EXAM #2 – Quizzes + Exam (CHAPTERS 4, 5, 8, 9, & 11) Flashcards by Jason Jennings

AJohn and Mary, both 45 years old, are married and have one child, age 10. They plan to pay for his
college at an in-state university from age 18 to 23 and they would like to retire at age 62. They have provided the following financial data.

Joint employment income $200,000
John’s 401(k) plan contributions $16,500
Mary’s IRA contributions $3,000
John’s 401(k) plan employer match $5,000
Annual gifts from John’s parents $10,000
Total Investment Assets $380,000
Total Cash and Cash Equivalents $100,000

From the goals and data given, which of the following statements is/are correct? (Do not make assumptions that are not stated)

John and Mary’s investment assets to gross pay ratio is adequate for their age.
John and Mary’s savings rate is appropriate for their goals.

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

B. 2 only

The investment assets to gross pay ratio is $480,000 ÷ $200,000 = 2.4 times which is not adequate for persons age 45. Their savings rate is $24,500 ÷ $200,000 = 12.25% and appears adequate for both the retirement and the education goals.

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The estimated value of a real estate asset in a financial statement should be based upon the:

A. Income tax basis of the asset, after adjusting straight line and accelerated depreciation.
B. The client’s estimate of current value.
C. Current replacement value of the asset.
D. The value that a well-informed buyer is willing to accept from a well-informed seller where neither is compelled to buy or sell.

D. The value that a well-informed buyer is willing to accept from a well-informed seller where neither is compelled to buy or sell.

The question is what values should be used in preparation of a personal financial statement. The answer is fair market value (FMV) and option d is the definition of FMV.

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Tracy and Brett are married.
Their current assets $9,243
Their current liabilities $6,921
Their monthly nondiscretionary expenses $4,693
Their annual combined income $70,000

Their annual debt payments (excluding monthly housing costs)

$22,084

Assume for this question only that Tracy and Brett’s monthly housing costs (P&I&T&I) are $1,500.
Which of the following lender thresholds will Tracy and Brett meet?

A. The 28% benchmark
B. The 36% benchmark
C. Both benchmarks
D. Neither benchmark

A. The 28% benchmark

$1,500 ÷ ($70,000 ÷ 12) = 25.7; ($1,500 + ($22,084 ÷12) ÷ ($70,000 ÷12) = 57.2

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Byron and Mandy are married and have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills total $8,000, how much are their total liabilities?

A. $122,000
B. $130,000
C. $138,000
D. $150,000

B. $130,000

Assets - Liabilities = Net Worth ÷ ($150,000 - $20,000 = $130,000)

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Mike Smith has the following financial data.
Investment Assets at Year End $475,000
Investment Assets at Beginning of the Year $392,000
Savings Made During the Year by Mike $27,000
Employer Match to Mike’s 401(k) Plan $5,000
Total Assets on Ending Statement of Financial Position $700,000
Gross Income on Income Statement $100,000
Total Assets on Beginning Statement of Financial Position $600,000
Total Liabilities at Beginning of the Year $200,000
Total Liabilities at Year End $180,000

What was Mike’s ROA for the year?

A. 11.33
B. 13.00
C. 14.84
D. 16.67

A. 11.33

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Which of the following statements is/are correct?
1. The emergency fund ratio metric should be 3 to 6 months of non-discretionary cash flows.
2. When calculating the savings rate for a family, any contributions to retirement made by the employer should be included.

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

C. Both 1 and 2

Both statements are true. For an adequate emergency fund there needs to be cash and cash equivalents of 3 to 6 months of non-discretionary cash flows as to mitigate against the risk of job loss or temporary injury. The overall savings rate includes any employer contributions.

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The balance sheet equation is:

A. Total Assets ÷ Total Liabilities = Net Worth
B. Total Assets x Total Liabilities = Net Worth
C. Total Assets - Total Liabilities = Net Worth
D. Total Assets + Total Liabilities = Net Worth

C. Total Assets - Total Liabilities = Net Worth.

This is the basic formula for the balance sheet.

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Six months ago, Joe purchased a new dining room table for $6,500. In preparing accurate personal
financial statements, this purchase would appear as a(n):

Use assets on the client’s balance sheet.
Investment assets on the client’s balance sheet.
Variable outflow on the client’s cash flow statement.
Fixed outflow on the client’s cash flow statement.

A. 4 only
B. 1 and 3
C. 2 and 4
D. 1, 2, and 3

B. 1 and 3

This is a personal use asset and a variable outflow.

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Which of the following is most likely not classified as an investment amount on the Statement of Financial Position?
A. Cash value of permanent life insurance
B. Valuable antique furniture
C. A 529 Plan for education
D. The vested portion of a pension plan

B. Valuable antique furniture

Collectibles are generally personal use assets. The cash value of permanent life insurance is most likely an investment asset unless the intent of the policy owner is to liquidate the cash value within one year in which case, it would be classified as cash and cash equivalents. Options c and d are both investment assets.

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Susan’s annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan; and her employer contributes 5% of her salary to a profit sharing plan. She also contributes $2,500 per year to an IRA. What is Susan’s approximate savings rate?

A. 5%
B. 10%
C. 15%
D. 18%

D. 18%

10% + 5% + 3% = 18%

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Which of the following statements is/are correct?

The principal but not the interest to be paid this year on a 30-year mortgage is properly classified on the Statement of Financial Position as a current liability.
A CD with a maturity of 9-months is classified as an investment asset on the Statement of Financial Position.

A. 1 only
B. 2 only
C. Both 1 and 2
D. Neither 1 nor 2

A. 1 only

The current portion of long-term debt (principal only) is classified as a current liability. A CD due in 12 months or less is classified as cash and cash equivalents not an investment asset.

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Your client, Tom, age 45, is currently making $145,000. You have determined that his wage replacement ratio is 80%. You expect inflation to average around 3% for Tom’s entire life expectancy. Tom expects a 9% return on his investments and plans to retire at age 64, possibly living to age 90. He expects he will receive about $12,000 per year from Social Security in retirement. Calculate Tom’s first year retirement needs at age 64.

$182,365

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Samantha has the following transactions:

She purchases $5,000 worth of a mutual fund with cash from her savings account.
She spends $6,000 on a vacation with cash from her money market account
She spends $10,000 on new furniture, and uses her credit card to make the purchase.

A. $21,000 decrease
B. $6,000 decrease
C. $15,000 increase
D. $6,000 increase

D. $6,000 increase

Transactions 1 and 3 were net washes (she was simply changing the nature of the assets). Samantha traded savings for a mutual fund, and obtained furniture by incurring a liability. Transaction 2 reduced her net worth, and there was no corresponding financial gain.

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For valuation purposes, balance sheet liabilities should be recorded at their:

A. Current outstanding balance
B. Fair market value
C. Discounted value
D. Total amounts of payments to be made

A. Current outstanding balance

A balance sheet provides a snapshot of a client’s assets, liabilities, and net worth, as of a stated date; therefore, liabilities must be recorded at their current outstanding balance as of the stated date, in order to have an accurate snapshot.

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anice is a nurse in the critical care department. She has property insurance, but does not have disability insurance through the hospital. She does not know that much about disability, except that a friend of hers told her that she needed to acquire it. Which of the following statements is correct?

A. Any occupation is the better choice for coverage than own occupation.
B. The elimination period is the period after the policy stops paying benefits.
C. A guaranteed renewable feature of a policy obligates the insurer to continue coverage as long as premiums are paid on the policy.
D. All of the above.

