment fees -Investment firm running the privately managed account will have an investment objective such as long-term appreciation or current income. They will make all buy and sell decisions within the account.

Real Estate Investment Trust (REIT)

-Invests in real estate, short-term construction loans, and mortgages -Achieves diversification and marketability which isn't typically found in real estate investments -Either listed on an exchange or traded over-the-counter -Equity REITs invest mainly in properties for growth -The net income from the property (rents less operating expenses) should exceed the REIT's borrowing costs, producing taxable income for the shareholders -Mortgage REITs invest mainly in mortgages and construction loans. The interest earned on the mortgages and construction loans should exceed the REIT's borrowing costs. They are highly leveraged and make their income from the "spread" between the lending rate and borrowing rate. -At least 75% of the REIT's income must come from real estate investments; 15% can come from securities, like GNMAs. If the REIT distributes 90% of net investment income or more, it only pays tax on the undistributed portion. If the REIT fails to distribute 90%, then all the net investment income is taxable to the REIT as an entity.

American Depositary Receipts (ADRs)

-Issued by a bank in a foreign country representing an ownership interest in a foreign security on deposit at the bank -An alternative way for a domestic investor to invest in non-U.S. companies without going into a foreign market -Prices are quoted in U.S. dollars and dividends are paid in U.S. dollars -Dividends are declared in the foreign currency. Investors also get a foreign tax credit.

Municipal Bonds

-Issued by state and local government -Federal tax-free interest. If resident of state and local, tax-free as well. This is only the interest but not for capital gains. -Types: General obligation bonds - backed by the entire gov't unit / Revenue bonds - backed only by the revenues from the project financed by the bond issue. Insured municipal bonds - the insurers pay timely interest and principal when the issuer is in default

COBRA

-Mandates continuation coverage for terminated employees whose employers have 20 or more employees (not gross conduct) -Must elect continuation coverage within a 60-day period 18 months if terminate employment, 29 months if become disabled, 36 months for all other qualifying events -Qualifying events: voluntary or involuntary termination of employment or change to part-time status, loss of coverage by a dependent because of of the employee-provider's death, divorce, legal separation, or eligibility for Medicare, loss of dependency status by children of employees. -Premium is up to 102% of the cost paid by the employee

Nonqualified Deferred Compensation

-May discriminate -Employer receives no federal income tax deduction until benefits are paid to the employee. All benefits are taxable to employee as ordinary income. -Salary Reduction - Employee gives up some current compensation (elect by 12/31 of prior year) --Constructive Receipt - a formal agreement must be made prior to earning the compensation to ensure taxation is deferred -Salary Continuation Plan - None of salary is reduced. Employer pays the entire cost and employee promises nothing. --SERPs - All employees get 40% from qualified Defined Benefit, but company offers additional 20% for exec ---Top-Hat Plan --Excess Benefit Plan - If all employees get 25% of salary in retirement through profit sharing, but the max is $53,000, which is a lot less, they can use this to make up the difference --Death-benefit only plan - Employer and spouse agreement --Rabbi trust - employer places assets to provide benefits in a trust. General assets of the company. Funds still subject to general creditors. This is to protect from future bad management. Key words: Merger, acquisition, change of company ownership. ---Springing irrevocability - If there's a change in management, this is locked down, becomes yours, and you're taxed. --Secular trust - employer places assets to provide benefits in a trust. Not general assets of the company and not subject to general creditors. Employee pays income taxes on contributions or no longer substantial risk of forfeiture (based on meeting goals, 15-year vesting). You have to pay taxes but you don't get the money until retirement.

