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148 Cards in this Set
- Front
- Back
- 3rd side (hint)
The 6-steps of the Financial Planning Process are:
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1.Establish & Define Relationship
2.Gather data / get goals and objectives 3.Analyze Information 4.Develop Plan 5.Implement Plan 6.Monitor Plan |
EGADIM
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The 6-steps of the Financial Planning Process are:
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1.Establish & Define Relationship
2.Gather data / get goals and objectives 3.Analyze Information 4.Develop Plan 5.Implement Plan 6.Monitor Plan |
EGADIM
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The 7 Principles of Ethics and Prosessional Responsibility
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•Principle 1 – Integrity
•Principle 2 – Objectivity •Principle 3 – Competence •Principle 4 – Fairness •Principle 5 –Confidentiality •Principle 6 –Professionalism •Principle 7 – Diligence |
IOCFCPD
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What things are found on a balance sheet?
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Assets and liabilities at FMV (Full market value) / Net Worth
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What are the three types of assets in the Balance Sheet?
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1. Cash
2. Invested Assets 3. Use Assets (residence, furniture, autos) |
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What are the two catagories of liabilities listed in LIABILITIES on Balance Sheet
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1. Current Liabilities (credit card balances)
2. Long-term liabilities (auto loans, mortgages, life insurance loans) |
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What are examples of things that increase / decrease Net Worth on balance sheet?
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INCREASE
Shares of S&P 500 Index fund increse in value with market DECREASE Interest rates have a substatial increase and the client has a big bond portfolio |
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What are examples events which have NO impact (increase or decrease) of Net Worth?
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1. Paying off debt with cash (repayment of a loan using funds from a savings account)
2. Buying an asset with cash (purchase of an auto 75% financed and 25% down payment - addition of auto increases assets - 25% / down payment decreases cash - 75% / financing increases liabilities - again a wash |
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To determine if A / L should be on balance sheet it should have 3 characteristics:
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1. A/L fixed and determinable amount
2. Receipt or payment NOT contigent on occurence of particular event 3. Receipt or payment does NOT require future performance or service |
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Be familiar with examples of liquidity (in order of liquidity)
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1. Mutual Funds
2. Cash value life insurance 3. Real Estate residence 4. Jewelry keep in mind what kind of primary and secondary markets exist for each asset listed |
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Statement of Financial Condition (Balance Sheet).
Use specific date or range? |
Specific Date
At OR As of December 31, 2005 NOT Period beginning / ending Dec 31, 2005 |
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Cash Flow statement:
Specific date OR ranges? |
Ranges
Cash Flows are snapshots of ranges such as year or quarter |
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What are INFLOWS on Cash Flow Statements
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1. Gross Salaries
2. Interest Income 3. Dividend Income 4. Rental Income 5. Refunds due (Tax) 6. Other incoming tax flows 7. Alimony recieved |
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What are OUTFLOWS on a Cash Flow Statement
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1. Savings & Investment - by item
2. Fixed outflows (non-discretionary) 3. Fixed outflows (discretionary) 4. Variable outflows (non-discretionary) 5. Variable outflows (discretionary) |
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EXAMPLES of Fixed Non-discretionary outflows
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House payments
Auto payments Taxes |
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EXAMPLES of Fixed discretionary outflows
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Club dues
Utilities |
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EXAMPLES of Variable Non-discretionary outflows
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Food
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EXAMPLES of variable discretionary outflows
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Vacations
Entertainment |
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Inflows - Outflows =
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Net Discretionary Cash Flow
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What does a Pro forma statement do?
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forecasts future balance sheets and cash flow statements
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Budget: Adjustable or firm?
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a budget should be adjusted monthly
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important consideration in preparing a budget is:
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inflation
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Individuals close to retirement use budgeting to figure what out?
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the best wage replacement ratio for retirement
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Consumer Debt Ratio
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Consumer debt (credit cards, auto loans and the like) should not exceed 20% of net income (gross income - taxes)
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20%
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Housing Payment Ratio
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Monthly payments on a home (P, I, T, I) should be no more than 28% of gross income
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28%
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Total Payment Ratio
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total monthly payments on all debts should be no more than 38% of gross montly income
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38%
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Renters expense - less than?