C. A guaranteed renewable feature of a policy obligates the insurer to continue coverage as long as premiums are paid on the policy.

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Your client, Jim, age 40, earns $78,000 annually. His spouse, Pam, age 38, used to work at the office with Jim, but is now a homemaker. They have one child who just turned age 14. Jim’s personal cosumption during the year was equal to $19,456 and he paid $8,550 in taxes. Assume the inflation rate is 3% and the yield on U.S. Treasury Bonds is 5%. Calculate Jim and Pam’s Life insurance need using the Capitalization of Earnings Method.

A. $1,252,640
B. $2,574,690
C. $2,105,455
D. $1,883,489

B. $2,574,690

The capitalization of earnings method uses a fraction to determine life insurance needs. The numerator is the client’s gross income, subtracting out taxes and consumption. The denominator is the riskless rate of return (typically the yield on U.S. Treasury Bonks) adjusted for inflation. Therefore…

(78,000-19456-8550) ÷ [(1.05/1.03)-1] = $2,574,690

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All of the following are needed to calculate the client’s human life value except:

A. Average annual earnings to the age of retirement.
B. Estimated annual Social Security benefits at retirement.
C. Annual self-maintenance costs.
D. Number of years from present age to the contemplated age of retirement for client.

B. Estimated annual Social Security benefits at retirement.

The human life value is determined by finding the present value of the future cash flows (the client’s annual salary). Options a, c, and d are all needed in this calculation. Social Security benefits are not earned; they are an entitlement. Therefore, benefits from Social Security are not needed in this calculation.

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Loss severity is the:

A. Probability that a liability judgment may exceed an individual’s net worth.
B. Probable size of a loss that may occur.
C. Probable number of losses that may occur.
D. Probability that a particular property could be totally lost.

B. Probable size of a loss that may occur.

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Jade is looking for an insurance policy for her home. Her friend, Shamus, who is an attorney, just told her that the policy is a contract and has some unique characteristics. Which of the following terms applies to the insurance contract?

Indemnity.
Res ipsa loquitur.
Adhesive.

A. 1 and 3
B. 2 only
C. 2 and 3
D. 1, 2 and 3

A. 1 and 3

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Your client, Terry, was working at a chemical plant when it suddenly caught fire and he was severely injured. Terry is no longer able to do his duties at the plant, however he landed a job teaching chemistry online at a local college. If he is currently receiving disability insurance, what type of disability would an insurance company define this as?

A. Any Occupation
B. Hybrid
C. Partial Period
D. Own Occupation

D. Own Occupation

Own occupation coverage is determined by whether or not the insured can carry out each and every one of the duties of his employment. Any occupation coverage is defines when the insured is considered unable to work any occupation.

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Which of the following types of life insurance could not be described as an investment, with a savings component?

A. Permanent life insurance
B. Ordinary life insurance
C. Universal life insurance
D. Term life insurance

D. Term life insurance

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Conditions that increase either the frequency or severity of loss are called:

A. Circumstances
B. Risks
C. Hazards
D. Perils

C. Hazards

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Ralf, the insured, owns a home with a fireplace and a generator. He has stacks of wood and several 55-gallon drums of camping oil in his garage. He likes to go camping and leaves his home for several days at a time, often with a fire burning in his fireplace. In addition, he leaves his home unlocked. Which of the following hazards apply?

A. Physical hazard and moral hazard
B. Morale hazard only
C. Morale hazard and physical hazard
D. Physical hazard only

C. Morale hazard and physical hazard

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Which of the following is an element that must exist before a risk is considered insurable?

A. Insured losses can only be intentional if the insured was not a part of the party inflicting the harm
B. The loss must not pose a catastrophic risk for the insured
C. A large number of similar exposure units must exist to help develop statistics for forecasting losses
D. All of the above

C. A large number of similar exposure units must exist to help develop statistics for forecasting losses

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All of the following statements concerning educational funding are correct EXCEPT: A. QTPs allow individuals to participate in prepaid tuition plans whereby tuition credits are purchased for a designated beneficiary for payment or waiver of higher education expenses, or participate in savings plans whereby contributions of money are made to an account to eventually pay for higher education expenses of a designated beneficiary. B. Prepaid Tuition Plans are plans where prepayment of college tuition is allowed at current prices plus a small premium for enrollment in the future. C. A Savings Plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred. D. One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary.

D. One of the disadvantages of QTPs is that the owner/contributor shares control of the account with the student/beneficiary.

Which of the following types of aid is not need based? A. Pell Grant B. PLUS Loan C. Perkins Loan D. Subsidized Stafford Loan

B. PLUS Loan

Which one of the following statements is wrong? A. A student must submit a FAFSA (Free Application for Federal Student Aid) form to be eligible to receive federal financial aid. B. The four repayment plans for a Stafford loan are: standard repayment, extended repayment, graduated repayment, and income based repayment. C. Factors used in calculation the EFC include taxable and nontaxable income, assets, retirement funds, and benefits, such as unemployment and Social Security. D. PLUS (Parent Loan for Undergraduate Students) loans are for parents to borrow to help pay for a dependent's undergraduate education expenses, and are based on financial need.

D. PLUS (Parent Loan for Undergraduate Students) loans are for parents to borrow to help pay for a dependent's undergraduate education expenses, and are based on financial need.

All of the following statements concerning educational funding is correct EXCEPT: A. A student must submit a FAFSA (Free Application for Federal Student Aid) form to become eligible for federal financial aid. B. The EFC (Expected Family Contribution) is a formula that indicates how much of a student's family's resources ought to be available to assist in paying for the student's college education. C. Factors used in calculating the EFC include taxable and nontaxable income, assets, retirement funds, and benefits, such as unemployment and Social Security. D. A common method of reducing a family's EFC is creating a trust for the parents and increasing the family's estate.

D. A common method of reducing a family's EFC is creating a trust for the parents and increasing the family's estate.

All of the following are treated as assets of the parent for financial aid, except? A. 529 Savings Plan B. Prepaid Tuition C. Coverdell ESA D. UGMA

D. UGMA UGMA accounts are considered assets of the child for financial aid purposes because the child has access to the account at age 18.

What is one of the primary differences between a Coverdell Education Savings Account and 529 Savings Plan? A. A Coverdell can be used for private elementary, middle or high school. B. A Coverdell does not have a phase-out limit for participation. C. A 529 plan has a phase-out limit for participation. D. A Coverdell allows a 5-year proration of contributions.

A. A Coverdell can be used for private elementary, middle or high school. A Coverdell may be used for private elementary, middle or high school. A Coverdell does have phase-out limits, whereas a 529 Savings Plan does not. A 529 Savings Plan permits a 5-year proration of contributions, not a Coverdell.

All of the following are qualified education expenses for the Lifetime Learning Credit and American Opportunity Credit, except: A. Tuition and Fees B. Books and Supplies C. Equipment D. Room and Board

D. Room and Board

Stephanie wanted to save for her daughter's education. Tuition costs $10,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 4 years. Stephanie can earn 12% on her investments and tuition inflation is 6%. How much must Stephanie save at the beginning of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college? A. $1,889 B. $2,104 C. $2,389 D. $1,687

D. $1,687

All of the following statements concerning educational fund 529 Savings Plans are correct EXCEPT: A. Contributions are recognized on a five year pro rata basis. B. Earnings grow on a tax deferred basis, unless used for qualified education expenses, and then distributions are tax free. C. The primary benefit of a 529 Savings plan is the state income tax deduction for contributions. D. Earnings are included in gross income and a 10% penalty is assessed if distributions are not used for qualified education expenses.

