General Principles Flashcards
Stan and Fran Mann pay off CCs monthly from cash flow. They pay their mortgage pmts from cash flow (yearly principal $2k, interest $8k, taxes $1k, and insurance $500). They save $50/month in a money market acct. (Interest earned and reinvested for the year is $100). How much will the Mann’s net worth increase in the current year?
$2700. Danko GP 3-5
Mortgage Princ + Annual Savings + Interest from MM Acct
After completing a fact finder then constructing a complete financial statement, cash flow, and identifying goals/priorities, you have found the following weaknesses. In what order do you address the following?
- Lack of disability insurance
- No umbrella coverage
- No emergency fund
- Total monthly debt is >40% of gross income
4, 3, 1, then 2. GP 3-19
Laura will have to make pmts of $10k per year 6 years from now. She will have to make a series of 5 yearly pmts at the beginning of the 6th year. She feels she can make an 10% after-tax return on a fund she sets aside now. How much does she have to put into the fund today to make future pmts?
$25,892
GP 4-7
1) How much does she need to make the pmt? BEG $10k PMT, 10 i 5 n = $41,699 PV
2) She needs to make the pmts at the BEG of the 6th year. that means she only has 5 years to fund the $41,699, not 6. $41699 FV 10 i 5 n = $25,892 PV
Fill in the blanks:
If NPV is positive, the IRR is ____ the ROR
If NPV is negative, the IRR is ____ the ROR
If NPV is 0, the IRR is _____ the ROR
Greater than, (more than required)
Less than, (less than required)
Equal to (exactly the rate required)
GP 4-12
Tom and Sue had W-2 earnings of $100,000 last year. They deposited $5,000 into each of their
IRAs from money that was in their checking account. They also sold their five-year-old car for
$1,000 less than it was worth. Due to a slow-down in the housing market, the value of their
home decreased by $25,000. What is their change in net worth?
A. No change
B. Minus $19,000
C. Minus $26,000
D. Plus $9,000
E. Plus $74,000
C
GP Sig Exam
4. Which of the following information should be gathered in the planning process in regards to the client's life insurance contracts? I. Premium and Dividend Options II. Property Insured III. Ownership IV. Policy Loans A. All of the Above B. I, II, III C. I, III, IV D. I, III E. IV
C
GP Sig Exam
- Lisa is in her first year at the local university; Lisa earns about $300 per month from a part-time
job and lives with her mother who does not work outside the home. Her mother receives
$2,000 per month in alimony and $500 in child support. Lisa or her mother may qualify for
which of the following?
A. Parent Loan to Undergraduate Students, American Credit Opportunity, earnings, UGMA
B. Pell Grant, American Opportunity credit, Coverdell withdrawal, educational gift
C. Subsidized Stafford Student Loan, Coverdell withdrawal, earnings, 2503(c)
D. Stafford Student Loan, Lifetime Learning Credit, 529 distribution, earnings
Answer: C
Lisa’s mother probably will not qualify for a Parent Loan to Undergraduate Student (PLUS). She
isn’t wealthy (answer A). Answers B and D will not work because of the coordination rules.
Answer C is the best answer.
GP Sig Exam
- Phil is a firefighter who recently was divorced from his wife Phyllis. They were married for 10
years. Phil agreed to pay Phyllis $2,000 per month in alimony for 5 years and give her the family
home in lieu of her attaching his pension. Phil owns a lawn service in addition to working for the
department. He charges people $500 per month to maintain their lawns. If he agrees to with
Phyllis to mow her lawn and also pay her $1,500 per month PITI payment, then how much of the
payment will be deductible?
A. $2,000
B. $1,500
C. $4,000
D. $3,500
Answer: B
The question is simply asking about the PITI payment. The $2,000 of alimony is not part of the
question. The value of services is not considered alimony. GP Sig Exam
12. Which of the following is a coincidental economic indicator? A. Industrial Production B. Stock Prices, 500 Common Stock C. Money Supply D. Index of Consumer Expectations
A. GP Sig Exam
- To sell variable life insurance contracts, a financial planner must hold which of the following
license?
A. A series 6 and a series 63
B. A series 7 and a state variable life insurance license
C. A series 63 and be a registered investment advisor
D. A series 6 and a series 7
Answer: B
They could have a Series 6 and still qualify, but a Series 7 will do.
GP Sig Exam
- Andee was injured in a fall at a grocery store and received $50,000 in compensatory damages.
However, because the store owner had failed to clean up a spill, she also received $100,000 in
punitive damages. While she was recovering, she won a $500,000 jackpot in the lottery. She
did not want anyone to know about the lottery win until the action related to the fall was
settled, so she waited for 9 months to claim her lottery winnings, which were to be paid out as
an annuity (used 60-day window of notification) over 10 years. If all these events occurred in
the same year, how much must she report as income?
