GP Review Questions

Question 1

Which of the following is an example of quantitative data?
A. The client would like to retire by age 60.
B. The client would like to provide a fully paid education program for his/her child.
C. The client will gift $14,000 to a parent each year.
D. The client has a low risk tolerance.

Answer 1

C - The other answers are qualitative data.

Question 2

What types of specific information should be gathered in the planning process in regards to the client's life insurance contracts?
I. Retirement account values
II. Property insured
III. Premium and dividend options
IV. Policy loans
V. Ownership
A. All of the above
B. II, III, IV, V
C. III, IV,  V
D. III, IV
E. I, II, III

Answer 2

C - ‘Retirement account value’ and ‘property insured’ don’t apply to life insurance contracts. One might argue that the cash value of life insurance could be used as a retirement resource. If the client has inadequate retirement savings, the planner might consider the cash value as a source. However, I, III, IV, and V is not a choice.
Therefore, Answer C is the best answer.

Question 3

Which of the following is a client weakness?
A. Having no guardianship provisions for minor children
B. Having no debt
C. Having a standard of living within budget
D. Saving for retirement at age 55

Answer 3

A - Lack of guardianship for minor children is always a major weakness.

Question 4

Dr. Walters, age 64, wants to retire next year. He has asked you do a retirement projection. He is asking for an impossible retirement income payout based on all his usable assets. In order to meet his projections, you will have to use very high return assumptions. What should you do?
A. Do nothing
B. Run the projections using only your normal return assumptions
C. Run the projections using both your normal return assumptions and necessary assumptions to meet his required retirement income payout
D. Refer him to your worst enemy in town

Answer 4

C - Remember this is a financial planning test. Answer C is being a financial planner. NOTE: Decline him as a client could be an answer on the exam, but even then you should consider Answer C to be the best answer. Welcome to the test. Answer D is Zahn humor.

Question 5

Which of the following is not an example of qualitative data?
A. Client’s priorities
B. Client’s personal and financial goals
C. Client’s desired retirement date
D. Fair market value (FMV) of the client’s assets

Answer 5

D - Since a client’s desired retirement date is subjective, the selection of the appropriate time horizon is considered qualitative. Answer D is clearly quantitative.

Question 6

Completing the data survey on the client’s family members (family tree) allows the financial planner to determine which of the following?
I. The potential life expectancy of the client
II. The insurability of the client
III. The special needs of the client’s family members
IV. The net worth of the client
A. I, II, III
B. I, II
C. I, II, IV
D. II, III
E. III, IV

Answer 6

A - The data survey (family tree) includes information such as date of birth and health. The net worth would be quantitative data obtained from the client’s financial statement.

Question 7

Learning about a client's health should help the financial planner determine which of the following?
I. Retirement needs
II. Life insurance needs
III. Disability needs
IV. Estate tax consequence
A. All of the above
B. I, II
C. II, Ill
D. Ill, IV

Answer 7

A - Health affects retirement, life insurance, and disability needs. The client’s life expectancy would impact the estate tax consequences.

Question 8

In the gathering-client-data step of financial planning process, there are two types of data. Which of the following is an example of qualitative data?
A. Client's date of birth
B. Amounts invested in stocks and bonds
C. Client would like to retire by age 65
D. Names of financial advisors
E. Copy of ILIT

Answer 8

C - The ability of the financial advisor might be considered qualitative but when you can retire is a quality of life Issue.

Question 9

During the first meeting with a client, the financial planner and client need to mutually define the scope of the engagement before any financial planning services are rendered. Which of the following should be defined?
I. The financial planner’s compensation arrangements
II. The responsibilities of the client
III. The duration of the engagement
IV. The services to be provided
V. Information which would limit the scope of the engagement
A. All of the above
B. I, Ill, IV, V
C. I, II, V, V
D. I, IV, V

Answer 9

A - The duration (or time) and the scope can be limited.

Question 10

When can a CFP certificant reveal confidential information?
I. To comply with legal process
II. In connection with a civil dispute between a CFP designee and a client
III. To defend the CFP designee against charges of wrongdoing
IV. Even if it causes irreparable harm to the client
V. With the client’s consent
A. All of the above
B. I, II, V
C. I, III, V
D. I, V

Answer 10

A - Irreparable harm - your client is getting a divorce. You are asked in court about your knowledge of his or her assets. You have to answer.

Question 11

The Standards of Professional Conduct clarifies that the Code of Ethics and Professional Responsibility applies to which of the following?
A. All CFP Board certificants
B. Financial Planners
C. Candidates who are registered with the CFP Board
D. Individuals who have been certified In the past and retain the right to reinstate their CFP certification without passing the current CFP Board Certification Examination

Answer 11

A - Compliance requires CFP Board certificants to comply with the code.

Question 12

Which of the following is a true statement?
A. The Principle of Objectivity states that the interests of the CFP designee and the client are of equal importance.
B. A CFP certificant may not provide references consisting of current or former clients since this would violate the rule of confidentiality.
C. There is no requirement to disclose conflicts of interest that develop after the professional relationship is under way.
D. Compensation disclosure to ongoing clients must be furnished biannually.

Answer 12

B - As written, this is a true statement. If we added to the question that a client gives permission to use their name as a reference, then one may use them as a reference. Conflicts of interest always need to be disclosed.

Question 13

Which of the following is/are true about CFP Board Code of Ethics, Part I?
I. It covers the seven principles.
II. It covers the rules.
III. It covers general statements and professional goals.
IV. It applies to specific activities performed by CFP Board designees.
A. I, II
B. I, III
C. I, IV
D. III
E. IV

Answer 13

B - Part I covers the seven principles. Part II covers the rules. Answer IV applies to the rules, not the principles.