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30% of gross monthly income
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30%
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Savings and Investment should equal at least:
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5% to 10% of gross income not including reinvested dividend and income
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Bankruptcy - Chapter 11
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Allowed to reorganize
Debtor remains in possession of assets subject to oversight of court |
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Bankruptcy - Chapter 13
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Allowed to set up repayment plan
Allowed to hold on to property as long as making regular payments file for 13 if faced with foreclosure debts that cannot be discharged through chapter 7 can be done through 13 |
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Bankruptcy - Chapter 7
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has to do with liquidation (voluntary or involuntary)
extinguishes debtors responsibility for DISCHARGEBL debt |
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What kind of debt is NOT dischargable through Chapter 7 bankruptcy?
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1. Back taxes (3 years)
2. Those based on fraud 3. Alimony & Child support 4. Student loans |
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Supreme Court ruled recently that creditors cannot take what kind of asset from debtors in bankruptcy?
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Retirement plan assets
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Lifetime Learning credit allows how much of a credit per return? (2006)
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up to $2,000 (20% of first $10,000)
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Lifetime Learning credit avaliable for what level of education?
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Available for all years of postsecondary education and for courses to acquire or improve job skills
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Lifetime Learning Credit avaliable for how many years?
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unlimited
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Lifetime Learning qualified expenses include tuition. What is not qualified?
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Books and supplies do not qualify unless condition of enrollment
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How much credit is avaliable for HOPE Scholarship credit? (2006)
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Up to $1,500 credit per eligible student
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HOPE Scholarship Credit how long can credit be taken? (2006)
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1st & 2nd year of undergrad studies
Must be enrolled at least part-time |
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Coverdell (ESAs) must be withdrawn by what age?
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30
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Coverdell (ESAs) maximum contribution amount?
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$2,000
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Savings Bonds interest exempt from what if used for qualified edu costs in same year cashed in?
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FEDERAL TAX - always excempt from State Tax
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Quanitative Data
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data tells you where the client is and what it will take to get him where he wants to go.
Fact finding interview |
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Qualatative Data
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data tells you why the client wants to reach the goal. Found using a gols and objectives interview
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Emergency Fund Planning: Marketability
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the ease with which an asset may be bought or sold
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Emergency Fund Planning:
Liquidity |
the ease with which assets can be converted into cash with little risk of principle
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Emergency Fund Planning:
Real Estate Is it liquid? Is it marketable? |
1) Considered illiquid because it may take a while to sell and asking price need to be lowered
2) Marketable because it is relatively easy to sell a house if priced below market value |
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Emergency Fund Planning:
Adequacy of reserves - One-income family? Two-income family? |
One-income family - 6 months
Two-income family - 3 months |
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What are the four life cycle phases?
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1) Accumulation
2) Consolidation 3) Spending 4) Gifting (may mirror spending phase) |
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Pell Grants
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1) given on basis of financial need
2) maximum of $3750 (undergrads only) |
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Federal Supplemental Education Opportunity Grants (FSEOGs)
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1) given on basis of financial need
2) max amount $4,000 |
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Perkins Loans
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1) funded by Feds, administered by schools
2) limit $4000 undergrads 3) limit $6000 grads 4) 5% w/ 9 mo grace period |
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CollegeSure CD
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1) Gauranteed to keep up with cost of college
2) Minimum 4% 3) if scholarship parents recieve $ back |
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Education Savings:
Ownership of assets - Financial Aid What is methodology for formula known as expected family contribution? |
Parents - as much as 47% of income - only 5.6% of assets
Students - 35% of assets |
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Section 2503(c) Minors Trust
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*Allows the transferred trust property to be treated as if it were a gift of present interest to child
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Why is a 2503(c) Minors Trust used?
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* Grantors income tax bracket is high and recipients tax bracket is low
* Grantor doesnt want an appreciated asset included in his gross estate |
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How is 2503(c) taxed?