A. $650,000
B. $600,000
C. $150,000
D. $100,000
Answer: C
Both the punitive damages ($100,000) and lottery winnings are taxable. The annuity was
selected within 60 days of notification to the lottery ($500,000/10 = $50,000).
GP Sig Exam
- The DJIA just fell another 350 points; housing starts are on a downward trend; consumer
confidence is down; new claims for unemployment are continually rising. What action is the
Federal Reserve likely to consider taking?
A. Sell government securities using a “reverse-repo”
B. Lower the prime rate
C. Raise reserve requirements
D. Buy government securities using a repurchase agreement
Answer: D
The Fed should buy securities to loosen the money supply. The Fed cannot lower the prime
rate, the banks do that. Answers A and C would tighten the money supply.
GP Sig Exam
- Which of the following is not true about Coverdell ESAs?
A. Contributions are considered to be a gift of a future interest until the student actually uses
the money for qualified education expenses
B. Account gains are tax-free if the funds are used for qualified education expenses
C. The funds must be distributed by the time the beneficiary reaches 30 or rolled to a new
beneficiary
D. The account assets are considered to be an asset of the parent for federal aid purposes
. Answer: A
Contributions are considered to be a gift of a present interest.
GP Sig Exam
20. Which of the following agencies does not monitor or oversee Commercial banks? A. FDIC B. Freddie Mac C. Comptroller of Currency D. Federal Reserve
Answer: B
Freddie Mac issues mortgage-backed securities that are packaged, guaranteed, and sold to
investors.
21. Bob and Sally Hutchinson have the following accounts at one bank: • Bob $200,000 in a checking account • Bob and Sally $200,000 in a money market deposit account • Bob and Sally $600,000 in a joint CD How much is FDIC insured? A. $250,000 B. $500,000 C. $900,000 D. $700,000 E. $1,000,000
Answer: D
Singular accounts are insured to $250,000, and joint accounts allow for each individual to
maximize his and her full $250,000 in joint accounts ($500,000 in joint). Total = $200,000 +
200,000 + 300,000 JT
- Under the Fair Credit Reporting Act which of the following is not correct?
A. A consumer has a right to see why he/she was denied credit.
B. The maximum liability a consumer has for a lost credit card is $50 if he/she reports it timely.
C. Only interested parties can access a consumer’s credit files.
D. Consumer has a right to one free copy of his/her credit report per year.
Answer: B
Credit card liability is covered under the Consumer Credit Protection Act.
- Joe is an aggressive stock market investor who wants to establish a college savings program for
his granddaughter McKenzie. He wants to deposit as much as he can without incurring gift taxes
yet still control the individual investments. What type of plan would be best for him?
A. A Coverdell ESA
B. A 529 Private Savings Plan
C. A UGMA/UTMA account
D. A 2503(c) Trust with Joe as the Trustee
- Answer: C
Joe cannot control the investments in the 529 plan. He is the trustee of the trust (beneficial
enjoyment) which makes the trust income taxable to him plus includes it in his estate. The
Coverdell has a limit of $2,000 per year.
Which of the following statements about ESA plans is true?
- All funds must be used by the end of the final college term.
- The funds can be held in a trust
- The ability of married taxpayers filing jointly to fund the ESA is phased out between $95k-110k.
- Expenses are limited to elementary & secondary education needs.
- is true. All funds must be used before age 30; phaseout for MFJ is on tax table ($190-220k); expenses can be used for elem., secondary, and college.
GP 6-9
ESA contributions are a present or future interest gift?
PRESENT INTEREST GIFT
GP 6-10
Mom wants to establish an account for her minor children. She does not want to incur expenses associated with a trust. She wants to transfer parcels of RE into the account. Which of the following should she use?
- 529 acct
- EE Education Acct
- UTMA
- UGMA
- Coverdell ESA
- UTMA. 529 plans cannot be self-directed, allowing for this particular investment in RE. UGMAs do not permit RE investments. Coverdell at $2,000/year vs $15k to an UTMA (gift exclusion) financially fits the answer. GP 6-10
A couple with an MAGI of $90k want to know which combo of techniques can be used to pay annual education costs for their daughter in her first year of college:
- The AOC, a $20k tuition gift from a grandparent, and a Pell Grant
- A LLC, a Coverdell ESA distrib, and a UTMA distrib
- A Coverdell ESA distrib, a $20k tuition gift from a grandparent, and the AOC
- The AOC, a $20k tuition gift from a grandparent, and an UTMA account distrib for room & board
- Pell Grants are limited to families with MAGIs under ~$60k. Expenses paid with grants/scholarships also do not qualify for these credits. Do not select any combo of the AOC, LLC, and Coverdell ESA withdrawal, or qualified tuition distribution in any one year due to coordination rules. When the question only indicates one expense (tuition), only use one of the four programs as an answer.