Question 14

During the analyzing and evaluating step of financial planning, which of the following would likely occur?
I. Development of a statement of financial condition
II. Identification of strengths and weaknesses
III. Identification of goals and objectives
IV. Identification of recommendations on investments
A. I, II
B. I, II, IV
C. II, III

Answer 14

A - Answer III is wrong. Identifying goals is part of the data gathering step. Answer IV is wrong. Making recommendations on investments is part of the developing and presenting planning recommendations step. It comes before implementation.

Question 15

Toby Adams CFP is meeting with a new client. He wants to establish and define the relationship. What are his obligations to the client?
I. To disclose his exact commissions on the potential sale of life insurance
II. To define the time frame for the engagement
III. To give the client a brochure about the firm
IV. To explain the client’s responsibilities
A. All of the above
B. I , II, IV
C. II, III
D. II, IV
E. Ill, IV

Answer 15

D - Toby must discuss how he will be compensated, but he does not need to disclose the exact commissions he could receive from the sale of life insurance products. A brochure is not required.

Question 16

Conflicts of Interest are disclosed under which principle and rule?
I. Objectivity
II. Fairness
III. Professionalism
IV. 2.2
V.	6.1
A. I, IV
B. I, V
C. II, IV
D. II, V
E. III, V

Answer 16

C - Conflicts of interest are spelled out in Fairness and Rule 2.2. Very Picky.

Question 17

Under the CFP Board’s Financial Planning Practice Standards, which of the following actions must take place prior to providing any personal financial planning services?
I. The CFP certlficant shall obtain sufficient and relevant quantitative Information and documents applicable to the scope of the engagement and the services being provided.
II. A client’s personal and financial goals, needs, and priorities relevant to the scope of the engagement and the services to be provided shall be mutually defined by the financial planning practitioner and the client.
III. An engagement letter covering the services to be provided must be signed by both the financial planning practitioner and the client.
IV. The scope of the engagement shall be mutually defined by the financial planning practitioner and the client.
A. I, II, III
B. II, IV
C. I, III, JV
D. I, II, IV

Answer 17

D - An engagement letter, while advisable and recommended, is not required.

Question 18

Roughly a dozen times a year, Bruce Leonard, a CFP certificant, encounters clients having serious cash flow and net worth deficits. He generally recommends they consider bankruptcy. Typically, the clients ask Bruce for a referral to a bankruptcy attorney. Bruce generally refers such clients to Mark Mason Esq. Bruce has no formal arrangement with Mr. Mason, but Mr. Mason pays Bruce $150 in cash for every referral who becomes a bankruptcy client. Which of the following statements best reflects the ethical aspect of this situation?
A. Acceptance of any referral fees clearly violates the Principle of Fairness found in the Code of Ethics and Professional Responsibility.
B. Acceptance of any referral fees does not violate the Principle of Fairness found in the Code of Ethics and Professional Responsibility If the nature and source of the referral fee is disclosed in writing to each client referred.
C. Referral fees to attorneys do not violate the Principle of Fairness found In the Code of Ethics and Professional Responsibility because they do not involve product commissions with potential to compromise the Principle of Objectivity.
D. Bruce has no obligation to research Mr. Mason’s competence providing Mr. Mason holds a valid legal license.

Answer 18

B - The code does not prohibit a planner from accepting referral fees; however, the source and nature, but not the amount of such fees, must be disclosed. The code does not distinguish whether the planner’s side compensation represents commissions or referral fees. The Principle of Diligence requires the planner to research the competence of other professionals to which the planner refers clients. Mr. Mason could be an estate planning attorney and know very little about bankruptcy law.

Question 19

Practice standard 400-2 refers to which of the Following?
A. Objectivity
B. Competence
C. Analysis and evaluation of the client’s financial status
D. Development of the recommendations

Answer 19

D - Practice standards refer to steps in the personal financial planning process. Analysis and evaluation is Practice Standards 300. Practice Standard 400-2 is Development of Financial Planning Recommendations.

Question 20

A prospective client calls and tells you a mutual fund that she is considering purchasing will pay a huge capital gain in a few weeks. What questions should you as a financial planner ask this client at this point?
I. What is the client’s date of birth?
II. What are her investment objectives?
III. What other investments does she have?
IV. Will she take the capital gains in cash or reinvest?
V. What is the client’s investment experience to date?
A. I and II
B. II and III
C. IV
D. All of the above

Answer 20

D - All the questions are important. However, the only possible answer is all of the above.The age of the client could be important. The client could be a child. The account is an UTMA. The parent is the custodian.

Question 21

Which of the following are inflows for the cash flow statement?
I. Savings
II. Insurance premiums
III. Inheritance received
IV. Trust income received
V. Alimony received
A. All of the above
B. I, II, IV
C. II, IV, V
D. III, IV, V
E. None of the above

Answer 21

D - Savings and insurance premiums are not inflows.

Question 22

At what value are assets shown on the statement of financial position?
A. Market value
B. Replacement value
C. Current fair market value
D. Market value less any encumbrances
E. Appraised value

Answer 22

C Fair market value

Question 23

Which of the following are not cash/cash equivalents?
I. Mutual Funds
II. Money market accounts
III. III. Cash under mattress
IV. CDs with long maturity remaining
V. Publicly traded stock
A. I, II, IV
B. I, IV, V
C. II, III
D. III, IV, V
E. IV, V

Answer 23

B - The mutual fund and the stock fluctuate in value. The long-term CDs entail a penalty if they are converted into cash.

Question 24

Tom is debt-free.  He used $4,000 from his money market account to contribute to a Roth IRA. From his cash flow, he invested $25,000 in a new mutual fund fund during the year. In addition, due to good investment choices, his existing investments plus his home grew in value by $100,000. What was his change in net worth for the year?
A. $29,000
B. $100,000
C. $121,000
D. $125,000
E. $129,000

Answer 24

D - The Roth investment ($4,000) was offset by a decrease in this money market, resulting in no change to net worth. If the Roth had been funded from cash flow, net worth would have increased. Mutual fund ($25,000) plus investment growth ($100,000) equals $125,000.

