2nd Set Of Missed Test Questions

Question 1

When an economy is coming out of a recession, what happens to cyclical stocks, unemployment rate, interest rates, personal income?

Answer 1

Cyclical stocks move up in price

Unemployment rate will decline

Interest rates will fall

Personal income will grow

Question 2

What is the tax equivalent yield of a Municipal bond with a 3.25% rate?

Investors marginal rate is 24%
State income tax is 6%

Answer 2

3.25% / 1- (.24+.06) = 4.64%

Question 3

If you are considering purchasing shares in XYZ stock that has a 20% probability of experiencing a -10% return, 40% probability of experiencing an 8% return, had a 40% probability of experiencing a 12% return. If you have a required rate return of 6.5% should you invest in this stock?

Answer 3

No

(.20 x -.10) + (.40 x .08) + (.40 x .12) = .06 or 6%

Question 4

Standard deviation measures what?

Answer 4

Total risk, systematic and unsystematic, and therefore is always the appropriate measure of risk

Question 5

You Purchase a 30 year bond for $977.36 with a stated coupon rate of 8.5%. What is the yield to maturity for this investment if you receive semi annual coupon payments and expect to hold the bond to maturity

Answer 5

8.71%

PV = -977.36
N = 60 (30 x 2) Semi annual pmts
PMT = 42.50 (85 / 2) Semi annual pmts
FV = 1000 (face amount of the bond)
Solve for I/YR = 4.357 x 2 = 8.72%

Remember you have to multiply the final number by the number of payments in a year to get the right number

Question 6

Are US treasury STRIPS subject to reinvestment rate risk?

Answer 6

No, they do not have coupon payments reinvestment rate risk is voided, but it’s price is more volatile than coupon paying bonds with similar maturities and ratings

Interest income is taxable to the holder annually and is considered ordinary income

Question 7

If interest rates are expected to rise in the near future, should you hold or sell your long-term bonds?

Answer 7

Sell your long-term bonds and reinvest the proceeds at a higher coupon rate once interest rates actually rise

Question 8

How are assets valued with expected returns that lie above the security market line (SML)?

Answer 8

Undervalued because they’re expected returns are higher than they required return represented by the SML

Question 9

In general, how do rising interest rates affect stocks and bond prices?

Answer 9

Stock prices will go down

Bond prices will go down

Question 10

To receive Worker’s Compensation benefits, what two eligibility requirements must be met?

Answer 10

The disabled person must work in a covered occupation and the worker must have a job related accident or disease

Remember these are Worker’s Compensation benefits not insurance

Question 11

General business liability is the legal liability arising out of business activities, except what?

Answer 11

Auto, motorized vehicle, aircraft, and employee or workers compensation injuries

Question 12

Negligence per se is a situation in which….

Answer 12

The injured party is relieved of the burden of approving negligence because the attic self constitutes negligence. The injured party does not have to prove negligence.

The act itself constitutes negligence

Question 13

When the foreign currency appreciates, each foreign currency denominated, cash flow buys more domestic currency units what does this do for a foreign investment?

Answer 13

This increases the domestic currency return from the investment, the appreciation of the foreign asset benefits, the investor as well

Question 14

What regulation established the securities investor protection corporation (SIPC)?

Answer 14

Securities investor protection act of 1970

Question 15

If you give a church a charitable gift that is a collection of lets say baseball cards or coins etc, some collectible that is not use related to the church…what is the allowable deduction?

Answer 15

Since this unrelated property, the allowable deduction is limited to his basis.

Question 16

Year 1 James sold stock to his son with a cost of $7000 to his son for $5,000 (FMV). A year later the son sells the stock in a transaction to another non related individual for $6,000. What is the proper tax treatment of these transactions?

Answer 16

James sale to his son is a related party transaction, So James cannot recognize the loss ($5,000 - $7,000 = $2,000)

When the son sells it for $6,000 he has a realized gain of $1,000, However he will not recognize this gain because he can utilize a $1,000 of his father’s unrecognized loss. The remaining $1,000 is gone forever

Question 17

What is the negligence penalty by the IRA?

Answer 17

20% of the amount applied of the negligence

Question 18

What is the 7 pay test that can turn a whole life insurance policy into a MEC?

Answer 18

The 7 pay test requires that the total premiums paid never exceed the amount of the level annual premiums paid if the policy had been charged a level amount that would pay the policy up after 7 years.

Example if the level premium in the 1st year is $3,000 then the prem paid cannot exceed $3,000 in the 1st year. In the second year told Pence paid cannot exceed $6000. If at any time, the total premiums paid exceed the net level premium that would have been paid up to the time and question the policy is considered a modified endowment contract and tax treatment changes.

Question 19

How loans from a retirement plan treated

Answer 19

Loans are never assessed a 10% penalty, regardless of the participants age when the loan is issued

However, the outstanding balance on a retirement plan loan becomes subject to income tax and the early withdrawal penalty if the loan is defaulted

From qualified plans to sole proprietors, greater than 10% partners, and greater than 5% shareholders in an S corporation are permitted

Generally loans are limited to 1/2 the vested account balance and cannot exceed $50,000

Account balances are less than $20,000 however loans up to the lesser of $10,000 or the vest of the account balance are available

Question 20

And determining whether the gain is long-term or short term, capital gains holding period is determined by either the day of disposition or the day of acquisition, which is it?