C. The primary benefit of a 529 Savings plan is the state income tax deduction for contributions.

Mrs. Escovido has come to you for advice on financing her son's college education at a state university. Even though her income exceeds $200,000, she has not saved enough for his college expenses. You advise her that her best opportunity to acquire education funds would be through: A. Pell grants B. Subsidized Stafford Student Loans C. Supplemental education opportunity grants D. Parent loans for undergraduate students (PLUS)

D. Parent loans for undergraduate students (PLUS)

Mutual funds that take the approach that "if you can't beat 'em, join 'em," are tax efficient, have low expense ratios and attempt to match the performance of a market are: A. Global Funds B. Bond Funds C. Sector Funds D. Index Funds

D. Index Funds

Betty wants to know the probability that her investment in HighFlier, Inc. will generate a return less than zero. The investment has a mean return of 6% and a standard deviation of 3%. Based on a normal distribution curve you correctly inform her that: A. There is a 2.5% probability of a negative return. B. There is a 5% probability of a negative return. C. There is a 10% probability of a negative return. D. There is a 34% probability of a negative return.

A. There is a 2.5% probability of a negative return.

Which of the following has maturities greater than 10 years? A. Treasury Bills B. Treasury Notes C. Treasury Bonds D. All of the above

C. Treasury Bonds

Which of the following types of investment risk cannot be eliminated through diversification? A. Unsystematic risk B. Company specific risk C. Systematic risk D. Business Risk

C. Systematic risk

Your client Holly Lynne has a 15% required rate of return. She is considering investing in XYZ, Inc., which paid an annual dividend of $0.75 this year and is projected to increase its earnings and dividends by 10% annually. The current market price is $15.40. A. The intrinsic value of the stock is $16.50, so the client should not purchase this stock since the company is currently overvalued. B. The intrinsic value of the stock is $16.50, so the client should purchase this stock since the company is currently undervalued. C. The intrinsic value of the stock is $15.00, so the client should not purchase this stock since the company is currently overvalued. D. The intrinsic value of the stock is $15.00, so the client should not purchase this stock since the company is currently undervalued.

B. The intrinsic value of the stock is $16.50, so the client should purchase this stock since the company is currently undervalued.

The following set of newly issued debt instruments was purchased for a portfolio: o Treasury bond. o Zero-coupon bond. o Corporate bond. o Municipal bond. The respective maturities of these investments are approximately equivalent. Which one of the investments in the portfolio would be subject to the greatest relative amount of price volatility if interest rates were to change quickly? A. Treasury bond B. Zero-coupon bond C. Corporate bond D. Municipal bond

B. Zero-coupon bond

Jennifer Jones wants to accumulate wealth, but she has told you, her new financial planner, that she is risk averse. What should you do with her money? A. Invest in products that bring the highest return regardless of risk. B. Invest in products that produce high income because fixed income products are generally low risk. C. Put Jennifer's assets in 100% cash equivalents because she is risk averse. D. Determine Jennifer's true risk tolerance

D. Determine Jennifer's true risk tolerance

Which of the following are true statements about the Capital Asset Pricing Model (CAPM)? 1. The Capital Market Line (CML) by itself does NOT determine the optimal portfolio for an investor. 2. Beta is used as a measure of risk on the Security Market Line (SML). 3. The required return is beta times the market return. 4. As investors substitute risky securities for risk-free assets, both risk and return increase. A. 1 and 3 B. 2 and 4 C. 1, 2, and 4 D. 2, 3, and 4

C. 1,2, and 4

Which, if any, of the following statements is (are) correct? 1. Financial risk has to do with the amount of leveraging or the use of borrowed funds that a firm utilizes to structure its investment and finance its asset. 2. Debenture bonds are backed by the income from a specific project. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2

A. 1 only

Which of the following is not an example of unsystematic risk? A. Country Risk B. Government / Regulation Risk C. Housing Risk D. Business Risk

C. Housing Risk

What impact would inflation have on retirement? A. Increases capital needs B. Fewer alternatives in retirement C. Unable to meet capital requirements D. Reduces purchasing power

D. Reduces purchasing power

Which of the following is a good benchmark for savings for retirement as a percent of gross income for someone who is between age 25 and 30? A. 5% to 10% B. 10% to 15% C. 15% to 20% D. 20% to 25%

B. 10% to 15%

Rod is 40 years old and plans on retiring at age 62 and living until age 90. Assume that he currently earns $110,000 and his wage replacement ratio is 72 percent. Social Security will provide $20,000 (in today's dollars) in retirement benefits per year. Inflation is expected to be 3 percent and Rod can earn 6 percent return on his investments. Find the amount Rod will need to have saved by day one of retirement. A. $1,993,230 B. $2,455,219 C. $2,004,516 D. $2,214,056

D. $2,214,056 STEP #1 – We start by calculating income needed per year (during retirement) in today's dollars. 110,000(0.72) - 20,000 = 59,200 STEP #2 – Next we need to inflate this out to future dollars. PV = -59,200 n = 62 - 40 = 22 i = 3% solve for FV = 113,433.32 STEP #3 –The next step determines the balance he needs in his investment accounts at retirement. PMT = 113,433.32 n = 90 - 62 = 28 i = {[(1.06)/(1.03)]-1}*100 = 2.9126 Solve for PV = -2,214,056

Your client, Tom, has come to you inquiring about retirement. He wants to know how much he needs to be saving at the end of each month to meet his goal. He is currently 45 and wants to work until age 64, and his estimated return on investment is 9%. He also has $250,000 in retirement savings already. You have calculated that he will need to have $2,413,545 saved by retirement to meet his goals. How much does Tom need to save at the end of each month to make this happen? A. $1,736 B. $2,112 C. $1,433 D. $1,512

A. $1,736 Given the information above we must first calculate working life expectancy (WLE) in months. WLE: 64 - 45 = 19: 19 * 12 = 228 (WLE) Next we need to calculate Tom's monthly return on investment. 9%/12 = 0.75% Given the above information, we can calculate the following: FV = 2,413,544 n = 228 i = 0.75% PV = -250,000 (Retirement savings already accumulated) PMT = -1,736 (This is what Tom will need to save at the end of each month to reach his goal).

Which of the following statements is correct regarding Social Security? A. Retirement benefits under Social Security are intended to provide at least a 50% wage replacement ratio for everyone except for the very highest earners. B. Non-working spouses of retirees receiving Social Security benefits are entitled to a 50% benefit regardless of the non-working spouse's age. C. More than 20 percent of retirees rely on Social Security for more than 90% of their retirement income. D. All employees in the United States are covered by Social Security and are required to contribute FICA taxes.