GP 6-15
Holly, the daughter of Mr. & Mrs. Guff, plans to get her master’s at a state university. Her parents, both professionals, earn well over $150k each, but spend almost all they make. Which of the following may generate fed income tax credits for the undergraduate as well as graduate education?
- AOC
- LLC
- Coverdell ESA
- PLUS
- None of the above
- NONE. AOC not available for graduate years. LLC is subject to phaseout. The Coverdell and PLUS do not generate fed income tax credits.
GP 6-17
Barry, who lives in CA, is concerned about his son, Brian. Brian is a freshman in high school, shows no signs of wanting a college education. Barry and his father attended Yale. Barry and his father would like to fund for that possibility. Which of the following do you suggest if Brian is an only child?
- Contribute the max allowable under gift tax laws to an UGMA/UTMA
- Wait and take out a PLUS
- Contribute the max allowable under gift tax laws to a 529 savings plan.
- Contribute the max allowable under gift tax laws to a 529 prepaid tuition plan.
- At age of majority, Brian can withdraw the assets in the UGMA/UTMA for personal use. Answer 3 is better than 4 bc the funds will be for an Ivy League school, not a state school. Funds will also be needed for room & board. GP 6-17
Harry & Sally’s divorce was finalized on Nov 30th, 2018. Which of the following qualify as alimony pmts to Sally is pursuant to a divorce instrument?
- Mortgage pmts for property owned by Harry but used by Sally
- Pmt of sally’s rent by harry
- Life insurance premiums on sally.
- Pmts which continue beyond Sally’s death, naming the children as the beneficiaries
- Pmt of Sally’s tuition to State University to become eligible to take the CFP Board Cert Exam
2 & 5. Any pmts made to maintain property owned by the payor are not alimony. Only life insurance premiums on the payor spouse qualify. Pmts that continue after the payee’s death are considered child support. Tuition pmts on behalf of the payee qualify if made pursuant to the divorce instruments.
GP 7-2
Susan’s husband is divorcing her. She was on his health plan provided by Orange Inc. (15 employees). How many months of coverage can Susan get through COBRA?
0 months. Small companies with FEWER than 20 employees are exempt from COBRA legislation. GP 7-5
Fiscal policy activities of the fed gov’t include which of the following?
- Expenditures
- Taxation
- The money supply
- Debt management
1, 2, & 4. GP 7-8 The money supply is monetary policy.
If the Fed wanteed to tighten credit bc of rising inflation, generally the Fed would decrease which of the following?
- Margin require.
- Reserve Require.
- Discount rate
- Purchase of bonds
- If the Fed purchases bonds, it will be pursuing an easy money policy. If the Fed stops buying bonds (decreased purchases), credit will tighten. To tighten credit, the Fed can increase margins, increase the reserve requirements, increase the discount rate, and sell bonds. GP 7-10
John & Mary Jackson bought a home 10 years ago for $100,000. They took out a 30-year, $80,000 mortgage at 9.75%. Now with low interest loans they are considering refinancing their mortgage. The bank will charge them $1000 to refinance at 5.25%. What is the dollar amount of their refinanced loan?
$73,462.70 GP 8-6
loan balance after 10 years plus $1k.
Bill, a life insurance broker, is crafty at answering questions on applications. Joyce desperately needed life insurance bc of a possible medical problem. Bill wrote the application, without discussing the possibility and the life policy was issued. What is the carrier’s obligation in this situation?
- The carrier is req’d to pay any claim bc Bill had apparent authority to write insurance for the carrier.
- If a claim is submitted, the carrier will refund the premium and null the contract (rescission).
- If a claim is submitted, the carrier will re-underwrite the policy and reissue it to reflect the medical exposure to what was originally intended (reformation).
- The carrier is req’d to pay bc Bill is an agent of the company
- Actions of brokers’ (NOT agents) authority do not extend to insurers. Given that it is not obligated to pay the claim, the carrier would refund the premium (rescission). GP 10-3
29. FHA mortgages are guaranteed by which of the following? A. Federal Government B. Department of Treasury C. FNMA D. FDMAC
Answer: A GP Sig Exam
- Which of the following is/are a “false” statement?
I. Investment Advisors Act (IAA) of 1940 assures the investor safety of investments in
companies handling securities.
II. SIPC is designed to protect individual investors from losses as a result of brokerage house
failures.
III. The Securities Act of 1933 provides for protection from misrepresentation, deceit, and other
fraud in the sale of new securities.
IV. Investment Advisors Act (IAA) of 1940 requires that persons or firms advising others about
securities investments must register with the SEC.
A. I
B. I, V
C. II, III
D. III
E. IV
Answer: A
IAA does not assure the investor safety of investments. The other answers are correct. GP Sig Exam