Answer 20

Day of disposition is included in the holding. The day of acquisition is not.

Question 21

Is tax exempt income from a municipal revenue bond a preference for AMT adjustment?

Answer 21

No, it is not a preference

Question 22

American opportunity tax credit

What is the maximum credit that can be taken and what is the breakdown of the credit?

Answer 22

Maximum of $2500 for the tax year

Predator is 100% of the first $2000 of qualified expenses +25% of the next $2000

Phase out range is $160,000-$180,000 MFJ
$80,000-$90,000 single

Question 23

What is the phase out range for the American opportunity, tax and lifetime learning credits?

Answer 23

$160,000 - $180,000 MFJ
$80,000 - $90,000 Single

Question 24

Is a state tax refund an offset against the state income tax itemized deduction?

Answer 24

No, it is not

Question 25

So you make an investment in a mutual fund that pays dividends that you reinvest in the fund

Total investment $15,000
Dividends
Year 1: $500
Year 2: $500
Year 3: $600
You sell the fund for $18,000
Capital gains are taxed at 15% and state taxes are 4%

What are the net after tax proceeds from the sale?

Answer 25

1st: figure basis
$15,000 + $500 + $500 + $600 = $16,600

2nd: Figure gain or loss
$18,000 - $16,600 = $1,400

3rd: Figure the tax on the gain
$1,400 x .19 = $266

Net Proceeds equal

$18,000 - $266 = $17,734

Question 26

In a gift loan, the lender makes a gift to the borrower in the amount of what?

Answer 26

Imputed interest and is considered a gift

Question 27

Under section 1231, a business is disposing of a depreciable and or real property loss and ordinary loss or a capital loss?

Answer 27

Ordinary loss

Question 28

What all is covered under FDIC?

Answer 28

Each category of ownership in the same institution is subject to a separate limit of $250,000

Categories of ownership: example individual, joint, or retirement account

Question 29

What is the definition of “covered insured” in a personal auto policy (PAP)?

Answer 29

Includes those individuals in the policy owners family, even while they are pedestrians

Question 30

Are CFP professionals required to uphold the provisions of standard A.1, duty at all times?

Answer 30

No, only upheld when financial advice or financial planning are occurring

Question 31

What are the tax benefits or non-tax benefits when a corporation is both the owner and the beneficiary of the disability policy?

Answer 31

Premium payments are non-deductible by the corporation

The corporation receives the insurance proceeds income tax free

Question 32

Which interest rate does the federal reserve board control in the exercise of its monetary policy?

Answer 32

Discount rate

Question 33

The Function of an investment bank may include all of the following

Answer 33

Advising corporations regarding the best ways to raise long-term capital

Distributing large blocks of stock to the public and to institutions

Raising capital for issuers by distributing new securities

Question 34

What is the Strategic Management approach to financial planning?

Answer 34

Clients goals and values drive a client planner relationship and the planner serves as a consultant

Question 35

What is a cognitive behavioral approach to financial planning

Answer 35

Believes a client attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results

Question 36

What is the classical economics approach in financial planning?

Answer 36

Planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures

Question 37

Assume Jason wants to save $50,000 (in today’s dollars) for his son’s college expenses in five years. Jason is comfortable using an inflation rate of 4% and an investment rate of return of 8%. Calculate the serial payment that Jason will make at the end of the third year

Answer 37

Question 38

In a Defined Contribution Plan what is the max percentage of employer contributions that can be used to purchase universal life or term insurance?

What is the max amount of employer contributions that can be used to purchase whole life insurance?

Answer 38

25% max universal life or term

50% max whole life

Question 39

In a Defined Pension Plan the life insurance death benefit cannot exceed how many times the monthly benefit for an employee?

Answer 39

100 times out of

Question 40

Hardship withdrawals are only allowed from 401k plans if specifically stated in plan documents and are typically for what expenses? Is it taxed and subject to the 10% EWP?

Answer 40

Medical Expenses, College Tuition and Fees, Purchase a Principal residence, burial expense for spouse and dependents, prevent eviction or foreclosure

Taxed as ordinary income and subject to 10% EWP

Remember these are not exemptions

Question 41

Mr Jacobs has established a profit sharing plan for himself and his employees which is a top heavy. He made a 1% of compensation contribution to all participants accounts this plan year. Does he need to make further contributions?

Answer 41

No because both non - key and key employees received the same percentage contributions

Safe Harbor rules

Question 42

If no deductible contributions have been made to an IRA, then distributions from the IRA are taxable how?

Answer 42

Are only Partially taxable

Question 43

Who do the CFP’s boards fitness standards apply to?

Answer 43

Candidates for the CFP exam and professionals eligible for reinstatement

Question 44

Are both subsidized and unsubsidized Stafford loans needs based?

Answer 44

No, just subsidized Stafford loans