Fundamentals of Financial Planning Flashcards
Which of the following can the Federal Reserve do to reduce the money supply?
Purchase Treasury securities.
Decrease the reserve requirements for banks.
Raise the discount rate.
Raise the discount rate
Which of the following can the Federal Reserve do to increase the money supply?
Decrease the reserve requirements for banks from 8% to 6%.
Increase expenditures of the federal government, thereby increasing the money supply in the economy.
Conduct open-market transactions.
Decrease the reserve requirements for banks from 8% to 6%.
Conduct open-market transactions.
Which one of the following actions might the Federal Reserve take when using open market operations to regulate the supply of money and the availability of credit?
-Raise or lower the discount rate that influences market purchases and sales of fixed-income securities.
-Call high-coupon Treasury bonds and allow investors to purchase newly issued Treasury bonds with lower coupons.
-“Put” corporate bonds owned by the Fed to the issuing corporation to reduce the quantity of money in the hands of businesses.
-Purchase Treasury bonds from bank investment departments.
Purchase Treasury bonds from bank investment departments.
The tools of the Federal Reserve include changing the discount rate, changing reserve requirements, and open market operations (which consist of either buying or selling Treasury securities depending on the Federal Reserve’s desired objective). This question is asking specifically about the Federal Open Market actions, which eliminates option A, as that is not an action of the FOMC. The FOMC deals with buying and selling treasuries with banking institutions (not businesses or individual investors). That eliminates options B and C.
Martina Flower, CFP® is dually registered under the Investment Advisers Act of 1940. For which one of the following activities would this planner be in violation of the act?
-She received, with the client’s knowledge, both a fee for advice given to the client and a commission from the client transactions.
-She included the cost of preparing the client’s income tax returns as part of the annual fee charged the client.
-She gave clients planning advice that was NOT achievable, given the current economic conditions.
-She distributed to clients the written disclosure brochure two weeks after an investment advising contract was duly signed.
She distributed to clients the written disclosure brochure two weeks after an investment advising contract was duly signed.
This question is challenging because of option “C.” However, future planning (holistic and lifecycle planning) is acceptable. It does not imply that her projections were inappropriate. Option “D” is correct because the disclosure brochure must be given to clients at or before the time an advisory engagement is entered into.
Which of the following industries are typically more affected by recession with regard to production and employment?
Capital goods.
Consumer durable goods.
Consumer non-durable goods.
Services.
Capital goods.
Consumer durable goods.
Long-term capital intensive durable goods and capital investments are most affected when recession occurs. The impact is felt in terms of employment in these areas. Non-durables, consumer, and service areas are less impacted by these events. In other words, we may wait to buy a new car, but we will still buy groceries.
Federal authorities govern the insurance industry in the following instances and manner:
The federal government NEVER influences insurance regulations. That is left to the individual states.
Through the Internal Revenue Codes.
Through the Securities Exchange Commission.
Through the Employees Retirement Income Securities Act.
Through the Internal Revenue Codes.
Through the Securities Exchange Commission.
Through the Employees Retirement Income Securities Act.
Insurance is regulated by the states from the prospective of what policies can be issued in a particular state, what companies can do business in a particular state. Keep in mind, if an insurance company wants to offer tax benefits, retirement benefits, or variable investments, other governing bodies will be involved.
Federal authorities govern the insurance industry in the following instances and manner:
I. is false if the insurance companies want to offer any extra benefits, tax or otherwise.
II. If insurance policies want to keep the tax benefits, they must follow IRS Codes.
III. If the policy is a variable policy, the Securities Exchange Commission will govern the variable investments.
IV. If Insurance is offered as an employee benefit, the policy must abide by rules set by the Employees Retirement Income Securities Act.
Regulation Z, issued by the Federal Reserve Board, is a part of the Consumer Credit Protection Act. Regulation Z requires that:
-Lenders must disclose the items purchased.
-Lenders must be given a “cooling off” period.
-The dollar amount of finance charges and the annual percentage rate be disclosed.
-The length of time to pay the debt be disclosed.
Solution: The correct answer is C.
With the advent of Regulation Z, consumers were able to see the actual cost (including finance changes) that they were paying in any transaction they were making.
The husband of one of your clients had his wallet stolen. He had five credit cards in his wallet when this occurred. He reported the cards as missing the next morning, but the following transactions had already occurred: (Discover Card - $350) (MasterCard - $100) (VISA - $425) (Sears - $25) (Marshall Fields - $685) What is the client’s liability for the fraudulent transactions on these cards?
$50
$225
$250
$1,235
Solution: The correct answer is B.
The maximum on any missing card that the client would have to pay would be $50. But remember the thief only charged $25 on the Sears Card. Therefore, the total is 4 cards times $50 plus $25, which equals $225.
The rules are different when the card number, not the card, is stolen.
A young couple, John and Mary Bartlett, are thinking about purchasing a new home using one of the following mortgages:
Mortgage #1 - 8.5% interest with 4 discount points to be paid at the time of closing.