Question 25

Todd Jones asks for your help to prepare his cash flow statement. He tells you that his salary before taxes is $250,000 and that he has no mortgage on his home. Which of the following statements is true about Robert's cash flow statement? A. The taxes on his salary are an expense. B. The value of the home is an income source since there is no mortgage. C. The value of the home is an asset. D. The taxes on his salary are a liability.

Answer 25

A - Answers B and C regarding his home have nothing to do with the cash flow statement.

Question 26

``` Mr. and Mrs. Young want to set up a 3-month emergency fund ($15,000). Both of them work, but due to mortgage interest and property taxes, their marginal income tax bracket is only 15%. What kind of account should they set up for the emergency fund? A. High-yield bond fund B. Aggressive growth fund C. Government money market fund D. Tax-free money market E. Tábills ```

Answer 26

C - Answers A and B are too risky to be used as an emergency fund. The government money market account provides a better equivalent yield than a tax-free because of their low marginal income tax bracket. Government market fund is significantly simpler than T-bills which are large denominations and can have maturities of up to 12 months.

Question 27

``` In designing a business budget for a couple that is self-employed, which of the following items would be included as inflows? I. Self-employment taxes II. Keogh contributions III. Notes payable IV. Fees for services rendered V. Checking account interest A. I, II, IV, V B. II, III, IV C. III, IV D. IV, V E. I, V ```

Answer 27

D - Answers I, II, and III are outflows.

Question 28

A client provides a current personal balance sheet to the financial planner during the initial data-gathering meeting. This financial statement will enable the financial planner to gain an understanding of all except which of the following? A. Diversification of the client's assets B. Amount of the client's net cash flow C. Client's liquidity position D. Client's use of debt

Answer 28

B - The question is asking about the balance sheet.

Question 29

``` What is the independent rule of thumb for PITI? A. 20% of net income B. 28% of net income C. 28% of gross income D. 36% of gross income ```

Answer 29

C - See details of PITI within Lesson 3 materials

Question 30

``` Torn purchases a CD for $50,000. He expects it to increase in value at 7.5% compounded annually for the next five years. How much will the CD be worth at the end of the fifth year? A. $34,827.93 B. $70,127.59 C. $71,781.47 D. $72,113.90 ```

Answer 30

``` C - HP10BII / 17BII 12C 1 gold P/YR $50,000 $50,000 ± PV CHS PV 7.5 I/YR 7.5 i 5N 5 n FV = $71,781.47 FV = $71,781.47 ```

Question 31

``` Tim expects to receive $100,000 from a trust fund in 5 years. What is the current value of this fund if it is compounding at 7% annually? A. $71,068.13 B. $71,298.62 C. $100,000.00 D. $140,255.17 ```

Answer 31

``` B - 10BII / 12C / 17BII+ (Enter 1 gold P/YR for 10BII / 17BII+) $100,000 FV 7 i 5 n PV = $71,298.62 The calculator will actually show a negative number; PV is negative. ```

Question 32

``` Mac expects to receive $100,000 in 10 years. What is the current value of this money if it compounds monthly at 12%? A. $30,299.48 B. $31,863.08 C. $32,197.32 D. $310,584.82 ```

Answer 32

``` A - 10BII / 17BII+ 12C 12 $100,000 FV gold 1* i P/YR 120* n $100,000 FV 12 I/YR 10 gold xP/YR PV = $30,299.48 PV = $30,299.48 *[12% Ö 12 months = 1 i, 12 months x 10 years = 120n, or shortcut 10 blue n = 120n] ```

Question 33

Jane purchased 1,000 shares of a mutual fund for $10 per share 5 years ago. Today, she sold the fund for $20 per share. What was her average annual compound rate of return? A. Error 5 B. 2.97% C. 13.89% D. 14.87% E. 15.26%

Answer 33

``` D - 10BII / 17BII 1 gold P/YR $10,000 ± PV $20,000 FV 5 N I/YR = 14.87% 12C $10,000 CHS PV $20,000 FV 5 n I = 14.87 ```

Question 34

``` Louise wants to purchase a home in 5 years. She anticipates making a 20% down payment on a $150,000 home. How much should Louise invest at the end of each year if she expects a return of 9% per year on the investment? A. $2,720.70 B. $4,598.87 C. $5,012.77 D. $22,994.37 ```

Answer 34

C - End mode 10BII / 12C / 17BII+ | $30,000 FV, 5 n, 9 I, PMT = $5,012.77

Question 35

``` Billie receives an inheritance of $100,000. She wants to withdraw equal periodic payments at the beginning of each month for the next 5 years. Billie expects to earn 9% compounded monthly on the $100,000. What amount will Billie receive each month? A. $1,965.54 B. $2,060.38 C. $2,075.84 D. $2,142.43 ```

Answer 35

``` B - Start in Begin mode 10BII / 17BII 12C 12 gold P/YR $100,000 CHS PY $100,000 ± PY .75* i 9 I/YR 60* n 5 gold x P/YR PMT = $2,060.38 PMT = $2,060.38 *[9% ± 12 months = .75 i/12 months x 5 years = 60n, or 9 blue i = .75 i, 5 blue n = 60 n] NOTE: Answer C is using end mode. ```

Question 36

``` If John has already invested $100,000 and wants to accumulate $200,000 more in 10 years, what amount is the annual investment he must make by the end of each year to accomplish his goal? Assume both the initial investment and new investment will earn 8%. A. $5,375.83 B. $5,805.90 C. $12,077.08 D. $13,805.90 ```

