Certified Financial Planner (CFP) General Principles of Financial Planning and Cash Flow Syllabus

How do you convert an ordinary annuity present or future value into an annuity due value?

Multiply the ordinary annuity result by $(1+i)$: $PV_{due} = PV_{ordinary}\times(1+i)$ and $FV_{due} = FV_{ordinary}\times(1+i)$, because each payment occurs one period earlier.

Write the present value formula for a perpetuity and a growing perpetuity.

Level perpetuity: $PV = \dfrac{PMT}{i}$. Growing perpetuity: $PV = \dfrac{PMT_{1}}{i - g}$, where $g$ is the constant growth rate and requires $i > g$.

Define Net Present Value (NPV) and state its formula.

NPV is the sum of discounted cash inflows minus the initial outlay: $NPV = \sum_{t=1}^{n} \dfrac{CF_{t}}{(1+r)^{t}} - CF_{0}$, where $r$ is the required rate of return.

What is the NPV decision rule for accepting or rejecting an investment?

Accept if $NPV > 0$ (adds value), reject if $NPV < 0$, and be indifferent if $NPV = 0$ (return exactly equals the required rate).

Define the Internal Rate of Return (IRR).

The IRR is the discount rate that makes a project's NPV equal to zero: it solves $\sum_{t=0}^{n} \dfrac{CF_{t}}{(1+IRR)^{t}} = 0$. It represents the project's compound annualized return.

State the IRR decision rule relative to the required rate of return.

Accept the project if $IRR > r$ (the required/hurdle rate) and reject if $IRR < r$. For a single conventional project this is consistent with the NPV rule.

Why can NPV and IRR rank mutually exclusive projects differently, and which is generally preferred?

They can conflict due to differences in project scale, timing of cash flows, and the reinvestment rate assumption (IRR assumes reinvestment at IRR, NPV at the discount rate). NPV is generally preferred because it measures dollar value added.

When valuing an uneven (non-level) stream of cash flows, what is the correct present value approach?

Discount each individual cash flow back to today at its own time period and sum them: $PV = \sum_{t=1}^{n} \dfrac{CF_{t}}{(1+i)^{t}}$. There is no single annuity shortcut because the payments differ.

In a serial savings (goal funding) calculation, how is an inflation-adjusted (real) rate of return computed?

Using the exact (Fisher) relationship: $r_{real} = \dfrac{1 + r_{nominal}}{1 + r_{inflation}} - 1$. This real rate is used to fund goals whose cost grows with inflation, such as education or retirement.

When funding a future education goal, why is the inflation-adjusted serial payment method used and what does the first payment require?

Because the goal's cost rises with education inflation each year, the serial payment grows annually. The first-year payment is computed with the real rate, and subsequent payments are increased by the inflation rate to keep pace with rising costs.

Compare the debt avalanche and debt snowball repayment strategies.

The avalanche method pays off debts highest interest rate first, minimizing total interest paid (mathematically optimal). The snowball method pays off the smallest balance first for psychological wins and momentum, but usually costs more in interest.

What is the difference between mortgage refinancing and a home equity loan/HELOC?

Refinancing replaces the existing mortgage with a new one (often for a lower rate/term). A home equity loan or HELOC is a second loan against accumulated equity; a HELOC is a revolving line, while a home equity loan is a lump-sum, fixed-payment second mortgage.

When does private mortgage insurance (PMI) typically apply, and when can a borrower request its removal?

PMI is generally required on conventional loans when the down payment is less than $20\%$ (loan-to-value above $80\%$). A borrower can request cancellation at $80\%$ LTV, and it is automatically terminated at $78\%$ LTV by law.

What are the five factors in a FICO credit score and their approximate weights?

Payment history ($35\%$), amounts owed / credit utilization ($30\%$), length of credit history ($15\%$), new credit/inquiries ($10\%$), and credit mix ($10\%$).

What is the general range of FICO scores, and what is considered a good score?

FICO scores range from $300$ to $850$. Generally, $670$–$739$ is good, $740$–$799$ is very good, and $800$+ is exceptional, while below $580$ is poor.