C. More than 20 percent of retirees rely on Social Security for more than 90% of their retirement income.

Your client, Tom, has come to you inquiring about retirement. He wants to know approximately how much (in future dollars) he will need to have saved by retirement. You have calculated that he will need about $182,365 a year to maintain his current life style. He expects to retire at age 64 and live to around 90, and his return on investment averages at 9%. Estimated average inflation is 3%. How much does Tom need to have on day 1 of retirement to meet this goal? A. $1,987,422 B. $2,127,937 C. $2,662,389 D. $2,552,815

D. $2,552,815 Given the information above, we need to first calculate working life expectancy or WLE. WLE = 90 - 64 = 26 Then we must calculate our inflation adjusted discount rate. i = {[(1+0.09)/(1+0.03)]-1}*100 = 5.82% Now we can determine the following BEGIN MODE n = 24 i = 5.82% FV = 0 PMT = -182,365 So we calculate PV = 2,552,815

Saben is 40 and wants to retire in 20 years. His family has a history of living well into their 90s. Therefore, he would like to plan on living until age 100, just in case. He currently needs $100,000 and expects that he will need about 80% of that if he were retired. He can earn 9 percent in his portfolio and expects inflation to be 3 percent annually. Some years ago, he purchased an annuity that is expected to pay him $30,000 per year beginning at age 60. It includes an inflation rate cost of living adjustment. In addition, he received $500,000 from his uncle BJ when he died. Saben has spent $200,000 on his home, but is investing $300,000 for his retirement. His Social Security benefit in today's dollars is $20,000. Which of the following statements is true? A. Saben needs to accumulate approximately $1,205,578 by age 60 to fund his retirement. B. Saben's current savings and other sources of income are adequate to satisfy his retirement needs. C. Saben needs to save approximately $9,300 per year for the next 20 years to fund his retirement. D. Saben needs to save approximately $7,926 per year at year end for the next 20 years to fund his retirement.

B. Saben's current savings and other sources of income are adequate to satisfy his retirement needs.

Lori, a self-employed pediatrician, currently earns $200,000 annually. Lori has been able to save 15% of her annual Schedule C net income. Assume that Lori paid $19,000 in social security taxes, and that she plans to pay off her mortgage at retirement, thereby relieving her of her only debt. Lori presently pays $4,333.33 per month toward the mortgage. Based on the information provided herein, what do you expect Lori's wage replacement ratio to be at retirement? A. 41.0% B. 49.5% C. 59.0% D. 67.0%

B. 49.5% Dollar Value Percentage Salary 200,000 100% Social Security 19,000 (9.5%) Savings 30,000 (15%) Mortgage 52,000 (26%) 99,000 49.5%

Contributing $2,300 to her retirement fund at the end of each year beginning at age 18 through age 52, with an average annual return of 11%, how much does Shelly have in her retirement account at this time to use toward a possible early retirement? A. $688,312 B. $705,726 C. $736,122 D. $809,326

B. $705,726 n = 52 - 18 = 34 i = 11 PV = 0 PMT = -2,300 FV = 705,726

Jimmy has the following expenditures during the year: i. Health Care ii. Spending on Club Dues iii. Travel iv. Gifts to Grandchildren Which of these expenditures would you expect to decrease during Jimmy's retirement? A. ii B. i, ii, & iii C. i, ii, iii &, iv D. none of the above

D. none of the above

Your client, Jim, is currently 45 years old and earns $90,000 a year, pays 7.65% of his gross pay in Social Security payroll taxes, and saves 14% of his gross income. Jim wants to maintain his current lifestyle during retirement, and any work-related savings from retirement are expected to be completely offset by additional spending adjustments during retirement. Using the top down approach, find Jim's Wage Replacement Ratio as a percentage. A. 82.35% B. 79.35% C. 78.35% D. 77.35%

C. 78.35% The correct answer is 78.35%, calculated as follows: $90,000 = 100.00% of salary in % terms ($12,600) = (14.00%) less: current savings in % terms (3,825) = (7.65%) less: payroll taxes in % terms= $41,175 = 78.35% wage replacement ratio in % terms

All of the following are excluded from gross income EXCEPT: A. Child support payments received from a former spouse. B. Scholarship or fellowship for a degree seeking student. C. Alimony received (divorce prior to 2019) D. Life insurance proceeds received due to the death of the insured.

C. Alimony received (divorce prior to 2019)

Christian filed his individual federal tax return for the year ending December 31, 2018 on April 15, 2019 and he owed $18,000. As of December 15, 2019, he still has not paid any of this tax libility. How much does Christian owe as of December 15, 2019? A. $23,310 B. $18,720 C. $22,500 D. $18,810

D. $18,810 [(18,000 x 0.005) x 9 + 18,000] Christian did not fail to file - he failed to pay. Therefore, he owes the 0.5% per month or part of a month failure to pay penalty plus the outstanding tax amount of $18,000.

Steven, age 43, earns $80,000 annually; and his wage replacement ratio has been determined to be 80%. He expects inflation will average 3% for his entire life expectancy. He expects to work until 68, and live until 90. He anticipates an 8% return on his investments. Additionally, Social Security Administration has notified him that his annual retirement benefit, in today's dollars will be $26,000. Using the purchasing power preservation model, calculate how much capital Steven needs, in order to retire at 68.

$1,061,342.08

TRUE OR FALSE: The three types of income in the US income tax system are ordinary income, portfolio income and passive income.

TRUE

Which of the following statements is / are correct? 1. Some tax credits are refundable. 2. Some tax credits are nonrefundable. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2

C. Both 1 and 2

TRUE OR FALSE: The three separate and distinct federal tax systems that are relevant to financial planning are the income tax system, the estate and gift tax system and the property tax system. To avoid income shifting, the principle of the fruit and the tree requires that income is taxed to either the person who earns it or the person who owns the asset that produced the income

FALSE The third one is the GST tax system.

All of the following federal income tax penalties are correct except: A. There is a 5% penalty per month for failure to file. B. There is a 0.5% penalty per month for failure to pay. C. There is a 20% penalty for accuracy related errors. D. There is a 20% penalty per month for fraud up to 100% of under payment.

D. There is a 20% penalty per month for fraud up to 100% of under payment. The penalty for fraud is 15% per month up to 75% of underpayment.

TRUE OR FALSE: The three types of income in the US income tax system are ordinary income, portfolio income and capital income.

FALSE The third should be passive instead of capital.

What is the IRS penalty for fraud-related filing issues? A. 5% per month or part thereof to 25% maximum. B. 0.5% per month or part thereof to 25% maximum. C. 20% of underpayment to 30%. D. 15% per month up to 75% of underpayment.

D. 15% per month up to 75% of underpayment. 15% per month up to 75% of underpayment is the penalty for fraud-related filings. Option A is Failure to File, option B is Failure to Pay, and option C is accuracy related filing penalties.

TRUE OR FALSE: The three primary sources of tax law are statutory sources, administrative sources, and judicial sources.

TRUE

Which of the following statements is / are correct? 1. A power of attorney is a power to act by an agent for the benefit of a principal. 2. A power of appointment is the power to appoint someone to act for the principal. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2

A. 1 only A power of appointment is the power to appoint assets of the principal. A power of attorney is the power to act.

Which of the following methods of joint ownership permits the right to partition the asset without the consent of the joint owner? 1. Community property. 2. Joint tenancy with the right of survivorship. 3. Tenants by the entirety. 4. Tenants in common. A. 4 only B. 2 and 4 C. 2, 3, and 4 D. 1, 2, 3, and 4

2 and 4 Community property and tenants by the entirety are ownership regimes that are restricted to married couples and therefore require the consent of the other spouse to partition the property. The other two titling methods permit partition without the consent of the joint owner(s)

Which, if any, of the following statements is (are) correct? 1. The value of a gift for estate and gift tax purposes is equal to the fair market value of the gifted property on the date of the gift or date of death. 2. The value of a publicly traded security for estates and gift tax purposes is equal to the average of the high and low trading price on the date of the gift or date of death. A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2

C. Both 1 and 2

Georgia just died from a terrible bus accident. She was only 34 years old and had two children under six. Under which of the following circumstances would she be considered to have died intestate? A. She handwrote a will, but did not sign or date it. B. She was not of "sound mind" when she signed her statutory will. C. She failed to prepare a last will and testament. D. All of the above.

