NOVEMBER CFP BOOK 1

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283 Terms

1
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What is a balance sheet?

Snapshot of where a client is financially at a point in time

2
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What is another name for balance sheet?

Statement of financial position

3
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Why aren’t life insurance cash values included as part of the investment assets or emergency fund?

There can be a 6 month delay in accessing cash value

4
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How are use assets valued on the balance sheet?

Current FMV

5
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Example of short term liability

Debt without schedule

credit cards or personal loans/lines of credit

6
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What time period should a budget cover?

12 months or shorter (especially if annual income and expenses cannot be estimated)

7
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What is the top tier priority in the financial planning process?

Establish positive cash flow

8
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How to improve cashflow?

Examine overspending

Earn more money

Renegotiate debts

Increase deductible (lowers premium)

9
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What should emergency fund be able to pay for?

3-6 months of real estate taxes, fixed and variable expenses, EXCLUDING federal taxes

10
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How many months should an emergency fund be?

Should have current months expenses in checking account (so total 4-7 months)

11
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If trying to pay down debt, what should be paid down first?

Highest interest rate paid first

12
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What should housing expense be (PITI or rent)?

</ 28% gross income

13
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What should total debt be?

</ 36% gross income

14
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What should consumer debt be?

</ 20% net income

15
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What does it mean if debt management ratios are exceeded?

Client struggling to maintain positive cash flow

16
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How much should be saved from gross income?

5-8% but more is better

17
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What is current ratio?

CA / CL

18
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What is a current asset?

Cash equivalents, marketable security, accounts receivable, and inventory

19
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What is current liability?

Accounts payable, credit card debt (even if paid off monthly), taxes payable (if due soon), mortgages (only if specifies payment due)

20
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What is a marketable security?

Assets easily bought and sold on public markets

21
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Examples of marketable security

Stocks, bonds, T-bills, preferred stock

22
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What is a marketable debt security?

Expected to be sold within 1 year

If not, it’s considered a LT investment

23
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What is the quick ratio formula?

cash equivalents/marketable securities/accounts receivable / CL

Removes inventory

Better for businesses

24
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What does it mean if the quick ratio or current ratio is < 1?

Signals financial issues over the ST

25
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Are income taxes and FICA included in fixed/variable expenses?

NO

26
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Should you include federal taxes into your emergency fund equation?

NO

27
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What is the purpose of a bank?

Financial intermediary

28
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Who oversees federal/nationally chartered banks?

Comptroller of currency, Fed, FDIC

29
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Who oversees a state chartered bank?

Regulatory authority of the state, FDIC

30
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Single CD $100k

Single Savings $200k

IRA $300k

How much is FDIC coverage for me?

$250k aggregate for single CD and savings

$250k for IRA

Coverage per titling, not per account

31
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Joint Savings with daughter $100k

Joint Savings with son $100k

Joint Checking with spouse $350k

How much is FDIC coverage for me and overall?

Me: $50k, $50k, and $150k because joint accounts are aggregated to a $250k limit

My spouse would get the full $175k from our joint account

32
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What is the function of a mutual fund company?

Investment company that raises money from investors and invests it into stocks, bonds, options, commodities, or money market

33
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What is the benefit of a mutual fund?

Diversification and professional management

34
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Who regulates mutual funds?

SEC

35
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What’s in a mutual fund prospectus?

I imagine riding majestic purple dragons and flying fast

I - investment strategies

Imagine - investment objectives

Riding - risks of investing

Majestic - may not include forward projections

Purple - past performance

Dragons - distribution policy

Flying - fees and expenses

Fast - fund management

36
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What is a trust company?

Organization which is engaged as a trustee, fiduciary, custodian, executor, personal representative or agent for individuals to handle the administration of trusts, wills, estates and custodial arrangements

37
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Who regulates trust companies?

State law

38
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Another name for Securities Act of 1933

Primary Act, Paper Act, 1st Act

39
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What is the Securities Act of 1933?

Requires purchasers of new issues be provided with a detailed prospectus before a transaction

40
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Another name for Securities Act of 1934

Secondary Act or People Act

41
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What is Securities Act of 1934?

Regulates the secondary market (trading of issued securities) and created the SEC to enforce securities laws

SECond Act, SECondary market, SEC

42
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What is the Investment Company Act of 1940?

Authorized the SEC to regulate UITs, manage investment companies (open and closed end funds), variable life insurance and variable annuities

43
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What is the Investment Advisors Act of 1940?

