Advisor's Guide to Investment Planning

Chapter 1 Introduction to Investment Planning LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should: 1. Understand the eight steps involved in the investment planning process 2. Understand components of strategic asset allocation. Chapter 2 Cash And Cash Equivalents LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand what investments in “cash” are in terms of short-term debt instruments. 2. Distinguish between a certificate of deposit and a money market fund. 3. Recognize the short-term debt instruments that comprise a money market fund. 4. Know the advantages and disadvantages of owning these type instruments, to include any risk factor that may attach to their ownership in a broader portfolio. 5. Understand the tax implications of short-term instruments and why some may offer higher yields. Chapter 3 United States Government Securities LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Describe what U.S. Government Securities are and how they are issued. 2. Distinguish between T-bills, notes, and bonds. 3. Recognize the significant impact of TIPS and how they contrast with non-indexed Treasury issues. 4. Know how these type issues may provide security in a portfolio and any unfavorable consequences of having invested in them. 5. Recognize the various ways by which these securities may be purchased, including the “Treasury Direct” system of book-entry security purchase. 6. List the items of information needed to replace a U.S. Savings Bond and what agency to contact. Chapter 4 Corporate Bonds LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Know the basic terminology surrounding the issuance, purchase, and sale of corporate bonds. 2. Recognize the distinction between investment and non-investment grade bonds. 3. Know why an investor might choose to invest or not invest in fixed-income investments. 4. Calculate nominal “coupon” yield, current yield, and yield-to-maturity percentages, and how each is distinguished from the other. Chapter 5 Convertible Securities LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Recognize the derivative / option-like characteristics of convertible securities. 2. Know how to calculate the payback period for recouping any premium paid. 3. Know the advantages and disadvantages of investing in either a convertible security or a similar debt instrument with no convertible feature. 4. Understand why corporations might desire to issue these hybrid securities as it pertains to funding requirements. Chapter 6 Municipal Bonds LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Define the terminology of, and distinctions between different types of municipal bonds. 2. Calculate the tax equivalent yield of a municipal bond issue. 3. Understand the risk characteristics of this financial tool and when it might be appropriate for inclusion in a portfolio. 4. Know how this product is priced and the fees attached in purchasing either individual issues or bonds that are part of a bond fund. Chapter 7 Stripped Bonds LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Describe what a Treasury Strip is, its basic characteristics, and how it might be utilized in an investment portfolio. 2. Know the different types of federal government securities and the terminology used to distinguish them. Chapter 8 Zero-Coupon Bonds LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Know the major characteristics of zero-coupon bonds. 2. Understand why these instruments might be preferable in a tax-deferred account. 3. Understand how the prices of zeros react in a hostile environment of rising interest rates, and how this scenario can ultimately affect an investor’s portfolio. Chapter 9 Promissory Notes LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Define what a promissory note is and the circumstances under which this type agreement might be utilized. 2. Understand the risks inherent in using these IOUs . 3. Know why certain “note” agreements can have imputed interest assigned to the lender, and how the AFR (applicable federal rate) may apply. Chapter 10 Guaranteed Investment Contracts (GICs) LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Distinguish between participating and nonparticipating GICs. 2. Understand the risks inherent as well as the advantages of in investing in GICs . 3. Know how these investment contracts are issued and the acquisition costs associated with obtaining them. Chapter 11 Common Stocks LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Know the advantages and disadvantages of common stock ownership. 2. Know why equities are usually highly marketable financial instruments. 3. Discuss the tax ramifications of stock ownership and explain the affect that JGTRRA 2003 has had on stocks paying dividends to its shareholders. 4. Understand when and why alternative financial instruments might be appropriate in an investment portfolio. Chapter 12 Preferred Stock LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Know the “cumulative’ feature of a preferred stock as it relates to common stock issues of the company. 2. State why a preferred stock is characterized as a “hybrid” instrument. 3. Distinguish between the tax implications to two owners of preferred stock, one who is in the 25% tax bracket, the other in the 15% bracket. Chapter 13 Warrants and Rights LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Distinguish between corporate warrants and stock rights. 