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If income is distributed every year - tax to recipient
If income accumulates - taxed to the trust |
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Opportunity cost
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the cost of foregone income that results from making an economic decision to purchase a piece of equipment
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Margin cost
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the cost to produce one more unit of product
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Variable cost
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cost that fluctuate with some cost driver (e.g. units produced)
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Fixed costs
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costs that do not change as a result of producing additional units (e.g. rent)
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Cost of Capital
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internal measure of a companies borrowing cost from stockholders or outside creditors
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Law of demand
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the lower the price the more consumers will buy
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LAW OF DEMAND
As price of a product increases what happens |
consumer will be able to find more substitutes and will be more responsive to price when more viable substitutions are avaliable
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LAW OF DEMAND
What is the difference between Change in Demand vs. Change in Quantity Demanded? |
Change in deman is a shift in the entire demand curve
Change in quantity demanded is a movement along the same demand curve in response to a price change |
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LAW OF DEMAND
What are examples of Change in Demand? (shift in curve) |
Changes in:
Consumer income Consumer expectations Demographic Changes Consumer taste and preferences # of consumers in a market |
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LAW OF DEMAND
What are examples of Change in quantity demanded (movement along demand curve)? |
Gasoline consumption increases as some of the taxes on gasoline are lowered
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Law of Supply
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the higher the price the more producers will produce
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LAW OF SUPPLY
Elasticity: |
Supply curve is elisatic when a price change leads to a great change in quantity supplied (think of rubber band)
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LAW OF SUPPLY
Inelasticity: |
Supply curve is inelastic when a price change produces only a small change in supply (think of rubber band)
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LAW OF SUPPLY
Factors that SHIFT the supply curve include: |
(a) Changes in resource prices
(b) Changes in technology (c) Natural disasters (d) other disruptive events |
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LAW OF SUPPLY
An inferior good will have: |
negative income elasticity (as income increases, the quantity demanded will decrease)
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LAW OF SUPPLY
A normal good will have: |
positive income elasticity (as income increases, the quantity demanded will increase)
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Price controls
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the attempt to adjust the balance between supply and demand
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Market price
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the price at which a willing buyer and a willing seller acheive their objective
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Supply-side economics
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a belief that offering incentives to produce can accomplish stated results
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Monetary Policy
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The Federal Reserve Bank (Fed) controls the supply of money enabling it to significantly impact interest rates
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Who controls Monetary policy?
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The Federal Reserve (Fed)
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MONETARY POLICY
Easy Monetary Policy |
The Fed will follow a loose, or easy, policy when it wants to increase the money supply to EXPAND the level of income and employment
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MONETARY POLICY
Tight Monetary Policy |
In times of inflation and when its wants to contrict the supply of money, the Fed will follow a tight monetary policy
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MONETARY POLICY
The Fed has 3 methods of controlling the money supply: |
(1) Reserve Requirements
(2) Reserve Discount Rate (3) Open Market Operations |
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MONETARY POLICY
Reserve Requirements: |
Minimum amount that a bank is allowed to have in its reserves
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MONETARY POLICY
Open Market operation: |
Buys and sells government securities
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MONETARY POLICY
Reserve discount rate: |
Adjusts discount rate which is the interest rate chanrged to member banks when they borrow money from the FED
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MONETARY POLICY
Prime Rate |
THE FED DOES NOT USE PRIME RATE TO CONTROL THE MONEY SUPPLY
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MONETARY POLICY
EASY OR TIGHT? Reserve Requirements: |
Easy - when this ratio is lowered mony supplies increase
Tight - when this ratio increases money supplies shrink |
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MONETARY POLICY
EASY OR TIGHT? Open Market Operations: |
Easy - Buy Treasuries (more $ supply to street)
Tight - Sell Treasuries (less $ supply to street) |
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MONETARY POLICY
EASY OR TIGHT? Reserve discount rate |
Easy - lower rate
Tight - raise rate |
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Fiscal Policy
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influence taken by Federal Government to influence economy by raises and lowering government spending and taxes
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FISCAL POLICY
Expansionary fiscal policy = |
Increase spending and lower taxes =
Increased GDP and price levels |
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FISCAL POLICY
Restrictive fiscal policy = |
Decrease spending and raise taxes =
Lower GDP and price levels |
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FISCAL POLICY
Deficit spending |
occurs when expenditures exceed revenues of the govt.