Answer 36

``` B End mode 10BII / 17BII+ 1 gold P/YR $100,000 ± PV $300,000 FY 10 N 8 I/YR 12C $100,000 CHS PY $300,000 FY 10 n 8 I PMT = $5,805.90 PMT = $5,805.90 ```

Question 37

Meg and John bought an older home ($40,000) that was in need of improvements. Immediately after moving in, they spent $5,000. - End of year one, spent $1,000 (lawn) - End of year three, spent $3,000 (gutters) - End of year five, spent $1,500 (windows) If they sold it at the end of year five for $100,000, what is the IRR? A. 9.56% B. 11.28% C. 15.55% D. 21.09%

Answer 37

``` C - 10BII $45,000 ± CFj $1,000 ± CFj $0 CFj $3,000 ± CFj $0 CFj $98,500 CFj gold IRR/YR 12C $45,000 CHS g CFo $1,000 CHS g CFj $0 g CFj $3,000 g CHS CFj $0 g CFj $98,500 g CFj f IRR 17BII CFLO clear data yes #T? off off Flow 0 = $45,000 ± Input $1,000 ± Input $0 Input $3,000 ± Input $0 Input $98,500 Input Exit calculate IRR ```

Question 38

Tony purchased a mountain cabin 5 years ago for $40,000. Subsequent transactions were the following. - End of year one, (new roof): $3,000 - End of year two, (new well): $5,000 - End of year three, (new fireplace): $10,000 - End of year four, (new windows): $8,000 - End of year five, (sold property): $85,000 What is the IRR? D. 16.2%

Answer 38

``` A - 10BII $40,000 ± CFj $3,000 ± CFj $5,000 ± CFj $10,000 ± CFj $8,000 ± CFj $85,000 CFj gold IRR/YR 12C $40,000 CHS g CFo $3,000 CHS g CFj $5,000 CHS g CFj $10,000 CHS g CFj $8,000 CHS g CFj $85,000 g CFj f IRR 17BII CFLO clear data yes #T? off #T? off Flow 0 = $40,000 ± Input $3,000 ± Input $5,000 ± Input $10,000 ± Input $8,000 ± Input $85,000 Input Exit, Calculate IRR ```

Question 39

Helen participates in a retirement plan with the following characteristics: - Her current balance: $28,000 - Yearly contribution paid by her employer: $7,500 - Annual Return: 9% How long will it take for her to accumulate $300,000 in the plan? A. 14 years (12C) / 13.62 years (10B / 17BII+) B. 15 years (12C) / 14.35 years (10B / 17BII+) C. 17 years (12C) / 16.8 years (10B / 176II+) D. 18 years (12C) / 17.7 years (10B / 17BII+)

Answer 39

``` B Start in End mode 10B $28,000 +/- PV $7,500 +/- PMT 12C $28,000 CHS PV $7,500 CHS PMT 9I 9 i 300,000 FV = N $300,000 FV = n 15 years (12C) 14.35 (10BII/17BII) Retirement plan contributions are made at year end. Please review page 4-4 for begin/end usage. She does not contribute. This is not a 401( k). ```

Question 40

``` What is the future value of $100,000 at 7% for 10 years? A. $50,834 B. $100,000 C. $176,431 D. $196,715 ```

Answer 40

``` D - 10B $100,000 +/- PV 7 I/Y 10 n Solve for FV 12C $100,000 CHS PV 7 I 10 N Solve for FV . ```

Question 41

``` Which of the following investment products is federally insured? A. Bonds B. Variable annuities C. Time deposits D. Treasury bills ```

Answer 41

C - A time deposit means a CD (federally insured) by FDIC. Bonds may be insured, but the question would have to say so. Variable annuities may provide some guaranteed rate of return and have some state guarantees. Treasury bills are guaranteed by the federal government.

Question 42

Which of the following investments is insured? A. Securities held at a brokerage company B. Treasury bonds C. Mutual funds D. Annuities

Answer 42

A - Picky. The SIPC insures investors against losses arising from the failure of the brokerage firm.

Question 43

Which of the following statements concerning federal law is correct? A. The Securities Act of 1933 provides for protections from misrepresentation, deceit, and other fraud in the sale of existing securities. B. The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of poor investment choices. C. The Investment Company Act of 1940 authorized the SEC to regulate mutual funds. D. The Investment Company Act of 1940 requires that persons or firms advising others about securities investments must register with the Securities and Exchange Commission.

Answer 43

C - Answer D is wrong. The Investment Advisors Act of 1940 covers registration of persons or firms advising others, not The Investment Company Act of 1940.

Question 44

``` What regulates brokerage companies? A. SEC B. FINRA C. NYSE D. Securities Act of 1934 ```

Answer 44

B - The SEC regulates brokerage companies through the FINRA.

Question 45

``` Mrs. Smith has the following assets at one FDIC-insured bank. Asset Various Certificates of Deposit Ownership Mrs. Smith Balance $200,000 Money Market Deposit Account Mrs. Smith $150,000 IRA Rollover Mrs. Smith $200,000 Passbook Savings Joint with son $100,000 Checking Account Joint with daughter $100,000 Savings Account Joint with husband $150,000 How much is currently insured by the FDIC? A. $700,000 B. $750,000 C. $800,000 D. $850,000 E. $900,000 Material is solely for the use in preparation for the November 2014 CFP Certification Examination . ```

Answer 45

C - She is insured for $250,000 for the CD and money market and $200,000 for the IRA. The joint accounts are handled as follows. Joint with son Joint with daughter Mrs. Smith $ 50,000 50,000 Others $50,000 50,000 Joint with husband 75.000 75.000 $250,000 single + $200,000 IRA + $175,000 JT + $175,000 JT The JT account for Mrs. Smith is under the $250,000 maximum.

Question 46

Jill wants to fund her daughter's college needs. She needs $40,000 available ($10,000 per year) at age 18. Her daughter is age 2. She feels that she can make an 8% after-tax return and that inflation will be 3% over the pre- college years. How much does Jill need to deposit today to meet her goal? A. $10,385 +/- $1 B. $11,675 +/- $1 C. $16,665 +/- $1 D. $18,735 +/- $1

Answer 46