D. All of the above

A spendthrift clause in a trust does which of the following? A. It requires the trustee to make small annual distributions. B. It protects the trust assets from most creditors. C. It requires the trustee to act as a fiduciary. D. It protects the trust assets, and allows wealth to grow within the trust income tax free.

B. It protects the trust assets from most creditors.

Although he has amassed a vast fortune, Rudolf has decided not to prepare an estate plan because he believes that his surviving family members will divide up his assets appropriately. Which of the following is not a risk associated with failing to plan an estate? A. His estate will incur excessive transfer taxes. B. His favorite Porsche will not be transferred to his ex-wife, Rita. C. His insurance policy on his own life will not be paid out to the named beneficiary. D. His current wife, Gina, will not provide for his children from a previous marriage.

C. His insurance policy on his own life will not be paid out to the named beneficiary.

TRUE OR FALSE: Retirement plans with named beneficiary designations such as IRAs, SEPs, and SIMPLEs pass outside of the probate process

TRUE Retirement plans with named beneficiary designations will pass outside of the probate process via state contract law.

TRUE OR FALSE: A limited power of appointment subject to an ascertainable standard results in inclusion of the assets subject to the power in the agent's gross estate.

FALSE

Our client, Samantha, died testate last week. At her death she had the following property interests: A. 1/2 of the home that she owns with her husband as community property. B. 1/3 of the vacation home that she owns with her two sisters as tenants in common. C. An empty lot that she alone owns. D. 1/3 of her late parents' home, which she owns with her two sisters as joint tenants with right of survivorship. Which property interest will not pass through her probate estate? A. 1/2 of the home that she owns with her husband as community property. B. 1/3 of the vacation home that she owns with her two sisters as tenants in common. C. An empty lot that she alone owns. D. 1/3 of her late parents' home, which she owns with her two sisters as joint tenants with right of survivorship.

D. 1/3 of her late parents' home, which she owns with her two sisters as joint tenants with right of survivorship. Property owned in joint tenancy, unlike property owned in fee, (option c), as community (option a), or as tenancy in common (option b), is not included in one's probate estate.

All of the following are essential legal documents used in estate planning except: A. A durable power of attorney for health care B. An advance medical directive C. A side instruction letter D. A will

C. A side instruction letter

which of the following statements regarding retirement trends is correct A. The savings rate in the United States has consistently been decreasing over the last 30 years B. The spending pattern of most elderly retirees shows an average decline in outflow during the atter part of retirement. C. Analysis of Social Security shows that only a small percentage of retirees in the United States rely on Social Security benefits as a major part of their retirement sources of income. D. Historically, the retirement age for citizens of the United States has been increasing as workers life expectancy has been increasing. However, that trend has been reversing over the last several years.

B. The spending pattern of most elderly retirees shows an average decline in outflow during the latter part of retirement. Option A is incorrect because savings rates have actually increased over the last several years after consistently decreasing. Option b is correct. Option c is incorrect as Social Security is the major source of income for most retirees. Option d is incorrect as the retirement age has been decreasing consistently until recently

Which of the following statements is true: A. To be more conservative in planning for an individual's retirement, decrease the individuals life expectancy. B. A sensitivity analysis helps the advisor determine the single most effective factor in a retirement plan. C. Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact pattern. D. The capital preservation model assumes that at retirement the client will have exactly the same account balance as he did at his ideal working age.

C. Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact pattern.

TRUE OR FALSE: As the RLE increases because of early retirement, there is generally both an increased need of funds to finance the RLE and a shortened WLE in which to save and accumulate assets.

TRUE

TRUE OR FALSE: The two methods for calculating WRR are the top down approach and the budgeting approach

TRUE

TRUE OR FALSE: The annuity method assumes that the individual will die at the expected life expectancy with a retirement account balance of zero.

TRUE

TRUE OR FALSE: The client balance sheet represents all income, earned less expenses incurred for the period being covered

FALSE

Cash and cash equivalents are assets that are highly liquid in are either cash or can be converted to cash within the next 12 months.

TRUE

TRUE OR FALSE: Investment assets are those assets that help to maintain the client’s lifestyle.

FALSE

TRUE OR FALSE: Long-term liabilities represent client financial obligations that are owed to creditors beyond the next 12 months.

TRUE

TRUE OR FALSE: Community property is an interest in property held by two or more related or unrelated persons.

FALSE

TRUE OR FALSE: If property is owned tenancy by the entirety or as community property then probate is avoided.

FALSE

TRUE OR FALSE: Main categories listed on the income statement, include income, savings, contributions, assets, and expenses.

FALSE

TRUE OR FALSE: Net discretionary cash flow represents the amount of cash flow still available after all savings expenses and taxes have been paid.

TRUE

TRUE OR FALSE: The client's income statement can be prepared from a client’s W-2, information, credit card statement, and other billing statement information.

TRUE

TRUE OR FALSE: The statement of net worth explained changes to net worth such as employer contributions to retirement savings accounts.

TRUE

TRUE OR FALSE: The cash flow statement captures recurring, income, and expenses for the period being reported.

FALSE

TRUE OR FALSE: Forecasted financial statements should reflect recommendations in inflation-adjusted income and expenses.

TRUE

TRUE OR FALSE: Vertical analysis is a tool for financial statement analysis using a common size comparison of a statement line items.

TRUE

TRUE OR FALSE: Ratio analysis is the process of calculating financial ratios that are compared to example benchmarks for meaningful interpretation of the client’s actual financial status.

TRUE

TRUE OR FALSE: The emergency fund ratio measures how many times the client can satisfy their short-term liabilities.

FALSE

TRUE OR FALSE: The housing ratio 1 industry benchmark is less than or equal to 28%.

TRUE

TRUE OR FALSE: The savings rate calculation includes reinvestments in the employer match.

FALSE

TRUE OR FALSE: The quality of debt assessment is based on the comparison of the term of the debt on an asset and the useful life of the asset.

TRUE

Your client Megh asked you several questions about her balance sheet. She doesn’t understand how the assets liabilities and net worth are related. Which of the following statements is true? A. Net Worth = Assets + Liabilities B. Assets = Net Worth - Liabilities C. Liabilities = Assets - Net Worth D. A balance sheet reflects how the assets, liabilities, and net worth changed over the year.

Which of the following statements concerning the valuation of assets on the balance sheet is correct? A. Since some financial planner has access to all of the client financials, a privately held small business is easier to value than a publicly traded company. B. Assets should be valued on the balance sheet using replacement costs. C. An actuary should be retained to value all personal use assets. D. Money market accounts are unlikely to lose value over time.

Jay purchased a new home for $100,000. He put $20,000 down and finance the $80,000 balance. What is the impact of this transaction on his net worth? A. His net worth increases. B. His net worth decreases C. His net worth remains the same D. The net worth will decrease with each mortgage payment made.

Which of the following property ownership regime has a right of survivorship feature? A. Sole ownership B. Tenancy in Common C. Tenancy by the Entirety D. Community Property

C. Tenancy by the Entirety

Marcus and Teresa are married. Marcus is a police officer and earns $50,000 per year. He contributes 10% of his salary to his retirement plan. His employer also makes a 5% matching contribution. Teresa stays at home with her children and contribute $5000 to an IRA. What is their total saving rate? A. 10% B. 20% C. 20.5% D. 25%

D. 25%

TRUE OR FALSE: Personal risk management is a systematic process for identifying evaluating and managing pure risk exposures.

