Dalton flash card set

Lifetime learning credit (only 1 per family per year)

A nonrefundable credit equal to 20% of the first $10,000 of qualified education expenses paid during the year on behalf of the taxpayer, his spouse, or his dependents for undergraduate, graduate or professional programs. Qualified education expenses are tuition, fees, student activity fees, books, supplies, and equipment as long as the fees were paid directly to the eligible education institution. maximum credit is $2,000 per "family" per year It can be claimed for an unlimited number of years

On December 31st Lisa purchased a home with a 20-year mortgage for $150,000 and an 8% annually compounding interest rate. What is Lisa's principal reduction for the first year?

) $3,171 Rationale The correct answer is "B." N = 20 x 12 = 240 i = 8/12 = .6667 PV = 150,000 PMT = ? FV = 0 PMT = 1,254.66 12C 12f On the 10BII, enter 1 input, 12 Orange shift AMORT =

Sharpe index

- is a portfolio performance risk-adjusted performance measure that standardizes returns for their variability. The model measures reward to total variability or total risk using the formula - Sp=rp-rf/@p where Sp = Sharpe index rp= realized return on the portfolio rf= risk-free rate of return @p = SD of the portfolio. -Sharpe index is also a relative risk-adjusted performance measure meaning it needs to be compared to another Sharpe index to be meaningful - Sharpe is a measure of how much return was achieved for each unit of risk. The higher the Sharpe ratio the better because that means more return was provided for each unit of risk - Sharpe index measures risk premiums of the portfolio relative to the total amount of risk in the portfolio. The formula does not measure a portfolio managers performance against the market.

Treynor Index

-A risk-adjusted performance measure using beta. It's also a relative risk measure meaning a treynor ratio needs to be compared against another treynor ratio to provide meaning. -Formula is Tp= rp - rf/Bp where Tp is treynor ratio, rp is the realized return on the portfolio rf is the risk free rate of return and Bp is the portfolio beta. The higher the Treynor ratio the better because that means more return was provided for each level of risk. Trynor measures how much return was achieved for each unit of risk. -It measures the reward achieved relative to the level of systematic risk (as defined by beta) - Accomplished by standardizing portfolio returns for volatility. - Treynor justifies use of the model on the assumption that in a well diversified portfolio, the unsystematic risk is close to zero. - Treynor does not indicate whether a portfolio manager has outperformed or under-performed the market.

Risk Management guidelines

-Avoidance for the most serious types of risk - Risk transfer is using insurance where the financial risk is severe but the frequent is low -Retention or reduction- is appropriate where the financial risk is low and frequency is high because it would be too expensive to insure. i.e. dings and scratches in your car.

Examples of transactions where gain/loss may be realized but is NOT recognized

-Like -kind exchanges of real property held for productive use or investment -certain exchanges where cash received is quickly reinvested in a similar property -transfer of property to a controlled corporation -exchange for plans of corporate reorg -transfers to or distribution from a partnership

Private long term care policies have 7 types of coverage

-Skilled nursing (traditional nursing home, physician ordered) -intermediate nursing (occasional nursing care ordered by physician) -custodial care- assistance with eating, dressing, bathing, etc -home health care- in home nursing or assistance -assisted living- apartment style living with healthcare services -Adult day care- care while a spouse, etc is at work -Hospice care- for terminally ill

Goals of state insurance regulation

-protect the insured -maintain and promote competition -maintain solvency of insurers

Bond swaps

-substitution swaps are designed to take advantage of a perceived yield differential between bonds that are similar in coupons, ratings, maturities and industry -Rate anticipation swaps- are based on forecasts of general interest rate changes -Yield pickup swap- is designed to change the cash flow of the portfolio by exchanging similar bonds that have different coupon rates -Tax swap -is made in order to offset gains and losses

A certificant shall not borrow or lend money to a client unless

-the client is a member of the immediate family -the client is an institution in the biz of lending money and the borrowing is unrelated to the services provided by the certificant -the Certificant is an employee of a company which in the biz of lending money and he money lent is that of the institution, not the certificants

Defense to Negligence

1-Assumption of Risk= person knew they were taking risk 2-Contributory negligence- injured party did not look our for his own safety 3. Comparative Negligence- a percentage assigned to the party's contribution to the incident 4-Last Clear Chance - fails to avoid negligent situation

3 types of REIT's

1. Equity REIT- invests in real estate for capital appreciation. Income is generated from rental income and appreciation. 2. Mortgage REITs- invest mostly in mortgages and construction loans. Make the spread between the lending and borrowing rate. 3. Hybrid REIT- combo of equity and mortgage reit

Financial Planning Process and the Related Practice Standard

1. Establishing and defining the relationship with a client 100-1 Defining the Scope of the Engagement The scope should be mutually defined by the planner and client before any services are provided! The following actions should be taken: 1) Identify the services to be provided 2) Cover all of the required disclosures 3) Establish the duration of the engagement 4) Provide any additional information necessary to define or limit the scope of the engagement This practice standard does not require the scope of the engagement to be in writing. The rules tell us whether the scope needs to be in writing or not. Exam Tip: Planner and client should mutually define the scope of the engagement

Money market securities-

1. Treasury Bills- maturities of 4, 13, 26, and 52 weeks. Denominations in $100 increments through treasury direct up to $5 mill per auction. Larger amounts available through competitive bid. 2. Commercial paper- short term loans between corporations- maturities of 270 days or less and they do not have to register with the SEC. Denominations of $100,000 and are sold at a discount. 3. Bankers acceptance- facilitates imports and exports. maturities of 9 months or less. can be held until maturity or traded. 4. Eurodollars- deposits in foreign banks which are denominated in US dollars.

Behavioral finance assumes

1. investors are normal (may commit errors because of biases, emotion, etc) 2. Markets are not efficient 3. Behavioral portfolio theory governs- people tend to compartmentalize different goals and may not look at the overall portfolio 4. Risk alone does not determine returns- BAPM determines expected return using Beta, value ratios, momentum, investors, likes, etc. Behavioral finance does not abandon traditional finance.

Depression

18 months or 6 consecutive quarters of declining GDP

FRA Full retirement benefit ages, if born

1960+ FRA is 67 if before 1938, FRA is 65 if 1943 to 1954, FRA is 66

As a rule of thumb, it is best if consumer debt does not exceed:

20% of net income. This is a rule of thumb, along with the others that recommend housing debt be limited to 28% of gross income, and total debt not to exceed 36% of gross income

A student is considered independent if

24 married working on masters or doctorate If they have legal dependents other than a spouse Veteran

Within what period must conflicts arising during the course of a client engagement be disclosed to the client by a CFP® professional?

24 hours

2nd or last to die policy

2nd to die life expectancy is greater than the life expectancy of either person good to pay for estate taxes and provide liquidity

cafeteria plans

A cafeteria plan must offer at least one taxable benefit, usually cash, and one qualified nontaxable benefit. A cafeteria plan is a written plan under which the employee may choose to receive either cash or taxable benefits as compensation or qualified fringe benefits that are excludable from wages. Cafeteria plans are authorized by Section 125 of the Internal Revenue Code. A cafeteria plan is appropriate when employee benefit needs vary within the employee group.

Which of the following requires registration under disclosure rules with the Securities and Exchange Commission

Sale of an entire issue of securities in an IPO. The following constitute a private placement. Sale of securities in a single block to a public pension fund. Sale of an entire issue of securities to a single investor. Sale of securities in a single block to a publicly-traded mutual fund.

Cost basis is the amount paid in cash,debt obligations, other property or services. Cost also includes amounts paid for the following items

Sales tax, freight,installation and testing, excise taxes, legal and accounting fees (when they must be capitalized) revenue stamps, recording fees, real estate taxes (if assumed for the seller)

the 5 types of tax filing status

Single, Married filing jointly, Married filing separately, Qualifying widow/widower with dependent child, and Head of household.

HMO models

Staff model- HMO is corporation and staff are employees of corporation Group model- aka network model where the HMO contracts with groups of medical providers to provide the care. Individual Practice Association- private physicians but contract with the HMO on a fee for service basis

beta is a measure of systematic risk which is non diversifiable

Standard deviation captures all inherent risk or total risk.

XYZ company paid a dividend of $3.00 this year and anticipates the dividend to grow each year by: Year 1: 5% Year 2: 7% Year 3: 8% After the third year, they anticipate dividends growing at 6%. If Sydney's required rate of return is 10%, how much would she be willing to pay for this stock?

Step #1: Determine the dividend to be paid each year. Year 1: 3.00 x (1.05) = 3.15 Year 2: 3.15 x (1.07) = 3.37 Year 3: 3.37 x (1.08) = 3.64 Step #2: Apply the constant growth dividend formula to value the stock as of year 3. V = 3.64 (1.06) ÷ (.10 - .06) V = 96.46 Step #3: Use uneven cash flows to determine the NPV of the stock at time period zero (today). CF0 = 0 CF1 = 3.15 CF2 = 3.37 CF3 = 3.64 + 96.46 = 100.10 I = 10 NPV = ? Answer: $80.86

AMT tax

The AMT credit that is generated from deferral items in the AMT calcuation may be carried forward indefinitely. The AMT credit may not be carried back. Deferral items may be reversed in future years through the use of the AMT credit, while exclusion items result in a permanent increase in tax.

IRR

The Internal Rate of Return (IRR) is a compounded annual rate of return. • An investment is considered acceptable when the IRR equals or exceeds the client's required rate of return. • An investment should be rejected if the IRR is less than the client's required rate of return. • NPV = Present Value of the Future Cash Flows - Cost of the Investment • IRR is that interest rate that will cause the sum of the discounted present value of all the future cash flows to equal the cost of the investment.

index

The NASDAQ, the NYSE Composite, and the Wilshire all use value weighted average, while the Dow Jones Industrial is a simple price weighted average. Only Value Line uses the geometric average.

Price earnings ratio

The P/E represents how much an investor is willing to pay for each dollar of earnings. P/E ratios are a useful tool to value a stock if the firm pays no dividends. the relationship of price to earnings is known as the P/E multiplier P/E = price per share/EPS or Price per share = P/E X EPS

What is the purpose of the Practice Standards?

The Practice Standards are a set of standards that establish the level of professionalism in practice that is expected of CFP® professionals engaged in financial planning and ultimately to protect and benefit consumers.

Which of the following are true statements about the Capital Asset Pricing Model (CAPM)?

The Security Market Line (SML) by itself does NOT determine the optimal portfolio for an investor. Beta is used as a measure of risk on the Security Market Line (SML). As investors replace risk-free assets with risky assets, the required return will rise. The required rate of return is determined by adding the risk premium (which is the market rate of return minus the risk free rate times the beta) to the risk free rate of return.

the effective income tax rate is

The average rate a taxpayer pays based on taxable income. The rate is determined by dividing the tax liability by the taxable income. The tax rate for planning purposes may be the effective or the highest marginal rate depending on the issue.

Risk

The chance the actual return may differ from what is expected. The more risk the higher return required. Risk consists of both systematic risk and unsystematic risk

The market where exchange and broker dealer services are eliminated entirely is:

The fourth market is the market where corporation and institutional investors deal directly with one another. Primary market is where investment bankers and corporations meet to arrange offerings to the public. Secondary markets are where previously issued securities are sold (exchanges, etc.).

Bond Duration concepts

The higher the coupon the shorter the duration The higher the YTM the shorter the duration The longer the maturity, the longer the duration 3 variables used in duration: Yield, term, coupon Time (term) is directly related to duration Yield and coupon (interest rates) are inversely related to duration

One of your clients runs a lawn-care and gardening business. She has just told you there has been a misunderstanding between herself and one of her clients on a contract they wrote and signed. They are both aware of the error and are willing to work together to rectify the situation. The remedy that will best suit this situation is:

The ideal result here, because both parties agree, would be reformation. Rescission occurs when no agreement can be reached and is usually carried out by a court of law.

Benefits of section 1231

The main benefit is gains are treated as capital gains and losses are treated as ordinary income losses. Since holding period for 1231 assets must be long term, gains are LTCG

All assets are capital assets except ACID assets section 1221(a)

ACID Accounts/notes receivable (ordinary income asset) Copyrights & creative works (ordinary income asset) Inventory (ordinary income asset) Depreciable property used in a trade or business (not an ordinary income asset, its a 1231 asset) )

1 Bankruptcy and CFP board

According to CFP Board bankruptcy disclosure procedures, CFP Board will: · Note the bankruptcy filing on the CFP® professionals public profile as displayed on CFP Board's website, www.CFP.net for 10 years from the date CFP Board is notified of the bankruptcy. · Include the individual's name in a news release identifying CFP® professionals who have filed bankruptcy within the previous five years and · Share with consumers and other stakeholders who contact CFP Board regarding a CFP® professional's certification status, including whether the CFP® professional has filed bankruptcy.

John, a CFP® professional, raises his compensation charged for assets under management by 50 basis points, does John have to inform his clients?

According to the CFP Code of Ethics, the certificant shall timely disclose to the client any material changes to compensation.

Elastic demand - quantity demanded responds significantly to changes in price. i.e. airline tix, movie tix, luxury goods, alcohol

An elastic demand curve is almost horizontal, sloping down and to the right so revenue to the firm can increase even when prices are reduced

American Opportunity tax credit (everyone- all students)

An individual tax credit of $2,500 per student based on qualified expenses paid during the first four years of post-secondary education (undergraduate) 100% of first $2,000 in qualified education expenses. 25% of second $2,000 in qualified education expenses per student tax credit is based on the number of dependent students on the family tax return Qualified expenses include tuition, fees student activity fees paid directly to the university and Books, supplies, and equipment which do not have to be paid directly to the university

Savings ratio

Annual employee savings + employer contributions / annual gross income benchmark is 10% to 12% of gross income if you start before age 32 20% to 25% of gross income if wait until age 45 to 50

anything that causes discretionary income to decrease (government increases taxes, consumers increase their savings rate) will shift the demand curve down and to the left

Anything that causes discretionary income to increase (the government lowering taxes, or consumers reducing their savings rates)will shift the demand curve up and to the right

If you have product with inelastic demand, which of the following is TRUE?

As the price increases, revenue increases. Rationale The correct answer is "B". If the demand is inelastic, price increases raise revenues.

Lesson 5

Bonds

Survivorship eligibility

Children under age 18 are always covered as are caretakers of children under age 16 Worker must have 40 quarters (fully insured) or currently insured (6 quarters of coverage in the last 13 quarters) Spousal coverage if worker is fully insured but no spousal coverage for a currently insured worker

Closed end funds

Close-end funds are traded on the secondary markets but are not passively managed.

Disability Income insurance

Coverage - sickness and accident Term- to retirement or death Elimination period - 0 to 180 days (premium is usually waived during the elimination period) Taxability of benefits- depends on whom paid. If employer paid, benefits are taxable, if employee paid with after tax dollars, then benefits are not taxable. Employee can not deduct premiums but employer can. Amount of benefits- 60% to 70% Residual benefit- if insured goes back to work for less pay, policy will pay the difference Probation period short term coverage is 2 years or less Long term coverage is until retirement age, death or a specified period of time.

The Yield ladder

Discount bond For a discount, YTC Call Mom's cell now YTM CY NY (coupon) Premium bond NY (coupon) CY YTM YTC

Perils that can reduce/eliminate the ability to earn

Dying too soon,(life insurance) superannuation (living too long- annuity), disability (disability insurance)

Section II coverages

E personal liability and F medical payments to others.

Lesson 3

Economic business cycle and consumer protection

Lesson 6

Education Planning

Which of the following is an attribute of mortgage REITs? They receive monthly income from investing in real estate loans. Mortgage REITs are more volatile than equity REITs.

Equity reits They receive income from the rental or lease of real estate properties. They provide more opportunity for capital gains than mortgage REITs. They frequently invest in commercial properties.

Lesson 1 read pages 1-19 of fundamentals pre study book

Ethics, law and code of ethics

CAPM, APT , etc use a required rate of return given consideration to a of a certain risk level.

Expected rates of return are calculated without concern for risk. Alphas are returns that do not line up on the SML or CML. that is they are neither over or undervalued. Risk adjusted return is actual return divided by beta

the maximum organizational expenditures that it can properly deduct for the current year would be

Expenses incurred in connection with issuing and selling stock are not deductible. The rule is the lesser of expenditures or $5,000

Campus based Financial aid

FSEOG Federal Supplemental Education Opportunity grant Need based, for students with very low EFC Federal Work study - on or off campus employment to help pay education expenses

Foreign investors also influence money supply and interest rates

Foreigners selling dollar denominated assets will decrease the money supply and increase interest rates foreigners buying dollar denominated assets will increase the money supply reduce interest rates for like the fed they put cash in our economy when they buy an asset

Basis in like kind property received using IRC approach

Formula: adjusted basis of like kind asset given + adjusted basis of boot given + gain recognized - FMV of boot received - loss recognized = basis in new asset

The qualified dependent test

Gross income, support, member of household or family, citizenship or residence, and joint return.

NOI

Gross rental receipts + plus non-rental income = (PGI) potential gross income PGI minus vacancy and collection losses = Effective Gross Income (EGI) EGI minus expenses = net income Net Income + Interest + Depreciation = (NOI) New Operating Income market value is NOI / %

Home Coverage summary

HO-8 (late- modified coverage form- BASIC coverage for ABCD, Condo HO-6 BROAD coverage ACD, Comprehensive HO-5 - OPEN coverage ABCD, Renters -HO-4 BROAD CD, Special form HO-3 OPEN coverage AB, BROAD coverage CD, Broad form HO-2, BROAD coverage ABCD.

Which of the following are included among the tools available to the Federal Reserve (the Fed) to accomplish its responsibilities?

I. Open market operations. II. Deficit spending. III. Discount rate change. IV. Treasury bill issuance. A) I and III only. Rationale The correct answer is "A." Choice "IV" - Issuing Treasury bills is the domain of the Treasury Department, not the Federal Reserve. Choice "II" - Deficit spending falls under fiscal policy which is governed by the executive and legislative branches of government, not the Federal Reserve.

Basic tax formula

Income (broadly conceived - exclusions from income = Gross income - deductions for AGI = AGI - standard deduction or total itemized deductions (whichever is greater) - any QBI x 20% deduction = taxable income tax on taxable income - any tax credits (including federal income tax withheld or prepaid = Tax due or refund due

The major advantage of the cash method of accounting is

Income may be deferred until cash is received and deductible expenses accelerated if paid

Income Tax Pre -study guide

Income tax

Sources of "substantial authority" available for tax research include

Internal Revenue Code. Congressional Committee Reports (Blue Book). Treasury Regulations. Private Letter Rulings. Substantial authority is official words and rulings which can be relied on to support a tax opinion or position

Stock valuation and ratio analysis

Lesson 4

Bond valuation

Lesson 6

Return on Equity (ROE) formula not on exam, need to memorize

Measures the overall profitability of a company. There is a direct relationship between ROE, earnings and dividend growth. ROE= EPS/stockholders equity per share

Social security survivor benefits

Monthly survivor's benefit for the worker's spouse occur only if there are minor children for the surviving spouse to raise. Once the children are of age, benefits to the spouse cease. Benefit for children stops at age 18 unless in high school then stops at age 19. SS no longer gives child benefits above age 18

Bond rating agencies

Moody and S&P's rate bonds on the company's default risk and investment quality. the higher the bond rating the lower the yield, the bond rating agencies analyze a firms liquidity, total amount of debt, earnings and quality of those earnings.

(PLUS) Parent loans for undergraduate students

NOT need based depends on parents credit score intended for parents to pay for their children's undergraduate education NOT subsidized Appropriate for parents whom can make the loan payment but may not have savings to pay for undergrad

What classifications of property are subject to cost recovery

Natural resources are subject to depletion and intangibles are subject to amortization. Personalty assets are used in business and are subject to depreciation. Real estate, as in permanent structures on land, are subject to cost recovery, but the land is not. Personal use property is not subject to cost recovery since it is not used for income generating business purposes.

Non recognition Transactions

Realized but not recognized income Like kind exchanges principal residence investment real estate life insurance policies

Split dollar life insurance is

an arrangement where an employee and employer generally share the premium cost and cash value for death benefit of a life insurance policy covering the life of the employee.

Section 1231 asset are used in a trade or business

and are depreciable property or real property including timber, coal, iron ore, certain livestock, and unharvested crops (under certain conditions) Section 1231 assets DO NOT include inventory, property held for sale to customers in the ordinary course of his trade or business or copyrights or creative works

annual yield formula

annual income/ purchase price

exchanges

annuity to annuity and life insurance to annuity or life insurance to life insurance are tax free exchanges 1035 annuity to life insurance is a TAXABLE event

waiver provisions

applies to insurance an insurer may seek to avoid liability from a loss due to their agents offering policy changes not authorized by the company

Ordinary Income assets

assets when sold result in ordinary income to the owner are not capital assets or 1231 assets

cash value life insurance policy surrendered

cash surrender value - premiums paid = amount subject to ordinary income taxes

SML security market line

helps us determine the required rate of return on a stock (asset) based on its systematic risk (beta)

A loss from worthless securities is deductible

in the year the securities become worthless section 165 sets the artificial sale date as the last day of the year in which they became worthless which can change the loss from short term to long term in some circumstances

Fed buying US treasuries is expansionary because

it increases the money supply and decreases interest rates

taxation of installment option for life insurance proceeds or annuity payments

monthly payment x 12 months x life expectancy = total payments basis/ total payments = exclusion ratio exclusion ratio x monthly payments= amount excluded from monthly income and the remainder is taxed as ordinary income any payments received after recovering your entire basis ( your basis is your life expectancy) is taxable income any basis (premiums paid) not recovered before death is deductible on the annuitants final tax return as a miscellaneous itemized deduction not subject to the 2% rule

Capital assets

most personal use assets and most investment assets are capital assets

to sell variable life insurance

need an insurance license and a series 7

Stafford Loan - Subsidized

need based interest is paid by federal government while student attending school

Federal Pell grant

need based and dependent on the EFC amount undergraduates only always available if student qualifies

Tax free transaction

nonrecognition of gain is permanent

replacement property section 1033 for owner/investor vs owner/user

owner/user must meet similar function/use rule owner/investor must meet the similar activity rule

E personal liability

pays for claims that result from bodily injury and property damage to others when the insured or a member of the insureds resident family are responsible. minimum coverage is usually $100,000 per occurrence. Insurer also pays for attorneys(legal defense) and settlement costs

Internal analysis

the internal environment defines how people work,spend, save and think examples of strengths may include, age, income, amount of emergency fund, amount of savings or savings rate, examples of weaknesses may be deficiencies insurance coverage, poor asset allocation, no estate plan, poor asset allocation internal data impacts a clients goals and behaviors internal data includes life cycle position (age) attitudes and beliefs, special needs, financial position, clients perception of financial position . Age is the most important element in financial planning, it impacts goals, priorities, risk and timing

The disadvantages of the dividend discount pricing model include

the model requires a constant, perpetual growth rate of dividends Many stocks do not pay dividends so the security value can not be estimated and the growth rate of dividends cannot be greater than the expected return and the security price becomes very sensitive to the expected return when nearing the growth rate

A decrease in the reserve requirement is expansionary because

the money supply increases and interest rates decrease

option losses

the most an investor can lose by buying a put or call is the premium paid, by selling a PUT the maximum loss is the strike price because the stock could fall to zero. the maximum loss on a naked call is unlimited for a stock can go up to to infinity...

The discount rate

the rate at which banks borrow from the federal reserve. the federal reserve does not control the other rates .e prime lending rate, fed funds rates, etc.

Long term liabilities include

the remaining balance on any outstanding debt >12 months, i.e. mortgage, car loan, etc.

Qualifying Relative as a dependent for the child tax credit Not a qualifying child test

to be a qualifying relative, the child can not be a qualifying child of anyone

r2

to calculate, square beta. enter beta, gold shift X2 tells us how much risk is systematic (came from the market) how much of our portfolio return is from the market. if r2 is .70 or higher, use beta as the risk measurement, if below .70 use standard deviation

Human life value approach

uses projected future earnings less self-maintenance costs. use current earnings, future growth rate of earnings, number of years of work remaining, minus the cost of self maintenance and the discount rate N = number of years would have worked I= expected % return on investments divided by expected income growth rate PMT is salary - self maintenance costs FV = 0 PV= ?

Agreed upon value is typically used for art and antiques

value is determined jointly by insured and insurer. i..e both have their own appraisers to arrive at a common agreed upon value

Adjusted taxable basis - property acquired by nontaxable exchange

when property is acquired in an non taxable exchange, the newly acquired property will have a carryover basis if the property is exchanged for property of equal value (no boot is paid) - when property is exchanged for more valuable property and boot is paid, the new asset will have the carry basis of the old property plus the boot paid. - if the property is exchanged for less valuable property and boot is received, the new asset will a carry basis reduced by the boot received that was greater than the gain ?

Mutual funds use the securities cash when report historical returns

which is a TIME Weighted return, an investor is concerned about Dollar Weighted return

Your company requires you to remove all CFP marks from material and you sell insurance, etc.

you are still required to fulfill your personal obligations to follow the standards of professional conduct and provide the duty of care of a fiduciary

Professionalism

• Act in a manner that demonstrates exemplary professional conduct. • Certificants cooperate with fellow certificants to enhance and maintain the profession's public image and improve the quality of services.

Fairness

• Be fair and reasonable in all professional relationships. Disclose conflicts of interest. • Fairness requires impartiality, intellectual honesty and disclosure of material conflicts of interest.

Confidentiality

• Protect the confidentiality of all client information.

Diligence

• Provide professional services diligently. • Provide services in a reasonably prompt and thorough manner.

What is the intersection on the Y axis of the CML/SML

The starting point on the CML/SML is a risk free rate of return.

A shift "up and to the left" of the supply curve occurs when:

The supply curve shifts up and to the left, resulting in a decrease of a good or service being supplied, when firms leave an industry or market. When firms leave an industry, less of a good or service is produced at all price levels

Supply curve

The supply curve will shift to the left or right due to a change in Technology, competition, anything other than price.

requirements for satisfying the bona fide resident test necessary for excluding foreign earned income

The taxpayer must establish permanent quarters in the foreign country for himself and his family. The taxpayer must intend to work in the foreign country for an indefinite period of time. occasional trips to US are ok

No Fault insurance Verbal threshold: Law suits may be allowed when there is a fatal injury.

There is no "pure no-fault" in existence in any state in the U.S. Modified no-fault allows suits when verbal and dollar thresholds have been crossed. Dollar threshold is damage occurring above a certain amount, not a limit to actionable compensatory amounts.

Intrinsic value can not be less than zero.

Time value is the premium - the intrinsic value

Support test for qualifying child

To be a qualifying child, the child --Cannot provide more than one-half of his or her own support --In the case of a full-time student, scholarships are not considered to be support

Categories of legal liability

Torts (civil wrongs)- some are covered Breach of contract- not covered by liability ins. criminal offenses- not covered by liability ins.

health insurance co pay calculation

Total Expenses - Deductible X coinsurance %

Which of the following have been repurchased by the corporation

Treasury shares. Unissued shares have never been held by investors to be repurchased. There is no such thing as "repurchased" shares. Authorized shares may be unissued or outstanding shares, but not necessarily Treasury shares (which are those the company has repurchased).

(EFC) Expected family contribution formula

Tuition/cost of attendance - EFC = Financial need

Marketable US treasury Issues. NOT taxable at state/local level

US T bills - maturities < 1 year, sold at discount, do not pay interest US treasury notes- 2 to 10 years pay interest semiannually US treasury bonds- maturities > 10 years, interest is paid semiannually Treasury bills, notes, bonds sold in denominations of $100 or more and are sold on an auction basis with the lowest yield (highest price) winning the auction

the maximum Child Tax Credit for 2018 per child

Under current law, the maximum credit per child is $2,000 TCJA increased the credit from 1,000 for tax years 2018 - 2025.

As a direct result of the rules under TCJA 2017, qualifying dividends will be treated in which manner

Under prior law, the capital gain breakpoints were related to the tax breakpoints. Under TCJA the capital gain breakpoints are at set dollar amounts not corresponding to the current tax brackets

The intrinsic value is

V = (D1 / r - g), D1 is next years dividend amount / r is the required rate of return - g is the growth rate

The recapture rules for Section 179 apply

When the asset is sold before it would have been fully depreciated. When the business use drops below 50%.

The ideal correlation for portfolio construction is

a correlation of negative one (-1) means that any two investments move exactly opposite from one another.

Asset examples

a painting owned by an art collector is a capital asset. A painting owned by the artist or a copyright owned by an author is an ordinary income asset. Office furniture used in a business or trade is a depreciable asset so it is a 1231 asset.

Complements are products that are consumed jointly

a price change for 1 product changes the demand for the other product. i.e. razors and razor baldes

Calculating bond duration

a zero coupon bond's duration will always equal its maturity. As the coupon rate increases the duration decreases and as the coupon rate decreases, duration increases As YTM increases, duration decreases and as YTM decreases, duration increases. Duration has an inverse correlation to the coupon rate and YTM. and a direct correlation to maturity.

Ethics in planning can be used for each of the following, EXCEPT

a. Establishing standards by which conduct can be measured. B) Forcing a uniform method of conducting business on professionals. Rationale The correct answer is "B." Practical ethics leaves much latitude for practicing the profession of financial planning. C) Balancing the power of knowledge of the professional with the rights of the client. D) Providing a practical guideline for practice standards.

Lesson 4 social security types of SS

retirement benefit disability benefit death benefit survivors benefit medicare

When the CFP exam asks about maximizing gains if the stock price falls

the right answer is buying a PUT

Which of the following statements is correct concerning the effect of prepaid tuition plans on federal financial aid?

" Prepaid tuition is not a student asset for federal financial aid purposes. Prepaid tuition is treated as an asset of the parents' and is included in the expected family contribution formula

calculating standard deviation

# +or -E+, orange key sxsy

Standard deviation formula

%amount E+ key for each return gold shift sxsy key

Market anomalies are exceptions to EMH

- January effect - January tends to be a better month because of tax loss selling in November and December and buying in January - Small firm effect- small firms tend to outperform large caps. its easier for small cap to grow revenues and profits faster than a large cap -Value line effect- stocks that receive value lines highest rating (1) out perform stocks that receive its lowest rating (5) P/E effect- stocks with a low P/E ratio tend to outperform stocks with a high P/E ratio Market anomalies do not support the EMH in any of the 3 forms

1. if the required rate of return decreases 2. if the dividend is expected to increase 3. if the required rate of return increases 4. if the dividend is expected to decrease

1. the stock price will increase 2. the stock price will increase 3. the stock price will decrease 4. the stock price will decrease

Section I coverages

A = dwelling B = unattached structures- i.e. storage buildings, garages, greenhouses. C= contents (personal property wherever it is in the world) D= loss of use

Candidate Fitness Standards

Behavior that "Always Bars" Certification o Felony conviction of: ▪ Theft, embezzlement, tax fraud or other financial/tax crimes. ▪ Murder or rape ▪ Violent crime within past five years. o Revocation of a financial professional license (registered securities representative, broker/dealer, insurance, accountant, investment advisor, financial planner) - Exception: Not renewing a license by not paying the fee.

a legal contract is

COLE competent parties offer and acceptance lawful purpose an exchange of value

Current ratio is a measure of

Current ratio = Current assets divided by current liabilities and is a clients ability to meet short term obligations Current assets is cash and equivalent assets maturing in less than 12 months and includes accounts receivable and cash value life insurance Current liabilities includes credit cards and short term debts due within 12 months

Lesson 8

Derivatives

The dividend payout ratio is

Dividend Per Share ÷ Earnings Per Share

Principles

I can Obtain CFP designation • Integrity Competence • Objectivity •Confidentiality • Fairness Professionalism • Diligence

treynor ratio

If a fund is diversified, use the Treynor model [(rp - rf) / (Bp)]. bp is beta

Physical assets might be suitable as an investment in the portfolio of an investor looking for:

Long-term capital gains. Hard assets are generally considered a hedge against inflation, which will lead to price appreciation and potential capital gains.

TIPS Treasury inflation protected securities

Provide inflation and purchasing power protection The principal (par value) adjusts for inflation, the coupon rate is applied to the new principal amount. The coupon rate does not change.

Predefined quiz on fundamentals

Quiz 2

US government bond risk no default risk PRI

Reinvestment rate risk, interest rate risk, purchasing power risk, PRI

what is the maximum amount of the child tax credit that could be refundable

They have 3 children. The child tax credit is $2,000 per child against their tax obligation, up to $1,400 ($4,200 for the three children) per child can be refundable if there is no tax obligation due.

Basis of property transferred between spouses incident to divorce

Transfers of property between spouses incident to divorce are treated the same as gifts so the carryover basis applies and the holding period. No gain or loss is recognized (so are non taxable) on a transfer between spouses or between former spouses incident to a divorce. -A transfer is treated as incident to divorce if it occurs within 1 year of the date on which the marriage officially ended and is related to the cessation of the marriage.

PULP personal umbrella liability policy

adds coverage beyond home and auto injury limits (including renters and condo) requires underlying policy liability minimums. i.e auto and home of $300,000 Criminal acts and intentional acts are not covered but slander and libel are covered. earning power and net worth should be considered for protection with a PULP policy

Reverse mortgage

age 62 or older, stay in home and get income, when you pass your benfeciaries receive net proceeds after the bank is reimbursed

Private activity bonds

are used to finance construction of stadiums

interest rates represent the cost of borrowing

as the money supply is reduced the cost of borrowing or interest rates rise.