Mortgage #2 - 9.5% interest with 2 discount points to be paid at the time of closing.
Assuming the couple qualifies for both mortgages, which of the following aspects should be considered in deciding between these two mortgages?
-Gross income of the couple.
-Estimated length of ownership.
-Real estate tax liability.
-Cash currently available.
Estimated length of ownership.
Cash currently available.
Solution: The correct answer is C.
The question tries to eliminate the need to include gross income as part of the answer by stating that the couple could qualify for both mortgages. Real estate taxes will be the same regardless of their financing.
Harry and Deidre Salinger are both age 59 and plan to work to age 65. They have been filling their “bucket list” with all of the things they plan to do in retirement and are really looking forward to getting started on it, but are also concerned about outliving their money. They have saved diligently in their company’s 401(k) plan. In addition to the 401(k)s, the Salingers each have variable universal life insurance policies with $50,000 of cash value. They maintain their checking and savings accounts at the bank where Deidre works, and have a total of $35,000 in those two accounts.
The Salingers have asked you to guide them regarding their asset allocation in the 401(k) plans and whether they can afford to retire at 65 and do the things on their bucket list. Which of the following is the most important piece of additional information that you will need to gather to assist them with these issues?
-Investment risk tolerance
-Summary of current income and expenses
-Copy of their tax return
-Whether either of their employers offers continuation of health insurance benefits for retirees
Solution: The correct answer is A.
In order to determine the appropriate asset allocation, you must have an understanding of the client’s risk tolerance. Risk tolerance is also necessary to make assumptions regarding investment return, which will affect the analysis of whether they can afford to retire at age 65 and live the kind of lifestyle they desire. Answers B and C are other items of information you will need to gather to complete the financial plan, but in terms of the question being asked, A is the most important piece of additional information. D would be least important because if they retire at age 65 as planned they will be eligible for Medicare.
Harold and Mary Anne Miller are a married couple in their early 40s with three children, ages 7, 10, and 12. Harold earns $350,000 per year as General Counsel of a mid-sized IT firm and Mary Anne is a homemaker. They have major assets of $1,500,000 cash and $1,000,000 in stock options. They have done no estate planning. Harold has life insurance of two times his salary from his employer. Harold plans on working full-time until age 62. Harold has the potential to receive more options and restricted stock based on his company’s performance, but has requested that this not be included in his assets for now given the uncertainty. College planning is of great concern to the Millers, currently they have no plan in place. They estimate that they will need $150,000 for each child in current dollars to fund their education. The Millers have constructed a budget and have determined that their household expenses are currently $12,000 per month, after tax. Assume that the Millers are in the 35% federal tax bracket and 6% state tax bracket.
The Millers would like to set aside money to cover all of the required funding for their children’s education. They are not confident the children will be able to handle money by age 21. Which of the following is most appropriate for the Millers (CFP® Certification Examination, released 8/2012)?
-Uniform Transfers to Minors Act (UTMA) account in the name of each child
-Coverdell Education Savings Account
-Section 529 Qualified College Savings plan
-Section 529 Prepaid Tuition plan
Solution: The correct answer is C.
Section 529 plans allow for the family to save for all qualified costs, not just tuition.
A is incorrect because the UTMA account causes loss of control at the age of majority.
B is incorrect because the Coverdell ESA (formally Education IRA) would not be able to fully fund education given contribution limits.
D is incorrect because the Prepaid Tuition plan only covers tuition.
John Hendrick wants to pay one-half of the college costs for his daughter, Ruth. She will be attending a private college with annual costs of $20,000 today. Ruth is 10 years old and will be starting college in 8 years. If these costs are expected to increase annually by 8%, how much will Mr. Hendrick need to provide for her first year of college?
-$18,509
-$23,409
-$27,371
-$37,019
-$74,037
Solution: The correct answer is A.
N=8
i=8
PV=10,000 (20,000/2) he only wants to pay half.
PMT=0
FV=?
Answer is 18,509.3021
Which of the following is not an element of the CFP Board Code of Ethics?
A) Exercise due care.
B) Manage conflicts of interest.
C) Maintain confidentiality
D) Act with knowledge and skill
D) Act with knowledge and skill
CFP professional’s Duties Owed to Clients states to make recommendations with skill and care. This is not an element of the Code of Ethics
When is a CFP Professional required to act as a fiduciary with their clients?
At all times when providing financial advice
When providing financial advice, a CFP Professional is required to act as a fiduciary with their clients at all times. The advice may take the form of selling financial assets or financial planning.
Which of the following is not an element of the CFP Board requirement of Fiduciary Duty?
A) Duty of Diligence
B) Duty of Loyalty
C) Duty of Care
D) Duty to Follow Client Instructions
A) Duty of Diligence
The duty of Diligence requires a CFP Professional to provide services to their clients in a timely and thorough manner. Diligence is not a required element of Fiduciary Duty.