TRUE

TRUE OR FALSE: Perils are approximate or actual cause of a loss that upon occurrence can lead to a severe financial hardship.

TRUE

TRUE OR FALSE: Risk avoidance is the implementation of activities that will result in the reduction of the frequency and/or severity of losses.

FALSE

TRUE OR FALSE: Transfer is the shifting of the risk of loss to remain such as insurance or a warranty.

TRUE

TRUE OR FALSE: A hazard is a condition that creator increases the likelihood of a loss occurring.

TRUE

TRUE OR FALSE: Moral hazard is the indifference to losses based on the existence of insurance.

FALSE

TRUE OR FALSE: The elements of a valid contract include offer and acceptance, legal consideration, and lawful purpose.

TRUE

TRUE OR FALSE: The human life value method of measuring life insurance needs to evaluate the income replacement, and Love um needs of survivors in the event of the insured’s death.

FALSE

TRUE OR FALSE: The capitalization of earnings method uses the clients gross income divided by the risk of risk of return to arrive at the initial amount of life insurance needed.

TRUE

TRUE OR FALSE: Term life insurance has both a savings and an investment component.

FALSE

TRUE OR FALSE: Critical provisions related to disability insurance include the definition of disability, coverage for both sickness and accidents, and whether the policy is noncancelable or guaranteed renewable.

TRUE

TRUE OR FALSE: The non-cancelable provision of a disability policy ensures that the insurance will not be canceled, and that the premiums will remain fixed for the term of the policy.

TRUE

TRUE OR FALSE: The guaranteed renewable feature of a disability insurance policy, obligate the insurer to continue coverage as long as appropriate premiums are paid on the policy.

TRUE

TRUE OR FALSE: The personal automobile policy (PAP) is a package policy that protects against loss for liability, comprehensive, and collision risks.

TRUE

TRUE OR FALSE: The PAP includes coverage for use with permission, business use, and unintentional acts.

FALSE

TRUE OR FALSE: The lack of catastrophic liability coverage in homeowners and auto insurance creates the need for an excess liability policy (PLUP).

TRUE

Which of the following would not be considered a personal risk? A. Becoming disabled due to a car accident B. Injury a passenger in your vehicle during an auto accident that was your fault C. Dying at age 42 given a normal life expectancy of age 80 D. Being diagnosed with a curable form of cancer

You recently met with your client, Leonardo, age 40. Leonardo is widowed and has one dependent child. During your meeting with him, you discussed the concept of risk management. Which of the following statements regarding the ways to manage risk is not correct? A. The selling of Leonardo’s jet ski is an example of risk reduction B. Not purchasing life insurance is an example of risk retention C. Purchasing a warranty is an example of risk transfer D. Insurance is not necessary for every risk of financial loss

If a risk has a high frequency of a occurrence and a high severity, you should: A. Transfer the risk B. Retain the risk C. Reduce the risk D. Avoid the risk

Camila had a very bad year. She wrecked her car in January when she ran a red light because she could not see properly having left her contacts at home and crashed into another car completely destroying both cars. The insurance company was very nice to her and she purchased a new car with the insurance proceeds. Camilla decided that since she had insurance, it really did not matter if she took proper care of her new car because she could always get a new one. Camila got in the habit of leaving her new car unlocked and it was stolen. After Camila bought another car, she decided that she really liked the insurance adjuster and wanted to see him again, so one day she purposely sent her car on fire. In her carelessness, she also caught her hand on fire. Camila was depressed over her circumstances and decided she didn’t want to go back to work. She filed a falsified disability claim for the loss of use of her hand even though she could still use her hand. Which of the following statements is true? A. Driving with poor eyesight is not a hazard B. Leaving the car unlocked as a moral hazard C. Burning the car on purpose is a moral hazard D. Filing a false disability claim is a moral hazard

Kanye wants to purchase a life insurance policy on his own life. He is interested in learning about the various approaches to determine the amount needed. Which of the following is not true regarding the three most common approaches? A. The human life value method estimates the present value of income generated over a person’s work, life expectancy, after adjusting for the expected consumption of the survivors. B. The financial needs method evaluate the income replacement and lump sum needs of the survivors after the insured dies. C. The capitalization of earnings method determines need by dividing the clients gross income by the riskless rate of return. D. Impress a financial planner would utilize all three methods, and then determine the clients needs based on a combination of factors, including affordability.

TRUE OR FALSE: The expected family contribution (EFC) for financial aid can be calculated using the simplified method, which does not consider the family’s assets.

TRUE

TRUE OR FALSE: The financial aid processes initiated by completing the student aid report.

FALSE

TRUE OR FALSE: Pell grants are based on an academic year, the family's EFC, cost of attendance, and whether the student is attending full-time or part-time.

TRUE

TRUE OR FALSE: The TEACH Grant provides up to $4000 per year and is converted to a federal directed unsubsidized Stafford loan if teaching requirements are not met.

TRUE

TRUE OR FALSE: The FSEOG is awarded to students pursuing a career in teaching who agreed to teach at least four years in a community that serves low income families.

FALSE

TRUE OR FALSE: Students must pay the interest expense as incurred for an unsubsidized Stafford loan.

FALSE

TRUE OR FALSE: The seven repayment plans for a direct Stafford loan include the standard repayment, extended repayment, graduated repayment, income-based repayment, pay as you earn, revised pay as you earn, and income contingent repayment.

TRUE

TRUE OR FALSE: Parent PLUS loans are for parents to borrow to help pay for a dependent’s undergraduate education expenses and are based on financial need.

FALSE

TRUE OR FALSE: The interest rate on consolidated loans is based on a weighted average of the interest rate rates of the loans being consolidated.

TRUE

TRUE OR FALSE: Prepaid tuition plans allow a parent to purchase college credits today for availability when the child attends college.

TRUE

TRUE OR FALSE: Distributions for qualified education expenses from a college savings plan or federal and state income tax-free when the student is attending any eligible educational institution.

TRUE

TRUE OR FALSE: The American Recovery and Reinvestment Act of 2009 expanded qualified education expenses to include books, supplies, and equipment.

FALSE

TRUE OR FALSE: Coverdell account contributions must be in cash, no future contributions are allowed once the beneficiary turns 18, and financial distributions must be made within 30 days of the beneficiary attaining age 30.

TRUE

TRUE OR FALSE: Qualified education expenses, including tuition, fees, and Room and board can be paid with Series EE and I bonds allowing the interest earned to be excludable from taxable income.

FALSE

TRUE OR FALSE: To $2500 of student loan interest is income tax deductible (before adjusted gross income) for loans used for qualified education expenses.

TRUE

TRUE OR FALSE: The American Opportunity Tax Credit provides a tax credit of up to $2000 (2021) per family for an unlimited number of years of qualified education expenses.

FALSE

TRUE OR FALSE: Scholarships are non-taxable and typically pay the students for work, such as teaching while studying for a Master's degree or conducting research while working towards a doctorate of philosophy degree.

FALSE

TRUE OR FALSE: Traditional IRA distributions by an individual prior to age 59 1/2 made for qualified education expenses are subject to a 10% tax penalty.

FALSE

TRUE OR FALSE: An UGMA account allows a minor to own cash or securities and an UTMA account allows minors to own cash, securities, and real estate.

FALSE

TRUE OR FALSE: An employer-provided education assistance program only reimburses employees for education, expenses, directly related to the employee’s current job duties.

FALSE

TRUE OR FALSE: The traditional method for education funding calculation is the best approach to use for education funding when the client continues to save while the child is attending college.

