Personal Financial Planning Final

Safe investment choices

Savings accounts

Bonds

CDs

Money market funds

Risky investment choices

Options

Stocks

Real Estate

Commodities

Mutual funds/ETFs (least)

Reasons to invest

Investment growth

Income (dividends, interest, rents, etc)

Calculation for your risk tolerance

100% - ur age = % of money in high risk investments

Rate of return

net income of investment/cost of investment

annual rate of return

(net income of investment/cost) / # years

Risk factors for investing

Inflation Risk

Interest Rate Risk

Business Failure Risk

Market Risk

Global Investment Risk

When interest rate increases, bond prices [increase / decrease]

decrease

Asset Allocation

When investments use dif asset categories (ex bonds and real estate)

Asset Diversification

When investments diversify within asset categories (ex Bonds: corporate, govt, municipal)

Taxes for the interest income of municipal bonds

Maybe state taxes, no federal

Taxes for the interest income of govt bonds

Only federal

Capital gains tax rates

0%, 15%, or 20%

Taxable income =

Net capital gains + ordinary income

Net capital loss deduction limit

$3,000 per year, rest can be rollover into next year

Why do corporations issue common stock

Raise capital

Equity that doesn’t have to be repaid

Why do investors purchase common stock

Dividend income

growth/appreciation

Blue chip stocks

safer stocks

Cyclical stocks

Stocks that follow the advances and declines of the economy

Defensive stocks

Stocks that provide consistent dividends/stable earnings during declines in the economy

Growth stocks

Stocks with potential to earn profits above average stock profits in the economy

Income investment

An investment that pays higher than average dividends

Capitalization

number of shares outstanding x market price of the stock

Large cap stock

Stock with market capitalization > $10B

Mid cap stock

Stock with a market capitalization between $2B and $10B

Small cap stock

Stock with a market capitalization between $300M and $2B

Micro cap stock

Stock with a market capitalization < $300M

Penny stock

Stock that sells < $5 per share

EPS

Earnings per share

Net income / number of shares outstanding

PE ratio

Price to earnings ratio

Stock price / EPS

Stock price / (net income/number of shares outstanding)

Dividend yield

$ annual dividend / stock price

If stock price decreases, dividend yield [increases / decreases]

increases

Market Order

To buy stocks at the current market price

Limit Order

To buy stocks at a lower price than mkt value, only executes if the stock hits that price

Sell limit

To sell a stock higher than the mkt price, only sells if it hits that value

Stop order

Buy at a higher price, hope it goes down and ‘chase’ it. If it goes up to price, it gets bought

Sell stop

Sell at a lower price, hope stock price increases, chase the price. If it does go down, you sell it

Buy + hold strategy

Buy a stock and hold it

Long term investment strategy

Dollar cost averaging strategy

Invest a certain $ amount regularly, likely a dif amount of shares each time

Long term strategy

Dividend reinvestment plan strategy

Reinvest dividends

Long-term strategy

Day-trading strategy

Don’t own stock overnight

Short term strategy

Buying on margin strategy

Buy stock with borrowed money

Lets you buy 2x the amount of stock

Short-term strategy

Selling short strategy

When you expect the price to go down

Borrowing stock, selling it, then when the price decreases, buy it again at the cheaper price and give it back to the person. Profit if price went down

Short-term strategy

Call option strategy

When you think the stock price will increase

Contract that allows the holder to buy an asset at a stated price (strike price) within a timeframe

Maximum loss is the premium, unlimited gain potential

Short-term strategy

Put option strategy

When you think the stock price will decrease

Contract that allows the holder to sell an asset at a stated price (strike price) within a timeframe

Short-term strategy

Why invest in bonds

Interest income (sometimes taxable)

Appreciation (if interest rates down, bond prices up)

Repayment at maturity

When are bonds sold at a discount

when the rate is < mkt rate

When are bonds sold at a premium

When their rate is > mkt rate

Municipal bond income taxability

No federal, no state(usually)

Corporate bond income taxability

Both federal tax and state tax

Federal bond income taxability

Yes federal, no state (if same state)

Why invest in mutual funds

Professional management

Diversification (over 10k you can invest in)

