Terms of Credit

KNOWLEDGE EXPECTED OF: QAFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Define terms associated with credit.
    • Interest rate
    • Payment
    • Term
    • Amortization
    • Compounding period
    • Compounding frequency
    • Covenants
    • Penalties for breaching a covenant
  • Define types of interest rates, such as:
    • Nominal rate
    • Effective annual rate (EAR)
    • Bank rate
    • Prime rate
    • Lender’s base rate1
    • Annual percentage rate (APR)
  • Compare types of interest rates, such as:
    • Variable interest rate versus fixed interest rate
    • Nominal interest rate versus effective interest rate
    • Bank rate versus prime rate
    • Prime rate versus lender’s base rate
  • Convert between a nominal and an effective annual rate.
  • Calculate the following interest rates.
    • Effective annual rate (EAR)
    • Annual percentage rate (APR)
  • Define types of interest.
    • Simple
    • Compound
  • Compare how simple and compound interest affect credit, specifically:
    • Cost of borrowing
    • Amortization
  • Define the variables that impact the calculation of interest (in dollar terms).
    • Face value
    • Interest rate
    • Compounding period
    • Compounding frequency
  • Explain the relationship between each variable that is used in the calculation of interest and the amount of interest (in dollar terms).
  • Explain the factors impacting the cost of credit, such as:
    • Administrative fees
    • Interest
    • Charges for the service of or disbursements made by a lawyer or notary
    • Broker charges / fees
    • Appraisal charges / fees
  • Identify that interest expense on credit may be deductible for tax purposes.
  • Explain how each of the factors may impact the decision to convert non-tax-deductible debt to tax-deductible debt:
    • Liquidity of assets
    • Volatility of assets
    • Marginal tax rate
    • Tax impact
  • Explain payment types that may be available on credit, such as:
    • Interest-only
    • Blended
    • Deferred
    • Lump Sum
    • Balloon
  • Explain payment options that may be available on credit, such as:
    • Frequency
    • Prepayments
    • Accelerated
    • Deferred interest
  • Determine the impact that a change in one of terms of credit has on the remaining terms of credit. 
  • Calculate the impact that a change in one of the terms of credit has on the remaining terms of credit.

REFERENCES

1 The lenders base rate is an interest rate upon which other lending rates offered by the lender will be based. This may or may not be the same as the prime rate or the bank rate.

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Define terms associated with credit.
    • Interest rate
    • Payment
    • Term
    • Amortization
    • Compounding period
    • Compounding frequency
    • Covenants
    • Penalties for breaching a covenant
  • Define types of interest rates, such as:
    • Nominal rate
    • Effective annual rate (EAR)
    • Bank rate
    • Prime rate
    • Lender’s base rate1
    • Annual percentage rate (APR) 
  • Compare types of interest rates, such as:
    • Variable interest rate versus fixed interest rate
    • Nominal interest rate versus effective interest rate
    • Bank rate versus prime rate
    • Prime rate versus lender’s base rate
  • Convert between a nominal and an effective annual rate.
  • Calculate the following interest rates.
    • Effective annual rate (EAR)
    • Annual percentage rate (APR)
  • Define types of interest.
    • Simple
    • Compound
  • Compare how simple and compound interest affect credit, specifically:
    • Cost of borrowing
    • Amortization 
  • Define the variables that impact the calculation of interest (in dollar terms).
    • Face value
    • Interest rate
    • Compounding period
    • Compounding frequency
  • Explain the relationship between each variable that is used in the calculation of interest and the amount of interest (in dollar terms).
  • Explain the factors impacting the cost of credit, such as:
    • Administrative fees
    • Interest
    • Charges for the service of or disbursements made by a lawyer or notary
    • Broker charges / fees
    • Appraisal charges / fees
  • Explain payment types that may be available on credit, such as:
    • Interest-only
    • Blended
    • Deferred
    • Lump Sum
    • Balloon
  • Explain payment options that may be available on credit, such as:
    • Frequency
    • Prepayments
    • Accelerated
    • Deferred interest 
  • Determine the impact that a change in one of terms of credit has on the remaining terms of credit. 
  • Calculate the impact that a change in one of the terms of credit has on the remaining terms of credit.
Additional Knowledge Expected of CFP Professionals
  • Explain when an interest expense on credit may be deductible for tax purposes.
  • Determine how each of these factors may impact the decision to convert non-tax-deductible debt to tax-deductible debt:
    • Liquidity of assets
    • Volatility of assets
    • Marginal tax rate
    • Tax impact
  • Evaluate how each of the factors may impact the decision to convert non-tax-deductible debt to tax-deductible debt.

REFERENCES

1 The lenders base rate is an interest rate upon which other lending rates offered by the lender will be based. This may or may not be the same as the prime rate or the bank rate.