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FISCAL POLICY
Effects of deficit spending: |
by selling securities to public to finance deficits, Treasuries compete with other securities (drives prices down - decrease in price causes yields to rise)
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SUPPLY OF MONEY
M-1 |
1) currency in circulation
2) checkable deposits 3) Traveler's checks |
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SUPPLY OF MONEY
M-2 |
1) includes everything in M-1
2) plus savings deposits 3) plus time deposits less than $100k 4) plus money market mutual fund shares |
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SUPPLY OF MONEY
What happens if individuals shift money from savings accounts to checking accounts? |
money supply is increase in norrow M-1
but unaffected under more braod M-2 |
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The National Bureau of Economic Research (NBER) tablulates a series of economic indicators. The 10 leading indicators are
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1) Stock prices (S&P 500)
2) Average weekly work hours 3) Average unemployment claims 4) Manafacturers new consumer goods orders 5) Manafacturers new orders for non-defense capital goods 6) Vendor performance (companies recieving slower deliveries) 7) New building permits 8) Interest rate spread (difference between the 10yr Treasury and Fed Funds rate) 9) Inflation-adjusted M-2 10) Consumer expectations from Univ of Mich |
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BUSINESS CYCLE THEORIES
Peak: |
1) accompanied by increased rate of inflation
2) results in a period of rising unemployment 3) declining naitonal output |
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BUSINESS CYCLE THEORIES
Recession: |
period when Real GDP decliens for two more more successive quarters
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BUSINESS CYCLE THEORIES
Depression: |
Depression is a prolonged and very severe recession
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BUSINESS CYCLE THEORIES
What is the most common means of measuring economic activity |
GDP
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BUSINESS CYCLE THEORIES
What do most economists use to determine the phase of the business cycle? |
unemployment rate
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CPI (Consumer Price Index)
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calculated by Bureau of Labor Statistics
Measures the cost of a basket of goods and services over time |
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PPI (Producers Price Index)
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calculated by US Dept of Labor
measures wholesale cost of goods over a period of time |
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Disinflation
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manifested when the rate of inflation decreases; prices are still rising, but at a slower pace
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Recession
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Real GDP declines for two more more successive quarters
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What will the Fed do to try to get economy out of recession?
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Put more money into circulation and expand the supply of credit
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What will Federal Govt do to get economy out of recession?
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Expansionary policy = increased spending - lowering taxes
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What kind of assets should one obtain during inflationary times?
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AVOID - interest-sensitive securities and long-term debt instruments
ACQUIRE - short term instruments (US Treas) / common stocks of firms with real assets (oil, metal, and land companies) |
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What kind of assets should one obtain during inflationary times?
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AVOID - tangible asset prices will decline (real estate, collectibles and precious metals)
ACQUIRE - short-term liquid assets (conservative) / Long term debt not too bad (agg) ONLY PURCHASE HIGHT CREDIT QUALITY - many go out of business |
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The Yield Curve
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Graph showing the relationship between term to maturity and yield to maturity
(relationship between interest rates and time) |
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BUSINESS ORGANIZATIONS
Sole Proprietorship |
Business owned by an individual who is personally liable for the obligations of the business
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BUSINESS ORGANIZATIONS
Sole Proprietors: Special forms needed to start SP / special tax forms to file? |
No special forms to file
Files a Schedule C with tax forms |
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BUSINESS ORGANIZATIONS
General Partnership - Liabilities (tort brought) |
If a tort is brought against the partnership all partners are jointly and severally liable
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BUSINESS ORGANIZATIONS
General Partnership - Pay of GP's |
Not entitled to Salary - entitled to a share in the profits
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BUSINESS ORGANIZATIONS
General Partnership - GP's commings and goings: |
Unanimous consent of all partners for admission
Partnership dissolved if: Partner dies Goes bankrupt Dissolved by termination provision |
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BUSINESS ORGANIZATIONS
General Partnership - Tax forms required: |
For 1065 to establish
Schedule K-1 for each partner yearly |
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BUSINESS ORGANIZATIONS
Limited Partnership - How organized: |
One GP and at least one other LP
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BUSINESS ORGANIZATIONS
Limited Partnership - What is role of LP? (3) |
1) Cannot participate in managing business
2) no authority to bind business 3) cannot use last name in name of partnership |
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BUSINESS ORGANIZATIONS
Limited Liability Partnership - (LLP) |
1) usually professional partnership (CPA, atty)
2) partners limited liability except personally to malpractice |
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BUSINESS ORGANIZATIONS
Limited Liability Company - (LLC) |
1) owners (members) have limited liabilities for debts and claims of business even while participating in mgmt.