Correlation / Correlation coefficient

correlation and covariance measure movement of 1 security relative to another and are thus both relative measures -Correlation ranges from -1 to +1 +1 means the 2 investments are perfectly positively correlated 0 means the assets are completly uncorrelated -1 means the assets are perfectly negatively correlated Diversification begins anytime correlation is less than 1 and the most benefit is received when the correlation is -1

Perils that can destroy/deplete existing assets

damage to property (homeowners, renters and a personal auto policy) legal liability (PULP)

HMO's

deliver comprehensive health care in return for a periodic payment (premium) care is managed by a preliminary care physician (gate keeper) who determines what care is received. The primary disadvantage is their is no coverage outside of the HMO

Anything which causes production costs to rise or supply to decrease, the supply curve will shift up and the the left.

equilibrium is the price at which the quantity demanded equals the quantity supplied (where the demand curve and supply curve intersect)

Universal Life A

flexible premium, adjustable death benefit, unbundled life insurance contract as the cash value grows, the risk to the insurance company decreases so universal A is cheaper than Universal B. Until the cash value amount exceeds the death benefit, the insured only receives the death benefit. usually the amount of insurance purchased declines as the cash value rises, keeping the total death benefit level receive death benefit or cash value whichever is higher

calculation for probability of achieving returns

for 1 standard deviation, 100% - 68% = 32% 32% divided by 2 = 16% for 2 standard deviations, 100% - 95% = 5% divided by 2 = 2.5% for 3 standard deviations, 100%-99% = 1% divided by 2 = .5%

Bargain sales to charity

if taxpayer sells property to a charity for less than FMV, the basis of the property must be allocated between the portion sold and the portion given to the charity Formula Amount realized/fair market value x basis of property = basis for sale purposes

Student loan interest

interest is deductible before AGI (above the line) Limited to 2,500 and must be solely for qualified educational expenses. Loan must have been used for tuition, room, board,supplies or other necessary expenses. Excess is personal interest.

Tactical asset allocation

is an active allocation strategy. It is performed frequently. The investor determines expected returns for asset classes then rebalances the portfolio to take advantage of expected returns.

Arithemetic average (mean) aka simple average

its the sum of all numbers divided by the number of observations. The arithemetic average ignores the compounding effect of returns over time.

Additional tests for qualifying child and qualifying relative tests Joint return test and citizenship/residency test

joint return test - a married dependent must not file a joint return unless to claim a refund citizenship or residency test - the dependent must be a citizen or national of the US, resident of the US, Canada, or Mexico during some part of the year. Adopted children are exempt from this requirement

Insurance Principles of insurance

law of large numbers helps to reduce objective risk- objective risk is measurable and quantifiable Insurance is used as protection against financial loss and is only used to protect against "Pure risks" Pure risks either create a loss or no loss Insurance involves the transfer of loss and sharing of losses with others Speculative risk adds a chance for gain so its is typically not insurable

regulating the insurance industry is done at the state level not the federal level

legislative branch- provides for licensing of agents and enacts laws and requirements for doing business in the state. Judicial branch- rules on constitutionality of laws passed by the legislative branch. Also render decisions and interpretations regarding policy terms. Executive or state insurance commissioner- does not make laws. They administers, interprets and enforces state insurance laws.

Liquidity vs marketability

liquidity- how quickly something can be turned into cash with little to no price risk. Stocks, bonds, mutual funds are not considered liquid because of the risk of selling for a lower price Marketability- good market of buyers available- real estate has good marketability but is not very liquid.

Rules that disqualify HSA participation

not having a High deductible medical plan participating in medicare being eligible to be claimed as a dependent on someone tax return HRA's and FSAs count as other health insurance and can disqualify HSA participation

Term policy sold to an unrelated party

number of months of payments x monthly payment amount = cost of insurance aka basis, so sale amount - prorated premium amount if sold during the month, so sales price is long term capital gain and the prorated premium already paid is return of capital

Portfolio risk Portfolio deviation

short cut formula, use a simple average Standard deviation of each portfolio added together and divided by the number of portfolios, the portfolio deviation is lower than the number

If the market risk premium increases

stock prices will decrease to provide investors with compensation for the increased risk associated with the market risk premium rising

Weighted average beta

stock value / portfolio value x stock beta, then total all betas

The marginal tax rate is

the tax rate applied to the last dollar earned.

Qualitative data

usually means how a client feels, what they want to do.

Accrued interest

when purchasing a bond, buyer pays the seller interest that has accrued since the last payment (a pro ration of the coming payment) The new buyer receives the full interest payment due and the 1099 INT will reflect the full amount, buyer can take a deduction equal to what he paid the seller in accrued interest

Rules of Conduct

• Establish expected high standards and also describe the level of professionalism required.

The Practice Standards

• The 100 Series o Establishing and defining the relationship with the client. • The 200 Series o Gathering client data • The 300 Series o Analyzing and evaluating the client's financial status • The 400 Series o Developing and presenting the financial planning recommendations • The 500 Series o Implementing the financial planning recommendations • The 600 Series o Monitoring

The Practice Standards

• The 100 Series o Establishing and defining the relationship with the client. • The 200 Series o Gathering client data • The 300 Series o Analyzing and evaluating the client's financial status • The 400 Series o Developing and presenting the financial planning recommendations • The 500 Series o Implementing the financial planning recommendations • The 600 Series o Monitoring Exam Tip: Merely completing each step of the practice standards may not be financial planning. Financial planning integrates the financial planning process with the financial planning subject areas.

BOND YTM Yield to maturity

assume 2 payments per year unless stated otherwise 2 gold P/YR X gold N +- PV PMT (semi annual) FV I ?

Indemnity

an insured is only entitled compensation to the extent of their loss and can not make a profit from the insurance contract

Stock valuation

dividend x (expected growth % +1) / (required rate of return % - expected growth %)

Married put

involves buying a PUT on a stock or index that is currently owned by the investor. Strategy could also be called portfolio insurance if the investor owns a diversified portfolio of common stocks

Fundamentals quiz

quiz 7

Required rate of return formula

r = rf + b(rm - rf) rf is risk free rate b is beta rm is market rate

David has won the Illinois state lottery. He must decide whether to receive annual payments of $250,000 at the beginning of each year for the next 20 years, or a lump sum payout. What lump sum amount does David need to receive to equal the $250,000 payments for the next 20 years, if he can earn an 8% return on his investments, assuming inflation is 3%?

$2,650,900 Rationale The correct answer is "B." This is a present value of an annuity due problem. So, N = 20, I = 8, PV = ?, PMT = 250,000, FV = 0. Put your calculator in BEGIN mode and solve for PV. Inflation is not necessary in this calculation.

Probability of returns with a normal distribution and standard deviation

68% of the time is deviation 1 which is average return +- the standard deviation 95% of the time is deviation 2 which is the the 68% SD +- the SD 99% of the time is deviation 3 which is the 95% deviation +- the SD

Net worth is

Assets-liabilities

covariance to find beta

Beta = SDP x SDM x Correlation / SDM squared if you have the covariance number beta= covariance/ SD squared

Convertible bond conversion formula

Bond Par PAR/Conversion Price = number of shares

Which of the following satisfies Practice Standard 100-1 (Defining the Scope of the Engagement)?

C) Verbally agreeing on the scope of the services you provide. Rationale This practice standard requires that the scope of the engagement is mutually defined and agreed upon. This practice standard does not require that the scope be in writing. The code of ethic's rules require certain written disclosures, but not this practice standard.

Lesson 4

Internal Analysis

Tools of technical analysis

Market indicators, price indicators, volume indicators, charting

Investment Planning Pre-study materials

Lesson 1

Basic income tax Income tax pre-study book

Lesson 2

Measuring Return

Lesson 3

529 plans, prepaid tuition plans, American opportunity tax credit, lifetime learning credit

No double dipping on expenses. Can not use an expense for more than one program including 529 distributions. You cannot claim an AOTC and LTLC for the same child in the same year

alimony recapture formula

P1 + P2 - 2P3 - $37,500 = Recapture, p= payment

Lesson 2

Registered Investment Advisors

sector funds

are not well diversified and have a low r squared (.50 to .60)

individuals and businesses who use property in productive use in a trade or business

can recoup their capital over the useful life of the asset against ordinary income as an expense based on IRC per asset type (computer vs truck, etc) the goals is so the capital can be reinvested back into the business.(essentially they receive their capital back tax free) If the asset is disposed of at the end of its life at 0 value, there is nothing to be concerned about for income tax. If the 1231 asset is sold, the taxpayer must make sure that the depreciation deduction taken equals the actual depreciation of the asset

3 types of investment companies

closed end, open end, UIT (unit investment trust) closed end fund- no new shares are issued, fund trades on an exchange and at a premium or discount to its Net asset value (NAV) Open ended fund- have an unlimited number of shares because will continue to issue as new buyers purchase. Shares are bought and redeemed directly from the fund family. Shares trade at NAV NAV= assets-liabilities/shares outstanding UIT while usually fixed income trusts can be equity also. UIT's are self liquidating, have passive management an no trading of assets within the trust. UIT's issues units not shares

Morgan, a prospective client, recently approached Mike, a CFP® professional with significant estate planning needs. Mike does not feel like he can adequately fulfill all of Morgan's needs so he refers Morgan to a colleague who specializes in estate planning. What principle did Mike most clearly demonstrate?

competence A competent financial planner focuses on maintaining and applying adequate skills and knowledge when providing services to clients. Competence also includes the planner's ability to recognize his or her limitations.

insurance contract features

conditions- details the duties and rights of the insured and insurer Declarations- includes the name of the insured, description of property, amount of coverage,amount of premium, term of the policy, inception and termination dates. exclusions- what will not be covered Riders and endorsements- additions to contract, take precedence over conflicting terms in policy

ETF's

considered tax efficient because of low cost turnover and passive investment strategy. Exam looks as ETF's like passive index funds

Inflation rate calculation

end inflation - beginning inflation divided by beginning inflation x 100

The significance of the Expected rate of return calculation

is it provides an investor with the rate of return that a given security, meeting certain levels of pricing and dividends, may be expected to return

B other structures including detached garages, greenhouses, storage buildings

losses are insured on a replacement cost basis but coverage is usually limited to 10% of coverage A amount. Other structures used for business purposes are not covered. must have a business policy

CML Capital market line

point at which efficient frontier hits the risk free (treasury bill) return line. that is the most optimal portfolio CML shows us the rate of return we should require for a well diversified portfolio. A well diversified portfolio only has systematic risk

1031 exchanges

the boot is recognized as a gain, unless the property being exchanged is being done at a loss

Conditional

the insured must abide by the terms and conditions in the contract, if he does not the insurer can choose not to pay the claim

according to Fundamental analysis

the intrinsic value of a share of common stock is the discounted value of all future dividends

Capital market line

specifies the relationship between risk and return in all possible portfolios. -Its the macro aspect of the Capital asset pricing model (CAPM) - The CML becomes the new efficient frontier, mixing in the risk free asset with a diversified portfolio. -A portfolios return should be on the CML. -Inefficient portfolios are below the CML. -Portfolios above the CML are considered unattainable. The CML is used to evaluate portfolios not single securities. CML uses SD for its risk measurement. - The CML intersects the Y axis at the risk free rate because an investor with 100% of their assets in the risk-free asset will yield a return but experience no variability (SD). -The CML runs tangent (touches in only one spot) with the efficient frontier at the optimal portfolio or the tangency portfolio. The investor is considered fully invested and is not lending or borrowing. -Before the CML touches the (to the left of the) efficient frontier the investor is said to have a security allocation made up of the optimal portfolio mix and is lending a portion of uninvested assets at the risk free rate. -To the right of the tangency the investor is said to have borrowed at the risk free rate to fully invest all capital and borrowed funds in the portfolio.

subjective and objective risk

subjective risk is risk based on your perceptions Objective risk is measurable and quantifiable, it measures the variation from actual loss to expected loss objective risk, can or can not be pure risk

Total risk is

systematic risk + unsystematic risk total risk is measured by standard deviation systematic risk is measured by beta

Geometric average (mean)

take each number and multiply it by the next number and multiply the total by the n power and n= total number of operations HP keystrokes #x#x# orange shift y/x then n orange shift 1/x then -1 x 100

Estoppel

takes place when a party is denied assertion of a right to which they are otherwise entitled

2. Gathering client data continued

Gathering Client Data - Determine Goals and Expectations - The planner should be an active and engaged listener during the data gathering step. - The planner should gather both quantitative and qualitative information. - The four categories of information gathered by the planner include: lists of assets and liabilities, dollar values, ownership information and contractual agreements. - The client and practitioner mutually define the client's personal and financial goals. - The planner should explore client's values, attitudes, expectations, and time horizons. - The planner should provide the client with a risk tolerance questionnaire and personal financial inventory questionnaire. - The planner should prepare financial statements for the client. - It is the planner's responsibility to verify the information provided by a client. - A formal written process for discovering client data leads to higher levels of client trust and commitment.

Arithetic mean formula, sum the numbers and divide by the number if sets

Geometric mean formula multiply each number to the next number -1 x 100 / number of sets - 1 x 100 negative numbers are the remainder from subtracting the negative from 100

inherited assets, always LT and step up or step down to FMV

Gifted assets, gift your tax basis and holding period unless gift is at a loss then double basis rule and your holding period starts on the date of the gift if gift pays gift tax new basis is gifts basis + gift appreciation from giftors cost basis to FMV at time of gift/ fmv at time of gift x gift tac paid = new basis if giftee dies < 1 year from time of gift and original giftor inherits the property, they get back their original cost basis.

Health & disability insurance policy provisions

Grace period- period beyond the premium due date, coverage remains in effect if premium is paid during the grace period. Reinstatement- insurer can reinstate policy if it lapses -Guaranteed renewable- Insurer is required to renew but may raise rates for an entire group -Non cancellable- Insurer must renew and can not raise premiums

Defining the Relationship

• A certificant shall at all times place the interest of the client ahead of his or her own.

Federal agency securities

backed by moral obligations of US government.Indirect obligations???? is this still correct

Covariance

how price movements of 2 securities relate to each other. (their interactive risk) Covariance is a measure of relative risk

Mean variance optimization

process of adding risky securities to a portfolio but keeping the same expected return.

The principle of objectivity addresses

put the clients interest ahead of your own

Average share price

total cost/number of shares

Employer education assistance

may pay or reimburse an employee for education expenses any benefit or reimbursement is not included in income up to $5,250

Legacy The big 3 documents

will DPOA for healthcare Advanced medical directive if the clients do not have the above, it should be considered a weakness

Insured Muni bonds

-AMBAC American municipal bond issuance corp -MBIA- municipal bond insurance association

Tax-advantaged plans for Education savings

1. Qualified State Tuition Plans a. Prepaid Tuition b. 529 Savings Plan 2. Coverdell Education Savings Accounts 3. Roth IRA 4. Series EE Savings Bonds 5. Uniform Gift to Minors Act (UGMA)

short term liabilities

are obligations due within 12 months, including credit cards, taxes payable and bills due, IT excludes interest unless already incurred.

What must be included, in writing, in any engagement letter that involves financial planning?

A) Privacy policy B) Conflicts of interest Rationale Answer: B The first step in the financial planning process is to establish and define the relationship. During this step, mutually defining the scope of the services is necessary. A is incorrect because the code of ethics do not require a privacy policy to be disclosed orally or in writing. C is incorrect because the requirements are to disclose the arrangement not the amount. D is incorrect because references are not required to be disclosed in the engagement letter. C) Compensation amounts D) References

Deductibles

are of form of "retaining risk"

UGMA and UTMA

Asset of the child Taxation of unearned income (dividends, capital gains, interest) may be subject to kiddie tax <19 unearned income may be taxed at trusts and estates rates 19 or older unearned income taxed at child's rate except full-time student age 23 or less subject to kiddie tax UTMA can include real estate plus stocks, bonds, mutual funds UGMA does not allow real estate

Inflation, interest rates, unemployment and GDP in business life cycle

At Peak- inflation, interest rates and GDP are at their highest and unemployment is at its lowest. Since interest rates are increasing to cut off inflation, bonds, preferred stock and other high duration or fixed income asset should be sold. Equities and hard assets such as gold and real estate tend to perform well in this environment. For Recession/contraction- Inflation, interest rates and GDP are decreasing and unemployment is increasing. Equities and hard assets should be sold and reinvested into short term cash and bonds until the market settles out. For Trough (the bottom) Inflation, interest rates, and GDP are at their lowest and unemployment is at its highest. High duration bonds will tend to perform well as bond yields drop and interest rates continue to fall. Stock purchases late in the cycle should be considered if valuations seem appropriate. For expansion- Inflation, interest rates and GDP are increasing and unemployment is decreasing. Investments should be in short duration bonds and equities.

Monetary policy used used by the Federal reserve and they have 4 tools

Bank reserve requirement- fed can increase or decrease which adds or subtracts from the money supply and moves interest rates. Discount rate- fed can increase or decease the rate at which banks borrow from the fed Open market operations- the bank can buy treasuries thus increasing the money supply or sell treasuries which reduces the money supply Excess reserves- the fed can pay interest on excess reserves of banks

Disability - waiver of premium

Whole life- insurer will waive all premiums after disability Universal and variable universal- insurer will waive the charges related to mortality and administration OR waive the entire premium

Mrs. Hoffman is an 80-year old widow whose liquid assets are on deposit at a small FDIC-insured bank. She has the following on deposit: - $75,000 in various Certificates of Deposit - $50,000 in a Money Market Mutual Fund - $200,000 in an IRA Rollover - $25,000 Passbook Savings (Joint with son) - $25,000 Checking Account (Joint with daughter) How much is currently insured by the FDIC?

$125,000 Rationale The correct answer is "B." The $75,000 CDs are insured under Mrs. Hoffman (Single). The $50,000 Money Market Mutual Fund is not insured by the FDIC. It may be insured under the SIPC but that is not what the question is asking. The $200,000 could be insured but we do not know what the IRA is invested in as it must be cash to receive FDIC coverage. The Passbook Savings is FDIC insured jointly with her son ($12,500 for each Mrs. Hoffmann and her son) for a total of $25,000 coverage. The Checking account is FDIC insured jointly with her daughter ($12,500 for each Mrs. Hoffmann and her daughter) for a total of $25,000 coverage. IF the question had asked "how much is Mrs. Hoffman insured for under the FDIC?" the answer would be: $75,000 + $12,500 + $12,500 = $100,000.

John Becker expects to receive $100,000 from a trust fund in nine years. What is the current value of this fund if it is discounted at 8% compounded semiannually?

$49,362.81 Rationale N=9x2=18 i=8/2=4 PV=? PMT=0 FV=100,000

Florence Hollingsworth purchases an automobile for $14,500. She financed the auto at 14% compounded monthly for three years. What payment is required at the end of each month for Florence's automobile?

$495.58 Rationale N=3x12=36 i=14/12=1.17 PV=14,500 PMT=? FV=0

BOND Duration to calculate price change of a bond

% price change = -D [ Change in interest rates/1 + YTM] = current price of bond x 1+ % change

order of operations: Parenthesis, exponents, multiplication, division, addition, subtraction

( ) Do everything inside the parenthesis first X2 then do exponents X squared, etc Xs and / from left to right + - from left to right

Weighted average share price

(# of shares x share price) + (#of shares x share price),etc. / total number of shares = $..

Conduct which is presumed to be unacceptable and will bar a candidate from certification unless they appeal to the DEC for reconsideration

- 2 or more personal or business bankruptcies (single bankruptcy cases will no longer be investigated, but their name will appear in a press release and on the CFP board public profile for 10 year - Revocation or suspension of a non financial professional license like real estate or attorney unless its administrative

Average invested assets formula

(Beginning assets + Ending assets) / 2

(ROI) Rate of return on Investments formula

(Ending investments - Beginning investments - savings - gifts received) divided by Average invested assets target is 9% to 12% depending on clients age, allocation, etc. provides some insight as to the likelihood of achieving goals. ROI should be compared with an appropriate benchmark based on a clients age and risk tolerance step 1 calculate savings (income-all expenses) step 2 calculate average invested assets (Beginning assets + Ending assets) / 2 step 3 (Ending investments - Beginning investments - savings - gifts received) divided by Average invested assets

ON-Budget debt

(GNMA) Government National Mortgage Association division of housing and urban development (FHA) Farmers home administration

Investment Policy statement

(RRTTLLU) Risk, return, taxes, timeline, liquidity, legal and unique circumstances. Objectives: Return requirements and risk Constraints: Time horizon, liquidity (how much and when), taxes(tax deferred or taxable account), laws and regs (trust account, UTMA account, etc) , unique circumstances establishes a clients objectives and put limitation on the investment manager. also used to measure investment managers performance IPS does NOT include investment selection

Analyze and Evaluate the Client's Financial Status continued

- Assumptions used during this step should be mutually agreed upon by the client and planner. - Three areas that are necessary to analyze and evaluate for every engagement: - Emergency fund - Level of debt - Insurable risks - For each cash flow need, a capital needs analysis must be conducted, such as education and retirement goals. Sensitivity analysis using Monte Carlo analysis should be used when conducting capital needs analysis.

Activities During Each Step of the Financial Planning Process • Establish Client-Planner Relationships

- Clearly identify the client for any engagement. - The focus of any advice and the duty of loyalty will be determined based upon who is the actual client. - At this point, determine the client's needs and expectations. - After understanding the client's needs and expectations, the planner should assess whether their skills match the client's needs, then communicate this assessment to the client. It may be necessary to refer the client to another professional if the planner's skills do not align with the client's needs. - As a fiduciary, the planner must identify, communicate and resolve any real or potential conflicts of interest between the client and planner. All conflicts should be resolved by mutual consent between the client and planner. - The planner should explain the client's roles and responsibilities in the financial planning process. - The scope of the engagement must be defined (or limited) and documented, and conflicts of interest should be disclosed and resolved. Finally compensation arrangements should be disclosed as well. - Advisory agreements are used during this step of the financial planning process.

Developing and Presenting (Communicating) the Financial Plan continued

- There are 5 elements that should be communicated to the client during this step: 1. Client goal review 2. Assumptions used 3. Observations and findings 4. Recommendations 5. Alternatives - Communication effectiveness increases client trust and cooperation and creates a low propensity for the client to leave their planner. - When communicating with the client, a combination of words, numbers and graphics should be employed. - Communication techniques that are effective include pacing, rephrasing and reflecting. - Pacing - matching the speed of listening with the speed of the person talking. - Rephrasing - restating or repeating back what has been stated. - Reflecting - a paraphrasing technique where the planner restates the client's words, in the planner's words.

A reduced (prorated) personal residence capital gain exclusion is available if the sale is due to

- a change in employment - a change of health - diagnosis, cure, mitigation, treatment for parent, grandparent, child, uncle, cousin, grandchild, sibling, in laws, niece or other unforseen circumstances, change of health, disaster area, involuntary conversion, unemployment, divorce,, breakup of engaged couple, multiple births from same pregnancy, bullying, etc. - the amount excluded is based on the ownership between the last sale and the current sale. take the normal exclusion allowed and multiply y number of actual months divided by 24 months. if prorated exclusion is > gain realized then no tax is due

The information ratio is

- a relative risk-adjusted performance measure -Measures the excess return and the consistency provided by a fund manager, relative to a benchmark. - The higher the excess return (or information ratio) the better -Excess return can be positive or negative depending on the funds performance relative to it's benchmark Formula: IR= Rp-Rb/ @A IR= Information ratio Rp= the portfolios actual return Rb= the return of he benchmark Rp-Rb= excess return @A = tracking error of active return(SD of the difference between portfolio returns and index returns)

Term life policy types

-ART Annual renewable term - premiums increase annually so every year the policy becomes more expensive advantage- insured receives a maximum death benefit for each dollar of premium Can be converted to a permanent policy without proving insurability - Level term- pay the same premium amount each year can be converted to a permanent policy without proving insurability disadvantage- in the early years the premiums are higher than ART. -Decreasing term- premiums remain the same, the death benefit decreases over time, good for a mortgage

The tools of technical analysis

-Charting- plotting price and volume using the 50 day, 100 day or 200 day moving average -market volume- gives insight into investor sentiment -short interest- a high short interest indicates "pent up demand" (have to buy it back at some point) -odd lot trading- what small investors do- do the opposite -Dow theory- signals an end to the bull or bear market -Breadth of the market -Advance decline line

Off- Budget debt

-FNMA Fannie Mae (federal national mortgage association) -FHLMC - freddie mac- Federal home loan mortgage corporation -SLMA- Sallie Mae Student loan marketing association - FFCB Federal farm credit banks -FICB Federal intermediate credit banks -FHLB Federal home loan bank

Scholarships

-are not included in gross income of a individual who is a candidate for a degree at an educational organization -a qualified scholarship is any amount received as scholarship or fellowship grant to the extent the money was used for qualified tuition and related expenses -this does not include amounts received for room and board. any amounts received for room and board are taxable income to the recipient -qualified tuition waivers by nonprofit educational institutions are excluded from income. This provision is generally limited to undergrad, an exception exists for graduate teaching or research assistants

Taxpayers not eligible for the standard deduction

-both spouses must either itemize or take the standard deduction, they have to file the same way, -Nonresident aliens -individuals filing returns for a tax year of less than 12 months

Life insurance NONforfeiture options when surrendering life insurance

-cash surrender value - owner receives cash value of policy minus surrender charges -Reduced paid up insurance - cash value used to fully pay for a policy with a smaller face amount -Extended term- cash value used to fully pay for a term policy with the same face amount as the original policy

general exclusions for most homeowners policies

-ground movement- earthquake, volcano, mud/mudslide, sink hole -ordinance or law regulating he construction, repair or demolition of a building or structure -damage from rising water- floods, surface and tidal water, waves, water below ground that exerts pressure on building and water backing up through drains and sewers - war -Nuclear hazards including radiation -power failure caused by an uninsured peril(i.e. spoilage due to freezer thawing out - intentional acts and neglect by the insured are not covered. In general, covered losses must result from something which is sudden and accidental.

Group Life insurance

-group term insurance is the most common life insurance offered by employers -Premiums for the first $50,000 are tax free Premiums paid by the employer are tax deductible for the employer Premiums paid by the employee are with after tax dollars Income must be imputed to the employee for coverage beyond $50,000 -Group whole life- allows employees to accumulate cash value (retirement savings). generally premiums paid by the employer are taxable income to the employee

variable universal life non direct vs direct recognition approach

-non direct recognition- a loan against the cash value does not affect the dividends paid. -Direct recognition- dividends are reduced by a loan against the policy cash value

Types of whole life aka permanent insurance

-ordinary life- insured pays premiums until age 120 or death cash value increases to face value at age 120 death benefit is the same throughout the life of the policy - Limited pay life- premiums are higher than ordinary life because only paying premiums for a specific time period -Modified whole life is a step up type payment plan. Payments start lower and over time step up. -Variable life- cash value is invested in stocks, bonds, etc. so possibility for a higher return death benefit and cash value fluctuate based on investment performance -CAWL- Current assumption whole life- insurer uses new money rates and new mortality rates to establish premiums. if interest rates turn out to be too high and premiums too low, the insurer reserves the right to adjust the premium once, usually at the 5 year mark. -LoCAWL is low premium assuming a higher interest rate for crediting - hiCAWL assumes a lower interest rate than is currently being credited resulting in a higher premium with the possibility of a 1 time downward adjustment at year 5 interest sensitive insurance LoCAWL is designed to attract people due to the lower premiums

Fiscal policy is how Congress influences money supply and interest rates with 3 tools

-taxation- increasing tax rates will reduce money available for spending, thereby increasing interest rates. Decreasing tax rates will increase money available for spending, thereby decreasing interest rates. ,-Spending- Through government spending congress can increase the money supply, thereby decreasing interest rates. Or Congress can cut spending thereby increasing interest rates. - Debt management- because of Deficit spending Congress must borrow to continue spending which puts pressure on interest rates to increase

when property is acquired in a taxable exchange

-the cost is the FMV of the property given in exchange for what is received -A mortgage does not affect the FMV or basis -property acquired as a dividend in kind or as compensation for services, the taxpayers basis in the property is the FMV of the property at the time of acquisition

the five tests which must be met to qualify as a dependent for a qualifying relative are

1) Gross Income Test, 2) Support Test, 3) Not a qualifying child, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.

Summary of treatment of gains and losses

1. Personal use property- gains can be short or long term, losses are not recognized/deducted from taxes 2. Capital asset - gains can be short or long term, capital losses are deductible to extent of capital gain plus $3,000 3. trade or business - gains can be short or long term, ordinary loss deductible against ordinary income 4. Trade ordinary income- gains are ordinary income, losses are deductible against ordinary income

Section 1231 gains and loss and 5 year look back rule

1231 gains and losses are netted over a 5 year period, so if a loss was taken 2 year sago, it has to be netted against the current year (which is taxed at capital gains rates) will be taxed at ordinary income tax rates to the extent of any 1231 losses claimed in the past 5 years

stock splits

2 for 1 is 2/1 or 2 x the number of shares and the stock price divided by 1/2 3 for 2 is 3/2 or 1.5 x the number of shares and the stock price divided by 1.5

BOND YTC yield to call

2 gold P/YR X gold N to call date +- PV PMT (semiannual) FV (call price) I ?

The Practice Standards Financial Planning Process Related Practice Standard 2. Gathering client data

200-2 Obtaining quantitative information and documents relevant to the scope before any recommendations are made. • May be obtained directly from the client or other sources such as interview(s), questionnaire(s), client records and documents. • Communicate to the client a reliance on the completeness and accuracy of the information provided and the impact on recommendations. • If unable to obtain sufficient and relevant quantitative information: • restrict the scope of the engagement, or • terminate the engagement • communicate to the client any limitations on the scope of the engagement and the effect on recommendations

MACR (Modified Accelerated Cost Recover)

3 semis, 5 vehicles and computers, 7 desks, 27.5 rentals, 39 commercial buildings rentals and buildings are 1250 recapture, everything else is 1245 recapture

Losses on wash sales are disallowed

30 days before and 30 days after the date of sale (so 61 days in total) the disallowed loss is added to the cost basis of the new security index fund to index fund - wash sale rule applies index fund for managed large cap fund - wash sale rules do not apply wash sale rules do NOT apply to gains

The Practice Standards Financial Planning Process Related Practice Standard 4. Developing and presenting financial planning recommendations

400-1 Identifying and Evaluating Financial Planning Alternative(s) 400-2 Developing the Financial Planning Recommendation(s) 400-3 Presenting the Financial Planning Recommendation(s) These practice standards emphasize •What is Possible? •What is Recommended? •How is it Presented?

Financial Planning Process Related Practice Standard 4. Developing and presenting financial planning recommendations

400-1 Identifying and Evaluating Financial Planning Alternative(s) • Consider sufficient and relevant alternatives to the client's current course of action in an effort to reasonably meet the client's goals, needs and priorities • Take into account legal and/or regulatory limitations and level of competency in properly addressing each of the client's financial planning issues • More than one alternative may reasonably meet the client's goals, needs and priorities, illustrating the subjective nature of exercising professional judgment

Financial Planning Process Related Practice Standard 4. Developing and presenting financial planning recommendations 400-2 Developing the Financial Planning Recommendation(s)

400-2 Developing the Financial Planning Recommendation(s) • Recommendation(s) shall be consistent with and directly affected by the following: • Mutually defined scope of the engagement; • Mutually defined client goals, needs and priorities; • Quantitative data provided by the client; • Personal and economic assumptions; • Practitioner's analysis and evaluation of client's current situation; and • Alternative(s) selected by the practitioner. • A recommendation may be to continue the current course of action • May be necessary for the practitioner to recommend that the client modify a goal

The Practice Standards Financial Planning Process Related Practice Standard 6. Monitoring

600-1 Defining Monitoring Responsibilities • Mutually define monitoring responsibilities: • Clarify the responsibility of the practitioner - more likely that the client's expectations are in alignment with the level of monitoring services which the practitioner intends to provide • Explain what is to be monitored, the frequency of monitoring and the communication method • Monitoring process may reveal the need to reinitiate steps of the financial planning process • The current scope of the engagement may need to be modified - The planner should conduct periodic meetings between the planner and client to review any changes in the client's life that may impact the client's ability to meet their goals. - The purpose of monitoring the financial plan is to: - Increase the likelihood of long-term financial security, - Ensure the financial plan is up-to-date - Lessen the liability exposure of the planner - Build trust with the client - There are two types of reviews, regular reviews and episodic reviews. Regular reviews occur at predetermined intervals. Episodic reviews occur after major, life-changing events. - Financial planners should review plans on at least an annual basis. - Investment results should be communicated at least quarterly or monthly during periods of extreme volatility. Investment management may require more frequent plan review. Performance benchmarks should be used at least annually.

Hannah currently has $715,000 saved. She will retire in 10 years and wants to take $100,000 income for 25 years at the beginning of each year. She also wishes to have $1,000,000 35 years from now to leave to her heirs. What is the internal rate of return needed to accomplish this? how to solve???

