Leveraged Investing

KNOWLEDGE EXPECTED OF: QAFP® Professionals

Highest Knowledge Level: Application

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 leveraged investing.
  • Identify the purpose for which leveraged investing may be used.
  • Identify benefits and risks of leveraged investing. 
  • Identify that additional regulatory disclosures may be necessary for leveraged investing. 
  • Identify the characteristics of a client related to investing using leverage, such as:
    • Risk tolerance of the client
    • Ability to pay current expenses
    • Ability to make payments on debt
    • Ability to sustain losses on investments
    • Investment knowledge
    • Investment experience
    • Investment objective
    • Time horizon for investment

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Application

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 leveraged investing.
  • Identify the purpose for which leveraged investing may be used.
  • Explain benefits and risks of leveraged investing. 
  • Identify that additional regulatory disclosures may be necessary for leveraged investing. 
  • Determine how each of these factors may impact the suitability of investing using leverage:
    • Risk tolerance of the client
    • Ability to pay current expenses
    • Ability to make payments on debt
    • Ability to sustain losses on investments
    • Investment knowledge
    • Investment experience
    • Investment objective
    • Time horizon for investment
Additional Knowledge Expected of CFP Professionals
  • Identify that using margin to purchase investments is a form of leveraged investing. 
  • Define a margin loan.
  • Identify that a margin loan may exist via a margin account.
  • Identify that margin proceeds can be utilized for any purpose. 
  • Explain a margin call.
  • Explain options for resolving a margin call, such as:
    • Add security to cover debt
    • Liquidate security to cover debt
  • Explain that the balance on the debt must be repaid regardless of the performance of the investment. 
  • Explain that investment-related fees may be payable if the investment is redeemed to pay the loan.
  • Identify conditions where interest may be tax-deductible, such as:
    • Reasonable expectation to earn an income from a business or property
    • Legal expectation to pay the interest on the debt
    • Interest must be paid or payable in the year that it is being deducted
    • Investment must be non-registered
    • Sole purpose of investment must not be for a capital gain
  • Determine how each of these factors may impact the suitability of investing using leverage:
    • Willingness to accept losses
    • Value of liquid assets available
    • Tax deductibility of interest
    • Tax impact
    • Risk to the asset being leveraged
    • Expected net after-tax return
  • Explain the net after-tax return of leveraged investing based on the capital invested.