Medicare Limitations

-Medicare doesn't pay for any of the costs of a stay after 100 days at a skilled nursing facility -Medicare doesn't generally pay for custodial care

Open-End Investment Company

-Mutual fund -Capitalization constantly changing -Active; portfolio changes -Prospectus required; each sale is an offering by the fund -Shares are redeemed by a fund at NAV, no trading on exchanges -Sales charges by fund

Umbrella Liability Insurance

-No umbrella = weakness -Self-insured retention applies to losses covered by the umbrella policy but not by a required underlying policy. Works like a deductible if there's no underlying policy (auto or homeowners). If there is, then they will use the underlying policy. -Typically $300,000 underlying policy required. Will pay only as much as it would have if those policies were maintained.

Annuity Taxation

-Noncontributory plans - All employer money (tax deduction) - Full amount of each payment is included in gross income -Contributory plans - employee puts after-tax money in as well - part of each payment is excluded and part is included in gross income Ex: Cost basis in plan is $300,000 - annuity chart has 260 for age 61-65 - $300,000/260 = $1,154 of each monthly payment is tax-free -Nonqualified annuity - outside retirement plan and after-tax --If annuity is for a fixed period, # of payments is known: Exclusion amount = Basis / # of payments = tax-free amount --If annuity is for life, # of payment is not known: Exclusion % = Basis / Expected return = % of each payment is tax-free If not annuitized, LIFO

Commercial/Professional Liability Insurance

-Occurrence basis - Policy covers claims arising from events happening during the policy period, regardless of when the claim is filed -Claims-made basis - Policy covers claims made during the policy period, regardless of when the injury or damage occurred --Tail coverage to report claims after policy ends (retirement) - 60-day tail, 5-year tail, and unlimited tail

Long-Term Equity AnticiPation Securities (LEAPS)

-Operate in a similar manner to short-term options, but --Have a maturity of up to 3 years --Are restricted to a much smaller number of stock selections

Summary Plan Description

-Outlines the coverage under both short-term and long-term disability through the employer (important since DI is nondiscriminatory). If client doesn't provide this, assume that there is no DI coverage at work or go back to step one in the planning process and exclude disability income planning.

Different types of financial aid

-Pell Grants and Supplemental Educational Opportunity Grants (SEOGs) Undergraduate only - Must show need -Perkins Loans Administered by college - Graduate and undergraduate - Must show need No interest charged while student in school and for 9 months after graduation -Stafford loans - Based on need - interested deferred while in school and 6 months after -Unsubsidized loans - interest accrues from date of loan *Don't need to show need -PLUS loans - *Don't need to show need Parents of undergrad students or for graduate students Interest accrues from date of loan **Wealthy clients - PLUS loans, unsub loans, 529s, UGMA/UTMA, 2503(c), Crummey **Family is better off using a savings vehicle that is parent asset instead of child asset **Middle and low-income - 529, ESA, Series EE, AOTC, LLC, interest deduction on loans, Perkins and sub loans, scholarships and grants

Taxation of Life Insurance

-Policy dividends - free of income tax. When dividends exceed premiums paid, they are included as ordinary income -Policy loans are not taxable unless policy is a MEC (ordinary income plus 10% penalty if under age 59 ½) -Withdrawals - No tax is owed until the amount withdrawn exceeds premiums paid unless it's a MEC (ordinary income plus 10% penalty if under age 59 ½)) -Surrender - Excess of surrender value over the owner's basis is taxable as ordinary income. Basis is owner's premium payments less dividends. -Death benefit - Income tax-free for both MEC and non-MEC

Taxation of Premiums and Benefits

-Premiums - Deductible as medical expense on Schedule A. Self-employed medical expense deductible above-the-line. Both have limits based on age. C-corporation can deduct as expense without dollar limits based on age. -Benefits are generally tax-free

Closed-End Investment Company

-Publicly traded fund -Fixed capitalization -Active; portfolio changes -After initial offering, buying on exchanges through a broker doesn't require a prospectus -Shares trade on exchanges above or below NAV; shares aren't redeemable -Commission to broker

Treasury Inflation-Protected Securities (TIPS)