Under the Fair Credit Reporting Act (FCRA), what free credit report rights do consumers have?

Consumers are entitled to a free credit report from each of the three major bureaus (Equifax, Experian, TransUnion) periodically through the official annual disclosure system, and to dispute inaccurate information.

How long do most negative items and a Chapter 7 bankruptcy remain on a credit report?

Most negative items (late payments, collections) remain for $7$ years, while a Chapter 7 bankruptcy can remain for up to $10$ years from the filing date.

Contrast Chapter 7 and Chapter 13 bankruptcy for individuals.

Chapter 7 is liquidation: nonexempt assets are sold to discharge most unsecured debts, requiring passage of a means test. Chapter 13 is a reorganization where the debtor with regular income repays debts under a $3$–$5$ year court-approved plan while keeping property.

What is the means test in consumer bankruptcy, and what does it determine?

It compares the debtor's income to the state median to determine eligibility for Chapter 7. If income is too high, the debtor is generally directed to Chapter 13 repayment instead of Chapter 7 liquidation.

Name common types of debt that are generally NOT dischargeable in bankruptcy.

Most student loans, recent income taxes, child support and alimony, debts from fraud, and court-ordered restitution or fines are generally non-dischargeable.

Distinguish debt consolidation, debt settlement, and debt management plans as relief options.

Consolidation combines multiple debts into one new loan (ideally at a lower rate). Settlement negotiates to pay less than the full balance (damaging credit and possibly creating taxable forgiveness income). A debt management plan is administered by a credit counseling agency with reduced rates and a single monthly payment.

What are the main federal student loan repayment plan categories?

Standard (fixed payments over $10$ years), Graduated (payments start low and rise), Extended (up to $25$ years), and Income-Driven Repayment (IDR) plans that base payments on a percentage of discretionary income.

How do income-driven repayment (IDR) plans calculate payments and when can balances be forgiven?

Payments are set as a percentage of the borrower's discretionary income (income above a multiple of the federal poverty guideline). Any remaining balance is forgiven after the plan term (commonly $20$–$25$ years; $10$ years under Public Service Loan Forgiveness).

What is the difference between federal student loan deferment and forbearance regarding interest?

Both pause payments, but during deferment interest does not accrue on subsidized loans (government pays it), whereas during forbearance interest accrues on all loan types, including subsidized.

What are the four phases of a typical business cycle?

Expansion (peak growth), Peak, Contraction/Recession, and Trough (the bottom), after which a new expansion begins. The cycle reflects fluctuations in real GDP, employment, and output over time.

Distinguish leading, coincident, and lagging economic indicators with an example of each.

Leading indicators forecast future activity (e.g., stock prices, building permits, new orders). Coincident indicators move with the economy (e.g., nonfarm payrolls, industrial production). Lagging indicators confirm trends after the fact (e.g., unemployment rate, CPI/inflation, prime rate).

What is the common technical definition of a recession?

A significant decline in economic activity spread across the economy lasting more than a few months; a common rule of thumb is two consecutive quarters of declining real GDP.

What are the main tax-advantaged vehicles for funding higher education, and their key feature?

$529$ plans (tax-free growth and withdrawals for qualified education expenses, high contribution limits) and Coverdell Education Savings Accounts (ESAs, tax-free growth but limited to $\$2{,}000$ per beneficiary per year with income limits).

Compare the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

The AOTC is up to $\$2{,}500$ per student, available for the first $4$ years of undergraduate study, and is $40\%$ refundable. The LLC is up to $\$2{,}000$ per tax return, available for unlimited years (including graduate and job-skill courses) but is nonrefundable.

What does the yield curve plot, and what does a normal (upward-sloping) yield curve indicate?

It plots bond yields against their maturities for the same credit quality (e.g., U.S. Treasuries). A normal upward-sloping curve means longer maturities have higher yields, reflecting expectations of economic growth and the term premium for longer holding periods.

What is an inverted yield curve and why is it significant?

An inverted curve occurs when short-term yields exceed long-term yields (downward slope). It is historically regarded as a leading indicator that often precedes a recession, signaling expectations of slowing growth and future rate cuts.