7.09% Rationale 715 +/-CF 0 CF 9 [OS] Nj [OS] means Orange Shift 100 Cf 25 [OS] Nj 1000 CF [OS] IRR/YR

MEC's Modified Endowment Contracts

A policy is a MEC if it fails the 7 pay test which is the insured pays in more than the required premiums in the 1st 7 years. -MEC's are subject to 10% penalty if withdrawn before 59 1/2 -MEC- withdrawals and loans are taxed on a LIFO basis which means the withdrawals come from the earnings not the premiums(basis). if the client doesn't intend to take a withdrawal or loan then there is not consequence. Death benefit proceeds are not taxable.

Which of the following is necessary for a certificant to disclose to a client if providing material elements of the financial planning process:

A That you own 50% of a corporation. B) Your secondary education. C) The IRS has a lien on your personal property. D) I have a lapse in a financial designation. Rationale Answer: D The certificant is required any information that could reasonably be expected to materially affect the client's decision to engage the certificant. A client attributes a certain level of expertise to a planner based on financial designations. If a financial designation has lapsed, that would be considered reasonable information the client would want to know. A is incorrect because the question does not indicate the planner is recommending the planner invest in the corporation owned by the planner. B is incorrect because if form ADV is being provided for disclosure requirements, only education after high school is disclosed on form ADV. C is incorrect because a lien on your personal property would not be considered to materially affect the client's decision to engage the planner.

Which of the following are necessary inputs to determine a client's goals?

A client's attitudes, values, expectations, and time horizon are all necessary to determine financial goals, needs, and priorities. A clients income is not needed

abode test for qualifying child

A qualifying child must live with the taxpayer for more than half of the year. --Temporary absences from the household due to special circumstances (e.g., illness, education, military service) are ok.

The rate of return determined by the Capital Asset Pricing Model (CAPM) is

A rate of return used in Jensen's Alpha. It is also the security market line equation and an indicator of the required rate of return by an investor on any given security, not a market or portfolio's return. CAPM uses Beta as its measure of risk and is useful for securities that are both more or less risky than the market.

Load funds A,BC shares

A shares- have a front end load, a small 12-b-1 fee (the marketing fee used to pay commissions), no redemption or back end load A shares are appropriate for long term investors because of the low 12b-1 fee -B shares- have a back end load(sales charge) and not a front end load have a high 12b-1 fee, typically the maximum 12b-1 fee is 1%, B shares can be converted to A shares. the only advantage is that an investor would NOT pay the front end load but would pay higher 12B-1 fees until the shares are converted into A shares. Many funds no longer offer B shares -C shares- usually charge a small back end load and the maximum 12b-1 fee, C shares are most appropriate for short term investors, C shares do not convert to A shares. They do not charge a front end load

Bond swaps

A substitution swap is designed to take advantage of anticipated and potential yield differentials between bonds that are similar with regard to coupons, rating, maturities, and industry. Rate anticipation swaps utilize forecasts of general interest rate changes. The yield pickup swap is designed to alter the cash flow of the portfolio by exchanging similar bonds having different coupon rates. The tax swap replaces bonds with offsetting capital gains and losses.

You are a CFP® professional and you have been working with a husband and wife client over the past 5 years. The wife is 42 years old and the husband is 46 years old. They have a moderate risk tolerance for their investments. They have no children and are primarily planning for their retirement. Last week, the wife requested a private meeting between you and her. During this meeting she explained that over the past 3-6 months, her husband has become a compulsive gambler, often gambling illegally. As a result of significant gambling losses, he has depleted all retirement savings they managed to accumulate. She asked that you keep her meeting with you confidential and not disclose it to her husband. After reviewing recent financial statements, you determine that they are unlikely to reach any of their financial goals, due to the husbands gambling problem. According to the CFP Board's Code of Ethics, what should you do next?

A) Disengage the client because you are unable to help them attain their goals. B) Contact the appropriate authorities regarding the husband's suspected illegal gambling activities. C) Contact the husband to inform him about the private meeting with his wife. D) Encourage the wife to seek professional help for her husband and continue working with the clients on their financial goals. Rationale Correct Answer: D The Code of Ethics requires a financial planner to refer out to other professionals issues in which the professional has no competence. In this case, the husband needs professional help with his gambling problem. The planner is unlikely an expert in this area and should refer the clients for the gambling problem. The gambling problem appears to be a new issue, since you have been working the clients for five years, and the gambling issue occurred in the last 3-6 months. The best action for the planner is to encourage the wife to seek professional help for her husband. If the gambling issue persists, and the wife is unwilling to address the issue with her husband, then the planner should disengage. Answer A is incorrect because although the client is currently unsuccessful at the implementation of the plan, periodic adjustments and changes to the plan are appropriate based on changes in the client's life. Answer B is incorrect because the Code of Ethics do not require a financial planner to report suspected illegal activities of a client to the appropriate authorities. Answer C is incorrect. Although the board is very sensitive about making appropriate disclosures; this is not the best answer choice. You have an obligation to both the husband and wife, since they are both your clients. Typically, when one spouse is keeping secrets from the other spouse, the planner should disengage.

One of the five tests which must be met to qualify as a dependent is

A) Whether the dependent files a joint return that year. Rationale The correct answer is "A." The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.

401k plans have 2 additional non discriminatory tests

ADP Actual deferral percentage test (limits the elective deferrals for the HC based on the elective deferrals of the NHC if ADP for NHC is 0-2%, then HC can do 2 x NHC ADP 2% to 8%, then HC can do NHC ADP + 2% 8%,+ then HC can do 1.25 x ADP for NHC ACP Actual contribution percentage test uses same scale as ADP and same methods to resolve a fail. but uses employee after tax(thrift) contributions and employer matching contributions

Arbitrage pricing theory (APT)

APT assets that pricing imbalances can not exist for any significant period of time; otherwise investors will exploit the price imbalance until the market prices back to equilibrium. APT is a multi factor model that attempts to explain return based on factors. Anytime a factor has a value of 0, then that factor has no impact on return. APT attempts to take advantage of pricing imbalances. Inputs are factors (F) such as inflation, risk premium, expected returns and their sensitivity to those factors. SD and beta are not used as variables.

Sally, age 28, is a CFP® professional and is just starting her own financial planning practice. Sally is concerned about the liability associated with practicing financial planning and would like to take the appropriate steps to minimize her liability. Which action should Sally take that would help her to minimize her liability?

According to the CFP Board's Standard of Professional Conduct FAQs, the CFP Board believes that compliance with the Standards, including the requirement that financial planning services be provided with the duty of a fiduciary, is a way to reduce liability. purchasing an insurance policy is used to transfer risk. Minimizing risk of liability is different from minimizing risk of loss. Although it's a possible answer, it's not the best answer

Everything must be disclosed in writing except:

According to the code of ethics, the responsibilities and obligation of each party are not required to be made in writing, but may be disclosed in writing or through discussion.

American options and European options

American option- exercise within a specified period of time European option- exercise at a specific future date

Inelastic demand- quantity demanded changes very little to changes in price, i..e staples, milk, diapers, gasoline

An inelastic demand curve is almost vertical, sloping down and the right

Supply, the higher the price the more suppliers are willing to supply, the lower the price, the less suppliers are willing to supply. Opposite configuration of demand curve

Anytime there is a change in price, there is a movement along the supply curve

XYZ company anticipates paying the following dividends, starting next year: Year 1: 2.25 Year 2: 2.75 Year 3: 3.01 After the third year, they anticipate dividends growing at 6%. If Diego's required rate of return is 12%, how much would he be willing to pay for this stock?

Apply the constant growth dividend formula to value the stock as of year 3. V = 3.01(1.06) ÷ (.12 - .06) V = 53.18 Step #2: Use uneven cash flows to determine the NPV of the stock at time period zero (today). CF0 = 0 CF1 = 2.25 CF2 = 2.75 CF3 = 3.01 + 53.18 = 56.19 I = 12 NPV = ? Answer: $44.20

Beta, correlation coefficient, etc.

Beta reveals the relationship of a given security's movement relative to that of the market Correlation coefficient and covariance measure two stocks movements relative to one another. Standard deviation measures a security's performance relative to expectations of performance. Alpha reveals the level of over or underperformance of the security relative to market expectations.

Option pricing models

Black /Scholes is used to determine the value of a call option and considers the following variables. Current price of the underlying asset Time until expiration The risk free rate of return Volatility of the underlying asset All variables have a direct relationship on the price of the option except the strike price. As the strike price increases the call option decreases in value which all have a direct relations -PUT/CALL PARITY- values a PUT based on the value of a corresponding call option. _BINOMINAL pricing model- attempts to value an option based on the assumption a stock can only move in one of 2 directions. This model can be extrapolated into the future based on the value achieved at each interval

Arbitration clause investment advisory agreement

Both SEC and FINRA call for voluntary negotiations first. Barring success with this then they both require arbitration.

Debt ratios

Consumer debt payments should not exceed 20% of net income Housing debt (PITI) should be <= 28% of gross income Housing debt plus all other reoccurring debt (consumer) should be <= 36% of gross income

Assets exempt from chapter 7 bankruptcy

Contributory, traditional and roth IRAS up to $1 mill (indexed for inflation) Qualified Plans and rollover IRAS have an unlimited exemption Debts related to neglience are discharged from bankruptcy

Taxable year

Calendar year ends Dec 31. Most individuals are on a calendar year basis a Fiscal year is the last day of the month for any month but December. Many business are on a fiscal year. A individual tax payer can request a fiscal year status with form 1128 but he IRS must approve.

CMOs- Collateralized Mortgage obligation bonds (secured)

CMO's are divided into tranches which determines which investors will receive principle repayment - Tranches A-Z represent short, intermediate and long term tranches. Short term tranches receive principal repayment before the intermediate, etc. CMOs are meant to mitigate against prepayment risk associated with mortgage backed securities

Measures of inflation CPI and PPI

CPI consumers price index measures the price change in a basket of goods and services at the retail level. CPI is applicable to consumer purchases and is historically 2% to 3% -PPI Producers price index- measures price changes in the wholesale and manufacturing sectors

CULP commercial umbrella liability policy

CPP (commercial package policy is similar to homeowners with basic, broad and open peril coverage Biz owner can also add endorsement for business interruption (lost profits) BAP business auto policies Professionals need liability ins. aka malpractice, or errors and omission ins. manufacturers also need product liability policies

Premium bond ladder

CR coupon rate is highest CY YTM YTC

Dollar weighted return

Calculates IRR using the investors cash flows. use the NPV cash flow formula and solve for IRR

Time weighted return

Calculates IRR using the securities cash flows. Assumes buy and hold Determined without regard to the investors cash flows Mutual funds report on a time weighted return basis.

Taxability of options

Call options create 2 potential tax consequences. If the contract lapses(expires) then the premium paid is a short term loss and the premium received is the short term gain. If the call is exercised, the premium is added to the stock price to increase the basis in the underlying stock. If the underlying stock is held for more than 12 months, it will be a long term gain/loss, if less than 12 months, its short term -PUT options if the contract expires without being exercised the premium paid is a short term loss and the premium received is a short term gain

Accounting periods and methods

Cash basis or accrual basis you can do both (cash for personal and accrual for your business) cash basis recognizes income when it is received (constructive receipt) Accrual basis recognizes income when it is earned

Developing cash flow projections and valuations for real estate can be difficult due to

Changes in demographic and economic variables. Cash flow projections and comparable equity capitalization rates are easily obtained for a valid comparison. The difficulty is one of the unpredictability of changes in economics and demographics which directly impact values. Real estate valuation models such as one using net operating income, adjust for variations in real estate financing.

Chapter 11 bankruptcy provides relief through reorganization for the business or self employed

Chapter 13 provides relief through adjusting debts schedules.

missed questions from Fundamentals practice exam

Consumer durable goods (i.e. washer/dryer) and capital goods (buildings, machinery, etc used to produce goods) are cyclical and fluctuate directly with the economy and GDP so are most sensitive to a recession Securities act of 1933 provides for protection from deceit and fraud in the sale of new securities Securities protection act of 1970 (SIPC) designed to protect individual investors when a brokerage firm fails Investment advisors act of 1940 requires firms or persons advising others about securities must register with the SEC it does not address investor safety with trading securities savings, fixed expenses, variable expenses and taxes (including income taxes) are expenses on the cash flow statement Asset, liabilities and net worth are on the balance sheet

Convertible bonds

Conversion value is the value of the stock into which the bond can be converted. One of the primary benefits of a convertible bond is than even if the stock does not perform well, the investor has a floor built in which is the par value of the bond that the investor will receive when it matures. Formula is NOT on the CFP exam sheet Conversion formula: CV= (PAR/CP) x Ps Ps is the price of the common stock, CP is the conversion price 1000/CP is the conversion ratio or the number of shares the bond can be converted into.

Market averages

DJIA - SIMPLE price weighted average. add up the stock price for each stock and divide by the number of stocks. It does not use market capitalization and is not a value weighted index. S&P500- uses market cap (value weighted index) Russell 2000- uses market cap (value weighted index of the 2000 smallest stocks in the russell 3000. Wilshire 5000- uses market cap (value weighted index. its the broadest index and includes 6500 stocks EAFE- uses market cap (value weighted index) that tracks stocks in Europe, Australia, and the far east.

Which of the following describes an investor's position in purchasing a put and a call on the same security, at the same exercise price, for the same period of time?

D) A straddle. Rationale The correct answer is "D." In a "spread", the prices are different. In a "strip", the price and time are the same, but two puts and one call are purchased. In a "strap", two calls and one put are purchased with price and time the same

Six steps of risk management

DIEDIE -determine the objectives of the risk management program -Identify the risks to which the client is exposed -Evaluate the identified risks as to probability of occurrence and potential loss -Determine alternatives for managing risk and select the most appropriate alternative for each -Implement the program -Evaluate, monitor and review (control)

400-3 Presenting the Financial Planning Recommendation(s) continued

Developing and Presenting (Communicating) the Financial Plan - The client and planner should consider alternatives to the client's current course of action. - More than one alternative may accomplish the client's goals. - During this step the planner is presenting the advantages and disadvantages of each alternative. - The planner recommends an alternative that is most likely to accomplish the client's goals. The recommendation must be presented as opinion, not fact. Developing and Presenting (Communicating) the Financial Plan - All critical assumptions used by the planner must be disclosed during this step. - The plan should be presented as: - Recommendation for implementation (optimal choice for this client) and - Alternative recommendations (less optimal choices). - During this step, the following questions should be answered: - Who should implement the recommendation? - When should the recommendation be implemented? - Why should the recommendation be implemented?

After analyzing and evaluating the client's information to determine the client's financial situation, 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. Rationale The answer is "A." Principle 7 states the CFP professionals must "Provide professional services diligently. Diligence is the provision of services in reasonably prompt and thorough manner, including the proper planning for, and supervision of, the rendering of professional services."

preferred stock

Dividends are set at issue by the Board as a percent of par value and do not change. Changes in interest rates directly impact preferred stock, and there is no relief on preferred stock because most cannot be held to maturity (as most are issued without a maturity date). Preferred stock is more risky than bonds because bonds are a legal obligation and have a higher priority in bankruptcy proceedings.

Donee's basis is determined using the formula

Donee's basis + (net appreciation in the value of the gift using donors basis and FMV at time of gift)/value of taxable gift when gifted aka FMV) X gift tax paid

Long term savings and investments

Education funding - save $3,00 a year for 18 years for a public state university, $6,000 a year for 18 years for a semi-private university, save $9,000 a year for 18 years for a competitive private university retirement amount- at age 62-65 you should have 16 times the amount of the annual income you need for retirement Savings rate- save 10 to 12% towards a retirement goal assuming you start at an early age. The education goal is in addition. Return on investment- expect 8 to 10% return assuming a long term time horizon Risk- is measured using standard deviation, which is a measure of volatility and variability. The benchmark for SD of a diversified portfolio is 8 to 14%

Suppose you have structured a budget with monthly periods as your budget intervals. Since certain expenditures such as auto insurance or a Thanksgiving charity donation do not occur every budget interval, they may be best incorporated by:

Estimating them in the budget only when incurred. Rationale The correct answer is "B." These types of varied or periodic expenses are extended only when they are incurred.

Which of the following is/are true regarding registering as an investment adviser.

Exceptions are not governed by the Act. Exemptions need not register, but are governed by the "anti-fraud" provision (Section 206) of the Act.

1031 exchange is only for real property used for productive use in a trade or business or as an investment Properties must be similar in nature but do NOT have similar uses. improved real estate can be exchanged for unimproved real estate, US realty however may not be exchanged for foreign real estate

FMV of new asset - gain not recognized + loss not recognized = basis in new asset when you meet the requirements for a 1031 exchange, it is mandatory

Medicare benefits

Federal health insurance for people 65 and older spouses can qualify at 65 based on the other spouses work record Medicare has parts A, B & D

Realization and Recognition

Gains on capital assets are taxed only when there has been both a realization and a recognition event Gains must be realized before they can be recognized. Realization occurs when there is a disposition of property (sale or exchange, etc) or there is a segregation of the gain -Recognition occurs when a realized gain is taxed - in general realized gains are (recognized) taxed unless an exception to this rule can be found in the IRS code. an exception will generally say the gain is exempt from taxation or the gain is deferred to a future time.

Gross domestic product measures the amount of goods and services produced in the US, regardless of ownership. i.e. Mexican beer produced in Texas is part of the GDP

Gross National product measures the amount of goods and services produced by a country's citizens regardless of where the goods are produced. Ford cars produced in Mexico are part of US GNP

What is the first step in the financial planning process?

Gather data B) Explain the scope of the services provided Rationale Answer: B The first step in the financial planning process is to establish and define the relationship. During this step, mutually defining the scope of the services is necessary. A is incorrect because gathering data is the second step in the financial planning process. C is incorrect because identifying the client's values and attitudes is part of the data gathering phase, which is the second step in the financial planning process. D is incorrect because an engagement letter cannot be drafted (and signed) until the scope of the engagement has been mutually agreed upon (answer choice B). Signing the engagement letter would take place after agreeing on the scope of the services to be provided. C) Identify the clients values and attitudes D) Sign the engagement letter

Holding period return with tax rates Based on Subchapter M or pipeline theory, investment companies must payout at least 90% of their portfolio earnings. If a mutual fund sells a position they hold at a gain, it is passes the gain, like-kind, to its investors.

HPR = (SP - PP +/- CF) x (1-TR) / PP [($21.00 - $20.00) x (1 - .30)] + [($1.00 + $.75) x (1 - .15)] / $20.00 Answer: 10.94% order of operations: Parenthesis, exponents, multiplication, division, addition, subtraction)

Players in the futures market

Hedgers are o Producers and processors o Protecting their interests in underlying commodity or financial instrument o Provide the actual products being sold • Speculators are Investors o Trying to earn profit on expected swings in prices of futures contracts o Long positions benefit if price increases, short positions benefit if prices decreases.

Kathleen recently died. She was fully insured and left behind her husband Robert (age 60), their two children, Nora (age 18 and in college) and David (age 13), and her dependent single mother Joy (age 70

Her husband, Robert, who is age 60 is entitled to a survivorship benefit of 71.5% of Kathleen's PIA based on retirement but he would be entitled to 75% since he is caring for a child under 16 (David). Her mother, Joy, age 70, who was dependent on Kathleen before her death is entitled to a survivorship benefit of 82.5% of Kathleen's PIA. Her daughter, Nora, age 18 and in college is not eligible for survivorship benefits because she is not less than 18 and being in college is not an exception to the rule. Her son, David, age 13 is entitled to a survivorship benefit of 75% of Kathleen's PIA.

traditional medical expense insurance types

Hospital expense- covers expenses associated with hospitalization but it does not cover physician fees Surgical expense- covers surgeon fees at hospital or elsewhere Physicians expense- covers all non surgical physicians expenses Major medical- covers all of the above plus drugs and physical therapy. for health plans issued after September 2010, lifetime caps have been eliminated. eye exams and dental care are not part of major medical. Usually 80/20 coinsurance above the deductible and each family member must satisfy a deductible with typically a maximum of 3 deductibles per family.

If more than 1 person is eligible to claim another person as a dependent under the qualifying child rules the tie breakers rules are applied

IF Eligible taypayers are -both parents then its the parent with whom the child lived with longer -both parents and custody is 50/50 then its the parent with the higher AGI -if only 1 is a parent, then that parent -if neither is parent then the taxpayer with the higher AGI

Exclusions (IRC sections 101-150) gifts and inheritances

IRC section 102 excludes from gross income amounts received by gift, bequest, devise or inheritance. The exclusion only applies to the property, not income generated on the property.

Final tax treatment is based on whether filing as individual or C corporation

If an individual or pass thru entity has a 1231 gain, LTCG applies, 20%, 15% or 0% if they have a 1231 loss, the loss can be written off without limitation against other forms of income for the current and possibly past years. if the loss is considered a capital loss vs a 1231 loss, the $3,000 loss limitation applies including the carry forward rule. If the 1231 loss exceeds the $50k or $100k limit, the capital loss rules can be used for the remainder. For C Corporations, they pay the same rate on capital gains and ordinary income so a 1231 gain has no tax benefit like it does for an individual If a C corporation generates a 1231 loss, the loss will be an ordinary loss and can be deducted against other income with no limitations or carried back if the carry back rule is invoked. For Corporations, capital losses may not be deducted against other forms of income, only used to offset capital gains. By categorizing an asset as section 1231 the corporation can recognize losses without having to generate capital gains to offset them.

Exceptions to passive active rules for rental activities

If the average period of customer use is seven days or less, the activity could be considered an active trade or business. If the average period of customer use is 30 days or less and the taxpayer provides significant personal services in concert (materially participates) with the rental activity, the activity may be classified as an active trade or business. The activity will be considered an active trade or business if the rental of property is incidental to the non-rental activity of the taxpayer. A rental activity that the taxpayer customarily makes available during business hours for nonexclusive use by customers will be classified as the active conduct of a trade or business, provided the taxpayer materially participates.

In the insurance industry

Insurance costs are unknown at the time the premium is established and unregulated insurers might charge too little or too much. Beneficiaries are usually entirely different from the insured. They are not present to protect their self interest when the contract is made. Upon death of an insured under a life insurance policy, Generally, there is no income tax on life insurance proceeds except in the case of transfer for value sales of a policy. Insurance is a service that is paid for in advance, but its benefits are reaped in the future.

insurable interest

Insured must have a emotional or financial hardship resulting from damage, loss or destruction life insurance - only need at time of policy inception life insurance policies are considered long term investments Property and Liability insurance - must have insurable interest at inception of policy and at time of loss

The bond investment strategy of "riding the yield curve" involves

Investing either short-term or long-term to take advantage of anticipated interest rate changes. Riding the yield curve refers to the purchase of debt instruments in anticipation of fluctuations in the rates of return on both long and short-term instruments. Rising rates of interest require repositioning a portfolio in advance of the rise in order to avoid significant price drops. These moves are based on anticipated changes in the yield curve.

COBRA

Is an extension of group health insurance with the same coverage. Employer may charge 2% administration fee so a total cost of 102% to employee. If the employer goes bankrupt, there is no cobra coverage because their is no health plan. Employee has 60 days to make COBRA election If Voluntary or involuntary termination(except for gross misconduct) or reduction in hours from full time to part time employee, dependents, spouse, children have 18 months of coverage. If termination due to disability, everyone has 29 months, if do to employees death, divorce, legal separation, eligibility for medicare or loss of dependent status have 36 months of COBRA COBRA only applies to employers with 20 or more employees. part time prorated hours count towards the 20 FTE's but they do not need 20 FTE's participating in the health care plan but only those employees participating in the plan can elect COBRA COBRA coverage may be terminated if the employer terminates its health plan for all its employees because it goes out of business, the employee does not make premium payments, the employee becomes covered under any other plan providing medical care. voluntary or involuntary termination including retirement or reduction in hours is 18 months of coverage (no coverage for gross misconduct) disability is 29 months, everything else is 36 months

GIC's Guaranteed investment contract

Issued by insurance companies with a guaranteed rate of return for a period of time. Yield is higher than treasuries.

Once the contract is placed in written form, all previous and prior understandings of a verbal contract (or any other nature) will not be allowed to contradict the written contract. This will be known as

Parol evidence rule

An investor who would like to know how a portfolio manager performed relative to how the manager was expected to perform on a risk-adjusted basis would use which one of the following indicators?

Jensen index To compare a portfolio manager's performance to that of the market using Sharpe or Treynor models, one must calculate the results of both of these models on other portfolios or on a market being used as a benchmark, as well as the portfolio in question.

Tax rates

LTCG and qualifying dividends are generally taxed at a maximum rate of 20% (the American tax relief act of 2012) - individuals in the 37% bracket, LTCG and qualifying dividends are taxed at 20% For individuals in the 22% to 35% bracket, LTGG and QD's are taxed at 15% if in or below 12% income bracket, LTCG and QD's are taxed at 0% Other exceptions- collectibles are taxed at 28% Unrecaptured section 1250 gain (which is equal to straight line depreciation) is taxed at 25% -Qualifying small business stock(section 1202) for which a percentage of the gain is taxed at 28% if the holding period is at least 5 years. The amount of gain you can exclude is (based on stock purchase price) 50% if the QSBS is acquired before Feb 18, 2009, 75% if acquired after February 17, 2009 and before September 28, 2010 and 100% if acquired after September 27 ,2010

Holding period return formula (HPR)

SP-PP +- CF/ PP if stock bought on margin only use the equity amount paid

Dodd Frank reform and consumer protection act

Lenders must now verify whether, based on income, credit history, and other data a borrower can reasonably be expected to repay their loan. Lenders are prohibited from refinancing unless their is a benefit to the borrower. after a job loss, homeowners who are unable to pay may qualify for up to $50k of mortgage assistance Banks must retain at least 5% of risky loan exposure The FDIC limit was made permanent at $250k An accredited investor is $1 mill net worth not including residence (reassesed every 4 years make $200k if single or $300k if married

RISKS

Life insurance 10-16 x gross pay Health insurance (at least $1 mill life time cap, but ACA eliminated caps) Disability 60% to 70% of gross pay Property insurance home and auto < FMV ,should be FMV LTC (inflation protection) and 36 - 60 months of benefits PULP (personal umbrella liability policy) $1-3 mill

Risk benchmarks for Insurance

Life insurance- 10 x 16 x gross income Health insurance- at least $1 mill lifetime cap (no caps now under affordable care act) Disability insurance- if client is paying premium with after tax dollars then 60-70% of gross income is needed Property insurance (home and auto)- policies that cover each at fair market value is appropriate Long term care insurance- policy which provides a daily benefit that rises with inflation (is inflation protected) personal Liability umbrella policy (PULP)- need $1 to $3 mill in liability protection

Straddles Long and short

Long straddle, investor buys a put and a call because expects movement or volatility but is unsure in which direction Short straddle- An investors sells a put and a call option. Investor does not expect volatility and is hoping to keep both premiums

Congress has 3 goals related to Fiscal policy

Maintain economic growth, Maintain price stability, maintain full employment

Federal reserve has 3 goals

Maintain long term economic growth, maintain price levels supported by the economy, maintain full employment

Medicare

Medicare is an 80/20 split without stop-loss limits. Medicare does not provide custodial care coverage, eye care or dental coverage. Medicare provides basic hospital and supplementary medical insurance Medicare does not provide coverage in foreign countries, unless in US or traveling to Alaska and the closest hospital is in Canada and its an emergency or you live in the US and the closest hospital is in a foreign country (does not need to be an emergency)

Value line ranks stocks on a scale of 1 to 5, with 1 a buy rating and 5 a sell rating

Morningstar ranks mutual funds with 1 to 5 stars, 5 stars is best

YTM Bond A has a 6% annual coupon and is due in 2 years. Its value in today's market is $900

N=2 i=? PV =<900> PMT=60 FV=1,000 Note: This is an annual bond so it's not necessary to adjust N, i or PMT. 11.91%

Stafford loan - unsubsidized

NOT need based interest begins as soon as the funds are disbursed

Federal Perkins Loan program

Need based for students with exceptionally low EFC amounts program expired September 30, 2017

Your client has asked you to assist her in examining possible funding methods for her daughter who is planning on attending graduate school for her MBA. Which of the following can you recommend as available to her to assist in covering expenses?

No grants are available to graduate students, only loans. Lifetime Learning Credit is a credit for tax purposes, not financial assistance direct for education. Parent PLUS Loans are loans for parents to pay for undergraduate course work. Graduate parent loans are available for graduate school, but is not an answer choice. Perkins loan program ended September 2017.

Municipal bonds

Nontaxable at the federal, state and local level if you live in the issuing state. Bonds issued by territories of the US (Puerto Rico) are not subject to federal, state and local taxes. You do not have to live there. 3 types of muni bonds- GO, Revenue, Private activity

Yield curve, plots interest rates against time (term for maturity)

Normal yield curve is concave (sloping up and to the right) and it typical of an expansion. Inverted yield curve, (convex) is sloping downward and to the right. (contraction) Fiscal and or monetary policy in effect will help to determine the shape of the yield curve.

On the Markowitz Model, at the point of tangency, we have attained

On the Markowitz Model, at the point of tangency, we have attained: The optimal portfolio. The efficient frontier measures what portfolios are attainable and which are unattainable. The indifference curve measures what level of risk an investor will accept for given levels of return.

charitable deductions by an artist

Only materials and expenses are deductible, not artistic contribution or time. No deduction is allowed for use of property; therefore, the pro-rata overhead would likely not be allowed.

Dispute remedies- Parol evidence rule, reformation, recission

Parol evidence rule - the written contract contains the complete understandings of both parties. any prior understandings are no longer Reformation- contract is revised to express the original intent of all parties Recission- deems a contract void from inception

Types of systematic risk (PRIME) non diversifable risks

PRIME P- Purchasing power risk- means your dollar may not be able to buy the same amount of goods in the future. affects stocks and bonds. R- Reinvestment rate risk- may not be able to reinvest your money at the same rate. Most common with bonds. I-Interest rate risk- risk that changes in interest rates will affect the price of stocks and bonds. M-Market risk- short term ups and downs of the market can always happen dragging down your portfolio E-Exchange rate risk- risk that a change in exchange rates will impact the price of international securities.

Automobile coverage (PAP) personal auto policy

Part A- liability split level x/x/x bodily injury per person, bodily injury maximum per accident, property damage. Part B medical- self and family in car and as pedestrian, other riders only in car. does not cover passengers in an non owned car driven by the insured. Part C uninsured motorist and under insured- also hit an run part D damage to the insureds vehicle- Collision- with object, comprehensive - animal, falling limbs, fire, theft etc. Part E- duties after an accident or loss-. report and prevent from further damage, prepare inventory, file written proof with ins. company Part F- general provisions- exclusions, covers US and Canada. does not cover driving in Mexico, intentional acts, racing, vehicles with less than 4 wheels, etc

Investment advisers act of 1940 Exceptions to registration

People/business's in the business of giving advice and receive compensation who receive an exception to registration. They do not have to register with the SEC. B- Bank or holding company that is not an investment company I- any broker or dealer whose performance of advisory services is solely incidental and who receives no special compensation for these services. Also any person whom is not within the intent of the law as determined by the SEC. G- any person whose advice advice, analyses or reports relate only to securities which are direct obligations of, or guaranteed by the US. P- Publisher of any bonafide newspaper, news magazine, business or financial publication in general and regular circulation Any L - Lawyer A - Accountant T - Teacher E- Engineer are excluded from registration when the advisory service is solely incidental to the practice of their profession.

SML. If the risk/return performance of a stock lies above the Security Market Line, the stock is said to have a Positive alpha.

Performance of a stock below the SML is a negative alpha. Again, the Jensen formula can be used for this calculation.

Long term care tax benefits

Premiums have limited tax deductibility based on age and are included in the medical expense deduction threshold of 10% of AGI If policy is qualified the benefits are tax free. a qualified policy has the following provisions- insured needs care for at least 90 days, unable to perform 2 of the 6 ADL's, insured suffers substantial cognitive impairment. A LTC policy does not have a surrender value, is limited to qualified LTC services, uses dividends to reduce future premiums or increase benefits, meets consumer protection laws and does not pay for expenses covered under medicare.

A small business owner wants to create a business succession plan, but the CFP® professional does not have any experience with succession planning for small businesses. However, his colleague has extensive experience. What should the CFP® professional do?

Prepare the plan, with the help of his colleague as a resource Rationale Answer: B The principle 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 of ethics and the principle of competence.

Which one of the following actions might the Federal Reserve take when using open market operations to regulate the supply of money and the availability of credit?

Purchase Treasury bonds from bank investment departments is the correct answer." The tools of the Federal Reserve include changing the discount rate, changing reserve requirements, and open market operations (which consist of either buying or selling Treasury securities depending on the Federal Reserve's desired objective.)

Formula for co insurance home damage

Purchased insurance amount / replacement value x .80 (which is required co insurance %) x loss amount = amount covered or the ACV x depreciation % Insurer covers the higher amount

Formula for home loss co insurance

Purchased insurance amount / replacement value x .80 (which is required co insurance %) x loss amount = amount covered or the ACV x depreciation % Insurer covers the higher amount

Behavorial finance

Regret avoidance (also known as the disposition effect) leads investors to take action or to refuse to act in hopes of minimizing any regret over their actions or inactions. In investments, it leads people to sell winners too soon and to hold on to losers too long. Loss aversion notes that people more strongly prefer to avoid losses than to seek gain. Overconfidence suggests that investors overestimate their ability to successfully predict future market events which leads to overtrading. Cognitive dissonance is a form of overconfidence because an investor's memory of past performance is better than the actual results Hindsight bias is a form of overconfidence related to an investor's belief that they had predicted an event that, in fact, they did not predict. Anchoring represents the investor's inability to objectively review and analyze new information. Herd mentality is the process of buying what and when others are buying and selling. Representativeness is thinking that a good company is a good investment without regard to an analysis of the investment Naïve diversification is the process of investing in every option available. Risk aversion is not considered to be a behavioral bias. Rather, risk aversion is an assumption of traditional financial analysis based on the precepts of rational, utility-maximizing economic theory.