-Sell at FV with a predetermined coupon rate -Principal adjusted semiannually relative to CPI percentage movement -Taxable (ordinary) income on any principal gains and on coupon interest - good for qualified accounts! -Real returns protected in tax-deferred acounts

(Top 10) UGMA/UTMA

-Should have small amounts of money for child -Kiddie tax is present -Irrevocable gift - must be given rights to assets at 18 (must submit paperwork, not automatic) -Can cause ineligibility for financial aid if unearned income exceeds $2100 - to avoid this problem can be transferred to 529

Forms of Discipline

-The DEC has the right to require the Respondent to complete additional continuing education or other remedial work (retake the CFP exam, completing the coursework). May be ordered instead of, or addition to, any discipline listed below. Where grounds for discipline have been established, any of the following forms of discipline may be imposed: -Private Censure - an unpublished written reproach mailed by the DEC to a censured Respondent -Public Letter of Admonition - a punishable written reproach of the Respondent's behavior. Standard procedure to publish this in a press release or other form of publicity selected by the DEC -Suspension - for a period of time, not to exceed 5 years. CFP Board must publish the fact of the suspension together with identification of the Respondent in a press release, or in such other form of publicity. Respondents receiving a suspension may qualify for reinstatement to use the marks. -Revocation - DEC may order permanent revocation of a Respondent's right to use the marks. It shall be standard procedure to publish the fact of the revocation together with identification of the Respondent in a press release or other form of publicity.

Homeowner's Insurance

-The minimum amount of insurance that should be carried is not the full replacement cost; it is 80% (or other coinsurance %) of the replacement cost. However, you will need 100% of the replacement cost if you want to be fully covered in the event your entire home is destroyed -If they don't have 80%, this is what they will pay: What they have (Coverage A) x Loss - Deductible = Recovery What they should have (80%)

Long-Term Care Insurance Partnership Program

-To encourage more people to purchase private long-term care insurance and relieve some of the burden on Medicaid -Rather than having to "spend down" assets to reach poverty level, allows the client to retain assets equal to the LTC benefits provided by the policy -Ex: client has qualified LTC policy that provides benefit of $200/day/4years = $292,000. Client can retain assets equal to this plus standard $2,000.

Guaranteed Investment Contracts (GIC)

-Typically issued by an insurance company that guarantees that the principal interest will be paid as required under the terms of the contract --Pays a lower interest rate than bonds due to lower risk of failure to pay the interest, but a higher rate than most money market instruments

Treasury STRIPS

-U.S. Treasury-issued bonds with 2 components: 1. Interest 2. Repayment of principal -Components are separated and sold individually as zero-coupon bonds -Separate Trading of Registered Interest and Principal Securities -Good for qualified accounts since they are taxed on imputed income every year (they don't receive it until maturity) -Direct obligation of the federal government

Unit Investment Trust

-Unit Trust -Fixed capitalization -Passive; portfolio is fixed -Units offered by trust require a prospectus -Units are redeemable with a trust at NAV -Sales charges by fund

FDIC Insurance

-Up to $250,000 -Deposits maintained in different categories of legal ownership (individual, joint with others, irrevocable trust, testamentary account) are separately insured -Separate insurance is also provided for accounts held for retirement purposes (IRAs, Keoghs, pension or profit-sharing plans) of up to $250,000 -Money market accounts are FDIC insured. Money market mutual funds are not.

Risk tolerance: sources of information

1. Direct inquiry by planner 2. Quantitative methods and questionnaires 3. Client's past actions 4. Demographic (characteristics)

Divorce

1. Evaluate whether the planner is able to continue to represent both 2. Advice on how income is to be shared (alimony, child support, retirement, SS) 3. Advice on how assets are to be shared under divorce decree or prenup 4. Income tax consequences of who will have custody of children **Alimony and separate-maintenance payments is considered earned income for IRA purposes.