``` B - $40,000 FV 16 n 8 i = $11,675.82 PV The question does not say $40,000 in today's dollars, just $40,000. ```

Question 47

``` Tom and Jennifer are struggling but would like to make monthly deposits to fund their new baby's college education. They realize college costs will Increase with inflation, but they want to start with a small amount of savings to fund $100,000 at age 18. They plan to invest $200 at the end of each month. What rate of annual return do they need to achieve? A. 6.92% B. 6.97% C. 7.84% D. 8.37% ```

Answer 47

``` D - End mode, Keystrokes below You solved for monthly interest Annual interest = .6974 i x 12 8.37% 10B 12 P/YR 100,000 FV 200 +/- PMT 18, gold P/YR I = 8.37% *18 years x 12 12C $100,000 FV 200 CHS PMT 216 n* ```

Question 48

During the educational funding period (pre-college), which of the following techniques will work for a middle-class family ($60,000 MAGI) for their son? A. An UTMA funded with EE education bonds B. A parent loan to undergraduate student (PLUS) C. Yearly gifts by a grandparent to a 529 plan and yearly contributions to a Coverdell ESA by the parents D. A Pell Grant

Answer 48

C - Answer A is wrong because EE education bonds cannot be owned by a UTMA. It is tax-deferred but not qualified. The child owns the UTMA, not an adult over age 24. PLUS and Pell Grants are available during the college years. The question is asking about the pre-college years.

Question 49

During the college years, which of the following techniques will work for families ($180,000 MAGI) to pay the tuition for the 1st year of college? A. A 529 withdrawal to pay tuition and a Lifetime Learning credit using the tuition payment B. Coverdell ESA withdrawal to pay tuition and an American Opportunity Credit using the tuition payment C. A Pell Grant and a 529 withdrawal to pay tuition D. A PLUS and a Coverdell ESA withdrawal to pay tuition

Answer 49

D - A 529 or a Coverdell ESA withdrawal cannot be used to pay the tuition and then to take a credit for the tuition paid (Answers A and B). A Pell Grant Is needs-based. This is a wealthy family. In answer B, the American Opportunity Credit is phased out.

Question 50

QTPs differ from UTMA accounts in all ways except which of the following: A. A gift to a QTP is considered a gift of a future interest; a gift to a UTMA is considered a gift of a present interest. B. The owner of a QTP retains the right to determine how and when to use the money in the account; the custodian of a UTMA loses control when the student reaches the age of majority. C. The owner of a QTP can change the beneficiary; the custodian of a UTMA cannot change the beneficiary. D. QTPs grow tax-deferred, and distributions are tax-free if used for qualified educational expenses; UTMA growth and Income distributions can be subject to both regular tax and kiddie tax.

Answer 50

A - Answers B, C, and D are correct; they spell out the differences. A QTP is a gift of a present interest even though the owner retains control. This is the same as a gift to a UTMA (present interest).

Question 51

Parents ($160,000 MAGI filing jointly) with one child in the first year of college should choose which of the following credits if he/she pays tuition of $10,000 in the current year? A. A Coverdell ESA of $2,000 B. An American Opportunity Credit of $2,500 C. A Lifetime Learning Credit of $2,000 D. An UTMA gift of $10,000

Answer 51

B - Both answers B and C are correct, but Answer B Is greater and so would be the parent's choice. In this case, the Lifetime Learning credit completely phased out (MAGI above $128,000). The question is asking about credits.

Question 52

Which of the following is true about Coverdell ESAs? A. Multiple $2,000 contributions can be made on behalf of one beneficiary per year by multiple individuals (not both parents). B. Expenses such as tuition can qualify even when they are for graduate school (to age 30). C. Contributions to the ESA are tax-deductible. D. All earnings must be paid out at age 18. E. Contributions may only be made by a parent.

Answer 52

B - Earnings rnust be distributed when the beneficary reaches age 30. The aggregate contribution on behalf of a beneficiary cannot exceed $2,000.

Question 53

``` Mr. and Mrs. Tice want to fund for their daughter's education. Their daughter is in the 1st grade and will need a computer with software in 2 years. How should they fund the computer and other elementary education expenses if they are in a 28% marginal income tax bracket (under $180,000 MAGI)? A. Save from cash flow B. Set up a Coverdell ESA C. Set up a UTMA account D. Invest in a 529 plan ```

Answer 53

B - UTMAs are subject to the kiddie tax. (Parents are in the 28% bracket.) Answer A is not a bad choice. Answer B answers the question with tax consequences. This is a writer-evaluation question/answer.

Question 54

``` Sally, age 8, has an UTMA account funded by her grandfather (15% tax bracket). Her account generated $2,500 of interest and dividends. Her father is the custodian. His income tax bracket is 28%. What is the amount of tax due on Sally's account? A. $100 B. $140 C. $200 D. $240 E. $420 ```

Answer 54

D - Income $2,500 Standard deduction - 1,000 Taxable at 10% - 1.000 @ 10% = $100 Remainder at 28% $ 500 @ 28% = + 140 $240 If the parents are alive always use their tax rate.

Question 55

John and Helen want to fund a college education for their son, William, age 2. William will attend 4 years of college starting at age 18. They feel that the cost of college will be $12,500/yr in today's dollars. They feel that they can achieve an 8% after-tax yield on their Investments and that inflation will be 5% over the next 20 years. Which of the following is true? A. The lump sum needed to fund the education is $30,555 +/- 5. B. The lump sum needed to fund the education is $29,706 +/- 5. C. The lump sum needed to fund the education is $31,857 +/- 5.