Section 267 disallows losses from direct or indirect sales or exchanges of property between related parties. This does NOT apply to gains.

Related parties are: -siblings including 1/2 but not step siblings -lineal descendents- children and grandchildren -ancestors- parents and grand parents spouse In laws, aunts, uncles and cousins are NOT considered related parties Disallowed losses reduce gains on subsequent disposition to a unrelated 3rd party. ** the tranferee's basis becomes FMV at time of transfer for losses and the transferors cost basis for gains. if the new sale price is between those amounts, their is no gain or loss when sold to a unrelated 3rd party.**

Term life insurance - Provisions

Renewable - most term policies can be renewed without evidence of insurablility Convertible- most term policies can be converted to a whole life policy without evidence of insurability for a particular period of time Waiver of premium- If insured becomes totally disabled, the premiums are waived while the insured is disabled Term insurance is pure insurance

My margin requirements are 50% initial margin and 25% maintenance margin. I purchase a total of 200 shares at $100 per share using full margin amount for the 200 share purchase. Shortly thereafter, share prices fall to $50 per share. What will my margin call be?

Required: $50 x .25 = 12.50 Actual: 50 - 50 = 0 $12.50 per share x 200 = $2,500

Investment advisers act of 1940

Requires registration with SEC if - A. advice- you give advice on securities -B. in the business of giving advice about securities - C compensation- receive compensation for giving advice All of these elements must be present for a person to be required to be registered as an RIA, but cant not use the initials RIA For example, if you are giving advice pro bono (free) you do not need to register Advisory contracts can not be assigned to another advisor or firm without the clients consent

additional Negligence concepts

Res Ispa loquitur- the act speaks for itself- allows the use of reasonable evidence when a specific explanation of negligence is not available. i.e. a plane crashes. -Negligence per se- the act constitutes negligence, thereby relieving the burden to prove it i.e. drunk driving -Burden of proof- initially born by the injured party. Standard of proof in most civil cases is the preponderance of the evidence (more than 50%) -Damages- from a tort can take 2 forms- bodily injury and property damage. Property damage is usually the actual cost, Bodily injury can be medical expenses, loss of income, mental anguish, loss of limbs, pain and suffering, punitive damages as punishment for the act. - Collateral source rule- damages should not be reduced just because the person has additional ways to collect. i.e insurance, health benefits, etc

Standard deviation

SD is sigma+ key for each percentage then orange shift sx,sy key

Earnings penalties for SS

SS is reduced by $1 for every $2 above the earnings threshold of $17,040 per year if under FRA In the year you reach FRA, the benefit is reduced $1 for every $3 earned above $45,360 per year Earnings based reductions end at FRA up to 85% of SS may be taxed, thresholds are based on combined income which includes AGI, non taxable interest, foreign earned income, 1/2 of retirement benefit for MFJ, 1st hurdle is $32k, 2nd hurdle is $44k for single filer, 1st hurdle is $25k and 2nd is $34k

All qualified plans must pass 1 of 3 tests to be considered non discriminatory

Safe Harbor test: NHC/NHT => 70% Ratio % test: % of NHC covered/ % of HC covered => 70% Average benefits test: AB% of NHC covered/ AB% of HC covered => 70% Defined benefit plan must also pass the 50/40 test 50 employees or 40% of employees covered test, whichever is less for each day of the year.

Sam Peterson wants an additional $24,000 per year income after his retirement. Sam can earn 8% interest. How much will he need to invest to reach his goal?

Sam does not mention how he wants the money. He may want it either in terms of "capital utilization" (like an annuity) or "capital conservation" where the principle is never touched, only interest is used. Since Sam does not know how long he will live. With the information provided you could back into a number by figuring 24,000 income based on 8% of your answer set. This would be the capital conservation model. $300,000 x 8% = 24,000 he has decided to put aside $300,000 which at 8% interest will generate $24,000 per year indefinitely without touching the principle.

Section 179 deduction for expensing qualifying business property in 2018 is

Section 179 deduction is $1,000,000 for 2018. However, the amount is reduced dollar for dollar for acquisition amounts above $2,500,000 placed into service during 2018.

Securities regulations

Securities act of 1933 (new issue act),- requires prospectus before they are purchased Securities act of 1934 (SEC) -regulates the secondary market of securities and created the SEC Investment company act of 1940- authorized SEC to regulate investment companies, the 3 types open, closed and UITs, Investment advisors act of 1940- requires investment advisors to register with the SEC or their state. Securities investors protection act of 1970- protects investors from the failure of a brokerage company Insider trading and securities fraud act of 1988- defines an insider as anyone with info that is not available to the public.

A married couple, who both work, recently had a baby. What should be their primary financial concern?

Since both parents work, there is likely a need for both incomes. The biggest financial risk that they face is likely premature death of one of the wage earners, therefore purchasing life insurance is likely the primary financial concern.

The current annual dividend of ABC Corporation is $2 per share. Five years ago, the dividend was $1.36 per share. The firm expects dividends to grow in the future at the same compound annual rate as they grew during the past five years. The required rate of return on the firm's common stock is 12%. The expected return on the market portfolio is 14%. What is the value of a share of common stock of ABC Corporation using the constant dividend growth model? (Round to the nearest dollar.)

Step 1 N = 5. I? PV = <1.36>. PMT = 0 FV = 2 I=.08 Step 2: D1 = 2 x 1.08 (from Step 1) = 2.16 Step 3: V = (D1) ÷ (r - g) = 2.16 ÷ (.12 - .08) = 54

Tax equivalent and Tax exempt yields

TEY = r/ (1-t) (provided on the exam) municipal bond after tax yield (taxable equivalent yield) TEY= Tax exempt Yield r= tax exempt yield t= marginal tax rate is the municipal bond after tax yield (taxable equivalent yield) tax exempt yield/ (1- marginal tax rate) or Not provided on the exam after tax yield for taxable bond Tax exempt yield = (corporate tax rate) x (1- marginal tax rate)

Which of the following is NOT a rule relating to the Principle of Fairness in the CFP Board's Code of Ethics and Professional Responsibility?

The CFP designee must disclose to the client material changes in the designee's business. B) The CFP designee must disclose to the client the designee's or firm's basic philosophy of financial planning. C) The CFP designee must disclose to the client the commission rates the designee will earn on any financial products or services the client buys through the CFP designee. Rationale The correct answer is "C." All choices are found in Principle of Fairness with the exception of Option "C." The CFP is required to divulge general compensation information such as sources, but the Fairness Principle does not require the advisor to divulge commission rates. D) The CFP designee must disclose to the client any relationships the designee has with third parties that may give rise to commissions for the CFP designee.

CML and SML risk measurement

The CML (Capital Market Line) uses standard deviation, while the SML (Security Market Line) uses the beta as its "risk" measurement.

Adherence by CFP Board certificants and registrants to the Code of Ethics and the Practice Standards is as follows:

The Rules of Conduct are binding on all certificants and the Practice Standards are mandatory for all certificants whose services include financial planning or material elements of the financial planning process. Rationale The answer is "B." The Rules of Conduct are mandatory and the Practice Standards are mandatory if involved in financial planning or material elements of the financial planning process

tax-exempt Original Issue Discount (OID) bond in

The bond basis increases at a set rate each year. The difference between maturity value and the original issue discount price is known as the OID. The bond's earnings are treated as exempt interest income. The bond was issued at a discount to its par value.

Regulation Z, issued by the Federal Reserve Board, is a part of the Consumer Credit Protection Act. Regulation Z requires that:

The dollar amount of finance charges and the annual percentage rate be disclosed. Rationale The correct answer is "C." With the advent of Regulation Z, consumers were able to see the actual cost (including finance changes) that they were paying in any transaction they were making.

An optimal portfolio on the efficient frontier represents

The best combination of risk and return for a given combination of investments. Investors seek the highest return at any level of risk, and the lowest risk at any level of return. This is the Modern Portfolio Theory

Duration is the weighted average maturity of all cash flows

The bigger the duration the more price sensitive or volatile the bond is to interest rate changes. Duration is the moment in time the investor is immunized from interest rate risk and reinvestment rate risk. Modified duration is a bonds price sensitivity to changes in interest rates A bond portfolio should have a duration equal to the investors time horizon to be effectively immunized

age test for qualifying child

The child must be under age 19 or under age 24 in the case of a student. --A student is a child who, during any part of five months of the year, is enrolled full time at a school, college, etc. or government-sponsored on-farm training course --Individuals who are disabled are not subject to the age test

Alpha tells us

The difference between a fund's realized return and its risk-adjusted expected return. The alpha of a security may be calculated using the Jensen Model. The Jensen formula is on the formula sheet included with the CFP® exam materials. Alpha is the fund's actual return minus the risk adjusted expected return, as measured by CAPM.

What is the total length of time a 35-year old employee must have worked to be considered fully insured in order to qualify for disability insurance under social security?

The disability recipient must have worked 40 quarters (or periods) in total to be eligible for benefits, and of these, 20 quarters must have occurred in the 40 quarters immediately before becoming disabled.

Investment advisers act of 1940 *exempted from registration

The following advisers are not required to register with the SEC. They do meet the definition of investment adviser but they are exempted from Registration. I - an intrastate advisor provided all clients reside in the same state where the adviser has his or her principal office and the adviser does not give advice on any listed securities or on any securities admitted to unlisted trading privileges on any national security exchange I - an adviser with only insurance companies as clients 15 - an adviser with less than 15 clients per year and doesn't hold him or herself out to the public as an investment adviser VC - an adviser whose only clients are venture capital funds F - a foreign adviser without a US office or other place of business that manages less than $25 million of client assets or has fewer than 15 US clients. P- an advisor solely to private funds < $150 mill

Kim and Mark make $65,000 per year combined gross income. Their housing costs are $1,625 per month, while another $300 covers the balance of any other debt they currently owe. Other household expenses bring their total expenses to $3,200 per month. The total portion of their obligations that are monthly interest payments (included in the mortgage and other debt amounts) is $1,000. Their take home averages $3,500 per month. Over the last several years, they have managed to save 3% to 5% of their income. They have set aside $22,400 in money market funds. Select "A" if their housing costs can be considered a strength. Select "B" if their housing costs can be considered a weakness.

Their housing costs is a weakness. Rationale The correct answer "B." =1,625/(65,000/12) =30%. They are paying more than the recommended 28% of gross monthly income for housing costs.

Kim and Mark make $65,000 per year combined gross income. Their housing costs are $1,625 per month, while another $300 covers the balance of any other debt they currently owe. Other household expenses bring their total expenses to $3,200 per month. The total portion of their obligations that are monthly interest payments (included in the mortgage and other debt amounts) is $1,000. Their take home averages $3,500 per month. Over the last several years, they have managed to save 3% to 5% of their income. They have set aside $22,400 in money market funds. Select "A" if their total debt can be considered a strength. Select "B" if their total debt can be considered a weakness.

Their total debt can be considered a strength. Their total amount of obligation is reasonable. Total debt should not exceed 36% of total asset value of a client. Total debt is $1,625 + $300 = $1,925. Total $1,925 / (65,000/12) = 35.5%. As their total debt is less than 36%, it is considered a strength.

The accrual accounting method recognizes income when the taxpayer has a right to collect.

This occurs usually after the completion of a job and in no case later than when the invoice is prepared and sent. The accrual accounting method recognizes expenses when the legal liability to pay arises. This usually occurs when the invoice is received.

adoption credit

They are limited to the least of a) qualifying adoption expenses (15,000), b) adoption credit of $13,810 for 2017, or c) amount of tax due ($11,000). The adoption credit is not refundable.

A client has bought a stock for $40 per share. At the end of the first year, she purchases another share at $43 per share. At the end of the second year with the share price of $48, she sells her shares. Along the way, at the end of each year, she received a $2 per share dividend. What is the time-weighted return on her investment

This is simply an uneven cash flow problem. CF0 = <$40> CF1 = $2 CF2 = $50 IRR = 14.33% Note: Since this is a time weighted return, we are only concerned about the security's cash flow. Therefore, we ignore the second purchase at $43 per share.

Billy Smith, age 55, has been a member of the union for 30 years, and as a result, has been excluded from his employer's retirement plan. Billy has been offered a management position with his firm, which will make him eligible to participate in the company's 401(k) plan. Billy's objective is to retire at age 65 with $2,000 in monthly retirement income, exclusive of Social Security benefits. He assumes a life expectancy of age 95. The union retirement plan will provide him with $1,000 monthly. (There are NO matching contributions from Billy's employer to the 401(k) plan and his income is adequate to have the required level of contributions fall within the deferral limits of the 401(k) plan. Contributions and payments, as appropriate, are made at the beginning of each month.) If the return in the company's 401(k) plan is 10%, what monthly amount will Billy have to contribute to that plan for 10 years to meet his objective?

This question is intended to test several time-value-of-money calculations, and is NOT intended to imply a level retirement income or savings approach. Set calculator on "Begin" mode. N = 30 x 12 = 360; i = 10 / 12 = .833; PV = ?; PMT = 1000; FV = 0. Solve for PV of annuity due ($114,900). Then use the PVAD figure of 114900 as a FV, where N = 10 x 12 = 120; i = 10 / 12 = .833; PMT = ?; FV = 114900; Answer = $556.

Bottom-up equity managers include: Value managers and Technicians.

Top down equity managers include: Group rotation managers and Market timers.

Tom is a CFP® professional and is working with a husband and wife on their financial plan. One of the recommendations is for the couple to purchase a $500,000 whole life insurance policy, for which Tom is to receive a commission. During a telephone interview with the clients, Tom completes the application based on the couple's responses to his questions. A question asks if the husband or wife have ever been convicted of driving under the influence within the past five years. Based on the CFP Board's code of ethics requiring a CFP Board designee to provide services diligently, what should Tom do after completing the insurance application?

Tom should review government motor vehicle records to corroborate and verify the answers on the client's policy application. Rationale Answer: A According to anonymous case #17554, the planner should corroborate and verify the client's answers regarding potential DUI convictions. If the client dies in an accident the insurance company will not pay a claim on the life insurance policy if the client was in fact, convicted of DUI in the past five years. The Disciplinary and Ethics Commission found this planner negligent in failing to review governmental motor vehicle records and violated Rule 701 of the CFP Board's Code of Ethics - A CFP Board designee shall provide services diligently. Choice B is incorrect, because the planner must first verify the information within the application. Choice C is incorrect, because the planner may take an life insurance application over a phone interview, but is responsible for verifying the information in the application and giving the client an opportunity to review the information contained in the application. Choice D is incorrect because the planner should corroborate the client's answers as the next step. A policy illustration should have already been provided to the client before the client agreed to implement the recommendation of purchasing a whole life insurance policy. B) Tom should forward the completed application to the clients for the clients to sign application and pay the first premium. C) It's a violation of due diligence to take a phone interview for a life insurance application, so Tom should invite the clients to his office for them to complete the application and sign it or forward a blank copy of the application for the clients to complete and sign. D) Tom should provide a copy of the application to the client for signature, along with a policy illustration.

Behavioral Finance vs traditional finance

Traditional finance assumes 1. Investors are rational 2. markets are efficient 3. the mean-variance portfolio theory governs- investors choose portfolios by viewing and evaluating returns and risk variance 4. returns are determined by risk (The CAPM model is followed)

Variability is measured using deviation

Variability is a measure of how far a return varies from what is expected. as in the mean average. Volatility- as measured by beta measures the relative relationship between a benchmark or the market and a return of some investment relative to the market. how much more or less volatile is the investment than the market if the market volatility is 1.

Exam tip

Very frequently the exam will test what a planner should be doing at each step in the financial planning process or what the planner should do next. LEARN the steps well

Discount bond ladder

YTC YTM CY CR coupon rate is lowest

Hazard and Peril

a Peril is the proximate or actual cause of a loss. Ice is the hazard, falling is the peril

Co- Insurance

a homeowners policy requires the insured to cover a stated percentage of the property value (usually 80%) the insurer pays the lesser of face value of policy, replacement cost or actual expenditures. if coverage is less than the co-insurance requirement, the insurer pays the greater of ACV or face value divided by co-insurance x loss minus deductible co-insurance is 80% x replacement cost

Requisites for an insurable risk

a large number of similar units of exposure loss's must be accidental from the insured's viewpoint losses must be measurable and determinable so the insurer can accurately forecast losses Losses can not pose a catastrophic risk to the insurer an insurer cannot provide coverage that would cause it to become insolvent Premiums must be affordable cannot insure moral hazards because premiums would skyrocket severity of loss is more important than probability of loss Insurable risks are CHAD not catastrophic, homogenous exposure units, accidental, measurable and determinable

standard deduction tables on exam

a single 65 year old or older person whiom is blind gets a deduction of $12,000 + $1,600 for age + $1,600 for blindness or $15,200 if married filing jointly the addition is $1,300 plus $1,300 per person if both >= 65 and blind

Collar or zero cost collar

a strategy when the investor owns the underlying stock, but wants to protect the downside risk without paying the entire cost of the put option. An investor sells a call option at a strike price that is slightly higher than the current stock price. This creates a premium received. The investor then buys a put option that is below the current stock price. the premium dollar received for the call are used to pay for the PUT.

a group universal life insurance plan

allows employees to borrow or withdraw cash can continue coverage after retirement provides flexibility in designing coverage to meet individual needs

Annuities issued after 1982 and premature withdrawals, the withdrawal receives LIFO tax treatment

any annuity issued prior to 1982 receives FIFO tax treatment

Section 1245 property sold is treated as ordinary income to the extent of deprecation allowed or allowable on the property

any gain beyond the ordinary income must be treated as a 1231 gain

Copayments

are in addition to the deductible. an 80/20 copayments means the insured is responsible for 20% of expenses above the deductible

dollar cost averaging

assuming price fluctuation, it allows the investor to purchase more shares at a lower cost which will lower the average cost of the investment

Margin- Reg T initial margin 50% set by federal reserve

can be more restrictive depending on the stock volatility. number of shares x stock share price x initial margin percent 100 shares at $50 per share 100 x $50 x .5 = $2,500 initial margin equity requirement

Endorsements

can be purchased to cover an excluded peril i.e. sink hole, earthquake, sewer back up, refrigerated property coverage. floods can be covered by a flood insurance policy

PEG ratio aka Price/Earnings to growth ratio

compares a stocks P/E ratio to a company's 3 to 5 year growth rate in earnings. PEG ratio = P/E ratio/3 to 5 year growth rate in earnings -the 3 to 5 year growth rate in earnings is the historical earnings growth rate - The PEG ratio is used to determine if the stocks P/E ratio is keeping pace with the firm's growth rate in earnings. A PEG ratio equal to 1 suggests the stock is fairly valued because the P/E ratio is in line with the earnings growth rate. A PEG ratio >1 suggests the stock is fully valued and may be overvalued because the expanding P/E ratio is contributing to the stock price appreciation more than the growth rate of earnings.

When doing financial planning

compensation disclosures must be in writing

Roth IRA

contributions limited to $5,500 per year and if 50+ another $1,000 contributions are not tax deductible and are after tax qualified distributions are excluded from gross income - must meet 5 year holding period AND death or disability or 59 1/2 or 1st time home purchase (limit of $10,000) Can always withdraw contributions and conversions with no penalty or tax in all cases for non qualified distributions the earnings are subject to a 10% penalty and are included in gross income Education benefit: 10% penalty waived but earnings are included in gross income for tuition, fees, books, supplies, equipment, and room and board if enrolled at least 1/2 time.

formula for exclusion

cost basis divided by value of all future payments received gives the exclusion percent which is the amount excluded from income, The inclusion amount is the amount left from 100 and is her taxable income.

Recession

defined as 6 months or 2 consecutive quarters of declining GDP

BOND Duration calculation using PV of cash flows ??

each year x amount of payment =FV then calculate PV for each period payment then total and divide by current bond selling price to calculate PV N -= payment period I = YTM PMT = 0 FV = period x payment

Dividends are declared by the board of directors and usually paid quarterly

ex dividend date- the date the stocks trades without the dividend sell on e dividend date and get the dividend. Buy on ex dividend date you do not receive the dividend x dividend date is 1 biz day before the record date a investor must purchase the stock before x dividend date or 2 days before record date to get the dividend Qualified dividends receive capital gains treatment a cash dividend is taxed on receipt Stock dividends (when you receive stock) is not taxed until you sell the stock

FDIC insurance each depositor has a total of $25,000 per type of account ownership per bank

for an IRA and other qualified plans, the insurance is up to $250,000 as llong as the IRA us invested in bank deposits (CDs,etc) FDIC does not cover mutual funds, etc. Each person is deemed to own 50% of a joint account for FDIC insurance any deposit in the US is covered any deposit only payable outside of the US is not covered money held in a money market MUTUAL FUND is NOT covered

Perils are the actual cause of the loss

for example fire, wind, tornado, collision, burgalry

Special basis rules

for inherited property the holding period is always considered Long term

LEAPS Long term equity anticipation securities

have expiration periods of 2 years or more vs traditional options that have expirations of up to 9 months.

Wash sale Proration ??

if wash sale rules apply and your new buy is more/less than the number of shares you sold you must apply ???

SS benefits for one year (4 quarters) can all be earned

in 1 day if wages subject to SS are $5,200 for that day ($1,300 x 4)

Use the CAPM to arrive at the appropriate rate of return

in the intrinsic value formula

appreciation and the 2/5 year rule

in the past 5 years, any period the home was rented, the appreciation is straightlined and taxable for the rented time period. if bought rental and moved into after renting for one year and sold for a $200,000 gain in year 5, Gain/holding period x number of years rented (not used as primary residence) is taxable vs excluded

Stock prices react inversely to

inflation and interest rates

What stock price will trigger a margin call?

initial margin loan amount stated as share price/ 1-minimum margin requirement

a decrease in the discount rate is expansionary because

interest rates goes down no affect on the money supply

an increase in the discount rate is contractionary because

interest rates rise no affect on money supply

Lesson 7

investment companies

Security market line (SML)

is the relationship between risk and return as defined by the CAPM and graphically plotted results in the SML. - Both the CAPM and SML assume an investor should earn a rate of return at least equal to the risk free rate of return - The SML intersects the Y axis at the risk free rate of return - the SML uses beta as its measure of risk, whereas the CML uses SD as its measure of risk - If a portfolio provides a return above the SML, it would be considered undervalued and should be purchased. - If the portfolio provides a return below the SML, it would be considered over valued and should not be purchased. -The SML may be used with individual securities.

accelerated death benefit

lump sum or monthly income 24 months or less to live income is not taxable to the insured money can be used for anything Payments are deducted from the policy's face value

convexity

measures the difference between durations estimate of a bonds price change and the actual price change of a bond

waiver

occurs when a party relinquishes a known right

Fundamentals and Insurance Practice exam questions

page 99 of prestudy book

adhesion

policies are take it or leave it, there are no negotiations over terms and conditions and as a result any ambiguities in a contract are found in favor of the insured

Non taxable transactions

realized gain/loss not currently recognized recognition is postponed to a future date (via a carryover basis) carryover basis Holding period of new asset (holding period of the asset surrendered carries over the the asset acquired Depreciation recapture- Potential recaptured from the asset surrendered carries over to the new asset

The principle of fairness addresses

reasonable fees and compensation

Recognition rules

recognition of gains occurs when debt is relieved, when money is take out of an investment as a loan when the individual is NOT personally liable for the loan and with net gifts (transfers where the donee agrees to pay the gift tax)

ADRS American depository receipts

represent foreign stock held in domestic banks foreign branch. ADRs entitle the shareholder to dividends and capital gains but are also subject to currency fluctuation. ADRS trade on US exchanges and are denominated in US dollars and trade in US dollars. Dividends are paid in US dollars. ADRS DO NOT eliminate exchage rate risk

Lesson 3 Property and Liability insurance

rule of thumb- losses must be sudden and accidental. Neglect and intentional acts of the insured are not covered. homeowners and auto combine property coverage with liability coverage

for a yield ratio (tax free/taxable), as the tax free return increases the ratio becomes bigger

so if investors are able to earn a tax free return that is close to a taxable return, they will choose the tax free return as the numerator gets bigger the ratio gets bigger, the numerator is the tax free yield

OID (original issue discount) bond

sold at a discount from par value zero coupons are OID bonds Bond holder is subject to phantom income, has to pay taxes on interest each year even though hasn't received it. Tend to be used in IRA's to avoid the annual taxes on phantom income

Medicare supplemental insurance

sold by private insurance companies designed to cover medicare deductibles and and co insurance amounts

Formula for mortgage payment

solve for PMT if also asks for interest deduction or principle balance at end of year. step 2 is 1 input (number of months paid) shift AMORT = =

Invested assets are

stocks, bonds, mutual funds, retirement accounts, business ownership and any asset set to mature in more than 12 months

Debts not discharged in chapter 7 bankruptcy

student loans, 3 years of back taxes, alimony, child support, debts related to fraud, Means test is required now for chapter 7, if the debtors average monthly income for their region is in excess of the threshold, they CAN NOT file for chapter 7.

Transfer for value

terminally ill, insured receives proceeds tax free not terminally ill or chronically ill (life settlement)- tax free return of basis (premiums paid in), ordinary income tax on cash value greater than basis and capital gains on the remainder.

The provision that all credit reports are required to contain accurate, relevant, and current information is a part of

the Fair Credit Reporting Act (FCRA) also allows individuals to challenge information deemed to be incorrect on their credit report and provides for changing that information if the creditor does not respond with a specific time period.

Norman Peterson earned 15 percent on the $100,000 he invested in a special account at his credit union. Interest was paid semi-annually. His effective rate of interest was:

the account made 15,562.50 on a $100,000 investment. Divide the amount made 15,562 by the amount invested ($100,000) to arrive at the effective rate 15.56%. N=1x2 i=15/2 PV=<100,000> PMT=0 FV=?

determining loss on the sale of gifted property

the basis of the property in the hands of the donee is the lower of the donors basis or the FMV of the property at the time of the gift

Effective annual rate

the effective annual interest rate earned on an investment when the compounding occurs more than once per year EAR= (1+i/n)n -1 i= stated annual interest n= number of compounding periods

Today, Walter is submitting his Initial Application for CFP® certification with the CFP Board of Standards. Four years earlier, Walter signed a Letter of Acceptance, Waiver and Consent with FINRA, as part of FINRA arbitration hearing. As part of the arbitration settlement, Walter consented to a 30-day suspension, a fine of $100,000 and 20 hours of continuing education. Which action is most appropriate for Walter to take when completing his Initial Application for CFP® Certification?

the requirement is to advise the Board of the arbitration and findings. the candidate for CFP® certification is required to disclose all arbitrations or other civil proceedings. There is no look back period limited to 5 years for arbitration, civil or criminal suit

When the CFP exam asks which option will provide the maximum gains if the stock price appreciates

the right answer is buying a CALL

Options

the value of an option is derived from the value of the underlying asset. so its a derivative. Options are used for Hedging, Speculation and Income

Health insurance deductibles, co insurance and stop loss formula

total medical expense - deductible = xx, total medical expense after deductible x coinsurance amount to the maximum stop loss amount deductible + (coninsurance= < stop loss cap) = total out of pocket for insured For major medical policies its the coinsurance amount plus the deductible For ACA compliant its a maximum of the out of pocket.

Obligations to Clients

• A certificant shall treat clients fairly and provide professional services with integrity and objectivity. • A certificant shall be in compliance. • A certificant shall exercise reasonable and prudent professional judgment. • A certificant shall make only recommendations that are suitable for the client. • A certificant shall provide supervision to any subordinate. • A certificant shall advise his or her current clients of any certification suspension or revocation he or she receives from CFP Board.

Fiduciary Requirement

• A fiduciary is defined as "one who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client."

Taxation of Whole Life Policies

• Policy owners who wish to receive lifetime benefits from a whole life insurance policy without triggering an income tax consequence can achieve this in two ways: o They can withdraw their basis in the policy o They can take loans against the cash value of the policy. Provided that the policy is in force at the date of the insured's death, loans outstanding against the policy cash value will be free of federal income tax, but will reduce the death benefit on the policy by the amount of the outstanding loan.

The Practice Standards

• The purpose of the practice standards: o To establish the level of professionalism in practice that is expected of CFP® certificants engaged in financial planning. o The standards are designed to advance professionalism in the practice of financial planning. o The standards enhance the value of personal financial planning. o In summary, the practice standards establish the guidelines for a financial planning engagement. o Compliance with the practice standards is obligatory. o The practice standards are not meant to be the basis for legal responsibility.

A qualifying child must meet 4 tests (all 4) for the definition of a child for purposes of head of household filing status, the earned income tax credit, the child tax credit, and he credit for child and dependent care expenses

- relationship -abode -age -support

Inflation adjusted return aka

- today's dollars -x years from now - equivalent of $xx today -the purchasing power of - and maintain their lifestyle throughout retirement - payments increase with inflation

Khalid Smith recently found out that he can reduce his mortgage interest rate from 12% to 7%. The value of homes in his neighborhood has been increasing at the rate of 5% annually. If Khalid were to refinance his house with $3,000 in closing costs in addition to the mortgage balance ($225,165) over a period of time to coincide with his chosen retirement age in 28 years, what would the monthly payment be for principal and interest? (Note: Closing costs are going to be added to the mortgage.)

$1,550.63 Rationale The correct answer is "D." One might be tempted to set the calculator in "begin mode", but be aware that "end mode" is used due to the delay from loan to repayment. N=28x12=336 i=7/12=.5833 PV=225,165+3,000=228,165 PMT=? FV=0 0

To what extent may the rental losses of an active participant be deducted against active and passive income

$25,000 of losses from rental property income may be deducted against ordinary income. The taxpayer must be considered "active" in that they participate in the general management and decision making of the property. The $25,000 is reduced $1 for every $2 over an AGI limit of $100,000. When the AGI reaches $150,000, the deduction is lost and must be treated as regular passive income

Cathy and John Gonnerman would like to retire in twelve years. At that time, they would like to have accumulated $350,000 in today's dollars. To achieve this goal, they plan to invest a sum at the end of each year that will remain constant in purchasing power. They anticipate average inflation at 6% and have an after tax investment earning capacity of 9%. What payment is required at the end of the first year for them to reach their goal?

$26,394.63 Rationale The correct answer is "B." N=12 i=[(1.09/1.06)-1]x100=2.83 PMT=24,900 x 1.06=26,394 FV=350,000

Julie Christie has been dollar cost averaging in a mutual fund investing $2,200 at the beginning of every quarter for the past seven years. She has been earning an average annual return of 9% compounded quarterly on this investment. How much is the fund worth today?

$86,435.29 Rationale The correct answer is "B." BEG N=28 i=9/4 = 2.25 PV=0 PMT=2,200 FV=?

Sharpe ratio

(stock or portfolio return - risk free rate of return)/ SD

For CFP Board certificants and registrants, the Principles of the Code of Ethics are:

) Aspirational in character and provide a source of guidance for certificants and registrants. Rationale The answer is "D." "[The] Principles are general statements expressing the ethical and professional ideals certificants and registrants are expected to display in their professional activities. As such, the Principles are aspirational in character and provide a source of guidance for certificants and registrants."

Walter is a CFP® professional and recently met with a prospective client, Bob. Bob is the owner of a chain of retail hardware stores throughout the southeast. Bob was referred to Walter through a mutual friend. Bob is considering rolling out a new 401(k) plan to his employees and has asked Walter to review his current plan and make a recommendation on improving the plan. Which of the following is required to be provided to Bob according to the Code of Ethics?

) Recommending and implementing a retirement plan for a company meets the definition of financial planning and requires certain written disclosures. B) Recommending and implementing a retirement plan for a company does not meet the definition of financial planning, however an accurate and "plain English" description of the compensation arrangements being provided, must be disclosed in writing. C) Walter cannot accept the engagement without gathering comprehensive client data on Bob and the company. D) No written disclosures are required. Rationale Correct Answer: D Recommending and implementing a retirement plan for a company does not meet the definition of financial planning because it is focused solely on factors related to a single subject area (FAQ 1-12). Generally, the integration of two or more subject areas are needed to constitute financial planning, unless the data gathering and recommendations are in-depth and/or very broad (FAQ 1-14). Although the Board encourages professionals to provide written agreements and disclosures for limited engagements, only the disclosures listed in Rule 2.2 a-d are required, and they may be oral. Answer A is incorrect since this is a limited engagement, the disclosures are not required to be in writing and may be oral. Answer B is incorrect since this is a limited engagement, disclosures are not required in writing. Answer C is incorrect because comprehensive client data on Bob is not necessary in a limited engagement to install a new 401(k) plan at his business.