Confidential information from the client can be disclosed when:

1. The client consents 2. Disclosure is compelled by a legal process 3. The certificant is required to make a disclosure to defend against an accusation or wrongdoing 4. A civil suit arises between the client and certificant 5. As needed to perform services

(Top 10) A CFP certificant is practicing financial planning or material elements of it if:

1. The client's understanding or intent 2. Comprehensiveness of data gathering 3. Breadth and depth of recommendations 4. Degree to which multiple subject areas are involved

(Top 10) Rule 1.3 - Agreement in Writing (financial planning)

1. The parties to the agreement 2. The date of the agreement and its duration 3. How and on what terms each party can terminate the agreement 4. The services to be provided as part of the agreement

Days to know:

1. Time to report conviction of a DUI - 30 calendar days 2. Time to report change of address - 45 days 3. Max term of suspension of use of CFP marks - 5 years 4. Time to appeal a DEC decision - 30 days

(Top 10) Calculate PV of a bond (Ex: How much to pay if 9% coupon that matures in 7 years yielding 10%?)

2 P/Y N: 7 x 2 I: 10 PMT: 45 (90/2) FV: 1000 PV: $951

Exceptions from registering

Bank Lawyer, Accountant, Teacher, and Engineer Broker-Dealer Publisher Gov't Securities Adviser Big Plate (Bank, Incidental Services, Gov't Securities, Publisher, Lawyer, Accountant, Teacher, Engineer)

Sell a Call (wins and losses with options)

Breakeven - Exercise price + premium Max Gain - Premium Max Loss - Unlimited

Buy a Call (wins and losses with options)

Breakeven - Exercise price + premium Max Gain - Unlimited Max Loss - Premium

Buy a Put (wins and losses with options)

Breakeven - Exercise price - premium Max Gain - Exercise price - premium (if stock price is zero) Max Loss - Premium

Sell a Put (wins and losses with options)

Breakeven - Exercise price - premium Max Gain - Premium Max Loss - Exercise price - premium (if stock price is zero)

Commingling

Commingling is only permitted if the clients give written authorization and the certificant keeps accurate records

Bond Risks

D=Default Risk R=Reinvestment Risk I=Interest rate risk P=Purchasing Power Risk Corporate and Municipal bonds = DRIP Zero-coupon bonds = DIP Government bonds = RIP STRIPS = IP

Bankruptcy: Exempt Properties and Nondischargable debts

Exempt Property: Life insurance Qualified retirement plans Homestead Limited equity in car or personal property Nondischargable debts: Taxes Alimony Child support Student and gov't loans Crimes, fines, penalties, etc.

Gifting highly appreciated property

Gifting highly appreciated property or income producing property can shift income taxation to the student, who is in a lower tax bracket than the donor (kiddie tax limits this)

Net Operating Income

Gross rental receipts + Nonrental income (such as laundromat equipment) = Potential gross income (PGI) - Vacancy and collection losses - Operating expenses (excludes interest and depreciation) = Net operating income (NOI) This helps to arrive at the intrinsic value. If the capitalization rate (given) is 10%, divide the annual NOI by 10%.

Principles

I Can Obtain CFP Designation I - Integrity C - Competency O - Objectivity C - Confidentiality F - Fairness P - Professionalism D - Diligence

Step 6 (Monitoring)

If new areas of planning arise that were not part of the original scope of the engagement, the planner and client will need to go back to Step 1 and redefine the scope of the engagement

Structured communication

Interviewing Advising Counseling *Do more counseling (educating) than advising

Stock Options (general definitions)

Intrinsic Value - The minimum price the option will command as an option. It is the difference between the market price of the stock and the exercise price of the option Exercise price (strike price) - The price at which the stock can be purchased or sold on exercise of the option Premium - the market price (cost) of an option. As the option approaches its expiration date, the market price of the option (the premium) approaches its intrinsic value Time premium - the amount by which the market price of an option exceeds its intrinsic value

Yield curve - downward sloping

It is often thought to predict an upcoming recession

LTC Premiums

May be paid from HSAs. They may not be paid from FSAs and cafeteria plans.

