KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Define leveraged investing.
- Explain the purpose of leveraged investing.
- Explain who may benefit from leveraged investing.
- Explain benefits and risks of leveraged investing.
- Identify that additional regulatory disclosures may be necessary for leveraged investing.
- 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.
- Explain requirements for interest to 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
- Explain how each of the factors may impact the suitability of investing using leverage, such as:
- Risk tolerance of the customer
- Ability to pay current expenses
- Ability to make payments on debt
- Ability to sustain losses on investments
- Willingness to accept losses
- Value of liquid assets available
- Investment knowledge
- Investment experience
- Investment objective
- Time horizon for investment
- Tax deductibility of interest
- Tax impact
- Risk to the asset being leveraged
- Expected net after-tax return
- Evaluate how each of the factors may impact the suitability of investing using leverage.
- Estimate the cost of leveraging.
- Explain the net after-tax return of leveraged investing based on the capital invested.
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