Answer 55

``` A - Cost Deposit now $12,500 $30,555 16 @ 5% 16 @ 8% $27,285.93 1st year 2.8571 4 n During College $104,679.76 total If you calculated $101,728 then you used end mode. Frankly, you either understand this calculation or you don't. If you do not, you must make up your mind you do not and move on. You cannot waste time on one potential question. 2.8571 is 1.08 Ö 1.05, -1, x 100. Please go back to page 6-1 and substitute these numbers. General Principles Quiz Lesson 7 ```

Question 56

``` Which of the following qualifies for compensatory damages? A. Auto accident B. Headaches C. Age discrimination D. Stomach disorders ```

Answer 56

C - Vague physical symptoms such as insomnia, headaches, or stomach disorders are not considered physical injury or Sickness. There is not enough information about the auto accident to know whether it qualifies for compensatory damages.

Question 57

Sue was awarded a lump sum settlement of $1,000,000 in punitive damages as a survivor benefit due to the wrongful death of her husband in a job-related accident. How is the lump sum taxed? A. 100% taxable B. 100% excludabie C. Punitive damages are always taxable.

Answer 57

B - The exception to the punitive damages tax inclusion rule is wrongful death.

Question 58

Barry suffers from a work-related injury (lung disease caused by asbestos). He is awarded $1,000,000 as compensatory damages. The settlement is awarded in the form of a single premium immediate annuity. How is the payout taxed? A. 100% taxable B. 100% excludable C. The $1,000,000 is excludable. Any Income earned is ineluctable. D. The $1,000,000 is includable. Any income earned is excludable.

Answer 58

B - When a single premium immediate annuity is purchased by the party obligated to make the damage payments, the entire amount of each periodic payment is excludable by the taxpayer receiving the payments.

Question 59

Harry and Sally won $200,000,000 In the Big Kahuna lottery. Within 60 days of winning, they decided to split the winnings and take payouts over 20 years rather than the lump sum. How much must be included In income this year? A. The payment each received this year. B. $200,000,000 because they split the winnings. C. $200,000,000 because they had the option to choose cash. D. The Income tax is based on the annuity Inclusion ratio.

Answer 59

A - A choice of either cash or an annuity made not later than 60 days after entitlement to the prize is disregarded in determining the tax year for which any portion of a qualified prizeis included In income.

Question 60

``` Which of the following is/are among the normal economic indicators? I. Standard & Poor's 500 Index II. Supplier delivery delays III. The Yield Curve IV. Initial unemployment claims A. I B. II, III C. I, II, IV D. II, III, IV ```

Answer 60

C - The yield curve is not an economic Indicator unless it is moving. The others are normal economic Indicators that we hear about every day.

Question 61

``` What is a 6-month (2 quarters) decline (negative GDP) in economic activity? A. Recession B. Depression C. Correction D. Expansion ```

Answer 61

A

Question 62

``` Which of the following industries operate independently of the business cycle? I. Cigarette industry II. Auto industry III. Food Industry IV. Home appliance industry V. Pharmaceutical Industry A. I, II, III, V B. I, III, V C. II, IV D. III ```

Answer 62

B - Answer C is cyclical industries which are highly sensitive to business cycle changes. Defensive industries (Answer B) have little sensitivity.

Question 63

``` The economy is going through 12 months of economic decline (negative GDP). The business cycle is in what phase? A. Depression B. Trough C. Recession D. Recovery ```

Answer 63

C - Two consecutive quarters is a recession. A severe or long recession is a depression. Technically, it is 6 quarters of negative GDP.

Question 64

Which of the following is true about the gross domestic product? A. GDP includes some income generated abroad. B. GDP is measured in constant dollars. C. GDP measures the dollar value of all final goods and services newly produced within the country's boundaries. D. Cars manufactured in Germany but sold in the U.S. are counted as a 1/2 fraction.

Answer 64

C

Question 65

``` Which of the following indicate a tight money policyby the Federal Reserve? I. Fed raises the discount rate. II. Fed lowers the reserve requirements. III. Fed sells securities. IV. Fed lowers the discount rate. V. Fed buys securities. A. I, II, III B. I, III C. II, III, IV D. II, III E. IV, V ```

Answer 65

B

Question 66

When does the business cycle peak? A. When activity is expanding and real GDP output Increases B. When business activity ages C. When business declines bottom out D. When inflation is significant E. When consumer confidence is increasing

Answer 66

B - Answers A and E reflect expansion. Inflation is always prevalent. Business activity ages simply means that the public stops buying because they h.ave enough of everything they need. Please refer to page 7-12.

Question 67

What is the major function of the Federal Reserve System? A. To maintain the soundness of banks and other savings institution B. To carry out monetary policy C. To serve as the country's lender of last resort D. To Implement fiscal policy

Answer 67

B - Its function is to carry out monetary policy. Its objective is to maintain soundness. This Is picky.

Question 68

``` Monetary policy is conducted through which of the following methods? I. Open market operations II. Setting reserve requirements III. Setting margin requirements IV. Setting tax rates A. I, II, III, IV B. I, II, III C. II, III D. I ```

Answer 68

B - Setting tax rates is fiscal policy.

Question 69

Which of the following qualify as an alimony payment to a spouse if made pursuant to a divorce instrument? A. Paying of the payor-spouse's mortgage B. Paying of $4,000 into the payee spouse's IRA C. Paying of child support by the payor spouse D. Paying of the premium on a life insurance policy on the life of payor (paid by the payee spouse)

Answer 69

B - Answer A is wrong. If it said the payee's mortgage, then it would be correct. Child support is never deductible alimony. Answer D would be correct if it were paid by the payor spouse and owned by the payee spouse.

Question 70

Tess and Richard Carpenter bought Microsoft shares many years ago for $5,000 as JTWROS. The stock has split many times and is now worth $100,000. Tess and Richard are now divorcing. She wants the Microsoft stock. What is her basis? A. $5,000 B. $52,500 (her basis plus a $50,000 half step-up in basis) C. $50,000 (split ownership) D. $100,000

Answer 70

A - Answer B is correct if Tess killed Richard prior to the divorce (but that would create other non-tax problems). Her basis will be the same as their original basis.