FALSE

TRUE OR FALSE: The account balance method used for education funding calculation is a three step approach that determines the lump sum amount needed when the child starts college and how much is saved to attain that amount.

TRUE

TRUE OR FALSE: Hybrid approach used for education, funding calculation, combines the concepts of the uneven, cash flow and traditional methods.

FALSE

Which of the following statements concerning educational tax credits and savings opportunities is correct? A. The lifetime learning credit is equal to 10% of qualified, educational expenses up to a certain limit. B. The American opportunity tax credit is only available for the first three years of post secondary education. C. A parent who claims a child as a dependent, is entitled to take the AOTC credit for the educational expenses of the child D. The contribution limit for Coverdell Education Savings Accounts is applied per year per donor.

C. A parent who claims a child as a dependent, is entitled to take the AOTC credit for the educational expenses of the child

Mitchell and Nina have AGI of $125,000 and have not planned for their children’s education. Their children are age of 17 and 18 and the parents anticipate paying $20,000 per year, per child for educational expenses. Which of the following is the most appropriate recommendation to pay for the children’s education? A. 529 savings plan B. PLUS loan C. Pell Grant D. Coverdell ESA

B. PLUS loan

The following type of financial aid is awarded to students with a low EFC and funds are guaranteed to be available if a student qualifies: A. Pell Grant B. PLUS loan C. Work-study D. Stafford Loan

A. Pell Grant

What is one of the primary differences between a Coverdell ESA and a 529 Savings Plan? A. A Coverdell has contribution limits far below those of 529 saving plans. B. A Coverdell does not have a phase-out limit for those making contributions. C. A 529 savings plan as a phase out limit for those making contributions. D. A Coverdell allows five year proration of contributions.

A. A Coverdell has contribution limits far below those of 529 saving plans.

What is the present value of all college education for five children ages 0, 1, 3, 3, and 5 if the cost of education in today’s dollars is $17,000 per year, education inflation is 5% and the parents expected portfolio rate of return is 8.5%? The children are expected to be in college for years and they will each start at age 18. A. $88,775.02 B. $148,958.22 C. $192,007.89 D. $203,085.22

C. $192,007.89

TRUE OR FALSE: A risk tolerance questionnaire identifies an investors investment goals, and guide the investor regarding appropriate investment choices.

FALSE

TRUE OR FALSE: The expected return is a function of the riskiness of an investment and is a rate of return expected for an asset or investment portfolio.

TRUE

TRUE OR FALSE: The investment planning process includes creating an investment policy statement, examines the external environment, involves selecting a portfolio consistent with the investment policy statement, and includes the periodic monitoring, updating, and evaluating of investment performance.

TRUE

TRUE OR FALSE: The Holding Period Return represents the time period an investment return is measured.

TRUE

TRUE OR FALSE: The geometric return is known as the simple average return.

FALSE

TRUE OR FALSE: Purchasing power risk is a type of systematic risk and is the risk that inflation will cause prices to increase.

FALSE

TRUE OR FALSE: Beta measures the total risk of an investment.

FALSE

TRUE OR FALSE: A normal distribution describes how returns are dispersed around the average return.

TRUE

TRUE OR FALSE: The efficient frontier compares various securities based on the risk-return relationship.

FALSE

TRUE OR FALSE: The capital market line specifies the relationship between risk and return in all possible portfolios.

TRUE

TRUE OR FALSE: Coefficient of determination is a measure of how much return is a result of the correlation to the market or what percentage of a security’s return is a result of the market.

TRUE

TRUE OR FALSE: The risk of a portfolio can be measured through determination of the interactivity of beta and the covariance of securities in the portfolio.

FALSE

TRUE OR FALSE: The zero growth dividend model the same size security pays an annual income or a dividend, each and every year, and the amount of the dividend does not change.

TRUE

TRUE OR FALSE: Risks associated with bond investment include interest rate, reinvestment rate, purchasing power, default, and call risks.

TRUE

TRUE OR FALSE: Mortgage REITs issue, construction, and mortgage loans with return being in the form of interest on the loans.

TRUE

TRUE OR FALSE: Calls gave the holder the right to sell the underlying security at a certain prize by a certain date.

FALSE

TRUE OR FALSE: A closed-end investment company is an investment company where investors purchased their shares from and sell them back to the mutual fund itself.

FALSE

TRUE OR FALSE: Balanced funds typically invest in a total mix of both fixed income securities and bonds.

FALSE

TRUE OR FALSE:

TRUE OR FALSE: Jensen’s Alpha is an absolute risk adjusted performance measurement that indicates whether the fund manager exceeded expectations were under-performed.

TRUE

TRUE OR FALSE: Treynor ratio is a relative risk adjusted performance indicator that compares a Treynor ratio for one fund to the Treynor ratio for another fund.

TRUE

Sylvia has two assets in her portfolio, asset A and asset B. Asset a has a standard deviation of 40% and asset B has a standard deviation of 20%. 50% of her portfolio is invested in asset A and 50% is invested in asset B. The correlation for asset A and asset B is 0.90. What is a standard deviation of her portfolio? A. Greater than 30% B. Less than 30% C. Equal to 30% D. Not enough information to determine

Municipal bonds that are backed by the income from specific projects are known as: A. Income bonds B. Revenue bonds C. General obligation bonds D. Debenture bonds

Alvin‘s investment portfolio consist of several types of stock bonds and money market instruments. The portfolio has an overall standard deviation of 12%, a beta of 1.06, and a total return for the year of 11%. Alvin is considering adding one of two alternative investments to his portfolio. Stock A has a standard deviation of 13%, a beta of 0.87, and a correlation coefficient with the portfolio of 0.6. Stock B has a standard deviation of 11%, a beta of 0.97, and a correlation coefficient of 0.95. Which stock should Alvin consider adding to his portfolio and why? A. Stock A it has a lower correlation coefficient B. Stock A because it has a lower beta than that of the portfolio C. Stock B because I have a lower standard deviation than that of the portfolio D. Stock B because it has a higher correlation coefficient.

Given a mean of 13% and a standard deviation of 9%, what is the range for 99% of all possible results? A. One standard deviation: 4% to 22% B. Two standard deviations: -5% to 31% C. Three standard deviations: -14% to 40% D. None of the above

C. Three standard deviations: -14% to 40%

Which of the following returns do mutual funds use when reporting a five-year historical return? A. Time-weighted return B. Dollar-weighted return C. Arithmetic mean D. Holding Period Return

A. Time-weighted return

Niles and Daphne are near retirement. They have a joint life expectancy of 25 years in retirement. Daphne anticipates their annual income in retirement will need to increase each year at the rate of inflation, which they assume is 4%. Based on the assumption that their first year of retirement need, beginning on the first day of retirement, for annual income will be $85,000, of which they have $37,500 available from other resources, And an annual after tax rate of return of 6.5%, calculate the total amount that needs to be in place when Niles and Daphne begin their retirement. A. $743,590.43 B. $859,906.74 C. $892,478.21 D. $906,131.31

D. $906,131.31

Scarlet has the following expenditures during the current year: Healthcare equals $800 Savings equals $4000 Travel equals $500 Gift to grandchildren $1000 Which of the following expenditures would you expect to decrease during Scarlett’s retirement? A. 2 only B. 1 and 3 C. 2 and 4 D. 1, 2, 3, and 4

Clay would like to determine his financial needs during retirement. All of the following or expenditures, he might eliminate his retirement needs calculation except: A. The $200 per month he spends on dry cleaning for his work suits B. $1500 mortgage payment he makes us scheduled to in five years into retirement C. The FICA taxes he pays each year D. The $2000 per month he puts into savings

Gemma, a 35-year-old client who earns $45,000 a year, pay 7.65% of her gross pay and Social Security payroll, taxes, and saves 8% of her annual gross income. Assume that Gemma wants to maintain her exact pre-retirement lifestyle. Calculate Gemma‘s wage replacement ratio using the top down approach (round to the nearest percent) and using pretax dollars. A. 70% B. 80% C. 84% D. 90%

Which of the following expenditures will most likely increase during retirement? A. Clothing costs B. Travel C. FICA D. Savings

TRUE OR FALSE: Approximately 80% of men work past age 65.

