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159 Cards in this Set
- Front
- Back
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5 c's of credit
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1. character - honest, reliable
2. capital - net worth 3. capacity - income 4. collateral - assets 5. conditions - economic environment |
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the financial planning process
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1. establish relationship with client
2. gather data 3. analyze & evaluate FP recommendations 4. develop & present FP recommendations 5. implement FP recommendations 6. monitor the FP recommendations |
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after-tax return
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the return on investments after applicable income taxes are subtracted
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special needs financial plan
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one goal/one objective
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aggressive growth fund
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a mutual fund that invests primarily in stocks of companies that put all or most earnings back into company, producing little income
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comprehensive financial plan
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includes all aspects of a client's financial situation:
-risk management -investment planning -tax planning -retirement planning -estate planning |
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amortization
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reduction of debt by regular, periodic payments of interest and principal sufficient to pay off a loan by maturity.
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types of financial plans
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1. comprehensive
2. special needs |
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analysis of financial statements
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evaluate the following:
emergency fund debt level savings pattern asset diversification retirement planning income tax issues other |
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SMART goals
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Specific
Measurable Attainable Realistic Time Bound |
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asset allocation fund
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a mutual fund that invests in different types of assets to create a diversified portfolio of investments
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cfp board's seven principles of conduct
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1. integrity - honesty, candor
2. objectivity - impartiality 3. competence - education, keeping up with ce requirements 4. fairness - disclosure of conflicts of interest 5. confidentiality - privacy 6. professionalism - prompt, courteous 7. diligence - complete in timely manner |
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asset allocation strategy
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the key to investment diversification; a strategy to invest in different types of assets that move in different ways from others in the portfolio
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duties owed the client
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1. fiduciary duty - good faith and full disclosure
2. prudent investor rule - must invest with prudence 3. duty to disclose - disclose conflicts of interest, material facts 4. duty to diagnose - duty to diagnose before making recommendations 5. duty to consult - consult other professionals when needed 6. duty to keep current - keep current, continuing education |
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asset combination fund
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a mutual fund that combines different types of assets, such as stocks and bonds, within one fund
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balance sheet
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statement of financial position
(as of a certain date) fair market value of assets |
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balanced mutual fund
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a mutual fund that invests in stocks, preferred stocks and bonds. investment objectives are security of principal, reasonable income, and long-term capital appreciation
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net worth
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the amount by which assets exceed liabilities. this term can be applied to companies and individuals
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basic liquidity ratio
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cash & liquid assets/monthly expenses
after-tax dollars |
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purpose of net worth statement
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to provide a snapshot of a person's financial status as of a certain date
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bearer bond
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a bond that has coupons attached that the investor must
physically remove and mail or bring to the issuing company to receive interest payments. the bond is not registered in the owner’s name |
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purpose of cash flow statement
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to summarize inflows and outflows over a certain past period
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beta
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a measure of the volatility of an asset relative to the volatility of an index. only measures systematic risk.
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blue chip stock
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stock that is issued by major, well-established companies. blue-chip stock has a long record of earnings growth and dividend payments in both good and poor economic conditions
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liquidity
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the ability to sell out of something quickly and easily
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bond
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a debt of the issuer that is a legal obligation to pay principal and
interest when due |
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budget
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pro forma cash flow statement
purpose: to project income and expenses over a fixed period of time. benefits: help people spend more wisely, live within means, plan for emergencies |
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liquid asset to net worth ratio
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liquid assets/net worth
15% or higher |
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business risk
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the uncertainty of investment returns resulting from the nature of a business or the industry in which it operates.