Sally recently had her tax return prepared by her CPA. The CPA recommended that Sally increase her employer sponsored 401(k) retirement savings to 10%. Around the same time, Sally was working with Bob, a CFP® professional, who recommended specific asset allocation percentages and amounts allocated to various asset classes for her retirement and investment assets. Sally has come to you, a CFP® professional, for assistance implementing the recommendations from both her CPA and financial planner. Under which circumstances are you considered engaged in the financial planning process and providing material elements of financial planning?

) You execute the transactions necessary to implement the asset allocation recommendations for her retirement and investment assets. B) You recommend that Sally increase her 401(k) savings to 12% of her gross pay and allocate the contributions evenly amongst all mutual funds in her 401(k) plan. Rationale Correct Answer: B According to the CFP Board (FAQ 1-15) implementation activities are considered financial planning or material elements of financial planning if the CFP® professional assists the client to determine the type of deferred savings, the amount to be saved, an investment approach and specific investment vehicles, as described in answer choice B. Answer A is incorrect because according to the CFP Board (FAQ 1-15) if the CFP® professional's implementation activities are limited to executing transactions based on the recommendations identified in a financial plan, then they are not considered providing material elements of financial planning. Answer C is incorrect because according to CFP Board (FAQ 1-15) because you are only providing transactions to implement the plan. Answer D is incorrect because the recommendations are not specific enough regarding the amount and type of investments to rise to the level of providing material elements of financial planning. Correct Answer: B According to the CFP Board (FAQ 1-15) implementation activities are considered financial planning or material elements of financial planning if the CFP® professional assists the client to determine the type of deferred savings, the amount to be saved, an investment approach and specific investment vehicles, as described in answer choice B. Answer A is incorrect because according to the CFP Board (FAQ 1-15) if the CFP® professional's implementation activities are limited to exec C) Since Sally is working with a CFP® professional, by implementing recommendations, you are also providing material elements of financial planning. D) You recommend that Sally contribute any federal income tax refunds to a Roth IRA and any state income tax refunds to a traditional IRA.

Optimal portfolio

- an indifference curve represents how much return an investor needs to take on risk. -If risk averse the indifference curve is steep, meaning the investor will need significantly more return to take on additional risk. -If risk seeking- the indifference curve is mostly flat, meaning the investor will take on more risk for a small improvement in return

Factors to consider to determine if stocks/securities are substantially similar

- if a reorg, the prior and new company may be considered substantially similar bonds or preferred stock are not considered substantially similar to the common stock of the same corporation unless they are convertible into common stock and the relative values, price changes and other circumstances make them similar. For example, preferred stock is substantially similar if it is convertible into common stock, has the same voting rights, the same dividend restrictions, trades at prices that do not vary much from the conversion ratio, and conversion is unrestricted

Qualifying Relative as a dependent for the child tax credit Support Test

- joint return test - citizen or residency test - relationship test -gross income test -support test - not a qualifying child test

The relationship test to be a qualifying child

- must be the taxpayers child - a descendant of the taxpayers child - the taxpayers brother, sister, step B/S, or 1/2 B/S or a descendant of any of the previous. A cousin does not count - the child may be a natural child, stepchild, adopted or an eligible foster child

Common biases or heuistics (mental short cuts or rules of thumb) affecting investors)

-Affect Heuristic- deals with judging something whether it is good or bad -Anchoring (conservatism, belief perseverance) - attaching ones thoughts to a reference point whether it is valid or not -Availability Heuristic- relying on personal knowledge or memory which may cause investors to overweight recent events vs looking at longer term trends -Bounded rationality- decisions are limited by the available info, the persons cognitive abilities and may search for a "satisfactory choice vs the optimal choice -Confirmation bias- people tend to look for info which confirms their opinions. Cognitive dissonance- tendency to misinterpret info that is contrary to your opinion or only pay attention to info which supports your opinion. -Disposition effect (regret avoidance, faulty framing) people maintain a view of their original purchase price vs adjusting to market price changes. reluctant to admit they made a mistake -Familiarity bias- people intend to overestimate the risk of investments they are not familiar with and underestimate the risk of investments they are familiar with -Gamblers Fallacy- investors often have incorrect understanding of probabilities and may sell a stock just because it has gone up several days in a row. -Herding- people tend to follow the masses or head. -Hindsight bias- believing you can predict the future because you can explain the past. -Illusion of control bias- overestimating your ability to control events, even when you have no control over the event -Overconfidence bias- investor mostly listens to themselves and overstate their risk tolerance -Overreaction- common emotion to new info or news. -Prospect theory- people value losses and gains differently- valuing losses different than gains. -Similarity Heuristic- making a decision or judgement when 2 apparent similar situations occur even though they may have very different outcomes -loss aversion- prefers avoiding losses more than making gains- they feel more pain from losses than joy from gains. Being unwilling to sell a losing investment is loss aversion -Naive diversification- buying every mutual fund available in your 401k to diversify. aka 1/n diversification -representativeness- thinking a good company is a good investment or investing in companies which are familiar

Registered investment advisers brochure rule, required to follow by 1940 act

-An investment adviser must deliver a disclosure statement to each client within 48 prior or at the time of entering into an investment advisory contract if the client as a 5 day (look-see) period and can cancel during the 5 days without penalty - the disclosure statement must be a narrative written in plain english describing the advisers business, conflicts of interest, disciplinary history, and other important info that would help clients make an informed decision about whether to hire or retain the adviser (including the 18 disclosure items in part 2A of the ADV form) including services provided, fees for those services, types of securities that are part of investments, education background of advisor, participation/interest in securities transactions ADV form part 2 covers the "brochure rule: requirements The disclosures made on form ADV do not necessarily satisfy ALL of the CFP Boards disclosure requirements

Disability Insurance definitions

-Any occupation- least expensive, disabled if can not perform the duties of any occupation -Modified any occupation- considered disabled if unable to perform duties an occupation fitted to the persons education, experience, training and prior economic status. -Own Occupation- most expensive, ideal for specialized high paying fields Split definition- Begins with own occupation and moves into modified any occupation after 1 or 2 years.

Legal environment covers consumer protection laws, worker and investor protection laws

-Consumer protection- protects consumers and other business's from bad business's. Run by the FTC federal trade commission -Fair credit reporting act- if a consumer is refused credit or employment they must be provided with the info in the report. Consumers have the right to 1 free credit report per year. the 3 main agencies are Equifax, experian and Transunion. -Fair debt collection act- calls are limited to 8am to 9pm, collectors must contact your attorney if you have one. collection calls are not permitted at work if your employer forbids them. -Fair credit billing act- gives creditor 30 days to acknowledge receipt of a billing dispute and explain or correct the error within 90 days. Liability for a lost or stolen credit card is $50 if you gave notice to the credit card company or the actual amount charged if less than $50 -Truth in lending act- lenders must disclose the total cost of financing, interest must be stated in APR, Act is administered by the federal reserve -Credit card accountability responsibility and disclosure act card companies must give cardholders 45 days notice of interest rate increases, they can not charge interest on debt that is paid on time during the grace period, a credit card cannot be issued to someone under 21 unless they have a cosigner over 21. Late fees are generally limited to $25

401k plans, methods to resolve a failed ADP and ACP test.

-Corrective distributions- decreases ADP of HC - Recharacterization- change contributions from pretax to after tax (Thrift plan) and least popular choice. creates a basis in the plan. - Qualified non elective contributions (QNEC) - increases ADP of NHC, is 100% vested and made to all eligible employees. - Qualified matching contributions (QMC) - increases ADP of NHC, 100% vested, given only to ee's whom defer in the current year.

Conduct which will always bar a candidate from certification

-Felony conviction for theft, embezzlement, or other financially based crimes - felony conviction for tax fraud or other tax related crimes -Revocation of a financial professional license unless its an administrative action - felony conviction for any degree of murder or rape - Felony conviction for any other violent crime within the past 5 years

Holding Period Return

-HPR = selling price- Purchase Price +- Cash flows/ purchase price or equity invested -is not a compounded return or time weighted -if dividends received or margin interest paid +- from cash flows -Taxes paid, subtract form cash flows only if question asks for after tax gain/loss -if purchased on margin, subtract margin interest from cash flows and only use the equity amount for the denominator

Types of annuities

-Immediate- purchased with a lump sum and payouts begin immediately -Deferred- Payments begin at some future date. can be purchased with a lump sum or periodic payments. -FPDA - Flexible premium deferred annuity- allows insured to vary the premiums paid. -SPDA- Single premium deferred annuity- proceeds from a life insurance policy can be used to purchase a single premium annuity, earnings accumulate tax free until distributed. -Fixed annuity- pays a fixed rate over time - Variable annuity- allows purchase on stocks, etc in sub accounts. no return guarantees. risk is on the insured. appropriate for a person whom wants to keep pace with inflation

Economic indicators- Leading, coincident and lagging

-Leading indicators- initial unemployment claims, stock prices, money supply (M2), new manufacturing orders, new private housing units, consumer sentiment -Coincident indicators- employees on payroll, personal income, industrial production, manufacturing sales -Lagging indicators- average duration of unemployment, change in the CPI, change in labor cost per unit, consumer credit to income, value of outstanding loans, average prime rate charged by banks

Surrender policy prior to death payouts

-Lump sum- amount above basis(premiums paid in) is taxable as ordinary income -interest only- interest received is taxable as ordinary income -Installment Payments- portion of payment is principal (not taxed) and portion is interest- taxed as ordinary income - Transfer of policy value- death benefits are taxable to the transferee( person receiving the policy) to the extent they exceed basis.

Secured corporate bonds

-MBS Mortgage backed securities, backed by a pool of mortgages, payments consist of P&I, biggest risk to bondholder is prepayment risk Collateral Trust bonds- backed by an asset owned by the company issuing the bonds, the asset is held in trust by a 3rd party. In the event of default on the debt payment, the bond holders are entitled to the asset

MPT Modern Portfolio theory

-MPT- an investor accepting a given level of risk while maximizing expected return objectives. When designing a portfolio with MPT, the most important variables are risk,return and covariance (how the assets move relative to each other). Negatively correlated assets are not necessary to reduce risk, assets with a correlation less than 1 are necessary. Diversifying across asset types is more effective by combining stocks and bonds. -Efficient frontier- the curve which illustrates the best possible returns that could be expected from all possible portfolios. It is very sensitive to risk and return input variables. -Indifference curves- Constructed using selections made based on the highest level of return given an acceptable risk -Efficient portfolio- occurs when an investors indifference curve is tangent (touching but not intersecting a curve) to the efficient frontier. -Optimal Portfolio- the one selected from ll efficient portfolios Investors seek the highest return attainable at any level of risk -Investors want the lowest level of risk at any level of return -The assumption is also made that investors are risk averse.

SS questions from quiz

-Medicare part a is paid for by a portion of SS taxes collected and part B is paid for by premiums charged for part b -the medicare portion is taxed on an unlimited salary while OASDI is taxed up to the wage base - if collect SS benefits prior to age 65, medicare part a coverage starts automatically at age 65 - SS benefits can be paid to the divorced spouse of a retired or disabled worker entitled to benefits if age 62 or over and was married to the worker for at least 10 years. -SS benefits can be paid to the surviving spouse including a surviving divorced spouse of a deceased insured worker if the widow(er) is age 60 or over -Benefits can be paid to the dependent parents of a deceased worker at age 62 or over

HDHP/HSA limits and taxes

-Minimum deductible- $1,300 single, $2,600 family -Maximum out of pocket- $6,550 single, $13,100 family - Contributions to HSA- $3,400 single, $6,850 family $1,00 catch up provision age 55 and older Contributions are deductible for employee, employer, any eligible family members who receive contributions on their behalf. If i contribute to my moms HSA, she can deduct the contribution from her taxes (I can not) but since she is on medicare, she can not have an HSA.

Inflation aka rise in prices and loss of purchasing power. Inflation rate is this years price - last years price divided by last years price

-Moderate inflation is when prices are increasing slowly, historic inflation has been 3% over the past 60 years so moderate inflation is 1% to 2% -galloping inflation is when money loses value very quickly - Deflation is when prices are falling, so cash becomes more valuable because if they hold it they their purchasing power goes up. -Disinflation- is a decline in the inflation rate

Distribution of returns

-Normal distribution- appropriate if an investor is considering a range of investment returns -Lognormal distribution- is not normal. appropriate if an investor is considering a dollar amount or portfolio value at a point in time. -Skewness- refers to the normal distribution curve skewed (shifted) to the left or right. Positive skewness- distribution curve is shifted to the left Negative skewness distribution curve is shifted to the right

Timing of annuity payments

-Pure life annuity- payments made over lifetime. stop at death. -Life annuity with guaranteed minimum payment- period certain. The payout payments are less than the pure annuity payout -Installment refund annuity- if annuitant receives less than the premiums paid, the beneficiary gets the difference up to the amount of premiums the annuitant paid in.

Coefficient of determination or R squared

-R squared is a measure of how much of the return is due to the market or what percentage of the securities return is due to the market -R squared also provided insight into how ell diversified a portfolio is, because the higher the R squared, the higher the percentage of the return which comes form the market (systematic risk) If R squared is >= .70 then Beta is the appropriate risk measure. If r squared is less than .70, SD should be used to measure risk **formula is correlation # gold key x2

Filing status 5 categories for individuals

-Single Married filing jointly (must have been married as of the last day of the year.) If the taxpayers spouse died during the year and the taxpayer did not remarry, the taxpayer can file a joint return for the year of death. -Married filing separately -Head of Household, status allowed for individuals who are unmarried or considered unmarried as of the last day of the taxable year (spouse did not live in home last 6 months of the year but child did, and the taxpayer paid more than 1/2 the cost of upkeep and care for the child. -Qualifying widower with qualified child - eligible to file for 2 years following the year in which the spouse died if ALL of the following apply: the taxpayer was eligible to file a joint return with the deceased in the year they died, the taxpayer has not remarried, the child or stepchild can be claimed as qualified, the child lived in the home all year, and the taxpayer paid more than half of the homes upkeep during the yer.

Bond strategies

-Tax swap- selling a bond at a gain and offsetting it with selling a bond at a loss or selling a bond at a loss and buying a new bond. -Barbell- buying short term bonds and long term bonds. When interest rates move, only one end of the barbell needs to be changed. -Laddered bonds- requires purchasing bonds with varying maturities, as bonds mature, new bonds are purchased with longer maturities than what is outstanding in the portfolio. This strategy helps reduce interest rate risk because bonds are held until maturity. - Bullets- have very little payments during the interim period and then a lump sum at some specified time in the future. Most of the bonds will mature in or around the same time period Zero coupon bonds, Treasuries (esp. treasury bills) and corporates are likely candidates for a bullet strategy since they pay little or no coupon during the period and the payoff comes at some predetermined date in the future. Bullet strategies are typically used when the investor has a balloon payment due on a liability at some future date.

Efficient frontier

-The efficient frontier curve(line) represents the most efficient portfolio in terms of risk /reward. -An investor can not achieve a portfolio that has a higher level of return for each level of risk -Portfolios that lie beneath the efficient frontier curve are inefficient because their is a portfolio that provides more return for the same level of risk. -The area above the efficient frontier is considered unattainable

Property received by gift or bequest is not taxed

-a bequest of specific property or a sum of money is exempt from income tax even if it is paid out of income -income earned on the property is subject to tax -a bequest of the income on property is subject to income taxation in the hands of the beneficiary -a gift or bequest of a specific amount paid in more than 3 installments is taxable to the extent it is actually paid from the income of the estate

CAPM (Capital Asset Pricing Model)

-calculates the relationship of risk and return of an individual security using beta (b) as its measure for risk. -The CAPM formula is often referred to as the Security Market Line (SML) equation because its inputs and results are used to construct the SML - The difference between the return of the market (rm) the risk free rate of return (rf) (rm-rf) is considered the market risk premium, that is how much an investor should be compensated to take on a market portfolio vs a risk free asset. - CAPM formula is on the formula sheet ri=rf + (rm-rf) x Bi where ri= required or expected rate of return, rf = risk free rate of return, Bi = beta, rm= return of the market. You may be asked to calculate an expected return or required rate of return using CAPM. Also may be given the market risk premium rather than the return of the market so will need the market risk premium formula (rm-rf)

Futures contracts, 2 types- commodities and financial

-commodities future contracts have an underlying asset such as pigs, corn, oil, etc -Financial futures - where the underlying asset is currency, interest rate and stock indices The 2 primary players in the futures market are hedgers and speculators Futures are marked to the market daily so the gain or loss in cash is credited or debited to your account daily farmers are always considered long the underlying asset so they will short futures Manufacturers are considered short the asset and will be long contracts

Disability insurance characteristics

-cost of living rider- benefits adjust for inflation - Residual benefit formula- Residual benefit provision amount x percentage reduction in income plus current income -integrating with SS- any SS disability benefits received will reduce the benefit amount from the insurance company. -Probation period - time the insured must wait after policy is issued before specified conditions are covered (usually 15 - 30 days)

The following rarely result in the delay or denial of certification

-customer complaints -misdemeanor convictions -employer reviews and terminations

Unsecured Corporate bonds

-debentures- backed by the credit worthiness of the corporation or government. They are not backed by any asset -Subordinated debentures- lower claim on assets than debentures and thus have more risk. -Income bonds- interest is only paid when a specific level of income is attained.

section 1231 assets

-depreciable or real property used in a trade or business is a section 1231 asset -holding period must have been long term (greater than 1 year) and used in the trade or business any asset used in a trade or business that is expected to decline in value qualifies for depreciation deductions and are thus 1231 assets

Basis is necessary to

-determine the amount of gain or loss on a sale or other disposition of property -determine the amount that may be recovered tax free through depreciation deductions - determine the deduction for obsolescence and sometimes for depletion

Taxation of benefits received during lifetime

-dividends are not taxable and are considered a return of premiums(basis) -if dividends exceed premiums then they become taxable Withdrawals are considered return of principal up to the total premiums paid. then withdrawals are taxed as ordinary income

EGADIM

-establish client planner relationships -gathering client data - determining goals and expectations -analyze and evaluate clients financial status -Develop and present the financial plan -implement the financial plan - monitor the financial plan

Certain below market loans have additional tax consequences

-from a corporation to a shareholder in that corporation. treated as dividends to the shareholder and the payments are treated as interest income to the corporation -from an employer to an employee are treated as paid compensation to the employee and are subject to employment taxes. the payments are taxable interest income to the employer

Futures vs option

-futures obligate the holder to make or take delivery of the underlying asset - options give the holder the right to do something Futures do not state the price of the underlying asset, it is determined by supply and demand

agency - agent and Broker

-general agent represents one insurer -Independent agent represents multiple unrelated insurers -broker represents the policy owner not the insurance company

Life insurance policy provisions

-grace period- typically 31- 61 days after the premium due date (policy remains in force). if insured dies during grace period, insurer pays the death benefit and subtracts the unpaid premium -misrepresentation- age- policy is still paid- amount is reduced to reflect premiums paid and actual rate -suicide- if committed during exclusion period, usually 1 to 2 years, premiums are returned and death benefit not paid • Incontestability o States that once the policy has been in force for a period of time (typically two years), the insurer may not cancel the policy if they later discover a material misrepresentation, omission, or concealment. • Reinstatement o If a life insurance policy lapses due to non-payment of premium and expiration of the grace period, the policy may permit reinstatement provided that the requirements specified in the policy are satisfied. o The policy will specify that reinstatement without evidence of insurability is available for a short time after expiration of the grace period (usually 31 days). • Policy Loan Provisions o When a policy loan is issued, there are no income tax consequences for the policy-owner (provided that the life insurance policy was not classified as a modified endowment contract (MEC)), and the interest rate charged on the loan is typically a low rate that is specified in the contract. o Any loan outstanding at the death of the insured, plus accrued interest on the loan, is deducted from the death benefit paid to the policy beneficiary.

Select which risk-adjusted performance measure to use based on r-squared

-if r squared is >= .70 use treynor and alpha because both use beta and an r squared >= .70 means the portfolio is diversified -if r squared is <.70 then the portfolio is not well diversified and SD should be used for risk measure and Sharpe should be used since it uses SD. - if r squared is too low, they are using the wrong benchmark. - If the exam does not give you r squared then select sharpe

Equity indexed annuity

-immediate- benefit is linked to the index -deferred- credited interest rate is linked to the index index term usually 1-10 years interest is credited a the end of the term Participate rate- (can vary) is percentage of index. i.e. index rises 10% and participate rate is 70%, your credited interest is 7% -indexing methods- -annual reset-ratcheting method- index linked rate calculated beginning of year vs end of year, interest added each year and is protected from decreases. Generally has lower participation rate & may use averaging over time. -High water mark- compares highest anniversary index date to initial index date, interest is only credited a the end. beneficial if index declines near the end. You get the high water mark. May have low participation rate or use a cap rate. -Point to point method- compares index at end term(usually 6-7 years) to beginning term paying interest at the end of term. may have higher participation rate than other methods

Wash rule also applies to

-losses from options trading -Wash sale rules do NOT apply to losses on commodity futures contracts and foreign currencies. -wash sale rules apply if selling stock at a loss and buying warrants of the same corporation - if u sale warrants at a loss and buy stock in the same corporation the rules only apply if the warrants and stock are considered substantially equal

Settlement options for life insurance

-lump sum -interest only - receive interest on the policy proceeds Annuity payment types -Fixed amount- bene receives a fixed payment amount until proceeds are depleted -Life income- converts the death benefit into an annuity for the life of the beneficiary -Fixed period- proceeds used to purchase an annuity which has a specified payout period aka annuity certain using a fixed period annuity payout may be better than the life income option when the beneficiary needs additional cash flow for a fixed period of time or expects top have a short life expectancy and wants to save some proceeds for their beneficiary - Life income with period certain- guarantees the life income payout for x number of years. -Joint and last survivor income- pays over the lifespan of both individuals, when first person dies, payments are reduced

Long term care options

-medicaid- for the poor -based on assets. benefits can be paid by state or federal or combo of the two -Medicare- limited benefits and only pays if patient is capable of improving their condition and eligible for Social security. -Continuing care retirement communities- (CCRC) offer several levels of onsite care- independent living, assisted living, memory care, skilled nursing and rehab. -Private long term care policy- provides coverage for nursing home says and others types of care not covered by health insurance- eligibility must be chronically ill- cant perform 2 of the 6 ADL's, or substantial cognitive impairment- is a danger to themselves or others.

What is the portfolio deviation of a portfolio invested 60% in stock "A" with a 15% return and a deviation of 17.5%, and the balance in stock "B" with an 18% return and a 16.75% deviation. There is a .29 correlation between the two securities. A) 16.2% B) 14.0% Rationale The correct answer is "B." COV = .175 x .1675 x .29 = .0085 s p = √(.60)2(.175)2 + (.40)2(.1675)2 + 2(.60)(.40)(.0085) s p = √.011 + .0045 + .0041 s p = √.0196 s p = .1399

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Yield curve theories

1. Liquidity preference- preference for liquidity leads to lower yields for short term bonds and higher yields for long term bonds 2. Market Segmentation theory- the yield curve depends on supply and demand on a given maturity and there are distinct markets for given buyers with distinct buyers and sellers at each maturity. when supply is greater than demand, rates are low and will have to increase for demand to increase. When demand is greater than supply, rates are high??, rates will then begin to decrease to drive demand down 3. expectations theory- yield curve reflects investors inflation expectations. normal curve is investors expect inflation will be higher in the future or are uncertain when inflation is expected to be lower in the future then yield curve inverts

3 types of torts

1. intentional interference- an intentional act committed against another that causes injury- not covered except for slander and defamation. slander is defamation or harm caused by a verbal statement. Libel - is defamation or harm caused by a written statement. 2. Strict and absolute liability- occurs when 1 party is legally liable regardless of who was responsible for the injury. Strict liability is you have few defenses like with workers comp laws. negligent, strict liability. Under absolute liability, you have no defense. 3. Negligence- failure to act with appropriate care. Courts use "prudent man rule" standard. Direct negligence- directly attributable Vicarious liability- you are held partly responsible, for example, employer being held liable for acts of their employees, or parents for their child's act

The Practice Standards Financial Planning Process Related Practice Standard 3. Analyzing and evaluating the client's financial status

300-1 Analyzing and Evaluating the Client's Information • Analyze the information to gain an understanding of the client's financial situation and then evaluate to what extent the client's goals, needs and priorities can be met by the client's resources and current course of action. • Use client-specified, mutually agreed upon, and/or other reasonable assumptions such as: • Personal assumptions, such as: retirement age(s), life expectancy(ies), income needs, risk factors, time horizon and special needs; and • Economic assumptions, such as: inflation rates, tax rates and investment returns • Determine strengths and weaknesses of the client's financial situation and current course of action (may be appropriate to amend the scope of the engagement and/or obtain additional information) Analyze and Evaluate the Client's Financial Status - The planner should conduct financial ratio analysis. - During this step the planner must evaluate the impact of the client continuing with their current course of action. - During the analyze and evaluate step, the planner may discover a need to expand the scope of the engagement. - The analysis and evaluation of a client's financial situation must be done objectively. - Objective analysis and evaluation may help protect the planner from liability claims

Financial Planning Process Related Practice Standard 4. Developing and presenting financial planning recommendations 400-3 Presenting the Financial Planning Recommendation(s)

400-3 Presenting the Financial Planning Recommendation(s) • Make a reasonable effort to assist the client in understanding current situation, the recommendation, and its impact on the ability to meet goals, needs and priorities. • Avoid presenting the practitioner's opinion as fact. • Communicate the factors critical to the client's understanding: • Personal and economic assumptions; • Interdependence of recommendations; • Advantages and disadvantages; • Risks; and/or • Time sensitivity. • Conflicts of interest not previously disclosed and how they may impact the recommendations should be addressed at this time.

Financial Planning Process Related Practice Standard 5. Implementing the financial planning recommendations

500-1 Agreeing on Implementation Responsibilities • Mutually agree on the implementation responsibilities consistent with the scope of the engagement • Client is responsible for accepting or rejecting recommendations and for retaining and/or delegating implementation responsibilities • Conflicts of interest, sources of compensation or material relationships with other professionals not been previously disclosed shall be disclosed at this time • Referrals to other professionals or advisers shall indicate the basis on which the practitioner believes the other professional or adviser may be qualified • If the practitioner is engaged by the client to provide only implementation activities, the scope of the engagement shall be mutually defined, orally or in writing, and may include such matters as the extent to which the practitioner will rely on information, analysis or recommendations provided by others

Implementation continued 500-2 Selecting Products and Services for Implementation

500-2 Selecting Products and Services for Implementation • Select appropriate products and services that are consistent with the client's goals, needs and priorities • Investigate products or services that reasonably address the client's needs • Products or services selected must be suitable to the client's financial situation and consistent with the client's goals, needs and priorities • Use professional judgment incorporating both qualitative and quantitative information in selecting the products and services that are in the client's interest Implementing the Financial Plan Recommendations - The implementation phase includes the following activities: - Identify activities necessary for implementation. - Determine implementation activities for the planner and client. - Possibly refer implementation activities to other professionals. - Share client information as approved by the client. - Select, purchase or invest in agreed upon products. For example, insurance products are purchased, wills and trust documents are updated or created, investment accounts are opened and contributions are made. - The client and planner mutually agree on the implementation responsibilities. - Any additional conflicts of interest should be discussed as well. - The planner should discuss any reservations the client may have regarding the recommendations. - The planner should use an implementation timeline to prioritize recommendations and keep the client on track.

Hannah currently has $715,000 saved. She will retire in 10 years and wants to take $100,000 income for 25 years at the beginning of each year. She also wishes to have $1,000,000 35 years from now to leave to her heirs. What is the internal rate of return needed to accomplish this?

7.09% Rationale The correct answer is "B." 715 +/-CF 0 CF 9 [OS] Nj [OS] means Orange Shift 100 Cf 25 [OS] Nj 1000 CF [OS] IRR/YR

When should you provide your client with Form ADV?

A) Prior to entering into an agreement to provide financial planning. B) As part of the engagement letter agreement. Rationale Answer: B 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. A is incorrect because a CFP® professional is required to make certain disclosures prior to entering into a financial planning agreement. All required disclosures are not satisfied by providing Form ADV. Disclosures required that govern financial planning services to be provided in an engagement letter may be satisfied by Form ADV.

Ralph, a CFP® professional, has been working with his new client Jack over the last few months. He has completed all required disclosures and provided all written documents required for a financial planning engagement. Jack is 32, married, and has 3 children. Ralph discussed Jack's insurance coverage following a thorough review of Jack's policies and recommended Jack purchase a disability policy, additional term life insurance through his employer and a personal liability umbrella policy. Ralph also performed a retirement needs analysis and developed an investment plan he believes will help Jack achieve his goals. While presenting the retirement and investment plan, Jack mentioned that he was rejected for the life insurance for medical reasons that he does not wish to discuss with Ralph. To comply with the Practice Standards of the Code of Ethics, Ralph's best course of action would be to:

A) Gather appropriate information from Jack's spouse to determine if Jack's condition may affect the retirement and investment plan. B) Inform Jack that without more information on his medical condition Ralph will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review. Rationale Correct Answer: B. PS 200-2 requires practitioners unable to obtain sufficient information to form a basis for recommendations to either restrict the scope of the engagement to matters for which sufficient and relevant information is available; or terminate the engagement. Since the insurance review has already been completed, this restriction would amount to terminating the engagement. A is incorrect because Jack is the client, not Jack's spouse and contacting her without Jack's permission would violate the client confidentiality standards. C is incorrect because the medical condition could be significant enough to warrant a revision to the life expectancy included in the retirement and investment analyses and therefore the recommendations should not be relied upon due to the lack of appropriate information. Answer D: Although PS 200-2 D states that "The practitioner shall communicate to the client any limitations on the scope of the engagement, as well as the fact that this limitation could affect the conclusions and recommendations" this does not negate the requirement for scope restriction or termination of the engagement. Ralph should definitely communicate the potential impact on his recommendations, but that alone is insufficient to qualify as the best answer. C) Inform Jack that without more information on his medical condition Ralph will not be able to properly address his situation and he would have to restrict the scope of the engagement to the already completed insurance review and retirement and investment analyses. D) Inform Jack in writing that his medical condition could affect Ralph's conclusions and recommendations.

A new CFP® professional with not much experience is offered a rather lucrative engagement. He does not have experience in everything that needs to be done, but he is confident he can figure it out. What should he do?

A) He turns down the engagement even though he knows he will lose the money. B) He takes the engagement, and when he needs help he asks for it and lets his client know when he's asking for outside help. C) He tells the client that part of the work is beyond the scope of his expertise and he will need help, but he lets the client decide if he wants to still use the CFP® professional. Rationale Answer: C The code of ethics requires the CFP® professional to disclose any third parties that will be used during the engagement. A is incorrect because the CFP® professional is required to disclose any information that may materially impact the client's decision whether to use the CFP® professional or not. The CFP® professional is not required to completely disengage, but instead make disclosures to the client and bring experts into the engagement when necessary. B is incorrect because the CFP® professional is required to make the disclosure about third parties and areas of expertise prior to entering a planning agreement. D is incorrect because the CFP® professional is required to disclose any information that may materially impact the client's decision whether to use the CFP® professional or not. The CFP® professional is not required to completely disengage, but instead make disclosures to the client and bring experts into the engagement when necessary. D) He tells the client that it's beyond his expertise and refers him to another CFP® professional.

Which of the following requirements of the Code of Ethics did Fella NOT violate? A)

A) Investigate products or services that reasonably address the client's needs. B) Products or services selected must be suitable to the client's financial situation and consistent with the client's goals, needs and priorities. C) Use professional judgment incorporating both qualitative and quantitative information in selecting the products and services that are in the client's interest. D) Use the marks in compliance with the rules and regulations of CFP Board. Rationale Correct Answer: D. "Fella Neeus, CFP®" is correct usage when part of the letterhead, or signature. At all other times, CFP® professional (or other acceptable noun), is the correct usage. A is not correct because there is no indication Fella ever investigated any products for her clients other than annuities, regardless of their needs and goals. B is not correct because the variable annuities were often not suitable investments for her clients. C is not correct because Fella made no effort to adjust product selections for either qualitative or quantitative client information.

An anonymous informant filed a complaint against Jerry and another CFP® professional regarding Jerry's involvement in a Securities and Exchange Commission ("SEC") and state regulatory authority investigation. Jerry entered into a Letter of Acceptance, Waiver and Consent agreement ("AWC") with Financial Industry Regulatory Authority, Inc. ("FINRA," f/k/a National Association of Securities Dealers or "NASD") regarding violations of NASD Rules 2110 and 3010. The AWC arose out of FINRA's investigation of Jerry's sale of shares in a private placement offering ("Offering") conducted in 2004 pursuant to a private placement memorandum ("PPM") that offered shares of Jerry's company ("Company"). Jerry discovered inaccuracies in the financial projections set forth in the PPM but did not disclose the inaccuracies to the purchaser because he determined that the inaccuracies were not material. In the AWC, Jerry consented to paying a $20,000 fine and to a 15-day suspension by FINRA. According to the Code of Ethics, all of the following statements are true EXCEPT:

A) Jerry was not required to notify the CFP Board of this event until he submitted his periodic re-application because the suspension was for less than 30 days per the revised Rules of Conduct. Rationale Correct Answer: A. Certificants must report ALL suspensions of financial professional licenses to the Board. The revised provisions extended the time for reporting from 10 days to 30 days. In Anonymous Case History 19872, the Commission found that Respondent knowingly used the materially inaccurate projections in his communications to investors, including prospective and existing clients and thereby made materially false and misleading communications to the public and failed to act with integrity. In other words, only Jerry believed the inaccuracies to be immaterial. Thus, B is true. C is true for the same reason. D is true because according to the Board's Complaint Investigation Procedure, "The Respondent has 30 calendar days to file a written response to the allegations with the CFP Board. If no response is received, a second notice is issued. Failure to respond within an additional 20 calendar days may be deemed an admission of the allegations." In most case histories, failure to respond results in revocation of the right to use the marks. B) Jerry engaged in misrepresentation or providing misleading information even though he found the inaccuracies in the financial projections contained in the offering to be immaterial. C) Jerry failed to exercise reasonable and prudent professional judgment in providing professional services when he opted not to disclose inaccuracies he believed to be immaterial. D) Failing to respond to a Notice of Investigation from the Board's Disciplinary and Ethics Commission and any follow up communication from the Commission can result in revocation of the right to use the CFP marks.