2) some states prohibit single member LLCs |
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BUSINESS ORGANIZATIONS
Limited Liability Company - (LLC) - LLCs can be taxed as any of the following: |
1) Sole Prop
2) Partnership 3) S Corp 4) C Corp |
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BUSINESS ORGANIZATIONS
C Corp May be required to pay one of the following taxes in addition to regular federal income tax: |
1) Personal holding company tax
2) Accumulated earnings tax |
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BUSINESS ORGANIZATIONS
S Corporation - Definition: |
Corporation with LESS THAN or EQUAL TO 100 shareholders
1) All individuals (US no aliens) 2)Certain estates or trusts 3)NO partnerships or corporations as shareholders 4) no more than one class of stock |
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BUSINESS ORGANIZATIONS
S Corporation - Taxation: |
1) IRS treats shareholders as partners
2) pro rata shares / flow through 3) avoid double taxation |
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BUSINESS ORGANIZATIONS
Professional Corporation (PC) Definition: |
1)Similar to commercial corperation - ownership is restricted to members of a certain profession
2) Continuity beyond death - trasnferred shares or bought up by PC |
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BUSINESS ORGANIZATIONS
Professional Corporation (PC) Liability? |
Big advantage is that all members retain limited liability for own actions as well as for those of people directly under their supervision
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SELECTION OF BUSINESS
When to use Sole Prop: |
1) Single owner in state that does not permit single member LLC
2) when adequate liability insurance is avaliable at acceptable cost 3) owner not concerned with transferring future interests |
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SELECTION OF BUSINESS
When to use GP: |
1) in start-up losses can be passed through to partners without being restrictions of C Corp. Income, gain, loss and deductions are passed through to partners
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Federal Truth-In-Lending Act (Consumer Credit Protection Act) is administered by:
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The Federal Reserve board
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Fair Credit Billing Act ammends what older Act?
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The Truth-In-Lending Act
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Equal Credit Opportunity Act:
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Prohibuts discrimination based upon:
1) race 2) religion 3) national origin 4) color 5) sex 6) marital status 7) age 8) receipt of certain types of income |
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Investment Advisers Act of 1940
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Easy as "A-B-C"
Requires registration with SEC if: A) Advice B) in the Business C) Compensation ALL ELEMENTS MUST BE PRESENT |
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Investment Advisers Act of 1940 (EXCEPTIONS)
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1) Bank or holding company that is not investment comp.
2) lawyer, accountant, engineer, or teacher when advisory services are incidental 3)publisher of bona fide newspaper 4)only give advise on govt securities |
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SEC Release #IA-770
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Reaffirmed Investment Advisers Act of 1940
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Registered Investment Advisors (RIAs)
Obligations: |
1) Disclose conf of interest
2) Fiduciary status 3) Performance fees only if managing $750k of clients assets or NW over $1.5 Million 4) Brochure rule (deliver 48 hrs) DO NOT USE INITIALS RIA |
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Insider Trading & Securities Fraud Enforcement Act of 1988
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Amended Advisers Act of 1940
1) prevents misuse of material 2) non=public information by reg IA or anyone associated with him |
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NASD Rules of Fair Practice
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Prohibits reg rep from engaging in a private securities transaction (cant sell away for compensation)
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National Association of Securities Dealers (NASD)
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1) NOT ASSOCIATED WITH SEC
2) Started by securities industry in attempt to regulate self 3) anyone selling stocks, bonds, etc. must register with NASD (File U-4 and pass NASD exams) |
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NASD Exams
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All the series 3, 6, 7 ...
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Consumer Credit Protection Act
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1) must give "true" rate - APR
2) max liability for stolen CC - $50 3) 3 day right of recission |
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Kiddie Tax
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Unearned income in excess of $1,700 per year (2006) of a child under 14 is taxable at parents top rate
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GDP =
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GDP = C + I + G + Xn
C = Consumption I = Investment G = Govt Spending Xn = Net exports (Exports - Imports) |
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Definition of GDP
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the total MARKET VALUE of all FINAL goods and services PRODUCED in an economy in one year
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Securities Act of 1933
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Primarily concerned with new issues of securities (IPOs)
Also prospectus |
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Securities Act of 1934
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Establishment of SEC
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Glass-Stegall Act (1933)
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prohibited commercial banks from acting as investment bankers
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Gramm-Leach-Bliley Act (1999)
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Repealed most of Glass-Stegall
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