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savings ratio
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savings and investments/total income
gross income 10% or higher |
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calculator map
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determine if beginning or end
c n i pv pmt fv |
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debt to asset ratio
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total debt/total assets
50% or lower |
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call
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if a bond is callable, the issuer has the right to redeem the bond before maturity at a predetermined amount
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debt service ratio
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annual debt repayments/annual net income
35% or lower |
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call option
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a contract that gives the holder the right to buy or sell a security at a set price (strike price) within a set period of time.
buy a call when you expect the stock price to go up. |
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non-mortgage debt service ratio
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annual non-mortgage debt repayments/annual net income
15% or lower |
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capital gain
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an excess of the sale price of and asset over it's basis (generally the purchase price)
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net investment assets to net worth ratio
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net investment assets/net worth
50% or higher |
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capital loss
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an excess of the basis in an asset over its sale price
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cash flow statement
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fixed and variable outflows/Inflows over a period of time (usually one year)
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types of credit
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1. installment - mortages (fixed, conventional, govt, arm), auto loans, student loans
2. revolving - credit cards, overdraft protection |
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certificate of deposit (cd)
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a fixed-income investment available through banks, savings & loans. interest rates and maturities are fixed.
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chapter 7
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full bankruptcy
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chapter 13
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bankruptcy with repayment
freeze debt level pay back most/all debt |
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rule of 72
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The number 72 is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling
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inflows on a cash flow statement
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dollars received (from salary, interest income, alimony, rent, etc)
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outflows
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expenditure or use of cash
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commercial paper
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short term promissory notes issued by major, well-established corporations. issued in large denominations.
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use asset
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an asset intended for personal use or enjoyment, i.e. house and cars
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systematic risk
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non-diversifiable risk - the variability of return caused by factors affecting all comparable investments.
market risk interest rate risk reinvestment risk purchasing power risk currency risk |
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unsystematic risk
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diversifiable - risk that can be reduced through diversification. the variability of return caused by factors unique to a given company, industry or property.
business risk financial risk credit risk default risk liquidity risk marketability risk event risk |
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methods of measuring risk
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standard deviation
covariance correlation coefficient beta |
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covariance
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a way of measuring risk that looks at the pattern of return; the way in which two securities move in relation to each other.
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types of return
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1. growth - capital appreciation
2. income - dividends, rent 3. balanced - growth + income |
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closed-end investment company
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a company with fixed capitalization, issues a fixed number of shares
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core/satellite asset allocation
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an asset allocation approach that divides a portfolio into two components
1. a core 70-80% in mutual funds or broad-based ETFs 2. a satellite for the remainder of the portfolio to increase returns and provide add'l diversification. |
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correlation coefficient
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a measure of the degree to which the returns of assets move together. correlation ranges from +1.0 to -1.0
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credit risk
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the risk that a bond or preferred stock will be downgraded due to excessive business risk or financial risk
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currency risk
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aka exchange rate risk
the risk of diminishing principal and return on a foreign investment because of changes in the relative value of domestic and foreign currencies. |
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dollar cost averaging
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an investment strategy that involves purchasing the same dollar amt of a security at regular intervals.
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event risk
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the possibility that a security will be affected by an unanticipated and damaging event
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ETF's Exchange Traded Funds
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a basket of securities, usually stocks, that track indexes or specific sectors of the stock or bond market. trade like stocks - generally low-cost and tax-efficient.
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ETN's Exchange Traded Notes
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unsecured debt securities usually issued by large commercial or investment banks. they track an index or benchmark, trade like stock, can be shorted. fixed maturity.
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financial risk
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a firm that is highly leveraged has greater financial risk that a firm with little or no debt
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hedge fund
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limited partnerships with managers as general partners and investors as limited partners. light regulation, generally for wealthy, heavy fees
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index mutual fund
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a fund that attempts to mirror an established index
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inflation
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a general increase in the level of prices within the economy
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interest rate risk
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the risk that a bond's price will fall if interest rates go up.
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investment risk
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the probability that actual investment returns will vary from expected returns.
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load
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a sales charge sometimes incurred when executing a mutual fund transaction.
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market risk
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non-diversifiable (systematic) risk. risk that the market with vary based on investors reactions to tangible and intangible events.
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marketability
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the ability to convert an investment into cash quickly and at the current price
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modern portfolio theory (mpt)
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an approach to strategic asset allocation that strives for the highest return for a given level of risk or the lowest risk for a given level of return
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mutual fund
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an open-end investment company that pools the money of many investors, hires a manager, and invests to achieve one or more financial objectives.