Question 71

``` In pursuing an easy money policy, the Fed would do which of the following? A. Lower the prime rate B. Lower the fed funds rate C. Sell securities D. Buy securities ```

Answer 71

D - Banks, not the Fed, change the prime rate. The Fed affects the prime rate, but does not set it. The Fed funds rate is determined in an auction by member banks. Fed funds are bank-to-bank overnight borrowing by banks needing additional reserves. If the Fed sells securites through the Federal Open Market Committee, it reflects a tight monetary policy.

Question 72

Can a client who makes $100,000 but has a low net worth invest in a limited partnership that requires $250,000 of net worth through a registered representative? A. Yes, the representative makes an arrangement to sell away. B. Yes, the representative sells it anyway. C. Yes, the representative does some creative financial conniving. D. No, the representative does not sell It to the client.

Answer 72

D - B/Ds typically require the investor to have a certain level of net worth and liquid assets. A brokerage firm may be sued if it allows an unsuitable investor to buy an investment that goes sour.

Question 73

``` If unemployment rises for 18 months and interest rates fall for 6 months, the economy is in which of the followi ng? A. Recession B. Depression C. Trough D. Peak E. Expansion ```

Answer 73

C - Absent any information about the number of months of negative GDP, troughis the best answer. Months by themselves do not create a recession or depression. Picky

Question 74

In a period of declining interest rates (the inverted curve to moving downward and changing to a normal curve) what should you advise a client to do? A. Buy short-term, high-grade bonds B. Buy long-term, high-grade bonds

Answer 74

B - The yield curve will shift downward, causing capital gains in bond portfolios. An investor should move from short-term bonds to long-term bonds to lock in higher coupons and generate capital gains in the bond portfolio.

Question 75

``` Mr. and Mrs. Pond took out a 30-year 6% mortgage on December 1st of this year. The payments will start January 1st next year. The home was purchased for $250,000. They put $150,000 down and financed the remainder. If they have to escrow taxes ($400/mo) and insurance ($200/mo), what Is the amount of their monthly payement? A. $971.14 B. $1,171.14 C. $799.55 D. $1,199.55 E. $1,205.40 ```

Answer 75

D - $599.55 PMT plus taxes and insurance $600.00 = $1,199.55 10B / 17BII 12C 12 PMT / YR $100,000 PV $100,000 PV 6 Ö12 i 6i 30 x 12 n 30 gold x P/PR = 599.55 This is an end answer. The mortgage was taken out 12/1. The first payment is 1/1, a month later. The end of 12/31 is the beginning on 1/1. Mortgages are always end.

Question 76

``` Home equity is a potential source of financing retirement and other financial goals. Which of the following may be used to access home equity for those purposes? I. A reverse mortgage II. A home equity loan III. Sale of the home IV. Refinance of the home A. All of the above B. I, II C. III, IV D. III ```

Answer 76

A - All the techniques can be a potential source of financing either retirement or financial goals. For example, getting the equity out of your home could finance a college education.

Question 77

``` Mr. and Mrs. X provide you with the following data: Their net worth Increased by $60,000 during the year. From cash flow they purchased a new boat ($25,000) and added $5,000 to savings. Their mutual funds grew by $10,000, and his 401(k) increased by $15,000 due to contributions and earnings. From cash flow, they paid $24,000 on their home mortgage and credit card balances. What was the principal reduction on their loans? A. $5,000 B. $10,000 C. $15,000 D. $20,000 E. $25,000 ```

Answer 77

``` A - From cash flow Boat 25,000 Mutual funds 10,000 401(k)* 15,000 Savings 5,000 *From cash flow and growth Assets To Statement of Financial Position $25,000 $60,000 (total increase in Net Worth $10,000 $15,000 $ 5,000 $ -55,000 (known source of asset increases) $55,000* $ 5,000 principle reduction (liability) *The new boat, mortgage, credit card payments, and savings came out of their cash flow. Granted, the $24,000 was paid on home mortgages and credit card balances, but how much was principal and how much was interest? It is probably mostly interest. These are like questions in the lessons and are the only way to solve the question. ```

Question 78

Bob and Allee are recent college graduates and are newly married. They both have accepted positions with firms where relocation is highly likely. Their combined income puts them in a 28% marginal tax bracket. Should they continue to rent an apartment or purchase the home of their dreams? A. They should purchase a home to take advantage of tax deductions for interest and property taxes. B. They should purchase a home to take advantage of a highly volatile real estate market and potential tax- free money should they have to sell it. C. They should continue to rent because of the llkellkhood of upcoming job-related moves. D. They should continue to rent to take advantage of the lower rental costs.

Answer 78

C - The time factor (relocation) is probably more important than all other factors such as tax deductions or tax-free gains. There is not enough infomatlon to support Answer D.

Question 79

``` Mr. and Mrs. Bailey have been advised by their financial planner that they can afford to make $650-a -month payments on a mortgage loan for a home. The current rate on a new 30-year mortgage is 6.75%. How much can they afford to borrow? A. $95,279 B. $98,213 C. $100,216 D. $100,924 E. $102,100 ```

Answer 79

``` C - 10BII 12C 12 PMT/YR $650 PMT 650 PMT 6.75 Ö 12 i 6.75 I 30 x 12 n 30 gold xP/YR = $100.216 PV ```