2. Know how to value a stock right. 3. Understand the tax implications exercising warrants and rights. 4. Know what viable alternatives exist to these financial tools and when they might be utilized. Chapter 14 Stock Options LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Distinguish between a stock option’s intrinsic value and time value. 2. Recognize the different risks involved in the use of these derivatives, especially as it relates to a call option vs. a put option. 3. Discuss the differences between stock options, stock purchase warrants, and stock rights. 4. Determine what the cost basis of the shares purchased are, after a stock option has been exercised. Chapter 15 Financial Futures LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Identify what the financial futures market includes, including its newest entry- the single stock futures contract. 2. Know what the general objectives are for an investor selecting this financial tool. 3. Know the volatile nature of financial futures and how their prices may be affected. 4. Understand why these instruments are characterized as ‘executory contracts,” and the tax implications resulting from their relation to the underlying asset(s). Chapter 16 Commodity Futures LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Distinguish between the terms “marked to market’ and “daily price limit.” 2. Know when an investor may have his position “closed out.” 3. Know the maximum effective tax rate at which net gains of speculative commodity futures contracts are taxed. 4. Understand the role played by both the producer of the commodity and the speculator who invests in a commodity futures contract Chapter 17 Mutual Funds LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to 1. Know how most mutual funds “maintain a market” in their own shares. 2. Understand what “fund supermarket” and “family of funds” are, and the impact they have on company sales. 3. List some alternatives to direct investments in mutual funds. 4. Know the key parts of a typical mutual fund worksheet (see Figure 16.1) and understand the importance of each element contained therein [ acronym: P-R-E-T: PERFORMANCE / RISK / EXPENSES / TAXES ]. Chapter 18 Exchange-Traded Funds (ETFs) LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Define what exchange-traded funds are and know how they may best be represented in a well-diversified investment portfolio. 2. Know what ‘creation-units’ are and how these financial tools may be traded. 3. Understand the tax implication of ETFs qualifying as regulated investment companies. 4. Understand what is meant by terms such as “tracking error” and “dead-weight” loss as it relates to expenses associated with ETFs. Chapter 19 Hedge Funds LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand what hedge funds are and their primary advantages and disadvantages as investment vehicles. Chapter 20 Separately Managed Accounts (SMAs) LEARNING OBJECTIVE FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand what a Separately Managed Account (SMA) is and when it might be used. 2. Recognize the benefits and drawbacks of investing in an SMA Chapter 21 Structured Products LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand what structured products are, differentiating between their five basic categories. 2. Recognize the advantages and disadvantages of investing in structured products. Chapter 22 Life Insurance LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand what a life insurance contract is and who are the parties involved. 2. Know the different types of permanent insurance policies. 3. Explain the advantages and disadvantages of different types of policies. 4. Understand how life insurance policies are sometimes marketed as “investment” alternatives, and how this may impact upon a client’s investment portfolio. Chapter 23 Annuities LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Identify the basic terminology associated with a general discussion of annuities. 2. Know the difference between a fixed and a variable annuity. 3. Explain the tax treatment of annuities and how the “exclusion ratio” impacts this treatment 4. Understand the different annuity payout options and how each affects the distribution of assets. Chapter 24 Real Estate LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Know why an investor might choose real estate as a preferred investment to other natural assets. 2. Understand the risks involved in direct investments in real estate. 3. Distinguish among the different forms of ownership, both direct and indirect. 4. Know what real estate “passive investments” are and how they affect personal liability concerns . Chapter 25 REITs (Real Estate Investment Trusts) LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Know the risk/reward tradeoffs of investing in REITs. 2. Understand what the considerations are for taxable investors. 3. Discuss what the impact of joint ventures in different types of REITs is on real estate investing generally. 4. Determine how best to select REIT investments when the goal is (a) income and, (b) capital appreciation. Chapter 26 Asset-Backed Securities LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Explain the similarities and differences between different types of mortgage-backed securities as they relate to: (a) payment streams, (b) guarantees, and liquidity concerns. 