Debt management percentages

Monthly mortgage payment (PITI) - 28% of gross income or 1-weeks take-home Monthly payment on all debt - 36% of gross income Consumer debt payment (non-mortgage) - 15% of net income

Mortgage Bonds (CMOs)

Mortgage payments received are looked at on a "cash flow" basis. Based on expected cash flow to be received over the life of the pool, separate classes of securities called "tranches" are created. The typical CMO has A to Z tranches, representing fast pay (A), medium pay (M), and slow pay (Y) plus an issue (a Z tranche) that bears no coupon (most risk) but receives the cash flow from the collateral remaining after the other tranches are satisfied.

Equation to determine college student's need

Need = Cost of Attendance (COA) - Expected Family Contribution (EFC)

CFP Fiduciary

Place the interest of the client ahead of their own. "One who acts in utmost good-faith, in a manner he or she reasonably believes to be in the best interest of the client."

Present interest gifts eligible for the gift tax annual exclusion

Present interest gifts are eligible for the gift tax annual exclusion ($14,000, $28,000 if splitting gifts with spouse) -Direct to student -529 plan (only plan that can front-load 5 years of annual exclusions) -UGMA/UTMA -2503(b) or 2503(c) trusts -ESA

Short Stock Combo

Protect = long call Income = short put

Stock and Option Combo

Protect = long option Income = short option

Long Stock Combo

Protect = long put Income = short call

Unbiased Expectations Theory (UET) Formula

Provided - implies that long-term investors will choose to purchase debt instruments based on whether forward interest rates are more or less favorable than current short-term rates. Ex: One year Treasury bill currently has a 3.06% rate. You expect one year from now the one year Treasury bill rate will increase to 3.25%. Is the theory is correct, what should the current rate be on 2-year Treasury securities? =((1+.0306)(1+.0325))1/2 - 1 = 3.15%

Reinvestment Risk

Risk that interest or earnings from a selected investment will not be reinvested at current rates of return -Type of systematic risk -Zero-coupon bonds don't experience this risk, as all payments are made at the time of maturity -If the coupon on a bond is higher than current interest rates, the reinvestment of the interest payment is at lower payments -Bonds: greatest for the security with the highest coupon rate

Confidentiality

Step 4 (Develop) - oral or written permission from client when working with other other professionals Step 5 (Implement) - no confidentiality issue since the plan has already been agreed upon

Annuity Uses

Suitable for: -A client who already accumulated a significant amount of money who wants to liquidate in a scientific manner -Seeking income guaranteed to last lifetime (superannuation) -Who hasn't yet accumulated a significant amount of money but who wishes to do with periodically saving money -Who owes another party a structured settlement typically due to a lawsuit

Brochure rule

The ADV, Part 2A (narrative form) must be delivered before or at the time of signing (includes business, conflicts of interest, disciplinary history, other info to help client make decision)

Purchasing Power Risk

The damaging effect a rising rate of inflation would have on the future purchasing power of an investor's investments -Also called inflation risk -Type of systematic risk

Tuition paid directly to a school

Tuition paid directly to a school is exempt from both the gift tax and the GST tax and they can also give annual exclusion gift on top of this

(Top 10) 529 Front-loading

Up to $70,000 ($140,000 for married couple) can be contributed to an account in a single year with no gift tax consequences. If the donor dies before the full 5 years have passed (ex: lives 2 years), $42,000 (3 years of annual exclusions) will be brought back into the donor's gross estate for federal estate tax purposes.

Black-Scholes Option Valuation Model

Uses 5 variables to value the option of a non-dividend paying stock. Think "call up." -The price of the underlying stock -The exercise price (strike price) of the option -The time remaining to the expiration of the option -The interest rate -The volatility of the underlying stock All the variables have a direct (up) relationship for calls except one (exercise price)