Also called 40 Act

What is considered investment advice

Who must register with state and federal regulators to deliver such advise

44
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What is the Securities Investors Protection Act of 1970?

Established SIPC to supervise securities firms that get into financial difficulties from the failure of brokerage firms

45
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Who does FDIC and SIPC coverage apply to?

Both foreign and domestic citizens investing in any US bank or investment company

46
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What is supply?

Amount of good or service that producers are willing to sell

47
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What does supply depend on?

Price, cost of production (labor costs), level of technology

48
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What is demand?

Amount of good or service that buyers are willing to purchase

49
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What does demand depend on?

Its price, prices of other goods (especially substitute goods), consumers’ income and taste

50
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Initial claims for unemployment insurance

Leading

51
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New manufacturing orders

Leading

52
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New private housing units

Leading

53
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Stock prices, 500 common stocks

Leading

54
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Index of consumer expectations

Leading

55
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Average weekly hours for production workers in manufacuring

Leading

56
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Vendor performance measured as a percentage of companies reporting slower deliveries

Leading

57
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Contracts and orders for plants and equipment

Leading

58
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Interest rate spread

Leading

59
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Money supply

Leading

60
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Number of employees on non-ag payrolls

Coincident

61
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Personal income less transfer payments (social security, welfare)

Coincident

62
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Industrial production

Coincident

63
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Average duration of unemployment

Lagging

64
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Average prime rate charged by banks

Lagging

65
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Commercial and industrial loans outstanding

Lagging

66
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Ratio of consumer installment credit outstanding to personal income

Lagging

67
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Change in the CPI for services

Lagging

68
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What is CPI?

Market basket of selected goods and services in various cities across the country

69
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What is CPI-U?

Number reported on news and reflects inflation for all urban consumers

70
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What is CPI-W?

Statistic for urban wage earners and hourly workers

71
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What is social security adjustment tied to?

CPI-W

72
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What are the categories of CPI?

FART HOME

Food and beverage

Apparel

Recreation

Transportation

Housing

Other goods and services

Medical care

Education and communication

73
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What does the business cycle reflect?

Movements in economic activity as defined by changed in real GDP

74
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What outperforms at a trough, right before the economy begins to recover?

Cyclical

Purchases of these items are deferred during a contraction

75
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What are defensive industries?

Little sensitivity to business cycle - recession proof

Food producers, pharmaceuticals and public utilities

76
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What are durable goods and what do they include?

Goods that do not quickly wear out

Cyclical

Cars, appliances, home furnishings, recreational items, toys

77
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What are nondurable goods and what do they include?

Consumables are defined as goods that are used up when used once or have a short life span

Not affected by recession

Cosmetics, food, fuel, paper, plastics, clothing, footwear

78
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During a trough, what is the stock market doing?

Rising bull market

79
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During expansion, what is the stock market doing?

Top of bull market

80
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During a peak, what is the stock market doing?

Falling bear market

81
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During contraction, what is the stock market doing?

Bottom of bear market

82
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What industries outperform during trough?

Technology, basic materials, industrials

83
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What industries outperform during expansion?

Basic materials, energy, consumer staples

84
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What industries outperform during peak?

Energy, consumer staples, healthcare

85
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What industries outperform during contraction?

Financials, technology, consumer cyclicals

86
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What does GDP measure?

US economy’s total production of goods and services

Dollar value of all final goods and services newly produced within the country’s boundaries

87
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How is GDP calculated?

By the sum of consumption, plus govt spending, plus investments into the economy plus net exports

88
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What is the most important element of GDP and how much does it consist of?

Consumer spending 70%

89
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What is the difference in nominal GDP and real GDP?

Real GDP takes price inflation into account

90
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What is a recession?

At least two consecutive quarters of decline in real GDP

Significant decline in economic activity spread across the economy, lasting more than a few months

91
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What is a depression?

Severe or long recession (6 quarters)

92
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Who controls fiscal policy?

Congress

93
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What does fiscal policy represent?

Federal taxation and spending

Designed to level out the business cycle and achieve full employment, price stability and sustained growth of the economy

94
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What is the objective of fiscal and monetary policy?

Stable domestic economy with steady GDP growth

95
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Who controls monetary policy?

The Fed

96
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What are tools of monetary policy?

Reserve requirements

Discount rate

Open market operations

Margin

97
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What is the prime rate?

What the bank may offer their best clients for loans

98
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What is the fed funds rate?

Rate banks charge other banks to meet reserve requirements

99
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Who sets the fed funds rate?

Banks

100
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What does increasing the reserve requirement do to credit?

Tightens credit