2. Understand what a pass-through certificate is and how it “works.” 3. Know the impact interest rate movements have on the term to maturity of a mortgage-backed security. 4. Locate sources having information about performance and availability for purchase of asset-backed securities. Chapter 27 Oil And Gas LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Explain the tax advantages accruing to a successful investment in these nonfinancial assets. 2. Know the concept of risk vs. return as it relates to investments in oil and gas assets. 3. Understand the role of the sponsor participation and how it affects direct investments in nonfinancial assets. Chapter 28 Gold And Other Precious Metals LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Explain some of the reasons why a risk-seeking investor might want to invest a portion of his assets in precious metals. 2. Understand basic terminology used in a discussion of tangible assets, such as (a) assay, (b) numismatic, (c) ingots, and (d) bullion. 3. Discuss some of the expenses that are unique to someone who invests “directly” in precious metals. Chapter 29 Collectibles LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Explain how supply and demand factors into the ability to access certain collectibles. 2. Understand the rationale behind why some collectibles increase in value. 3. Discuss the tax ramifications of investing in collectibles. Chapter 30 Limited Partnerships LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Define what a limited partnership is, and the different forms it may take. 2. Understand how liability concerns might attract an individual to invest in a limited partnership. 3. Discuss liquidity, marketability, and suitability concerns as they relate to investments in a limited partnership. 4. Understand the distinction between limited partnerships being taxed either as corporations or partnerships. Chapter 31 Private Placements And Venture Capital LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Distinguish between private placements and publicly traded stock. 2. Distinguish between the terms (a) a private placement and (b) venture capital. 3. Explain what the nature of a venture capital partnership is and how it is funded. 4. Recognize the implications for both investment risk and liquidity risk when investing in a private placement. Chapter 32 American Depositary Receipts LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Explain what an ADR is, and how it trades. 2. Understand the tax implications of investing in ADRs, and what affect both U.S. and foreign country tax regulations have upon their sale. 3. Become familiar with terminology associated with ADRs, such as (a) GDRs and EDRs, and (b) “qualified foreign corporation.” Chapter 33 Investment Risk LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Define the term “investment risk.” 2. Distinguish between systematic and unsystematic risk. 3. Explain how modern portfolio theory relates to an investor’s risk profile. Chapter 34 Measuring Investment Risk LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand the meaning of “risk” and its impact on an investment portfolio. 2. Know the key terminology associated with the measurement of investment risk. 3. Interpret what different statistical measurements of risk mean in relation to their impact on a portfolio. 4. Understand the difference between symmetrical and asymmetrical distributions and how each might influence individual security and portfolio analysis. Chapter 35 Time Value Concepts LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Evaluate alternative investment strategies utilizing time value of money concepts. 2. Identify key terminology associated with time value concepts. 3. Explain how tangible benefits of an investment must be considered in any complete discussion involving time value analysis. 4. Calculate all PV, Interest, PV, PMT, and FV solutions to either annuity due or ordinary annuity type problems. Chapter 36 Measuring Investment Return LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Identify the rate of return concepts and how financial professionals utilize these measurement devices. 2. Distinguish between simple vs. compound rates of return and between time-weighted and dollar-weighted returns. 3. Describe some of the shortcomings of the IRR Method 4. Define what is “pay back period analysis” and its usefulness when comparing alternative investments. Chapter 37 Measuring Yield LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand how the current price of bonds affects their yields. 2. Know the key terminology associated with fixed-income investments. 3. Identify when convexity, as a measure of bond price sensitivity to interest rates, can be a better “indicator” than modified duration. 4. Determine when a bond may be selling at either a discount or premium. Chapter 38 Security Valuation LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand how each method of valuation discussed in this chapter is calculated for a security’s intrinsic value. 2. Distinguish between equity valuations derived from (a) the constant growth model and, (b) the multiple growth rate model. 