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prospectus
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the official booklet that describes a security and provides full and fair disclosure of relevant investment information
summary prospectus - condensed version |
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purchasing power risk
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the impact of inflation or deflation on the value of an investment's returns.
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reinvestment rate risk
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the risk that interest rates have decreased at the time payments from an investment are received, so that reinvestment would be at a lower rate
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risk tolerance
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the level of risk that an individual is willing to assume in investing
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standard deviation
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a measure of risk that indicates the degree to which an investor's returns deviate from its average
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discount
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a bond selling below par value
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duration
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a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. duration is expressed as a number of years
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equity
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ownership, in particular as it pertains to the right to share in future profits or appreciation in value
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fixed-income security
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an investment that promises a stated amount of income - either in periodic payments or an ending payout
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leverage
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1. the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment
2. the amount of debt used to finance a firm's assets. a firm with significantly more debt than equity is considered to be highly leveraged |
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long position
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an investor buys stock, holds it and then sells it
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short position
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speculating in common stock.
stocks are borrowed and sold, then purchased to repay the borrower. used when decrease in value is expected |
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maturity date
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the date when principal must be repaid to a bondholder
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par value
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bonds - the value that will be paid to investors when the bond is redeemed at maturity
preferred stock - value of the stock and price at which initially sold common stock - the dollar amt assigned at issue |
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put option
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a contract that gives the holder the right to buy or sell a security at a set price (strike price) within a set period of time.
buy a put when you expect the stock price to go down. |
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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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outflows on a cash flow statement
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fixed expenses
savings variable expenses |
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tips
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-coupon payments periodically adjust to changes in inflation rate -changes in inflation are represented in the principle rather than coupon -calculated by multiplying the inflation-adj principal by the real rate (which represents the fixed coupon rate net of inflaiton)
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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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debetures
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promissory notes not backed by collateral, but by reputation of firm. during bankruptcy debentures can only be redeemed after all other secured debt has been paid off.
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sinking funds
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-series of staggered payments that retire a portion of the bond issue prior to maturity
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stock splits
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-reduce the par value -do not affect the common equity part of the balance sheet -no overall change in equity after split
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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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option
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contract that gives the owner the right to trade in an asset for a predetermined price at a later date
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emergency fund planning: liquidity
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the ease with which assets can be converted into cash with little risk of principle
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strike price
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predetermined price
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expiration date
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date at which the option can no longer be exercised
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preemptive rights
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rights held by current stockholders to maintain their proportion of ownership in the firm
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marketability risk
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the relative ease with which a security may be bought or sold
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liquidity risk
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refers to the relative ease with which a security can be sold at a fair price without risk of loss
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NAV
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Net Asset Value
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REIT
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Real Estate Investment Trust
equity: ownership interest in commercial, industrial and residential properties. mortgage: lend the funds for construction and mortgages hybrid: combination of equity and mortage reits |
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yield to call
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yield of a bond if you were to buy and hold until the call date. calculation is based on the coupon rate, the length of time to the call date and the market price
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yield to maturity
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rate of return anticipated on a bond if it is held until the maturity date. calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity
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limited partnership
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two or more partners united to conduct a business jointly, and in which one or more of the partners is liable only to the extent of the amount of money that partner has invested
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FP goals should be specific in terms of:
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P Purpose
A Amount T Timeframe |
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fp step one: establishing and defining relationship with the client
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determine services to be provided, compensation, responsibilities of planner and client and duration of relationship
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fp step two: gathering data
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determining a client's personal and financial goals and priorities and obtaining quantitative information and documents
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fp step three: analyzing and evaluation financial data
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analysis and evaluation of all information to determine if reaching the client's financial goals is likely
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fp step four: developing and presenting plan recommendations and analysis
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planner uses data gathered and analysis of that data to develop financial planning recommendations and/or alternatives
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fp step five: implementation of fp recommendations
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this step enables the client and fp to implement recommendations of the fp and, if necessary get outside help (lawyer, accountant, etc)
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fp step six: monitoring the fp recommendations