Open end mutual fund

Shares are issued + redeemed by the investment company at the net asset value

Not traded intraday

Net asset value

(portfolio value-liabilities) / # shares

only for open-ended

Closed end mutual funds

Shares issued only when fund is organized

Traded intraday

<10% of all funds

Exchange traded funds (ETF)

Tracks an index

Traded intraday

Closed ended

Most mutual funds are [open ended / closed ended]

Open ended (>90%)

Aggressive growth funds

Stocks in small, fast growing companies

Equity income funds

Stocks in companies w/ history of dividends

Global vs Int’l funds

Global - includes US

Int’l - outside of US

Growth funds

stocks expecting higher than avg return

High yield bond funds

AKA junk funds

high risk, high yield

Money market funds

Invest in CDs, govt securities, other safe/highly liquid investments

Direct real estate investments

Principal residence

Vacation home

Investment property (Land, commercial, residential)

Indirect real estate investments

Partnerships (general-debt guaranteed by partners, limited-liability in limited)

LLCs

Real Estate Investment Trusts

Corporate stock

Mutual funds

ETFs

Why invest in real estate

Financial leverage (using bank’s $ to control it)

Hedge against inflation

Easy entry (indirect ownership)

Limited liability (indirect ownership)

No management concerns (indirect ownership)

Disadvantages of owning real estate

Illiquidity

Declining property values potentially

Long depreciation periods (slower tax deductions)

Management problems (direct ownership)

Lack of a tax shelter (no loss deductions on income unless rental real estate)

Depreciation periods for residential vs commercial buildings

Residential-27.5 years

Commercial-39 years

Rental real estate loss deductions

up to 25k

phaseout AGI 100k to 150k

straight line depreciation

cost/# years = depreciation per year

Qualified personal residence trust

Removes appreciation from your estate

May still pay gift tax

Set a term for how long you have the right to live in property for, then goes to beneficiary

Irrevocable

If you die before term ends, propert goes back into estate including all appreciation

Property loss protection

Covers physical damage from fire, smoke, water

Covers loss of use due to robbery, vandalism

Liability protection

Covers negligence resulting in another’s bodily injury or property damage

Homeowners insurance

House + other structures

Additional living expenses

Personal property (floater/rider comes seperate)

Personal liability (injury/damage to others

Renter’s insurance

Personal property protection

Additional living expenses

Personal Liability coverage

Factors affecting home insurance costs

Location

Policy type (replacement value vs actual cash value)

Deductible (higher is cheaper)

Group policy (cheaper)

Motor vehicle bodily injury coverage

Bodily injury liability - your fault, for medical, legal, lost wages

Medical payment coverage - injuries in your vehicle, you too

Uninsured motorists protection

underinsured coverage

Motor vehicle property damages coverages

property damage liabilities - your fault

collision coverage - not your fault

comprehensive physical damage coverage - damage not caused by an accident

what is 100/300/50 auto liability coverage

100k max to one person in an accident (bodily injury coverage)

300k max to all people in an accident (bodily injury coverage)

50k max for other’s property damage in an accident (property damage coverage)

Group insurance accounts for what % of all issued health insurance

90%

Tax deductions for medical insurance premiums

If an employee - excess of over 7.5% AGI

If self-employed - 100% deductable

Health maintenance organization vs preferred provider organization

HMO-lower premiums, low or no deductible, must select PCP, referrals required for specialists, only within network

PPO-higher premiums, have a deductible, no referral needed, don’t need to select PCP, some out of network coverage

Disability income insurance

Income if you become disabled

Types of life insurance

Whole life - covered till death, expensive

Term - covers for a specific time period

Multiple of income method for life insurance needs

salary x # years to cover

Easy method for life insurance needs

Salary x 4.9

(70% * 7)

Dual Income No Kids method for life insurance needs

Couple’s liabilities x 50%

Nonworking spouse method for life insurance needs

Cost of daycare x # years till all children 18 yrs

Family needs method for life insurance needs

((#years income lost x income) + funeral cost + debt payoff + nondaily expenses) - assets

Which mutual fund uses net asset value

Open-ended