FALSE

TRUE OR FALSE: The RLE is the time period beginning at retirement and ending at death.

TRUE

TRUE OR FALSE: Has the RLE increases because of early retirement, there is generally both in increased need of funds to finance the RLE and a shortened WLE in which to save and accumulate assets.

TRUE

TRUE OR FALSE: Fixed income securities, generally provide the best hedge against inflation and loss of purchasing power.

FALSE

TRUE OR FALSE: Our society tends to save at a rate that is adequate for retirement planning.

FALSE

TRUE OR FALSE: Individuals must consider the impact of inflation when projecting retirement needs.

TRUE

TRUE OR FALSE: The WRR is an estimate of the percentage of an annual income needed during retirement compared to income earned prior to retirement.

TRUE

TRUE OR FALSE: The two methods for calculating WRR or the top down approach and the budgeting approach.

TRUE

TRUE OR FALSE: Retirees generally rely on Social Security, private pension, plans, and personal savings to fund their retirement incomes.

TRUE

TRUE OR FALSE: Social Security is an adequate wage replacement for most individuals.

FALSE

TRUE OR FALSE: Personal savings is the source of retirement income most influenced by the individual.

TRUE

TRUE OR FALSE: Needs analysis is the process of calculating the amount of investment needed and retirement to maintain the pre-retirement lifestyle.

TRUE

TRUE OR FALSE: The capital preservation model, the purchasing power preservation model, and the capitalization of earnings model are used to medicate the risk of outliving retirement funds.

TRUE

TRUE OR FALSE: The annuity method assumes that the individual will die at the expected life expectancy with the retirement account balance of zero.

TRUE

TRUE OR FALSE: Sensitivity analysis eliminates the risk of retirement planning.

FALSE

TRUE OR FALSE: Monte Carlo analysis predicts particular events.

FALSE

TRUE OR FALSE: Simulations allow for an unlimited number of simultaneous ranging variables.

TRUE

Which of the following expenditures will most likely increase during retirement? A. Clothing costs B. Travel C. FICA D. Savings

B. Travel

Gemma, a 35-year-old client who earns $45,000 a year, pays 7.65% of her gross pay and Social Security payroll, taxes, and saves 8% of her annual gross income. Assume that Gemma wants to maintain her exact pre-retirement lifestyle. Calculate Gemma‘s wage replacement ratio using the top down approach (round to the nearest percent) and using pretax dollars. A. 70% B. 80% C. 84% D. 90%

C. 84% Rationale Dollar Value Percentage $45,000.00 = 100.00% Salary ($3,600.00) = (8.00%) Less: Current Savings ($3,442.50) = (7.65%)Less: Payroll Taxes $37,957.50 = 84.35% Wage Replacement Ratio

B. $1500 mortgage payment he makes us scheduled to end five years into retirement

Scarlet has the following expenditures during the current year: * Healthcare equals $800 * Savings equals $4000 * Travel equals $500 * Gift to grandchildren $1000 Which of the following expenditures would you expect to decrease during Scarlett’s retirement? A. 2 only B. 1 and 3 C. 2 and 4 D. 1, 2, 3, and 4

A. 2 Only Rationale Scarlett is likely to decrease her savings during retirement. She is likely to increase her health care expense since she will begin to age and need more medical attention. She is likely to increase her travel expense as she will have more free time available for travel. She is likely to increase the amounts she gives to her grandchildren since she will be in the distribution phase.

Niles and Daphne are near retirement. They have a joint life expectancy of 25 years in retirement. Daphne anticipates their annual income in retirement. Will need to increase each year at the rate of inflation, which they assume is 4%. Based on the assumption that their first year retirement need, beginning on the first day of retirement, for an annual income will be $85,000, of which they have $37,500 available from other resources, And an annual after tax rate of return of 6.5%, calculate the total amount that needs to be in place when Niles and Daphne begin their retirement. A. $743,590.43 B. $859,906.74 C. $892,478.21 D. $906,131.31

D. $906,131.31 Rationale No BEGIN Mode N = 25 i = [(1.065 ÷ 1.04) - 1] x 100 = 2.4038 PV = ? PMT = 85,000 - 37,500 = 47,500 FV = 0 PV= <906,131.3080>

Which of the following statements regarding retirement trends is correct? A. The savings rate in the United States has consistently been decreasing over the last 30 years. B. The spending pattern of most elderly retirees shows an average decline in outflow during the latter part of retirement. C. Analysis of Social Security shows that only a small percentage of retirees in the United States rely on Social Security benefits as a major part of their retirement sources of income. D. Historically, the retirement age for citizens of the United States has been increasing as workers' life expectancy has been increasing. However, that trend has been reversing over the last several years.

B. The spending pattern of most elderly retirees shows an average decline in outflow during the latter part of retirement. EXPLAIN: Option a is incorrect because savings rates have actually increased over the last several years after consistently decreasing. Option b is correct. Option c is incorrect as Social Security is the major source of income for most retirees. Option d is incorrect as the retirement age has been decreasing consistently until recently.

B. $705,726 n = 52 - 18 = 34 i = 11 PV = 0 PMT = -2,300 FV = 705,726

Which of the following is the most common range for wage replacement ratios? A. 50% to 60% B. 60% to 70% C. 70% to 80% D. 80% to 90%

C. 70% to 80%

D. $2,552,815 EXPLAIN: Given the information above, we need to first calculate working life expectancy or WLE. WLE = 90 - 64 = 26 Then we must calculate our inflation adjusted discount rate. i = {[(1+0.09)/(1+0.03)]-1}*100 = 5.82% Now we can determine the following n = 24 i = 5.82% FV = 0 PMT = -182,365 Set Calculator to begin mode So we calculate PV = 2,552,815

TRUE OR FALSE: One of the challenges in retirement planning is that people are living longer and have been retiring early over the last 20 years with only a recent reversal in retirement age.

TRUE

D. $1,505,091.23

C. More than 20 percent of retirees rely on Social Security for more than 90% of their retirement income. Option a is false because Social Security was intended to provide a safety net for retirees and is a foundation of retirement income. It was never intended to provide a substantial amount of income for retirees. Option b is false because the non-working spouse must be at least age 62 to receive benefits under Social Security. Option d is false because there are groups of employees that are excluded from the Social Security program, including workers of some state and local governments.

Which of the following statements is true? A. To be more conservative in planning for an individual's retirement, decrease the individuals life expectancy. B. A sensitivity analysis helps the advisor determine the single most effective factor in a retirement plan. C. A Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact pattern. D. The capital preservation model assumes that at retirement the client will have exactly the same account balance as he did at his ideal working age.

C. A Monte Carlo Analysis uses a random number generator to provide the advisor with an array of possible outcomes utilizing the same fact pattern.

TRUE OR FALSE: The WLE and the RLE expectancy are not inversely related.

FALSE