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regularly scheduled reviews with the client to be sure they are implementing plan as needed
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advantages & disadvantages of credit
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adv - necessity, emergency, convenience, instant gratification
dis- overspending, interest |
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truth in lending act
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information that must be disclosed to a borrower prior to extending credit: annual percentage rate (APR), term of the loan and total costs to the borrower
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default risk
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risk that a company cannot meet is obligations
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risk tolerance factors
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goals
time frame experience personality market conditions financial conditions age investment advice |
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three methods of asset allocation
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strategic
tactical core/satellite |
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strategic asset allocation
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passive
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tactical asset allocation
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sector rotation and market timing
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three types of return
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growth - capital appreciation
income - dividends, interest, rent balanced - growth and income |
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efficient frontier
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the optimal portfolios plotted along the curve have the highest expected return possible for the given amount of risk
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asset classes
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the three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments)
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types of investment analysis
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technical - method of analyzing securities based on supply and demand factors
fundamental - examination of many variables unique to the security, its industry and overall economic factors |
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four types of investment approaches
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1. buy and hold
2. market timing 3. dollar cost averaging 4. value averaging |
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value averaging
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an investing strategy that works like dollar cost averaging (DCA) in terms of steady monthly contributions, but differs in its approach to the amount of each monthly contribution. in value averaging, the investor sets a target growth rate or amount and then adjusts the next month's contribution according to the relative gain or shortfall made on the original asset base
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features of mutual funds
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advantages:
pooling, diversification, professional management costs: loads, operating expenses |
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basis
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a security's basis is the purchase price after commissions or other expenses
types: cost basis, specific id, fifo, average cost basis |
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bond funds
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9 combinations of
high, medium and low quality long, intermediate and short duration |
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stock funds
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9 combinations of
large, mid and small cap value, blend, growth |
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money market fund
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an investment fund that holds the objective to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share
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sector fund
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a fund that invests solely in businesses that operate in a particular industry or sector of the economy
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growth fund
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a diversified portfolio of stocks that has capital appreciation as its primary goal, with little or no dividend payouts
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international/global fund
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a fund that can invest in companies located anywhere in the world (international) including the investor's own country (global)
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closed-end fund
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a publicly traded investment company that raises a fixed amount of capital through an initial public offering
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growth and income fund
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a fund that has a dual strategy of capital appreciation (growth) and current income generation through dividends
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common stock
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a security that represents ownership in a corporation
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common stock characteristics
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rights: dividends, voting, preemptive
splits: stock split, reverse split returns: capital appreciation, dividends |
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4 ways of evaluating stock
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eps
p/e ratio yield investment style |
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common stock risks
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systematic
market risk currency risk (int'l stocks) unsystematic business risk event risk liquidity and marketability |
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preferred stock
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fixed dividends
senior to common stock no voting rights cumulative dividends some issues can be called participating preferred |
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participating preferred
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a type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends receive as well as an additional dividend based on some predetermined condition
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types of real estate investments
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direct ownership - land, home, building
reits limited partnerships |
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passive income and losses
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earnings or losses an individual derives from a rental property or limited partnership in which he or she is not actively involved
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coupon rate
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the interest rate stated on a bond when it's issued. the coupon is typically paid semiannually.
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discount vs. premium
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price of bond is lower (discount) or higher (premium) than par
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indenture
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a contract between an issuer of bonds and the bondholder stating the time period before repayment, interest paid, if the bond is convertible, if the bond is callable and the amount of money that is to be repaid
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default
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the failure to promptly pay interest or principal when due. default occurs when a debtor is unable to meet the legal obligation of debt repayment.
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call provision
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a provision on a bond or other fixed-income instrument that allows the original issuer to repurchase and retire the bonds.
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bond types
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corporate
municipal government mortgage-backed |
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bond risk
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interest rate risk
purchasing power risk call risk reinvestment rate risk financial risk event risk liquidity marketability |
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eps
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the portion of a company's profit allocated to each outstanding share of common stock.
net income - dividends on preferred stock/average outstanding shares |
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p/e ratio
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a valuation ratio of a company's current share price compared to its per-share earnings.
market value per share/ earnings per share (EPS) |