Tom, a CFP® professional, has developed a financial plan for his client. Based on the CFP Board Practice Standards which of the following should Tom do next?

A) Review the plan with the client's CPA and Attorney. B) Implement the financial plan. C) Present the financial plan to his client. Rationale Answer: C Based on the 400 series of the CFP® practice standards, the next step for a CFP® certificant after developing the financial plan is presenting the plan. Choice A is incorrect because reviewing the plan with the client's CPA and Attorney is not required in the Practice Standards. Choice B is incorrect because Tom must first present the plan to the client before implementing the plan. Choice D is incorrect because Tom would have already developed financial planning recommendations at this point of the financial planning process.

Becca applied for CFP Certification and was denied. Her prior conduct falls under the "presumed" list and she wants to appeal. All of the following are true regarding the review process EXCEPT:

A) She must submit a written petition for reconsideration to Professional Review staff and sign a form agreeing to CFP Board's jurisdiction. B) A fee will be charged to all candidates submitting a reconsideration request. C) Staff will review the request to ensure the transgression falls within the "always" bar list. Rationale The correct answer is "C." All other statements are true. Staff will review the request to ensure the transgression falls within the "presumed" list. The "always" bar list cannot be petitioned unless the revocation of a license is vacated or a felony conviction is overturned. D) She may appeal this decision to the Appeals Committee of the Board.

What conflict of interest do you need to disclose in writing?

A) That the CFP® professional recommended his personal accountant who gives the CFP® professional free accounting services. B) The CFP® professional received an undisclosed fee for a referral to a municipal bond broker. C) A client who is an attorney brought him to a sporting event as a thank you for a referral. D) The CFP® professional gave the name of his lawyer to one of his clients who was wishing to divorce his wife, whom was also a client of the CFP® professional. Rationale Answer: D Written disclosures of conflict of interest are required for any engagements where material elements of financial planning are being provided. Answers A, B and C do not lead us to believe that material elements of financial planning are being provided. Answer choice D is the only choice that indicates we are referring a "client", thereby the professional is likely providing material elements of financial planning.

If one of your clients has a profitable long position in an oranges futures contract and does nothing as the contract expires, what should she expect to occur?

A) The oranges will be delivered to her. Rationale The correct answer is "A." Positions in futures contracts are closed by taking an equal and opposite position. One who is long on a contract at the expiration should expect delivery of the commodities at the stated contract price. It is the buyers responsibility, but in this case, we could say the broker was remiss in his or her duties!

When is a client responsible for contacting their CFP® Professional?

A) When the client has an additional child. B) If there is a change in the client's marital status. Rationale Answer: B This is a difficult question to choose one correct answer. The best answer is B, as a change in marital status likely results in a major impact to current and future financial planning. A is incorrect because the client should contact their CFP® professional regarding a new child at least as early as when a pregnancy is known. The client should inform that CFP® professional that they intend to have a child and approximately when, so that planning can begin immediately. C is incorrect because a change in tax rates is likely expected, unless it's related to a significant change in income. D is incorrect because simply changing jobs is immaterial, unless it accompanies a significant change in insurance benefits and/or income. C) If there is a change in the client's tax rate. D) If there is a change in the client's employment.

Jonathan got divorced in 2007 and subsequently had severe financial problems. In 2009, he filed for bankruptcy. After getting back on his feet, he graduated from college and got a job selling life insurance for a large national insurer. In July 2012, he completed all of the requirements for the CFP® designation. In August of 2012, he made his application to the CFP Board for licensing. Which of the following is correct under the Board's revised policy regarding bankruptcy?

A)Jonathan's bankruptcy falls on the presumed unacceptable list because it is within five years preceding his application. He will be denied the right to use the marks unless he files a successful consideration request with the CFP Board. B) Jonathan's bankruptcy falls on the always bar list because it is within five years preceding his application. He will be denied the right to use the marks. C) Jonathan's bankruptcy is no longer a concern of the CFP Board as long as he discloses it in writing to all potential clients for the five year period following the bankruptcy. D) Jonathan's bankruptcy will not prevent him from becoming a CFP® professional, but it will be disclosed on the CFP® professional's public profile displayed on the CFP Board's website for 10 years. Rationale Correct Answer: D D is correct under the revised Candidate Fitness Standards effective July 2012. His name will also be included in a press release disclosing the bankruptcy. A is incorrect because that was the prior requirement before the standards were revised. B is incorrect because two or more bankruptcies are required to move to the always bar list. C is incorrect because the Board must still be informed and will take the proactive measures listed in Item D to ensure proper disclosure. Jonathan should also make written disclosure of this event, but that alone is not sufficient.

Types of Unsystematic risks (ABCDEFG) diversifiable risks

A- Accounting risk- risk audit firm is too close to management B-Business risk- is the inherent risk a company faces by operating in their industry. i.e. Oil industry risks are different than software industry risks but each industry has risks. C-Country risk- is the risk a company faces by doing biz. in a particular country. i..e doing biz in IRAQ D-Default risk- risk of a company defaulting on its debt payments E-Executive risks- risks associated with the moral and ethical character of the management F-Financial risk- is the amount of financial leverage used by a firm. do they have little debt or lots.. G-Government/regulation risk- risk that tariffs or restrictions may be placed on an industry or firm.

Investment strategies - Active and Passive

Active- believe markets are inefficient, can achieve above average market returns through active investing and market timing Passive- believe the markets are efficient and its difficult to achieve above average market returns, a passive buy and hold strategy is best Passive investment strategies are buy and hold such as laddered bonds, etf's, barbell bond strategy, UITs and index investing

Tools of the Federal Reserve used for executing monetary policy include:

Adjusting the reserve requirement. Raising or lowering the discount rate. The Federal Reserve does not sell commercial paper. Only corporations sell commercial paper. Printing money is the domain of the U.S. Treasury Department

Futures contracts caharacterisitics

Buyer agrees today to pay for and take delivery of a commodity on a specific date in the future. • The price is agreed to today. • The quality and quality of the commodity is agreed to today. • The delivery date is agreed to today. • Seller agrees today to make delivery of the commodity. The price of the futures contract can change each day. If the price of the contract increases, the buyer benefits, as the buyer has already locked in the lower price. • If the price of the contract declines, the then buyer of the futures contract loses, as the buyer has already agreed to pay the higher price. • If the price of the contract increases, the seller loses as the seller has agreed to sell at the lower price. • If the price of the contract declines, the then seller of the futures contract benefits, as the seller has locked in the higher price. • Transaction will not be completed until some agreed-upon date in the future • Delivery date and quantity are all set when the financial future is created • Seller has legally binding obligation to make delivery on specified date • Buyer/holder has legally binding obligation to take delivery on specified date • Futures may be held until delivery date or traded on futures market • All trading is done on a margin basis

The best source for gathering information about the intent of recent changes in the tax law might be:

Congressional Committee Reports (sometimes known as the Blue Book) provides congressional reasoning for enacting tax law. RIA Federal Tax Coordinator provides plain language interpretation of tax law. Treasury Regulations are the highest level of tax regulations, but does not indicate the intent of Congress in enacting tax law. Tax Court Cases provides rulings of the U.S. Tax Court in the form of case law.

While talking to Jack on the phone about his current company retirement plan, Jack mentioned that his father had been diagnosed with cancer and Jack thinks he and his sister might inherit a large sum of money sometime in the next couple of years because his father has more than enough money to provide for his second wife and still leave some to his children. Jack did not know the specifics of the estate and was uncomfortable contacting his father right now about the details. To comply with the Practice Standards of the Code of Ethics, Ralph's best course of action would be to:

Contact Jack's sister to see if she know how much they would inherit so that Ralph would have adequate information upon which to form an opinion. B) Inform Jack that without more information on the potential inheritance Ralph will not be able to properly address his situation and restrict the scope of the engagement to the already completed insurance review. C) Inform Jack that without more information on the potential inheritance Ralph will not be able to properly address his situation and terminate the engagement. D) Inform Jack in writing that the potential inheritance could affect Ralph's conclusions and recommendations regarding the retirement and investment plan. Rationale Correct Answer: D. PS 300-1 B states that when practitioners identify other issues that should be addressed during the analysis and evaluation stage "it may be appropriate to amend the scope of the engagement and/or to obtain additional information." However, Jack is far from certain that the inheritance will occur and how much, if any, he will inherit. Therefore, Ralph is under no obligation to restrict or terminate the engagement, as indicated in answers B & C. Ralph should clearly communicate the potential impact on his conclusions and recommendations based on the currently available information in accordance with PS 200-2 D. Although this isn't required to be in written form, there is no problem in doing so. Answer A is not the best choice. Ralph should obtain Jack's permission should he decide to do this to protect the confidentiality of his client's information.

A young couple wants to save for their child's college education. What does the financial planner need to disclose to them during their engagement?

Contact information Rationale Answer: A This would not be considered material elements of the financial planning process because the activity is limited to one subject area of financial planning. Since this activity is not considered financial planning, the planner may disclose either orally or in writing each of the following: An accurate and understandable description of the compensation arrangements. A general summary of likely conflicts of interest. Any information about the certificant or certificant's employer that could reasonably be expected to materially affect the client's decision to engage the certificant. Contact information for the certificant and if applicable, the certificant's employer. B is incorrect because the code of ethics requires "likely" conflicts of interest to be disclosed. The answer suggests "any" conflicts of interest, which would suggest immaterial conflicts be disclosed too, which is incorrect. C is incorrect because investments will be recommended in the future, as the time horizon and risk tolerance change. Investment options do not need to be disclosed during the initial engagement. D is incorrect because this is not considered providing material elements of the financial planning process, therefore the disclosures may be oral or written. B) Any conflicts of interest C) Future investments or mutual funds D) All disclosures must be in writing

Hershel, a client of Jonah, deposited $40,000 into a securities account at Jonah's firm. At the time, Jonah's only services to Hershel involved investment recommendations and executing transactions. Over the next two years, Jonah conducted numerous trades in Hershel's account without Hershel's approval, including during a month when Hershel was hospitalized. Jonah and the Firm received commissions from the trades that exceeded Hershel's initial deposit. By this time, Hershel's account was only worth $15,000. The New York Stock Exchange ("NYSE") initiated an inquiry regarding Hershel's matter. Jonah and the NYSE entered into a Stipulation and Consent to Penalty. Jonah consented to the following findings: 1. Respondent engaged in conduct inconsistent with just and equitable principles of trade when he: 1) recommended transactions in the accounts of a customer which were unsuitable in light of his investment objectives, investment experience and/or financial resources; and 2) effected excessive transactions in the accounts of a customer of his member firm employer; and 2. Jonah violated NYSE Rule 408(a) when he exercised discretion in the accounts of a customer without first obtaining written authorization from him. Following the events above, Jonah completed the requirements and became certified to use the CFP marks. At his hearing with the Disciplinary and Ethics Commission, Jonah: ・ expressed a commitment to the financial planning process; ・ noted that his actions took place several years before he began to pursue CFP® certification; ・ had made changes to his practice to prevent similar occurrences in the future; and ・ advocated CFP® certification to employees under his supervision. Jonah's conduct violated all of the following provisions of the Rules of Conduct EXCEPT?

D) A certificant shall make and/or implement only recommendations that are in the best interest of the client. Rationale Correct Answer: D. Since at the time of the conduct Jonah was not a CFP® professional and was not engaged in financial planning, he was not held to the duty of care of a fiduciary to act in the best interest of the client. The Commission issued a Private Censure to Jonah and considered the mitigating factors Jonah provided at his hearing. All of the other Rules were clearly violated by Jonah.

Which of the following is not an appropriate match? A) Classification by time: Spot markets. B) Classification by type of claim: Equity markets. C) Classification by participants: Mortgage markets. D) Classification by products: Money markets.

D) Classification by products: Money markets. Rationale The correct answer is "D." Money market securities are short-term instruments categorized by time considerations, not product. Look at this from the product to determine the classification. For example, money markets and spot markets are classified as according timing because they are either short term maturities or current price. The common component when classifying these type of securities is timing. Equity and debt markets can be classified as to the order of claims in the event of liquidation. "Type of claims" simply refers to debt vs. equity and which is more senior. Bond markets, which include mortgage bonds, are divided into short, intermediate and long term markets. Each market has participants that prefer different segments of the yield curve. A participant in this case is an insurance company, bank, manufacturing company, etc. Different participants will prefer mortgage bonds over shorter term maturities

According to CFP Board bankruptcy disclosure procedures, CFP Board will: · Note the bankruptcy filing on the CFP® professionals public profile as displayed on CFP Board's website, www.CFP.net for 10 years from the date CFP Board is notified of the bankruptcy. · Include the individual's name in a news release identifying CFP® professionals who have filed bankruptcy within the previous five years and · Share with consumers and other stakeholders who contact CFP Board regarding a CFP® professional's certification status, including whether the CFP® professional has filed bankruptcy.

D) Sally must modify the scope of the engagement to reflect Deidra's new life situation. Rationale Correct Answer: D. Assuming Sally had done Items A-C as required by Practice Standard 600, there is no need to modify the scope of the current engagement. Sally should reinitiate several types of analysis and revise her recommendations based on the new information, but all of these actions would fit within the scope of a typical comprehensive financial planning engagement.

Homeowners insurance policy forms

HO-2 broad form - covers the 18 named perils HO-3 Special form aka open perils or all risks except for "perils" specifically excluded from policy. however personal property is covered under a broad form basis (HO-2) 18 named perils. HO-4 - renters policy - provides personal liability coverage and personal contents(C) on a broad perils basis. minimum amount sold is $6,000, also loss of use of premises (equal to 30% of personal property coverage) HO-5 Comprehensive form- provides coverage on an "open perils or all risks basis. Comprehensive and most expensive. Same as HO-3 but provides personal property coverage on an open perils basis instead of broad form. HO-6 Condo owners form- coverage for inside structure of the unit and all contents. Covers same perils as HO-2 and HO-4 (broad perils coverage). does not provide building coverage except for additions and alterations. Minimum amount of contents(personal property) which can be purchased is $6,000. Loss of use (coverage D) is limited to 40% of coverage C limit. HO-8 Modified coverage form (late). provides repair cost coverage instead of replacement cost coverage for damage to the property. Provides "functional replacement cost coverage" typically for older homes which would be very expensive to repair if required to use original materials and workmanship

Which of the following are exceptions under the definition of "investment advisor"

I. Banks that are NOT investment companies. II. Accountants or lawyers whose investment advice is "solely incidental" to the practice of their profession. III. Persons whose advice relates only to securities issued or guaranteed by the U.S. government. IV. Publishers of financial publications that have regular and general circulation. A) I and III only. B) II and IV only. C) I, II and IV only. D) I, II, III and IV. Rationale The correct answer is "D." Exceptions do not come under the jurisdiction of the Investment Advisor's Act and need not register as investment advisors.The correct answer is "D." Exceptions do not come under the jurisdiction of the Investment Advisor's Act and need not register as investment advisors.

The CFP Board Code of Ethics prohibits a CFP certificant from doing which of the following activities?

I. Commingling client funds with funds of the financial planning firm. II. Misleading a client. III. Establishing relationships that could compromise the planner's objectivity. IV. Using the initials RIA after his or her name. A) I and II only. B) I and IV only. C) II and III only. D) I, II, and IV only. Rationale The correct answer is "D." Statement "I" - Commingling client funds is disallowed under the Rules of Conduct Chapter 3. Statement "II" - Misleading a client is specifically disallowed under the Rules of Conduct Chapter 2 Section 1. Statement "III" - A planner would be ill-advised to establish relationships that compromise his or her objectivity, but it is not expressively forbidden by the CFP Board in the Code. Statement "IV" - Using RIA after you name is disallowed under Federal Securities law (Lesson 6), but disallowed under the Rules of Conduct under Chapter 6 Section 5 regarding not breaking other laws.

Reasons to use life insurance to fund business continuation agreements include which of the following:

I. It provides sufficient assets for the buyer to perform on the contract. III. The insurance gives the agreement efficacy. No money . . . No deal. IV. The insurance strengthens the commitment of the buyer when it must follow through on the agreement. The IRS may challenge the valuation of stock in business continuation agreements, with or without insurance; the IRS is not bound by any contractual agreement between the company and its shareholders.

Federal authorities govern the insurance industry in the following instances and manner:

I. The federal government NEVER influences insurance regulations. That is left to the individual states. II. Through the Internal Revenue Codes. III. Through the Securities Exchange Commission. IV. Through the Employees Retirement Income Securities Act. A) I only. B) II, III and IV only, Rationale The correct answer is "B." Federal authorities govern the insurance industry in the following instances and manner: through the Internal Revenue Codes, through Securities Exchange Commission, and through the Employees Retirement Income Securities Act.

Which of the following statements about the selected industry relative to its regulatory body and the relationship between the two are true? I. The insurance industry is primarily regulated by each of the 50 states. II. The majority of banks are subject to federal regulation by the Federal Reserve System and the Federal Deposit Insurance Corporation. III. Pension plan funds are primarily subject to federal regulation. IV. The organized stock exchanges, such as the New York Stock Exchange, are primarily regulated by the federal government.

I. The insurance industry is primarily regulated by each of the 50 states. II. The majority of banks are subject to federal regulation by the Federal Reserve System and the Federal Deposit Insurance Corporation. III. Pension plan funds are primarily subject to federal regulation. IV. The organized stock exchanges, such as the New York Stock Exchange, are primarily regulated by the federal government. A) I, II and III only. B) I and III only. C) II and IV only. D) I, II, III and IV. Rationale The correct answer is "D." Option "III" - Pension funds are governed by PBGC (also known as the Pension Benefit Guarantee Corporation) and ERISA (also known as the Employees Retirement Income Security Act) rules as to reporting and requirements on the federal level. Option "IV" - Organized stock exchanges are regulated by the U.S. Government agency, the Securities Exchange Commission (SEC).

Which of the following are included in the 100 series (Defining the Scope of the Engagement)?

Identifying the services to be provided. Determining the client's responsibilities. Disclosing the practitioner's compensation arrangements. The scope of the engagement DOES NOT need to be in writing

Mary is a CFP® professional and is in the analyzing and evaluating step of the financial planning process. Mary is developing a capital needs analysis for her client and has established assumptions for tax rates, investment returns and inflation rates. Her client disagrees with Mary's assumptions regarding inflation and other economic variables used in the retirement needs analysis calculation. What should Mary do next?

If Mary and her client are unable to agree on the assumptions used for the retirement capital needs analysis, Mary should limit the scope of the engagement and exclude retirement capital needs analysis from her recommendations. Rationale Answer: A According to Practice Standard 300-1: Analyzing and Evaluating the Client's Information, the practitioner will utilize client-specified, mutually agreed upon, and/or other reasonable assumptions. If the practitioner and client are unable to agree upon assumptions regarding the capital needs analysis for retirement, it may be appropriate to amend the scope of the engagement and/or to obtain additional information. Answer B is incorrect because Practice Standard 300-1 requires assumptions to be client-specified and mutually agreed upon, not the assumptions that result in the most conservative recommendations. Answer C is incorrect because Mary is not required to disengage, but instead limit the scope of the engagement. Answer D is incorrect because the client disagrees with her assumptions, so either limit the scope of the engagement or use client-specified assumptions

The cumulative feature on a preferred stock is best described in the following

If dividends are not paid in a given cycle, they cannot be paid to anyone else until they are paid to preferred shareholders. Preferred stocks are non-voting shares.

All of the following statements concerning the AMT as it applies to individual taxpayers are correct EXCEPT: A) Some itemized deductions taken for regular tax purposes must be added back to regular income to determine income under AMT. B) Taxpayers are permitted to take the standard deduction for both regular and AMT tax purposes. Rationale The correct answer is "B". Taxpayers who do not itemize deductions take the standard deduction for regular tax purposes, but this is added back to alternative minimum taxable income for AMT purposes. All of the other statements are correct. C) All adjustments made to itemized deductions when calculating AMT result in a permanent increase in tax. D) Charitable deductions are claimed in the same manner for regular tax and for AMT tax purposes.

If the calculated tax due is greater under the AMT, the taxpayer must pay the higher amount. The AMT is not a voluntary alternative to the regular tax system. It is a mandatory alternative, and applies only when the AMT tax exceeds the regular tax imposed on the taxpayer. B) The AMT is designed primarily to change the timing of tax payments to more current tax payments. C) The AMT frustrates efforts by taxpayers to participate in activities that reduce or eliminate their current tax liability. D) Some adjustments made for AMT purposes result in a permanent increase in tax.

common exam question on Bond HPR (holding period return)

Joe purchased a bond for $880 with a 9% coupon. He sold the bond after 1 year when it was paying him a current yield of 10%. What is the holding period return? Current yield = coupon payment / price of the bond 10% or .10 = $90/$880 price = coupon payment / current yield price = $90/.10 = $900 holding period return(HPR)= SP-PP +- cash flows/purchase price HPR= $900-$880 +$90/$880 = 12.5%

Jonathon got divorced in 2007 and subsequently had severe financial problems. In 2009, he filed for bankruptcy. After getting back on his feet, he graduated from college and got a job selling life insurance for a large national insurer in 2011. During his first year on the job, he received a large number of customer complaints, his insurance license was suspended for one month and he was discharged by his employer. During his unemployment, he completed all of the requirements for the CFP® designation. In August of 2012, he made his application to the CFP Board. Which of the following is correct under the Board's revised policy regarding bankruptcy?

Jonathan's behavior falls on the presumed unacceptable list and he will be denied the right to use the marks unless he files a successful consideration request with the CFP Board. Rationale Correct Answer: A A is correct under the revised Candidate Fitness Standards effective July 2012. Although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of his insurance license. B is not correct because revocation of a financial professional license is required to move to the always bar list. C is incorrect because there is no five year expiration period on the suspension of the insurance license D is not correct because although the bankruptcy alone would not constitute presumed unacceptable behavior, it is a consideration when accompanied by any other behavior on the list, such as the suspension of the insurance license. B) Jonathan's behavior falls on the always bar list and he will be denied the right to use the marks. C) Jonathan's behavior will prevent him from applying for the CFP® designation for the five year period following his actions D) Jonathan's bankruptcy will be disclosed on the CFP® professional's public profile displayed on the CFP Board's website for 10 years. He will need to request a consideration from the Disciplinary and Ethics Commission for the suspension, but the bankruptcy will not be a factor in their decision.

Ross is employed as a loan officer at a local bank. Ross recently sat down and visited with his financial planner Julie, a CFP® professional. Ross was in need of cash and borrowed $9,500 from Julie. Based on Rule 3.7 of the CFP® Rules of Conduct (A certificant shall not lend money to a client.), which of the following statements is accurate?

Julie is in violation of the rule. Rationale Julie has violated rule 3.7 which states a certificant shall not lend money to a client UNLESS, the client is a member of the certificant's immediate family or the certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant. In this instance neither of the exceptions apply and Julie is in violation of the rule.

The state has set arbitrary guidelines which, if violated, constitutes a clear breach of duty (thus liability) best describes which of the following:

Negligence Per Se. Rationale The correct answer is "D." Option "A" - Vicarious liability is responsibility for another. Option "B" - Res ipsa loquitor, "the thing speaks for itself" means the liability is obvious and negligence need not be proven. Option "C" - A written contract embodies the entire agreement. Future writings that conflict with the contract are forbidden.

Snidely, a CFP® professional, met with Dudley and Geezer, Dudley's father. During the meeting, Snidely entered into an oral agreement with Dudley to manage Geezer's financial affairs. Snidely did not complete a client profile of Geezer. Snidely offered to review and make recommendations on Geezer's then-current living trust. Snidely prepared a Last Will, Revocable Trust and Durable Power of Attorney for management of Property and Personal Affairs, and charged Geezer $400 per hour for preparing the documents. Geezer had not requested such documents. Geezer asked Snidely to provide him with all the documents pertaining to his investments. As of the hearing date with the Disciplinary and Ethics Commission, Snidely had not provided the requested documents to Geezer. The Commission issued an Order to Revoke Permanently Snidely's right to use the CFP®, CERTIFIED FINANCIAL PLANNER™ and certification marks. The Commission ordered Snidely to verify that he was not using the marks by submitting copies of letterhead and business cards within 30 days of the Order. To comply with the Code of Ethics, before providing any services to Geezer, Snidely was required to take all of the following steps EXCEPT:

Provide a written agreement outlining the mutually defined obligations and responsibilities of each party. Rationale Correct Answer: A. Although the obligations and responsibilities of each party are required to be mutually defined, this is not required to be in written form. [Rule 1.1 & 1.2] B is required by Rule 1.2 a. Since this is a financial planning engagement, C is required by Rule 2.2 e. Since this is a financial planning engagement, D is required by Rule 1.3. B) Gather appropriate data to assess Geezer's financial situation, needs and objectives. C) Provide a written agreement outlining Snidely's compensation and potential conflicts of interest. D) Provide a written agreement outlining how and on what terms each party can terminate the agreement.

A CFP professional's client, Jim, was previously married and had 2 children. He set up an irrevocable trust for those two children, naming his brother Harry as the trustee. Jim remarries a woman named Laura who has no children. Laura comes into the CFP professional's office saying that Jim is concerned about losing money in the trust due to the recent drop in the market, so he wants to change some things. What should the professional do?

Provide her with the trading forms that will require Jim's signatures, allowing her to make the changes requested. B) Tell her that because she is not the trustee, she is not authorized to make any charges. C) Tell her that he will contact Harry, the trustee, and let him handle it. D) Contact Jim to discuss the meeting with Laura. Rationale Answer: D The CFP Professional owes a duty to the client, who is Jim. The Code of Ethics require the CFP Professional to discuss Jim's concerns with Jim, not Laura. In addition, the conversation with Jim needs to address that Jim does not have control over the trust assets, the trustee does. A is incorrect because Jim is the client and the planner owes the duty of a fiduciary and confidentiality to Jim since Laura is not the client. B while true, the CFP Professional should first tell Laura that Jim is the client and Jim should discuss his concerns, because the CFP® professional may only speak to the client about the trust. C is incorrect because the CFP® professional must talk to the client about the trust, not Laura or Harry, unless Harry instructs the CFP® professional differently.

Foreign currency translation

Purchasing an asset that is denominated in a foreign currency so the change in exchange rates affects the total return 1. Convert US dollars to the foreign currency to determine cost 2. Compute the return, typically using the holding period return calculation 3. Convert the currency back to US dollars

Purpose & use of basis

Purpose of basis is to allow taxpayer to recover the value of the assets (e.g. cash) used to purchase or acquire property. Under the "recovery of capital" doctrine basis is returned to a tax payer tax free, either as a result of a sale or as a result of depreciation deductions

Ruby, a CFP® professional works for a life insurance company and sells only life insurance products. She met with her new client Sally, a single parent, for the first time today. She had already collected data from Sally concerning her income, needs and age of her children. During the meeting, Ruby discussed the distinctions between term, universal and variable life insurance with Sally. She subsequently evaluated Sally's needs concerning life insurance and plans to discuss the advantages and disadvantages of two approaches: (1) purchasing a universal policy designed to provide sufficient coverage for Sally's insurance needs while building cash value for the long term, and (2) purchasing a term policy to cover insurance needs until her children become independent and recommending another CFP® professional who Ruby is confident could assist Sally with building her investment portfolio for the long term. Which of the following would be correct under the CFP Board's Practice Standards?

Ruby is not engaged in financial planning if Sally chooses option (1) because she is limiting her engagement to only one financial planning subject area. Rationale Correct Answer: B According to the CFP Board's Standard of Professional Conduct FAQs (1-12), if a "needs analysis" is focused on a limited component of the client's financial situation, and does not involve other services related to financial planning, that analysis may not rise to the level of financial planning. For instance, if a client hires a CFP® professional solely to purchase life insurance, the CFP® professional will by necessity obtain information about the client sufficient to ensure that any policies recommended meet the client's needs. If the "needs analysis" is focused solely on factors related to the client's life insurance needs, that analysis may not rise to the level of financial planning. It is irrelevant which option Sally chooses. In both cases, Ruby is neither engaged in financial planning nor providing material elements of financial planning.

Using the following information, what is the duration of the bond being described? - Maturity is 11 years. - Par value is $1,000. - The coupon rate is 8.25%. - The bond is currently selling in the market at $1,094. - The bond pays interest annually. A) 12.4 years. B) 11 years. C) 9.3 years. D) 7.8 years.

The correct answer is "D." First the YTM must be calculated (7%). Once this is done, it can be plugged into the formula with the coupon rate and the number of periods, and reveals a Duration of 7.8 years. Step 1: Calculate YTM N = 11 i = ? PV = <1094> PMT = 82.50 FV = 1000 i = 6.9967 i = 7% then calculate duration or educated guess of 7.8 years

Using the constant growth dividend valuation model, calculate the intrinsic value of a stock that pays a dividend this year of $2.00 and is expected to grow at 6%. The beta for this stock is 1.5, the risk free rate of return is 3% and the market return is 12%.

The correct answer is "D." Use the constant growth dividend model to solve for intrinsic value. The question does not provide the required rate of return, however the capital asset pricing model can be used solve for required rate of return. V = D1/(r - g) V = 2 (1.06) / (.165 - .06) V = $20.19 R = Rf + b(Rm - Rf) R = .03 + 1.5(.12 - .03) R = .165

STRIPS Separately tradable registered interest and principal securities

The coupon payments are separated (stripped) from the bond. Each coupon payment and the bond par value trade separately Essentially strips create many zero coupon bonds STRIPS are highly liquid, and appropriate for investors looking for low risk, highly liquid with a specific time horizon.

Patient protection and affordable care act

Those without coverage pay a penalty of $695 per year up to a maximum of 3 x that amount or 2.5% of household income above the filing threshold, whichever is greater. -The tax penalty for non-compliance will be zero beginning January of 2019. -created exchanges for individuals and small business to purchase insurance with premium and cost sharing credits for those with income between 133% to 400% of the federal poverty level. - Employer requirements- employers with 50 or more full time employees pay a $2,000 fine if they do not offer coverage, excluding the first 30 employees -Employers with more than 200 employees have to automatically enroll employees into health insurance plan offered by employer. Employees can opt out. - Employers with <50 full time employees are exempt from the penalty -Created 4 benefit plans levels plus a separate catastrophic plan for the exchanges. Bronze 60% with out of pocket limit equal to HSA out of pocket limit Silver 70% with HSA out of pocket limit equal to HSA out of pocket limit Gold 80% with " " Platinum 90% with "" Catastrophic limited to those up to age 30 or those exempt from the mandate to purchase coverage. coverage limit set by HSA law levels plus gives prevention benefits and 3 primary care visits. Plan only available in the individual market -Provides dependent coverage up to age 26 -Prohibits life time and annual limits - provides guaranteed issue and renewability. No pre -existing conditions clauses. -Rating variation only based on age, geographic rating area, family composition and tobacco use.

stock entity agreement vs a cross purchase corporate buy sell agreement funded with insurance

Transfer-for-value problems can be created if existing policies are transferred between shareholders of a corporation in a cross-purchase agreement. An exception to transfer-for-value exists for transfers from a shareholder or officer to the corporation (to fund an entity purchase agreement), but not for transfers between shareholders. when surviving owners expect to sell their business interest during lifetime, they will prefer a cross-purchase agreement to allow them to increase their cost basis in the business upon the death of one of the owners. the business will be the owner, premium payer, and beneficiary of the policies in an entity purchase agreement. Since the business will be paying the high premium on the policy covering the older owner, the other owners are relieved of that financial hardship. with an entity purchase agreement only one life insurance policy is needed for each owner. With a cross-purchase agreement the number of policies needed = n(n-1).

Of the following situations, when should a pre-marital agreement NOT be considered by individuals contemplating marriage?

When one or both parties are unwilling to make a full disclosure of all their income and assets to the other party. Rationale The correct answer is "A." Without full disclosure of the assets of both parties, it is not possible to arrive at a fair arrangement for a prenuptial agreement. All other answers are suitable for premarital agreements.The correct answer is "A." Without full disclosure of the assets of both parties, it is not possible to arrive at a fair arrangement for a prenuptial agreement. All other answers are suitable for premarital agreements. B) When each party has significant wealth and wishes to protect his/her financial independence. C) When there is a significant difference in wealth of each party. D) When one or both parties have ongoing obligations, rights and/or children from a previous marriage.

Which of the following statements accurately reflect the nature of buy-sell agreements?