3. Distinguish among the different ratio analysis formulas discussed in the MARKET BASED METHOD section and how they may be related. Chapter 39 Asset Pricing Models LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Understand the underlying relationship between required rates of return and portfolio theory. 2. Distinguish between the capital market line and the security market line. 3. Make comparisons among different asset pricing models and the limitations that each may possess in attempting to assess expected returns. Chapter 40 Portfolio Management and Measurement LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Recognize the six main steps in the financial planning process, and the three main phases in a client lifecyle analysis . 2. Distinguish between different risk-adjusted measurements of risk. 3. Distinguish between time-weighted returns and dollar-weighted returns when evaluating a client’s portfolio. 4. Understand the importance of the investment policy statement in relation to developing a well-rounded financial plan for a client. Chapter 41 Asset Allocation and Portfolio Construction LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Differentiate between theoretical and practical considerations relating to the “market portfolio.” 2. Identify basic terminology associated with asset allocation and modern portfolio theory. 3. Describe what is meant by “market efficiency” and its implications for the trading of and investing in securities. Chapter 42 Investment Strategies LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Distinguish between fundamental analysis and technical analysis in active security selection. 2. Be familiar with the terms used when discussing the main elements described in a company balance sheet. 3. Identify key company ratios used to evaluate a firm’s financial performance as contrasted with similar companies in the same industry. 4. Understand the advantages and disadvantages of market timing vs. a buy and hold investment strategy. Chapter 43 Formula Investing LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Identify key terminology associated with formula investing and the common terms associated with investment strategies for both equity and fixed-income assets. 2. Calculate the average cost per share (DCA) and price per share (Share Averaging) for periodic investments in a typical mutual fund. 3. Be familiar with the formula investing strategies for both equity and fixed-income assets. Chapter 44 Hedging and Option Strategies LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Identify key terminology associated with the use of hedging and option strategies understand the fundamental nature of hedging and other option strategies. 2. Explain when the use of such financial instruments may help reduce risk in an investment portfolio. 3. Understand the fundamental nature of hedging and other option strategies. 4. Distinguish between stop-loss orders and short sales. 5. Understand the fundamental characteristics of the derivative markets. 6. Explain how the use of “synthetic” securities may improve upon the efficiency and reliability of hedging “tools.” Chapter 45 Leveraging Investment Assets LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Distinguish among the three type of “leverage” techniques employed in an investment portfolio. 2. Know when the use of leverage is appropriate for an investment portfolio, and the risks associated with it. 3. Understand the ramifications of utilizing “reverse leverage” in the purchase of an investment. 4. Describe the risk associated when there is only a 2% “spread” between the cost of borrowing and an investment’s expected return. Chapter 46 Taxation Of Investment Vehicles LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Illustrate how property acquired by gift is recognized by the Internal Revenue Service. 2. Explain the significance of timing of reporting gains or losses upon sale of an individual asset. 3. Explain how the tax law defines income and some of the common items included in the definition. 4. Differentiate between allowed and disallowed interest as it relates to deductibility. 5. Define the “economic benefit theory” as it relates to the employee benefit of group term life insurance. 6. Identify the tax preferences that must be added back when computing alternative-minimum-taxable income (AMTI). Chapter 47 Tax-Efficient Investment Strategies LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Calculate the tax equivalent yields on taxable and nontaxable bonds. 2. Explain how the recognition of either a gain or loss can be controlled through the concepts of deferral or acceleration. 3. Discuss the tax treatment applicable to investors who own different types of mutual funds. Chapter 48 Investment Strategies For Tax-Advantaged Accounts LEARNING OBJECTIVES FOR THIS CHAPTER Upon completion of this chapter, the student should be able to: 1. Apply time value concepts and formulas as they relate to investment strategies for tax-deferred accounts. 2. Evaluate and compare tax rules relating to traditional IRAs and Roth IRAs. 3. Measure the effects of tax leverage when comparing alternative investments. 4. Explain how gains on net unrealized appreciation (NUA) on employer security distributions is treated.