Which of the following statements accurately reflect the nature of buy-sell agreements? A) A stock redemption plan must have a corporation as a party to the contractual arrangement. Rationale The correct answer is "A." The corporation must be a party to the stock redemption plan. A stock redemption plan is a stock purchase by a corporation, so the cost basis of the surviving shareholders are not affected, thus they do not receive a step up in basis. Proceeds of a policy owned by a surviving shareholder are not includible in the decedent's gross estate. Premiums are not tax deductible.

Which one of the following statements best describes a firm commitment?

Which one of the following statements best describes a firm commitment? The investment banker agrees to purchase the entire issue and resell the securities to the public. a best effort agreement is The investment banker agrees to sell a minimum number of shares before the offering closing date. . A "syndicate" offering occurs when an underwriter forms a team of brokerage firms. A "green shoe" agreement is a standby commitment.

Straddles

a long straddle is buying a call and a put on both companies. its for expected volatility when you do not know which direction. A short straddle is when you do not expect much volatility. A married put locks in profit.

Substitutes are products that serve a similar purpose

a price change in 1 product changes the demand for the other. i..e Movie tix go up in price and thus the demand for movie rentals increases

Void vs Voidable

a void contract was never valid, never came into existence and is not enforceable. i.e. a contract to sell cocaine is void because it was never allowed to exist due to an illegal purpose Voidable is a valid contract that allows cancelation by one of the parties and the other party is bound by the agreement i..e a minor enters into a contract. The minor can void the contract, the other party is bound by the contract.

If engagement letter states client is soley responsible for implementation but the client comes back to you later

about purchasing a product which was recommended you are considered still engaged with the client for financial planning

In a situation where someone has undertaken activities or actions that bring about extraordinarily hazardous circumstances, the term that would best describe this situation is

absolute liability.

The 3 classifications of income are

active, passive and portfolio Earned income is a subset of active income while unearned income may be either a passive or portfolio income.

distributions from retirement plans with adjusted basis

adjusted basis exists when the participant made after tax contributions to a contributory qualified plan or the participant was taxed on the premiums for life insurance held in the qualified plan to calculate the exclusion ratio (% age not taxed) cost basis in the annuity/ total expected benefit also for IRA's with after tax contributions adjusted basis /IRA FMV at time of distribution x amount withdrawn = amount not taxed and the remainder is taxed

types of authority - express, implied, apparent

an agents authority to legally bind the insurer is based on 3 types of authority. express- given through an agency or written agreement. insurer is responsible for acts of an agent under express authority implied authority- authority that the public perceives and a valid agency agreement exists. The delivering of an insurance contract and accepting a premium is an example of implied authority. The insurer is still responsible even if a client is misled Apparent authority-is when the insured believes the agent has authority to act on behalf of the insurer when in fact no authority actually exists. Apparent authority could be inferred based on business cards or a sign on the wall, but the agency agreement actually expired. If an agent represents the insured can pay the premium late but is wrong, the insurer is still responsible Implied authority is based on the agents biz card, letterhead and insurance company sign on the wall/door Express authority is the agency agreement between the insurance agent and the insurance company Apparent authority is when no authority actually exists

Section 1245 property includes property that is or has been subject to

an allowance for depreciation or amortization. 1245 property is tangible property used in a trade or business and includes depreciable property i.e. equipment, patents, copyrights, and other intangibles -Real property (land and buildings is NOT 1245 property

NAIC National Association of Insurance commissioners

an association of the commissioners of the insurance departments of each state, the District of Columbia, and the U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments Provides a watch list of insurance companies based on financial ratio analysis NAIC has no regulatory power over the insurance industry but is involved in accrediting state regulatory offices NAIC issues model regulation that state legislatures may or may not adopt

Termite damage is usually excluded from home policy's for it happens slowly

and is thus considered a result of negligence

Life insurance annuities retain the exclusion ratio indefinitely?? whats the difference from above term

and the beneficiary of an annuity from a life insurance settlement is not permitted to recover any basis left at death

Bond current yield

annual coupon payment/ current price of the bond

BOND coupon rate

annual coupon payment/ par value

Appropriate uses of whole life aka permanent insurance

anyone with lifetime or permanent insurance needs estate planning for providing cash to pay transfer taxes, payoff debts, provide cash during grieving process insured has a need for investment like performance/returns Advantages of whole life: tax deferred growth of cash value and permanent insurance until 100 or 120 Disadvantage: expensive and inflexible premiums, cash value growth is gradual, due to cost the insured may not be able to purchase as much insurance as needed

Income taxes, payroll taxes and contributions to retirement accounts

are considered discretionary expenses

A dwelling and attached structure including building materials on the premises, coverage losses

are covered on a replacement cost basis which is the amount necessary to repair or replace with same or similar materials at current material prices (no deduction is taken for depreciation) Some policies require a co insurance of at least 80% for to be covered for PARTIAL LOSSES amount of insurance carried / coinsurance requirement (80% x home replacement cost) x amount of loss

Consumer durables and capital goods

are cyclical in nature and fluctuate directly with the business cycle.

Medicare part A benefits (Hospital)

are for hospital stays, home health care, hospice stays and skilled nursing following a covered hospital stay. semi private room, meals, lab tests x rays. Benefit periods begin on the 1st day in the hospital and end after 60 days of no further skilled care. The deductible is $1,340 per benefit period and is the only charge for the 1st 60 days. Beyond the 60th day, the following co insurance amounts apply $335 per day for days 61 to 90 $670 per day for days 91 to 150 for each lifetime reserve day. there are only 60 lifetime reserve days. $167.50 per day for skilled nursing care days 21-100. the first 20 days following a hospital stay are covered 100% Custodial care is not covered including nursing care facilities that provide help with ADL's

Personal and dependency exemptions ?

are repealed for 2018 through 2025

Below Market Loans

are term or demand loans that are gift loans or tax avoidance loans. The interest the lender would have received is reported as phantom income on the lenders taxes and the gift may be eligible for the annual exclusion amount. the amount of the gift is (interest) is also reported by the receiver if over x dollars. loans <= $10,000 then $0 is reported $10,000 to <=$100,000 if borrowers net investment income is <- $1,000, then $0 imputed interest, if not then the lesser of Net investment income or interest calculated using AFR less interest calculated using the stated rate of the loan if loan is > $100,000 then use federal rate for imputed income to the lender

529 Savings plan aka savings plan

asset of the parent anyone can contribute to the plan assets grow tax free if used for qualified education expenses can 5 year front load $15k x 5 years = $75k or $30k x 5 = $150k (gift splitting) advantages possible state income tax deduction no AGI phaseout for contributions Account owner controls the asset owner can change beneficiary at any time the contributor can remove assets from their gross estate Disadvantages 10% penalty on the earnings and earnings are included in gross income if not used for qualified education expenses Exceptions to the 10% penalty are distributions due to death, disability and scholarships

529 Prepaid tuition plans

asset of the parent pays for instate college lock in tuition costs in today's dollars Disadvantages only earn rate of tuition inflation if child receives a scholarship and not use the credits if parents return the credits they usually only receive their principal back limited to the curriculum of the state schools Designed to only pay for tuition, do not include room and board

Coverdell

assets of the parent contributions are limited to $2,000 per year for each child which includes all accounts. so $2,000 total no matter how many accounts or contributors distributions used for qualified education expenses are tax free (tuition, fees,equpment, room & board) can be used for college or elementary school or high school beneficiary can be changed at any time by the account owner assets in coverdell must be used by age 30 of the beneficiary 10% penalty on the earnings and earnings are included in gross income if not used for qualified education expenses Contributions are not allowed at age 19 or higher

Duration assumptions

assumes there is a linear relationship between a change in interest rates and a bonds price. The actual price change of a bond is curve-linear NOT linear Convexity is a concept that actually measures the difference in price between what duration estimates and the actual price change of a bond. Duration does a good job for small changes in interest rates but does NOT do a job job of estimating price change for large changes in interest rates. Duration understates the price appreciation when interest rates decrease and overstates price depreciation when interest rates increase.

Jensen Model or Jensen's alpha

attempts to construct a measure of absolute performance on a risk adjusted basis. Treynor and sharpe are for relative performance between portfolios or funds. Jensens formula is capable of distinguishing managers performance relative to that of the market and determining differences between realized or actual returns and required returns as specified by CAPM. Formula is @p = rp- (rf+ (rm-rf) x Bp where @p is alpha (the managers contribution to the portfolio return) rp is realized portfolio retunr rf = risk-free rate of return rm is expected return of the market Bp is beta of the portfolio -a positive alpha indicates the fund manager provided more return than was expected for the risk undertaken. - A negative alpha indicates the fund manager provided less return than was expected of the risk undertaken. -An alpha of 0 indicated the manager provided a return equal to the return expected for the risk undertaken. A portfolio managers performance is judged relative to the CAPM. the higher the alpha, the better the managers performance Treynor and Jensen Alpha use beta so better for well diversified portfolios Sharpe uses SD so better for poorly diversified -The only time alpha will equal the amount the fund beat the market by is if the fund has a beta of 1.

Homeowners coverage

basic - 12 named perils broad - 18 named perils Losses not specifically "named" are not covered. open-aka all risks- all perils are covered except those specifically excluded

Advisers to private funds will have to provide

basic organizational and operational info about each fund hey manage general info about the size and ownership of the fund, general fund data the advisers services to the fund identification of 5 categories of "gatekeepers" that perform critical roles for advisers in the funds they manage: auditors, prime brokers, custodians, administrators, marketers. All advisers have to provide additional info: the types of clients they advise, their employees, and their advisory activities, their biz practices that may present significant conflicts of interest.

Adjustments to basis

before determining gain or loss on a sale, exchange or other disposition of property, certain adjustments must be made to the basis of the property. The result is the adjusted basis

Reduced benefits

benefits are reduced 5/9 for each month for the 1st 3 years that a worker retires early 5/12 per month greater than 3 years if FRA is 65, at age 62, 20% reduction if FRA 66, at age 62 25% reduction if FRA is 67, at age 62, 30% reduction

Viatical settlements and accelerated benefits

benefits paid to terminally ill (certified to reasonable be expected to pass away in 24 months or less)are tax free benefits paid to chronically ill ( certified by a licensed health care provider as being unable to perform at least 2 ADL's (eating, toileting, transferring, bathing, dressing, incontinence) are tax free if used for unreimbursed medical expenses

Term life insurance

best for temporary needs, such as education planning, paying off debts, or to cover expenses during the grieving process,usually for younger people. Most term policies lapse without paying a DB

Adjustable rate mortgages (ARM)

best if homeowner will be in home 3 years or less 2/6 ARM means the maximum the interest rate could rise per year is 2% and over the life of the loan 6%.

Bond price change due to interest rate change

bond price change = interest rate % increase or decrease X [1/(1+ current market yield %) ]

Series EE savings bond

bought at face value $25 min purchase, $10k annual maximum only available through online treasury direct non marketable, non transferable acts like a 0 coupon bond, no interest payments, matures at face value over 30 years redeemable after one year with 3 month interest penalty if < 5 years Interest is not subject to federal income tax until bond is redeemed (no phantom tax) May qualify for federal tax free if redeemed for education expenses (tuition and fees only) tax free at state and local level

BOND HPR calculation

calculate selling price: price of bond = annual coupon payment/current yield calculate HPR: SP-PP +- cash flows /purchase price

Only 529 plan (if >= 1/2 time, Roth IRA (if >= 1/2 time) and Coverdell,

can be used for room and board expenses Prepaid tuition, EE savings bonds, LTLC, AOTC can NOT be used for room & Board expenses

Weighted average

can be used to calculate a weighted average share price, expected return, beta or duration

Determining net capital gains

capital asset gains and losses of the same holding period are netted against each other, long vs long, If excess losses result, they are shifted to the category carrying the highest tax rate. if net LTCG and net STCG they are taxed separately -Treatment of Net Capital losses- for individuals they are deductible for AGI to the extent of $3,000 per year indefinetly and the $3,000 can be applied against other income. When carried over, they retain their classification as long or short if the CFP question says a 6 month holding period for the seller but the stock was inherited, assume LT

Items which increase basis

capital improvements, assessments for local improvements i.e.new roof, driveway, new sidewalks, or roads, the cost of restoring damaged property after a casualty or loss, zoning costs, legal fees including the cost of defending and perfecting a title to the property

Personal use assets

car, house, furniture, jewelry

Currents assets are

cash & cash equivalents meaning cash, checking account, money market, CD if 12 months or less to maturity, laddered CD's set to mature every 6 months, and anything the clients expects to convert to cash within one year Does NOT include EE savings bonds which are considered an invested asset

Upon surrendering his whole life policy

cash value minus premiums paid minus dividends received = basis Cash value- basis = ordinary income, taxable in the year it is received.

Coverdell qualified education expenses

college- tuition, fees, books, room and board, and computer related expenses (equipment) elementary and high school- tuition, fees, books, supplies, equipment, tutoring,computer related expenses, certain special needs services for special needs beneficiaries. also room and board, and transportation if required or provided by the institution

529 qualified education expenses

college- tuition, fees, books, supplies, equipment, room and board for students enrolled at least half time elementary, high school, religious school - $10,000 per year for tuition only

Yield summary

coupon rate stays the same for discount, par and premium bonds Current yield is higher than the coupon rate for discount bonds and = coupon rate for a par bond. Current yield is lower than the coupon rate for a premium bond. YTM is the same as the coupon rate and current yield for a par bond. YTM for a discount bond is is higher than the coupon rate and current yield. For a premium bond YTM is less than the current yield and less than the coupon rate. YTC is the lowest for a premium bond and highest for a discount bond.

Disability eligibility

covered if worker is age 31 and greater, fully insured (40 quarter credits) and earned 20 quarters in the past 40 quarters if 24-30 and worker has earned 1/2 of quarters available since age 21 if 21 to 24 and workers has earned 6 quarters in the past 12 quarters

Section 1250 governs the recapture of depreciation on real (buildings and real estate) section 1231 assets

currently all depreciation is on a straight line basis, except for property purchased and placed into service before 1980 and between 1980 and 1986 was eligible for accelerated depreciation -when real property that was depreciated on an accelerated basis is sold, section 1250 requires that the excess depreciation (depreciation taken - what straight line depreciation would have been) be recaptured as ordinary income at ordinary income rates or 25% ?? the straightline depreciation amount is taxed at ??? Section 1231 gain - Capital gains (difference between unadjusted purchase price and sales price is taxed at capital gains rate of 15% all section 1250 losses are ordinary losses.

calculation of imputed income for group life

death benefit amount - $50,000 exclusion = excess coverage. excess coverage imputed income is $.10 per $1,000 so $100,000 of excess coverage is 100,000 divided by 1,000 is 100 x.10 x 12 months is $120 imputed income

Taxation of life insurance

death benefits not taxable except for transfer for value rule dividends earned on cash value are not taxable until withdrawn cash value is not taxable if withdrawn at death loans against life insurance are tax free, unless a MEC exchanges of a life insurance policy for another or an annuity is not taxable. Exchanging an annuity for a life insurance policy is taxable

Corporate bond risks PRID - have default risk

default risk, reinvestment rate risk, interest rate risk, purchasing power risk PRID

Qualifying Relative as a dependent for the child tax credit Gross income test

dependents gross income must be less than the personal exemption ($4,150 for 2018 - even though the personal exemption was repealed) For the qualifying child test this is not required a 25 year old child who is in college, not self supporting and lives with you when they are not in college would not be eligible for the child tax credit because they are over 24, but they would be eligible for the child tax credit as a qualifying relative.

Section 1231 assets are depreciable property used in a trade or business and not capital assets

depreciable property used in a trade or business is generally a 1231 asset and not a capital asset

Under COBRA an employer is required to extend medical coverage to eligible family members of an employee if the employee

dies, retires, divorces or terminates employment prior to retirement

Weak form efficient market hypothesis

directly refutes Technical analysis

SS beneficiaries

disabled worker under age 65 a retired insured worker age 62 or older a spouse of a retired or disabled worker who is 62 OR caring for a child under 16 or a disabled child A divorced spouse of a retired or disabled worker if age 62, was married at least 10 years and did not remarry by age 60

HSA distributions & MSA's

distributions for qualified medical expenses are tax free, OTC drugs are not permitted unless they have a prescription and copays. Distributions are not required so contributions and earnings can build up and be used in retirement Health insurance premiums are only permitted as a qualified expense for LTC, COBRA, health care coverage premiums while receiving unemployment, Medicare and other health covered if you are 65 or older, dental including orthodontics and vision care. Cosmetic surgery costs are not qualified expenses. Distributions for non qualified medical expenses before age 65 are subject to a 20% penalty and income tax, at 65 or older, no penalty but must pay income tax. -MSA were only permitted for the self employed or those working for a small biz with less than 50 employees. Only the employer or the employee could contribute, not both. Distributions rules are the same as HSAs.

Children of divorced or separated parents

due to the abode test, its usually the parent with more custody days. However if all 4 of the following requirements are met then the non custodial parent can claim the child as a dependent 1. 2. the child receives over half his/her support from the parents 3. the child is in the custody of the parents for more than 6 months and 4. the custodial parent signs a statement that they will not claim the child for the year and the non custodial parent attaches the statement to his tax return (can use form 8332). the statement can be part of the divorce decree and can be for more than 1 year. So the statement, form 8332 or the divorce decree can be attached each year

Taxation of annuity payments

each annuity payment includes -a return of capital (prorata portion of premiums) which is received tax free - interest which is taxable Exclusion ratio is investment in the contract/ expected total return from contract when multiplied by the amount being received (payment) gives the amount that is received tax free and the remainder is taxable If annuitant lives beyond expected life span, any payments received beyond that year are fully taxable. If he does not live past the expected year, then he will get a deduction on his last tax return for tax free amount not received

Benchmarks for short term savings and investments

emergency fund- 3 to 6 months of non discretionary expenses (emergency funds = current assets divided by monthly non discretionary expenses) Housing ratio- which includes principal, interest, taxes, homeowners insurance (PITI) Should not exceed 28% of gross income (PITI divided by monthly gross income) Consumer debt payments should not exceed 20% of net income All debt ratio (housing plus all other recurring debt payments) should not exceed 36% of gross income Life insurance 10-16 x gross pay Disability 60% to 70% of gross pay

Health / medical savings accounts (HSA's replaced MSA's) MSA's are no longer being offered

employees/individuals receive tax deduction for contributing to HSA and tax free use of the money for qualifying medical expenses. The employer can also make contributions to the employees HSA Must have a high deductible medical plan(HDHP) to be eligible for an HSA

Health insurance portability and Accountability act (HIPPA)

enacted to protect workers ability to obtain health insurance when changing jobs, being laid off or retiring. Switch jobs within 62 days, utilize HIPPA, coverage begins with no or a limited preexisting condition time frame Switch jobs with unknown time frame-utilize cobra to extend coverage and minimize "break" period. Utilize HIPPA to obtain a new policy Retire- utilize medicare if eligible or Cobra to get you to medicare age. ACA prevents policies from containing pre existing clauses for polices issued after September 2010 but its still best to know HIPPA for the cfp exam

Sources of income

essentially all sources are considered, a couple of extra details. Partnerships and S corps are pass thru entities so any income from them will be passed to the owners of the business. the income of a trust or estate is generally taxable to the beneficiary, unless the income is not distributed in which case it will be taxable to the trust or estate. in community property states, 1/2 of the husband's income is considered the spouses and vice versa.

Needs approach for life insurance

evaluates the income replacement and lump-sum needs of survivors in the event of the income producers death any future cash or income need should be discounted using the present value of the future cash flow

Items which decrease basis

exclusion from income of subsidies for energy conservation measures, casualty or theft loss deductions and insurance reimbursements, deduction for clean-fuel vehicles and clean fuel refilling on property, section 179 deduction (qualifying purchase or lease of equipment, software, etc) , credit for qualified electric vehicles, depreciation, non taxable corporate distributions

Misc other new Dodd Frank rules

exempt reporting advisers will still be required to file and periodically update reports with the commission using the same registration form as registered advisers. Mid size advisers are those with AUM from $25 mill to $100 mill The pay to play rule is designed to prevent an adviser from seeking to influence government officials awards of advisory contracts through political contributions

Coverage E and F do not cover

expected or intended acts of the insured, business or professional activities, rental of the premises, or a location which has not been declared on the policy, aircraft, watercraft, motorized vehicles, war or nuclear weapons, transmission of a communicable disease, sexual molestation, corporal punishment, physical or mental abuse, or association with illegal drugs.

calculating expected return

expected return whole number x the probability of return %, add up the resulting number for each return year to get the total expected return

SS retirement eligibility and funding

fully insured means worker has earned 40 quarters of coverage. A quarter of coverage is based on a dollar amount of earnings per quarter. 1 quarter = $1,300 in wages subject to SS Retirement benefits are funded with A OASDI TAX OF 6.2% ON WAGES UP TO $127,200 IN 2018 Medicare taxes are 1.45% for a total of 7.65% An additional medicare tax of .9 is for married filing jointly earning more than $250k $200k if single, head of household with qualifying person, widower with dependent child $125k if married filing separately

appreciation

gain/purchase price

Holding period of gifted property

general rule is the holding period in the hands of the donee includes the holding period of the donor. if double basis (gifted asset where the FMV < donor's basis at the time of the gift) is sold for a loss the the holding period for the donee starts on the date of the gift.

Good debt, reasonable debt, bad debt

good debt - anytime the useful life of the asset far exceeds the term of the debt. For example a 15 year mortgage or a 3 year car loan. Reasonable debt is a 30 year mortgage or a 5 year car loan Bad debt includes carry a credit card balance

"Gift" defined

gratuitous transfer of property Donor acted out of a "detached and disinterested generosity made out of affection, respect, admiration, charity or like impulses" whether something is a payment or gift is determined by motive, or whether the transfer was made as the result of detached and disinterested generosity or from constraining force of any moral or legal duty or from the incentive or anticipated benefit of an economic nature. in general amounts transferred by an employer to an employee will not be treated as gifts

IRS 1040 Gross income

gross income is all income from whatever source derived unless the IRC contains a specific provision excluding a particular item from income. Barter is consider income

group hospitalization and major medical, ACA compliant

has an out of pocket limit. maximum loss for the insured is the out of pocket limit. The deductible is part of the out of pocket limit. Since the affordable care act, all policies should now use the "out of pocket" limit approach

Preferred stock

has equity and debt features debt features- stated par value, stated dividend as a percentage of par. Equity features- price of preferred stock may move with the price of he common stock. Differences- dividend does not fluctuate like a common stock dividend, has no maturity date like a bond, price of preferred stock is more closely tied to interest rates than common stock. Tax advantage- corporations receive a 50% or 65% deduction of dividends (preferred and common stock) based on percentage ownership of the company paying the dividends (covered in tax) for years after Dec 31, 2017

REIT's Real estate investment trusts

have a low correlation with the stock market and provide a diversification benefit to portfolios Real estate is a hedge against inflation REIT's must distribute 90% of investment income to shareholders to maintain their tax exempt status.

auto policy if replace your car

have to notify ins. co. within 30 days of the purchase date

Conditions that increase the severity or frequency of a loss are

hazards

What is the geometric rate of return for a stock that has experienced the following prices over a four-year period? Year 1 = $20 Year 2 = $32 Year 3 = $24 Year 4 = $28

here is the quickest: N=3 i=? PV=<20> PMT=0 FV=28 Assume you paid $20 for the stock today and three years later, it is trading at $28.

Ratios

housing ratio <= 28% of gross income Monthly housing costs (PITI) / monthly gross income Housing and all other reoccurring debt <= 36% of gross income PITI+ all other reoccurring debt payments/ monthly gross income

Property valuation

how much should an investor pay Formula is a restatement of the dividend yield formula wher eyou are determining how much an investor is willing to pay for stock or real estate. Capitalized value= NOI/ capitailization rate NOI is net operating income Capitalized rate = NOI/cost capitalizing NOI NOI formula gross receipts + non rental income = potential gross income (PGI) - vacancy & cancellation losses = effective gross income (EGI) - total current year cash type expenses (does not include depreciation, etc) = net income + interest expense + deprecation expense = Net operating income (NOI) Cash operating expense does NOT include depreciation or amortization, which are not cash expenses. It also excludes payments on debt service since its a financing expense not an operating expense. short cut: add back depreciation and financing expenses to get NOI

Congress generally has the power to tax income when it is realized

however, Congress has chose to defer some items and to not tax some items

In a situation where an employee has accepted workers compensation benefits, an employer is protected from a suit by the employee

however, other parties that can sue are the employees family, spouse or a 3rd party

P/E formula examples

if EPS are $3.0 and stock is $40 what is P/E ratio P/EPS is 40/3 = 13.3 P/E if stock is $50 with P/E ratio of 20 what is EPS P/EPS ratio is $50/20 = $2.5 if EPS are $3 and a P/E of 20 what is stock price EPSxP/E $3 x 20 = $60

The sale of a personal residence

if a loss is realized, the loss may NOT be recognized on income taxes because the house is a personal asset if the taxpayer realizes a gain on the disposition due to casualty, theft or condemnation (involuntary conversion), the gain may either be deferred under section 1033 or excluded under section 121 (subject to limitations)

Depreciation recapture

if a taxpayer disposes of depreciable or amortizable property at a gain, they may have to treat all or part of the gain as ordinary income due to depreciation recapture

Investment advisers act of 1940 * Registration form

if assets <$100m must register with state, if no state agency, then SEC if $100m to $110m register with either if >$110 mill SEC an investment adviser required to register with the SEC must file form ADV -Form ADV Part 1. General and background info regarding the financial planner and their clients, advisors name,education, business and disciplinary history for last 10 years., must file form and schedule 1 electronically within 90 days of advisors fiscal year end. Adviser must refile Part 1 along with a current balance sheet on an annual basis - ADV form Part 2A includes 18 disclosure items that must be included in the advisors brochure, i.e. compensation, fees, education, investment objectives, conflicts of interest, and the background of the personnel. Must be written in plain english - Part 2B provides supplemental info about supervised persons who may provide advisory services to the client Individual advisers or the advisers organization may register A RIA must promptly update ADV part 2 if any information becomes Materially inaccurate, otherwise annually. ADV part 2 along with the company brochure must be provided to all clients and prospective clients at least annually. To withdraw registration from SEC must use form ADV-W

Formula for double tax free bond (federal and state tax exempt) takes into consideration state taxes are deductible at the federal level

if client does not itemize deductions tax exempt yield/ (1- (federal + state tax rate) if client ITEMIZES their deductions the formula is Tax exempt yield/ [ 1- Federal tax rate + state tax rate (1- federal tax rate)]

the bond with the longer duration will experience the biggest percent change when interest rates change

if interest rates go down, the bond value goes up, if interest rates go up the bond value goes down

Kurtosis refers to variation of returns

if little variation of returns the distribution will have a high peak (like US treasuries), called positive kurtosis if returns are widely dispersed, the peak of the curve will be low and have a negative kurtosis. Leptokurtic = high peak with fat tails (higher chance of extreme events Platykurtic- low peak with thin tails (lower chance of extreme events)

Applying for medicare

if receiving SS at age 65, automatically enrolled in medicare if not receiving SS at age 65, then must enroll self in medicare

Disability benefits

if severe physical or mental impairment for 5 months that is expected to prevent work for at least 12 months or result in death

C contents

includes tangible moveable property, furniture, clothing, books, music, etc. Losses are insured on a actual cash value basis (at the time of the loss) Coverage is usually limited to 50% of coverage A amount. A replacement cost endorsement can be purchased. Actual cash value of purchasing the item today - the depreciation which occurred = amount you will receive

Doctrine of constructive receipt

income is constructively received when it is readily available to the taxpayer and not under restrictions or limitations such as timing or manner of payment. Financial condition of the debtor makes payment of the income impossible then there is no constructive receipt

Universal life insurance is Flexible

insured may adjust premiums, face value of policy and cash value insurer directs the investment portion of the cash value not the insured cash value can be used to pay the policy premiums. Could receive notice from insurance company that the cash value is not covering the premium and need to deposit x dollars to maintain the same death benefit. disadvantage is death benefit could decrease, it could also increase

Dollar cost averaging

investing roughly equal amounts of money at regular intervals and is considered a strategy to reduce risk

Efficient market hypothesis (EMH) believes

investors can not consistently achieve above average market returns Prices reflect all available info stock prices follow a random walk investors who believe in EMH believe a passive strategy is best

Strategic asset allocation

involves assessing the likely outcomes for various allocation mixes between asset classes. is done every few years is considered an active allocation strategy

The maximum loan amount to get the interest expense deduction

is $1,000,00 for the primary home and $100,000 for the HELOC

Balance sheet

is a listing of assets, liabilities and net worth at a moment in time., as of xx xxxx. assets- liabilities = net worth any net worth calculation includes personal assets which are typically stated at an estimated FMV

statement of Cash flows (Statement of Income and expenses)

is a listing of income, savings, expenses and taxes over a period of time. i.e. for the year 2017. income includes salary,interest, dividends and business income. Savings is an outflow to a savings account or a retirement plan (employees contributions to any savings account, retirement plan, education account by the employee does not consider an EMPLOYERS contributions to retirement plans Does not Capture and report receiving or giving gifts or inheritances Expenses are both variable and fixed. Variable is considered any expense over which a client can exercise control, even utilities. does not show income taxes payable (would show as a current liability on a balance sheet (statement of financial condition Income taxes payable would be listed as a current liability on the balance sheet(statement of financial position)

BETA coefficent

is a measure of a securities volatility relative to the market. Beta is best used to measure the volatility of a diversified portfolio the market has a beta of 1 Beta is also a measure of systematic risk (market risk) Beta can also be calculated by dividing the security risk premium by the market risk premium if stock has a 20% return and the market has a 10% return the beta of the stock would be 2

Standard deviation

is a measure of risk and variability of returns around an average. the higher the standard deviation the greater the risk SD can be used to determine total risk of an undiversified portfolio memorize the 68%,95% & 99% if the returns are +- 1,2,3 to calculate SD at +- 1, add and subtract the SD from the average return

Warranty

is a promise made by the insured to the insurer. i.e. will not ride motorcycles a breach of warranty is grounds for avoidance

selling of dollar denominated assets by foreigners

is a strong indication interest rates might rise because the foreigners are taking their US dollars overseas as they sell assets which decreases the US money supply. interest rates rise anytime the money supply decreases. (if the demand for dollars is low, then interest rates will fall.)

standard deviation

is an absolute measure of risk measures variations of returns around an average

emergency fund

is current assets/ monthly non discretionary expenses credit card or line of credit is ok if the client is NOT currently disabled

adverse selection

is managed by the underwriter of an insurance company denying coverage, raising premiums afterwards

Book value

is the amount of stockholders equity in the firm or how much the comoany's shareholders would receive if the firm was liquidated The book value us useful to compare to the firms stock price. If the stock price is significantly higher than book value the stock may be overvalued and if the book value is equal to or greater than the stock price, it may indicate the firm is undervalued.

Dividend yield formula

is the annual dividend as a percentage of the stock price Dividend yield = dividend/price to calculate which company is likely to increase it's dividend, calculate stock price x dividend yield and see if result is lower than EPS

Current Yield (CY)

is the annual payment in dollars divided by the current price of the bond CY= Coupon payment/price of the bond

Coupon rate (CR) or Nominal yield

is the annual payment in dollars divided by the par value CR = coupon payment/Par

Internal rate of return (IRR)

is the discount rate that sets the NPV formula to 0 IRR can also be thought of as compounded rate of return IRR should be calculated when you have uneven cash flows and are asked to calculate a compounded rate of return. HP calc: same formula as NPV but solve for IRR instead of NPV if NPV is positive then IRR > discount rate If NPV is 0 then IRR = discount rate if NPV is negative, then IRR< discount rate

Systematic risk

is the lowest level of risk you can expect in a diversified portfolio. It is inherent in the system (markets). Systematic risk can NOT be eliminated with diversification. Systematic risk is non diversifiable, i.e. market risk, economy based risk

The fed funds rate

is the overnight rate at which banks borrow from each other

Technical analysis

is the process of charting and plotting a stocks trading volume and price movements. TA believes analysis of the trading volume and price movements will predict the future direction of stock prices long before fundamental analysis will. They also believe supply and demand drive a stock price. TA does not involve ratio analysis or analysis of financial statements. Resistance may develop when investors bought on an earlier high may now view this as a chance to get even. Some may see this as an opportunity to take a profit. Support may develop when a stock price goes down to a lower level of trading because investors may choose to act on a purchase opportunity that they previously passed. This is a signal new demand is coming into the market.

Beta

is the relationship between a securities return and the market return Plot security return on the y axis and the market return on the x axis beta is simple rise/ run or the slope of the line that best represents the securities returns and the market returns Beta can be positive or negative but most are positive Beta is an indication of a securities volatility relative to the market

Dividend payout ratio Formula is not on the exam, need to memorize

is the relationship between the amount of earnings paid in dividends relative to earnings per share. DPR = dividend/EPS usually the higher the DPR the more mature the company A high DPR may also indicate the possibility of the dividend being reduced a low DPR may indicate the dividend may increase thus increasing the stock price

Unsystematic risk is diversifiable

is the risk that exists in a specific firm/investment which can be eliminated with diversification. Unsystematic risks are diversifiable, unique, company specific.

calculation of amount realized

is the sum of cash received plus the FMV of the property received plus any liabilities shed. the party that is giving up(sheddding - passing on) the debt will have an amount realized equal to the liability. -the person receiving the liability will have that amount added to their cost basis -the sale of mortgaged real estate can yield phantom income, this usually occurs when the financing is through non recourse loans, the tax payer takes large write offs or the taxpayer disposes of property subject to the loans.

Warrants

issued by the corporation expiration period is usually 5-10 years terms are not standardized options are issued by the exchange and call options are written by investors expiration of options in 9 months terms are standardized for strike price, etc

(IBR) Income based repayment

monthly student loan repayment of 15% of discretionary income with remaining debt forgiveness after 25 years Stafford loans and most other Federal loans are eligible PLUS loans are not eligible for undergraduate students PLUS loans to graduate students are eligible

types of hazards a hazard is a condition that increases the likelihood of a loss occurring, 3 types are

moral - a persons ethics morale- indifference to loss because insured physical- a tangible condition that increases the probability of a peril, i.e. icy roads, banana peel

Whole life insurance aka Permanent life insurance till 120

lifetime protection if premiums are paid. has a savings or investment component which has a cash value which can be borrowed or received if policy is surrendered.Cash surrender value is cash value - cash surrender charges cash values usually have a minimum guaranteed rate of interest policy provide tax deferred growth of cash value and life insurance until age 120 many choices for paying premiums. single premium, level, etc. Death benefit is level throughout policy life and the premium is usually level also all whole life policies pre-fund future higher mortality costs using present value analysis (like a level term policy does) earnings accrue on the residual of the premium less the cost of the year plus any previous savings balance premium - mortality cost- overhead/profit= amount added to cash value (savings or investment component) each year disadvantages - premiums are expensive and there is no flexibility with premium payments cash value grows gradually due to cost insured may not be able to purchase as much protection

UET unbiased expectations theory

long term rates have embedded sort term rate expectations in them. So if 1 year rate is 2% and in one year it is expected to be 2.5% then the 2 year rate is about 2.25%

Summary of taxation

medical, group term, group disability, group ltc premiums are deductible by the employer if they pay them key person life, cross purchase and entity purchase are not deductible premiums for the employer. Cross purchase premium added to employees basis. if employee pays disability premiums with pre -tax dollars or the employer pays, the benefit is taxable to the employee. If employee pays premium with after tax dollars, the benefit is not taxable

Terminally ill seller of term life insurance policy to viatical company

money received is tax free to the terminally ill, the viatical company is taxed on the amount between the purchase price and the death benefit when the terminally ill dies.

An increase in the fed reserve requirement is contractionary because

money supply decreases and interest rates rise

Fed sale of US treasuries is contractionary because

money supply decreases and interest rates rise

A decrease in the excess reserve requirement rate is expansionary because

money supply increases and interest rates decrease

Pay as you earn Repayment

monthly student loan repayment of 10% of discretionary income with remaining debt forgiveness after 20 years. only Direct federal loans and PLUS loans to graduate students are eligible Stafford loans are not eligible

Mortality

mortality cost is the face amount of the policy times the chance the policy will have to pay a claim

Qualifying Relative as a dependent for the child tax credit Relationship test

must be the taxpayers -child or a descendant of a child - brother, sister, step B/S - father, mother or an ancestor (grandparent, etc.) -stepfather or stepmother -child of a brother or sister (nephew or niece) - a brother or sister of the taxpayers parents (aunt,uncle) -any inlaw - any other (totally unrelated person) who has the same principal residence and is a member of the taxpayers household. A person who was married during part of the year does not qualify. -Not all relatives of a taxpayer qualify, i.e. cousin - an unrelated person does not qualify in certain instances (i.e. relationship violates the law) - a child who does not meet the qualifying child test may meet the qualifying relative test

short selling

must have a margin account no time limit on how long can maintain a short no longer an uptick rule Dividends paid must be covered by the short seller (does not receive the dividends)

Weighted average portfolio return

needs to take into account. 1. current fair market value of the securities held, 2. the total portfolio value (TPV) 3. the return of each security throughout the period in question. Fair market value of 1st security / the total FMV of all securities x the % return = weighted return % due same calculation for each security and then add up the weighted returns to give you the weighted average portfolio return.

Calculation of a gain or loss

once it has been determined a realization event has occurred, a gain or loss must be determined. Section 1001 of the Internal revenue code provides the formula Amount realized - adjusted basis = realized gain/loss cost of property + capital additions - cost of recovery = adjusted basis

Related party transactions (section 267)

only affects transactions where there is a loss Tranferor's loss is forever lost, transferee takes asset with the double basis rule (FMV for losses, tranferors basis for gains. the holding period begins on the date of the transfer

Immediate annuities are not subject to a premature distribution penalty tax

only deferred annuities are subject to a premature distribution penalty tax

Unilateral (one sided)

only the insurer makes a promise to pay in the event of a loss. The insured can choose to stop making payments

Once recognized gain/loss have been determined then they must be classified as ordinary or capital

ordinary gains are fully taxable and ordinary losses are fully deductible. Capital gains/loss are subject to special treatment

Life annuity contracts

payment which is period certain or life time commonly used to fund retirement not appropriate if you wish to leave assets to heirs not a hedge against inflation provides protection from outliving your assets

Estimated Tax Payments

payments are due April 15, June 15, September 15, and January 15th of the following year Payments required if both of the following apply - will owe at least $1,000 in 2018 taxes after subtracting withholding and credits - his withholding does not equal at least 90% of the current year required tax amount or 100% of the tax shown on the prior years tax return. (must be a full year return)

Dividend options- non participating- no dividend, participating- receive a dividend

payout types- CRAPO Dividends accumulate tax free, when they exceed basis and are withdrawn the excess above basis is taxed. -cash- clients receive the money and use it as they wish -Accumulate interest- the insurer invests the dividends are they are tax free up to the clients basis in the policy. -reduce premiums- dividends applied toward the premium reducing the cost for the insured -paid up additions- purchases additional insurance for the insured regardless of health or occupation. - one year term-also known as the 5th dividend option- adds term insurance to the policy face amount equal to the cash value of the policy

F medical payments to others

pays all necessary medical expenses without regard to liability for others arising out of the insureds activities, premises or animals. Family member must reside on premises. medical expenses must be incurred within 3 years of the accident. policy limit is usually $10,000 per person per occurrence.

D loss of use

pays for additional living expenses while the insured is unable to occupy their dwelling because of damages caused by a covered peril. May also pay for lost rental income when the rental property is uninhabitable. Limit is usually 30% of coverage A amount

Personal residence qualification requirements for section 121 exclusion

personal principal residence must have been 1. owned and occupied as the principal residence for 2 out of the last 5 years. (a 1 year stay in a nursing home does not count towards the 2 year requirement) 2. the exclusion can only be used once every 2 years 3. any appreciation during non qualified use periods are not subject to the exclusion -Single taxpayers can exclude $250k of the gain _ married taxpayers filing jointly may exclude up to $500k in gains - married taxpayers must both meet the use requirement and not have used the exclusion within the past 2 year but either may meet the ownership requirement

Capital Market Line (CML),

portfolios above the CML are undervalued and have outperformed the market. Portfolios below the line are overvalued and have underperformed the market. Portfolios on the line are in equilibrium.

Premiums

premiums paid by the insured are not tax deductible group life premiums paid by the employer are deductible for the employer Premiums paid by the employer for insurance in excess of $50,000 are taxable to the employee at .10 cents per $1,000 x 12 months

Maintenance margin 25% by Fed, house requirements can be higher

price to receive a margin call is initial loan share price x (1- initial margin requirement) divided by ( 1- maintenance margin requirement) 50 x .5 = $25 divided by .7 or $35.71

Personal financial statements

primarily uses as a scoring mechanism for capturing an individuals financial position and performance financial statements include balance sheet, (statement of financial position, net worth statement) Income and expense statement ( statement of cash flows) Financial statement analysis gives us insight into the clients strengths and weaknesses and allows us too answer questions related to - how well the client manages debt, how well is the client progressing toward his financial goal, how well the client is able to meet short term obligations. Financial statement analysis only provides a historical perspective, it is not predictive of the future. and inflation makes it difficult to compare financial statements from 1 period to the next.

Stafford Loan

primary type of loan provided by DOE Stafford loans are student loans Repayment begins 6 months after leaving school or falling below part-time status which is 6 semester hours Not appropriate if the parents intend to repay the loans

1031 rules

proceeds held by an escrow agent a replacement property must be identified within 45 days and purchased within 180 days of the sale date of the original property or the due (including extensions) of the tax return for the year the original property was sold. -the taxpayers basis in the original party and the holding period will carry over to the new property. - non like kind property received including cash is called 'boot"

Key documents

prospectus- must be issued prior to selling shares red herring- prelim prospectus issued before SEC approval. used to judge investor interest 10K- annual report of audited financial statements filed with SEC 10Q- quarterly report of un audited financial statements filed with the SEC Annual report- sent to shareholders. contains a message from chairman of board on the progress of last year and an outlook for the coming year.

Both Sharpe and Treynor

provide very similar results in the performance measurement of portfolio managers. In well diversified portfolios the result s are frequently identical. In poorly diversified portfolios the results of a comparison of Sharpe and Treynor can be significantly different in ranking the performance results of managers. Standard deviation is used for poorly diversified portfolios and beta is used for well diversified portfolios. For poorly diversified use Sharpe because it uses SD. For well diversified use Treynor because it uses beta Always choose the fund with the higher ratio whether treynor or sharpe because each measures return for unit of risk

Medicare Part B (doctor)

provides coverage for doctor visits, lab tests, ambulance, outpatient therapy, clinical research, durable medical equipment. i.e (wheel chairs, hospital beds, walkers, oxygen), mental health (inpatient, outpatient, partial hospitalization) getting a 2nd opinion before surgery and home health care. medicare part B covers an initial preventative visit and annual wellness visit. ***It does not cover: dental care, dentures, cosmetic surgery, hearing aids, eye exams** The insured is automatically enrolled in part B unless they opt out. The standard premium is $134 per month and its deducted from their SS. Higher premiums for single filers with income over $85k and MFJ $170k. The deductible is $183 per year and then covers 80% with no stop loss limit.

Medicare Part D (Drugs)

provides prescription drug coverage wide variation among plans, most have a deductible and co pays.

Mortgage backed securities are subject to the following risks

purchasing power risk, interest rate risk, prepayment risk, default risk

Predefined Quiz on fundamentals

quiz 1

Predefined fundamental quiz

quiz 4

Preliminary fundamentals quiz

quiz 5

Predefined fundamental quiz

quiz 6

Expected rate of return Formula is on exam sheet

r= D1/P +g P is market price

FINRA Financial industry regulatory authority

register with U-4 FINRA is self regulatory series 6 mutual funds, UITs, Variable life insurance and variable annuities, also need state insurance license for any variable insurance/annuity product series 7, can sell everything except commodities and futures FINRA requires all brokers to consent to arbitration if a client requests arbitration Required investor arbitration at FINRA if required by written agreement the dispute is with a member of FINRA which could be a broker and or brokerage firm and the dispute involves the securities business of the broker and/or firm

Valuation of insured losses- replacement cost and actual cash value (ACV)

replacement cost-the current cost of replacing property with new materials of like-kind ACV- is replacement cost minus depreciation of the cost of the original item ACV can impose serious financial burden on the insured Almost all auto policies are ACV.

Misrepresentation vs material misrepresentation

representation are statements made by the insured to the insurer during the application process. misrepresentations must be material to void a contract misrepresenting your age is not material. the benefits are adjusted to what the premiums should have been and how much you have paid thus the benefit amount is reduced if you understated your age

Ownership of S corporation stock is

restricted to individuals who are US citizens or residents, estates, certain trusts, and charitable organizations. A shareholder in an S corporation may vote to retain or revoke S corporate status, votes, receives an annual K-1 and reports their pro rata share of profit or loss on their personal income tax return.

Health insurance provisions

right to continue or discontinue the policy non cancellable- guaranteed right to renew until a specific age or a stated number of years. The insurer cannot raise premiums or cancel the policy. Guaranteed renewable- the right to renew is guaranteed until a specific age or stated number of years. The policy can not be cancelled, but premiums can be raised for a "class or group. All policies must now be guaranteed renewable under the PPACA (affordable care act) Group health insurance- employer provided health insurance is not taxable to the employee. The coordination of benefits clause prohibits insured collecting more than 100% of actual expenses incurred.

to avoid ADP and ACP test on a 401k plan, the sponsor can use the safe harbor feature

safe harbor: Employer must provide 1 of the following: 3% non elective contribution to all eligible ee's or matching contributions 100% up to 3% AND 50% from 3 to 5% OR they could do 100% up to 4%, ER contributions are immediately 100% vested

cash value life insurance policy sold to an unrelated party ??? cost of insurance vs premiums paid

sales price - basis( premiums paid) = ordinary income amount. sales price - basis - cost of insurance = capital gain + ordinary income amount

Universal Life B

same as Universal A except the death benefit fluctuates with the cash values B is more expensive than A because the death benefit is the death benefit + cash value

Weighted average Portfolio beta

same formula weighted average portfolio return just substitute beta for % return

Exchanges of stock for property

section 1032, sale of stock to investors is an infusion of capital and not subject to income tax

Conditional acceptance

signed policy and provide payment to agent, you are insured for life insurance as long as you are insurable (dont have a terminal disease, etc)

Involuntary conversions is destruction, theft, seizure, condemnation, or sale/exchange under threat of condemnation.

section 1033 permits but does not require non taxable treatment of gains if the amount of reinvestment property is => the amount realized. the new property only has to be equal to or greater in value, it can be 100% financed, etc.. no requirement to use cash received, etc. replacement property must be similar in FUNCTION or use and acquired within 2 years from the end of the year the gain is realized, i.e if sold on july 1, 2018, its 2 years from dec 31 2018. if condemned you have 3 years

related parties and 1031 exchanges

section 267by blood line or adopted or if a controlled corporation (taxpayer owns >50% of the equity interest) and corporations that are members of controlled groups Related party rules do not apply if either party dies before the sale or they can demonstrate to the IRS, tax avoidance was not a principal purpose

Non marketable US Treasury issues (not easily bought or sold) NOT taxable at state/local level

series EE bonds- sold at face value, $25 min purchase, $10,000 annual max, only available through treasury direct (online) non transferable, non marketable Bond principle slowly increases in value over 30 years based on fixed rate at time of purchase. Does NOT pay interest redeemable after 1 year with 3 month interest penalty if less than 5 years. Interest is not subject to federal taxes until bond is redeemed. May qualify for federal tax free treatment if redeemed for education expenses series HH bonds- pay interest semiannually Series I bonds - coupon (interest rate) adjusts for inflation. Sold at face value with no guaranteed rate of return interest portion has 2 components,1. a fixed rate of return,2. inflation component which is adjusted every 6 months

Holding period

short term gains (held for one year or less) are taxed at ordinary income rates, the day of disposition is included in the holding period but the day of acquisition is not

Income Contingent repayment

similar to pay as you earn except 20% of discretionary income with 25 year loan forgiveness

TEY

tax equivalent yield formula of the taxable security return divided by one minus the client's tax rate to arrive at the correct answer to this problem. TEY= (Tax Exempt Security yield ) ÷ (1 - the investor's marginal tax rate). include the state rate in the calculation of marginal rates if the municipal security is state tax-free in the state of issue if one is a resident of that state.

Random walk theory believes

the behavior of stock prices closely resemble a random walk. Prices of stocks are unpredictable but not arbitrary Its impossible its impossible to consistently achieve above average market returns At any given moment, prices that exist on securities are the best incorporation of all available info and a true reflection of the value of that security Prices are in equilibrium changes in price and volume are generated by the changing needs of investors

insofar as employment and production are concerned

the capital goods and consumer durable goods industries are most affected by a recession because they are cyclical and fluctuate directly with the economy and GDP

Dividend discount model aka Intrinsic value model Formula is on exam sheet

the constant growth dividend discount model values a company's stock by discounting the future stream of cash flows. V= D1/(r-g) r= required rate of return g= dividend growth rate D1= next period's dividend D1 is calculated using the current dividend and the dividend growth rate D1= Do (1+g)

When CFP exam asks about protecting profits or locking in gains

the correct answer is buying a PUT

SS Benefits can be paid too

the dependent parents of a deceased insured worker at age 62 or over

a taxpayer whom is claimed as a dependent will have a limited standard deduction

the dependents standard deduction is equal to or the greater of $1,050 or $350 plus earned income not exceeding the normal standard deduction ($12,000 for single). if the dependent is >= 65 and or blind, the standard deduction may be higher

first to die policy

the first to die life expectancy is less than the life expectancy of either person. money is for the survivor

Business assets

the gain or loss is usually a 1231 gain/loss when a taxpayer disposes of depreciable property (either 1245 or section 1250 property) at a gain, the taxpayer may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any remaining gain is a section 1231 gain

Basis of gifted property

the general rule is that the donee's basis in the gifted property is the same as the donor's basis. The first exception is when the FMV of the gifted asset is less than the donor's basis, the double basis rule is used. For gains the basis of the donor is also the adjusted basis of the donee. (no change in donor's basis) For losses, the basis to the donee is the FMV of the property on the date of the gift. if the asset is later sold by the donee and the amount realized is between the FMV at the time of gift and the adjusted basis of the donor, no gain or loss is recognized. the 2nd exception occurs when the gift tax has been paid. and the asset appreciated in the hands of the donor, then the portion of the tax which is associated with the appreciation is added to the donors basis to determine the donee's basis.

aleatory

the money exchanged may be unequal. i.e. small premium but large payout due to death

An increase in the excess reserve rate is contractionary because

the money supply goes down and interest rates rise

In general, the elements of a gift are:

the owner must have intent to make a voluntary transfer the donor must be competent to make the gift the donee must be capable of receiving the gift The donee must take delivery the donor must actually part with domain and control over the gifted property

Assignment

the owner transfers policy ownership to someone else -Absolute assignment- owner transfers all policy ownership rights -Collateral assignment- policy is used as collateral on debt which only assigns limited rights. Assignment automatically terminates when the debt is paid Most participating whole life policies use DIRECT RECOGNITION, which reduces the dividends and interest for the portion of the cash value used as collateral for loans

1031 income tax consequences summary

the party trading up recognized no gain and adds to their old basis any boot given to the other party -the party trading down will be required to recognize gain to the extent of boot received. if the boot received exceeds the gain, the amount of boot in excess of the gain is treated as return of capital and reduces basis in the new asset. -losses realized in a 1031 exchange are not recognized until the replacement property is sold. The basis in the replacement property equal FMV of the property received plus the disallowed loss - if either party disposes of the property received within 2 years, both parties are required to recognize any gain/loss that was not recognized in the year of the exchange on the date the property was sold.

Fundamental analysis

the process of conducting ratio analysis on the balance sheet and income statement to determine future financial performance and a forecasted stock price. Ratio analysis includes calculating liquidity, activity, profitability and common stock measurements FA also includes a look at economic data to determine how the economy will impact various industries. Economic data includes inflation, interest rates, GDP and unemployment FA believes that a stock price is largely driven by the financial performance of the firm FA assumes investors can determine reliable estimates of a stocks future price behavior. Some securities may be mispriced and through fundamental analysis, it can be determined which securities are mispriced

2018 standard deduction

the standard deduction is $24,000. which is 200% of a single tax filer. The maximum taxable income in the 22% bracket for MFJ filers will be twice the amount as for single filers.

Qualifying Relative as a dependent for the child tax credit Support test

the taxpayer must provide more than 50% of the support for housing, food, clothing, education, medical, etc. If the dependent earns income but does not use it for their own support the income is not included in the support test

the standard deviation of the returns of a portfolio of securities will be less than or equal to (depending on the correlation between securities)

the weighted average of the standard deviation of returns of the individual components

if the client has a whole life ins. policy with a death benefit on the spouse and a cash value with dividends used to purchase additional paid up life insurance and the spouse dies with the son as beneficiary

then a taxable gift of life insurance proceeds has been made from the client to the son.

When section 1245 property is sold

there are 4 possible results from a tax perspective. 1. if sold for an amount equal to its adjusted basis, there is no gain or loss or depreciation recapture thus no tax consequences. 2. property is sold for < adjusted basis, then tax payer will have an ordinary loss and will not have any depreciation recapture 3. property is sold for greater than the adjusted basis, but the amount does not exceed the amount of depreciation taken then the taxpayer will have a ordinary gain to the extent of the gain. 4. property is sold for more than the adjusted basis and their depreciation taken, in other words more than what they paid for it. they will have ordinary income to the extent of the depreciation taken and a capital gain on the additional amount. The only way to have a section 1231 gain on a section 1245 property is to sell it for more than you paid for it because any sell amount in excess of the original purchase price is of a section 1245 asset is a section 1231 gain.

Written request by the IRS is not considered a court order

thus its is not a valid reason to disclose confidential info

the duration of a bond is a function of

time to maturity, yield, coupon and price

Exceptions to the transfer for value rule

transferred to the insured, a business partner, a partnership of the insured, a corporation in which the insured is a shareholder or officer, as part of a divorce settlement, any transfer that results in a carry over of the basis.

Capital losses on small biz stock can be recategorized into

under IRC section 1244, a single taxpayer can deduct up to $50,000 ($100,000 for married filing jointly) of the loss on small business stock as an ordinary loss in any given year if -the stock represents ownership in a domestic corporation - the corporation was a small biz (< $1 mill in total capital contributions plus paid in capital as the time the stock was issued - The company was incorporated after November 6, 1978 - the loss was sustained by the original owner of the stock (the person whom the stock was issued by the corporation who is not a trust, estate or corporation. - the stock was issued to the original owner in exchange for money or property. services and other stock do not qualify. - for the 5 years prior to the loss, the corporation must have earned > 50% of its gross receipts from sources other than royalties, rents, dividends, interest, annuities and capital gains - any loss in excess of the per year limit is treated as a capital loss. Section 1244 does not apply to gains. any gains associated with section 1244 stock are treated as capital gains.

Workers compensation is an absolute form of liability, regardless of fault if injured at work, the employee will collect benefits

unemployment compensation insurance premiums is funded by a tax on employers. max # of weeks is 39 for periods of high unemployment, otherwise 26 weeks

Variable universal life (variable means no guaranteed returns, the insured takes on the investment risk and makes the investment decisions, mutual fund, etc)

universal life with investment options, stocks, etc no minimum guaranteed rate of return. it all depends on your investments cash value is invested in a separate account - not the insurers general account separate account is not an asset of the insurer if it fails.

Social Security benefits

up to 85% are taxable tax is based on taxpayers modified AGI (MAGI) For SS, MAGI is equal to the taxpayers AGI not including SS benefits received plus tax exempt interest, interest earned on savings bonds used for higher education, amounts excluded from the taxpayers income for employer provided adoption assistance, amounts deducted for interest paid for educational loans, amounts deducted as qualified tuition expense and income earned in a foreign country, US possession or Puerto Rico, that is excluded from income to calculate the taxable portion of SS benefits, MAGI plus 1/2 of of the taxpayers SS benefits must be compared to the following hurdle amounts Married filing jointly 1st hurdle $32,000, 2nd hurdle $44,000 all other taxpayers except MFS = 0 1st hurdle $25,000, 2nd hurdle $34,000 If MAGI plus 1/2 of SS benefits exceed the 1st hurdle but not he 2nd, the taxable SS benefits are the lesser of 50% SS benefits or 50% [MAGI+ .50(SS benefits) - Hurdle 1] if MAGI plus 1/2 the SS benefits exceed the 2nd hurdle, the taxable benefit is the lesser of 85% of SS benefits or 85% [MAGI + .50(SS benefits) - Hurdle 2] plus the lesser of $6,000 for MFJ or $4,500 for all others or the taxable amount calculated under the 50% formula and only considering Hurdle 1

If the CFP exam gives you combined fixed and variable expenses rather than non discretionary expenses,

use the combined fixed and variable expenses as a substitute for non discretionary expenses

Stocks that experience volatility with positive and negative returns

use the geometric average to determine their true returns. Geometric average for the negative number, subtract it from 100, so -5% return would be .95 and positive 12% would be 1.12

YTC (yield to call)

use the time periods until the bond is called not to maturity as N, and use the call price, not the par value as FV p/yr end mode +p/yr, PV, PMT, FV, I?

Net Present value (NPV)

used to calculate investments that will result in differing cash flows over the useful life or investment period NPV is deterministic. -If NPV is positive the investor should make the investment. If NPV is negative, the investor should not make the investment NPV= PV of cash flows- initial cost Hp calc year 0 initial investment is -..CFj year 1 is CFj year 2 is CFj if sold equipment in last year, add it to the last year cash flow amount I = discount rate of return gold NPV

Coefficient of variation

useful for determining which investment has more relative risk when investments have different average returns. Coefficient of variation tells us the probability of actually experiencing a return close to the return average. The higher the coefficient of variation the more risky the investment per unit of return CV= standard deviation divided by average return

Human value life insurance approach

uses projected future earnings less self-maintenance costs. use current earnings, future growth rate of earnings, number of years of work remaining, minus the cost of self maintenance and the discount rate N = number of years would have worked I= expected % return on investments / expected income growth rate ( 1+ investment % / 1+salary growth %) - 1 x 100 PMT is salary - self maintenance costs FV = 0 PV= ?

Bond reinvestment risk

usually the bond with the highest coupon has the most reinvestment risk if the matures are all similar

3 forms of EMH ( Efficient market hypothesis)

weak form- price reflects historical data and fundamental analysis and inside info give you an advantage. Weak form rejects technical analysis and asserts that fundamental analysis will give you an advantage Semi-strong form- price reflects public info and inside info gives you an advantage. historical and public info will not give you an advantage. Strong form- prices reflect all info and react immediately and their is no advantage gained by anything else.

A loss from a limited partnership in which there is no material participation is governed under the passive activity loss rules. Since there is no other passive activity income to offset the loss, the loss is not currently deductible. Option "II" - The same passive activity loss rules apply, and therefore, the loss is not currently deductible. Option "III" - Because she is a material participant in managing the S corporation, the losses are deductible. Option "IV" - Wages are always included in AGI. Option "V" - Dividend income unless excluded is included in AGI. $40,000 (wages) minus $3,000 (S corp loss) plus $1,200 (dividends) = $38,200.

what is her AGI

Losses generated on the sale or exchange of property used for personal purposes is disallowed for income tax purposes

when an asset is used for personal purposes, any loss incurred during the period of personal use is considered a personal loss and is not permitted as a tax deduction and will never be deductible and is a permanent loss of capital for the taxpayer

1031 "boot"

when boot is received, it must be recognized and will be taxable. if boot is received> than the gain realized, the remaining boot is not taxed but is treated as a return of basis - boot received in an exchange reduces the basis of the new property by the amount of the boot -Loss is not recognized on exchanges involving boot -mortgage relief is also considered boot

Life insurance proceeds

while life insurance proceeds to the beneficiary are tax free, if the proceeds are received in installment payments, any interest component of the payments is taxable to the beneficiary

Sale or exchange requirements

while obvious in many cases that a sale or exchange occurred, it is less obvious in cases such as natural disaster that destroy property cause a realization event for income tax purposes, since the gain or loss can be calculated (is permanently set aside). the loss may or may not be recognized at that time. a bankruptcy of a company could also cause a realization event.

Anything which causes production to improve (technology improves efficiency, good used in the manufacturing process become cheaper, more manufacturers enter the market)

will shift the supply curve down and to the right

YTM Yield to maturity

yield to maturity assumes the investor is able ti reinvest the coupons payments at the yield to maturity rate YTM is useful for comparing the return of different bonds end mode # gold P/YR (number of payment periods per year) #, gold xPyr aka N number of years # amount +- PV # PMT dollar amount per payment # FV solve for I/YR

medicare does not provide coverage for services received in a foreign hospital unless

you live in the US and the foreign hospital is closer whether an emergency or not. your are traveling through Canada from a us state going to Alaska and have an emergency and the Canadian hospital is closet

If you and client are unable to agree on assumptions, i.e. inflation, etc

you should limit the scope of the engagement and exclude any analysis which relies on the disputed assumptions

Family members are covered for part A auto liability when operating

your covered auto, rented auto, borrowed car

Obligations to CFP Board

• A certificant shall abide by the terms of all agreements with CFP Board. o Use marks appropriately CFP® Certificant, CERTIFIED FINANCIAL PLANNERTM • A certificant shall meet all CFP Board requirements, including continuing education Requirements. • A certificant shall notify CFP Board of changes to contact information within forty-five (45) days.• A certificant shall notify CFP Board in writing of any conviction of a crime, except misdemeanor traffic offenses or traffic ordinance violations within ten (10) calendar days unless drugs or alchohol are involved • A certificant shall not engage in conduct which reflects adversely on his or her integrity or fitness as a certificant, upon the CFP® marks, or upon the profession.

Information Disclosed to Clients

• A certificant shall not communicate any false or misleading information. • A certificant shall disclose: o An accurate and understandable description of the compensation including information related to costs and compensation and any other sources of compensation. o A general summary of likely conflicts of interest between the client and the certificant. o Any information that could reasonably be expected to materially affect the client's decision to engage the certificant. o Contact information and, if applicable, the certificant's employer. o These disclosures must be in writing. Form ADV shall satisfy the requirements of this rule. • The certificant shall timely disclose any material changes to the above information.

Obligations to Employers

• A certificant shall perform professional services with dedication to the lawful objectives of the employer/principal and in accordance with CFP Board's Code of Ethics. • A certificant who is an employee/agent shall advise his or her current employer/ principal of any certification suspension or revocation he or she receives from CFP Board.

Client Information and Property

• A certificant shall take prudent steps to protect the security of information and property, including the security of stored information, whether physically or electronically, that is within the certificant's control. • A certificant shall obtain the information necessary to fulfill his or her obligations. • Clearly identify the assets. • A certificant shall identify and keep complete records of all funds or other property. • A certificant shall not borrow money from a client. • A certificant shall not lend money to a client. • Exceptions to these rules include: o The client is a member of the certificant's immediate family. o The certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant. • A certificant shall not commingle a client's property with the property of the certificant. • A certificant shall not commingle a client's property with other clients' property. o Except as permitted by law and authorized by client • A certificant shall return a client's property to the client upon request as soon as practicable or consistent with a time frame specified in an agreement with the client.

Client Information and Property

• A certificant shall treat information as confidential except: o as required in response to proper legal process; o as necessitated by obligations to a certificant's employer or partners; o as required to defend against charges of wrongdoing; o in connection with a civil dispute; or o as needed to perform the services.

Candidate Fitness Standards

• Behavior that is "Presumed Unacceptable" and will Bar Certification (unless the individual petitions the Disciplinary and Ethics Commission) o Felony conviction of: ▪ Violent crimes other than murder or rape that occurred more than five years ago. ▪ Non violent crimes, including perjury within the last five years. o Revocation or Suspension of a non-financial professional license (real estate, attorney). - Exception: Not renewing a license by not paying the fee. o Two or more personal or business bankruptcies.

Taxation of Life Insurance

• Death benefits are generally excludable from taxable income. • Dividends earned on cash surrender value are generally not taxable until withdrawn. o Cash value is not taxable if withdrawn at death. • If an individual owns a life insurance policy on his or her own life, or if the proceeds of the policy are made available to the executor of his or her estate, the death benefit will be included in the owner/insured's gross estate, and may be subject to estate tax.

Taxation of Benefits Received During Life

• Dividends o Not taxable, considered a return of basis (or premiums). o If dividends exceed premiums, then the dividend is taxable. • Withdrawals o If the policy is a Modified Endowment Contract (MEC), then withdrawals & loans are taxed on a LIFO basis. ▪ A MEC is determined at inception of the policy if you pay faster than a 7 year corridor (7 pay test). A contract fails to meet the 7-pay test if the cumulative premiums paid at any time during the first 7 policy years exceeds the cumulative 7-pay premiums on or before such time being considered. Failure to meet the 7- pay test results in the contract being classified as a "modified endowment contract" for tax purposes. ▪ Taxed as ordinary income until cash value equals accumulated premiums ▪ MECs subject to a 10% penalty if withdrawals before the age of 59 1⁄2. o If not a MEC withdrawals are taxed on a FIFO basis. ▪ Loans are not taxable

Taxation of Benefits Received During Life for whole life policy

• If the insured surrenders the policy prior to death, the insured may take the cash value as: o Lump Sum ▪ The amount above premiums paid is ordinary income. o InterestOnly ▪ Interest is taxable as ordinary income. o Installment Payments ▪ Portion is a return of principal and interest. ▪ The interest portion is taxed as ordinary income.

Integrity

• Integrity demands honesty and candor which must not be subordinated to personal gain and advantage.

Competence

• Maintain the knowledge and skill necessary to provide professional services competently. • Competence means attaining and maintaining an adequate level of knowledge and skill, and application of that knowledge and skill in providing services to clients. • Competence also includes the wisdom to recognize the limitations.

NPV

• Net Present Value (NPV) is used in capital budgeting by managers and investors to evaluate investment alternatives. • NPV measures the excess or shortfall of cash flows based on the discounted present value of the future cash flows, less the initial cost of the investment. • NPV = Present Value of the Future Cash Flows - Cost of the Investment

Objectivity

• Objectivity requires intellectual honesty and impartiality. • Certificants should protect the integrity of their work, maintain objectivity and avoid subordination of their judgment.