Question 80

``` Which of the following is not considered unsecured debt? A. Personal lines of credit B. Personal loans C. Home mortgage D. Signature-only loans ```

Answer 80

C - The other answers are unsecured.

Question 81

Which of the following is not true about a reverse mortgage? A. The home does have to be owned free and clear to qualify for a reverse mortgage. B. There are no monthly mortgage payments during the life of the loan. C. There are no income qualifications. D. A reverse mortgage is only available to homeowners 62 years and older living in condominiums and single family homes.

Answer 81

A - The other answers are true. Answer A is missing the word 'not'.

Question 82

Which of the following is true concerning a pro forma statement? A. It illustrates the sources and amounts of gross income received by the client. B. It illustrates the solvency ratio of the client. C. It illustrates what future financial statements are expected to show. D. It illustrates what has occurred in the past.

Answer 82

C - A pro forma statement projects the expected result of the next year. This comes from lesson 3.

Question 83

``` If a CFP certificant decides to become a RIA, which agency does he notify first? A. FINRA B. SEC C. CFP Board D. Clients E. Broker-Dealer ```

Answer 83

B - Advisers must first file with the SEC. Answer E is the practical answer but not necessarily the best answer. The CP certificant might not have a broker-dealer relationship.

Question 84

Randy Jenkins, a plumber, has been successful in the stock market since the beginning of the bull market in March 2003. Although he earns a comfortable living as a plumber, he realizes he can earn money more easily by advising his friends and relatives all over the country on buying and selling specific stocks and charging them a fee for such advice. Randy has advised over ninety (90) people this past year. Must Randy register as an investment adviser? A. No, he is only advising friends and relatives. B. No, he is not in the business of giving advice. C. Yes, he is in the business of giving advice. D. Yes, he is issuing reports on specific stocks.

Answer 84

C - Randy provides advice on securities for compensation (fees) to clients in multiple states.

Question 85

Which one of the following events arises from being classified as an investment adviser by the SEC? A. A client advisory contract can be transferred to another financial planner at any time. B. A written disclosure brochure must be delivered to the FINRA. C. The individual can use RIA after his or her name on business cards and stationery. D. The individual must file an update Form ADV Part 1 and Schedule 1 with the SEC each year.

Answer 85

D - The written disclosure must be delivered to SEC and FINRA. You cannot use RIA after your name.

Question 86

Which of the following describes the sequence of the initial registration process to sell certain equity-based products? I. Registers with the FINRA through a B/D on Form U-4 II. Central Registration Depository (CRD) System makes registration with the FINRA uniform among states. III. Associates with broker-dealer firm IV. Passes appropriate exam(s) A. I, II, III,IV B. I, IV, II, III C. III, IV, I, II D. III, I, IV, II

Answer 86

D

Question 87

Jack Johnson advises clients about specific securities and provides written financial plans. He charges a fee for these services. Although he usually recommends that the client consider purchasing specific mutual funds and stocks, he does not sell any of these products to his clients. Does Jack have to register as an Investment Adviser and/or with FINRA? A. Neither. He sells no products. B. Must register as Investment Adviser only C. Must register with FINRA D. Must register as Investment Adviser and with FINRA

Answer 87

B - Nothing in the question implies that Jack receives commissions. Thus, he need not register with the FINRA as a securities representative. Please go to www.ria-compliance-consultants.com. It says that some states security regulators also accept other professional designations as an alternative to the Series 65. This alternative has been since the 1970s and 1980s.

Question 88

Sandy has her Series 6 and all applicable state licenses. She may not sell which of the following investments? A. Variable annuity B. Variable life insurance C. Mutual fund traded on a major exchange D. UIT (initial offering)

Answer 88

C - The words mutual fundmay have thrown you off. But, a mutual fund traded on a major exchange is a closed-end fund. To sell closed-end funds (NYSE, etc.), you need a Series 7 license. A Series 6 license allows a representative to sell an initial UIT offering.

Question 89

Jack Goodguy, CFP, your lifelong friend, recently obtained his Series 6 license. He joined a securites firm, Penny Stocks Unlimited. He is selling portfolios of individual stocks like a mutual fund to Florida retirees. What should you do? A. You should turn this bum in because he is cutting into your market. B. You should let it go. The SEC will catch up with him someday. C. You should join the firm. This sounds like a good idea. D. You should send an anonymous envelope to the SEC describing the violation. E. You should notify the Board, SEC, FINRA, Florida Securities Department, etc. promptly even if this guy once saved your life at the old swimming hole.

Answer 89

E - He only has a Series 6 license. He can't recommend or sell individual securities.

Question 90

``` Which of the following is correct? A. J.J. Johnson, RIA B. J.J. Johnson, C.F.P. C. J.J. Johnson, RIA© D. J.J. Johnson, CFP ```

Answer 90

D - C.F.P. is incorrect.

Question 91

``` An ADV Part 1 includes which of the following? I. Applicant's business address II. Compensation III. Background of the client IV. Applicant's business background A. All of the above B. I, II, III C. I, II, JV D. I, IV E. II, IV ```

Answer 91

D - The Part 1 includes the business address and background. The Part 2 spells out the compensation arrangements.

Question 92

Which of the following statements concerning federal law is correct? A. The Securities Act of 1933 provides for protection from misrepresentation, deceit, and other fraud in the sale of existing securities. B. The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of poor investment choices. C. The Investment Advisers Act of 1940 requires that persons or firms advising others about securities investments must register with the Securities and Exchange Commission. D. The Investment Advisers Act of 1940 assures the investor safety of investment in companies engaged primarily in investing, reinvesting and trading in securities.

Answer 92

C - Answer A is wrong because the 1933 Act has to do with new securities not existing securities. Answer D is wrong because the Investment Advisers Act does not assure the investor safety in investing. 0

Question 93

``` Susan, a financial planner, entered into an agreement to provide a financial plan for Mr. and Mrs. Todd. The scope of the plan was agreed to by both parties, and 50% of the plan fee was paid delivered. Susan is exposed to what legal concept? A. Absolute liability B. Vicarious liability C. Tort law D. Contract law ```

Answer 93

D - This is a contract exposure.

Question 94

An enforceable insurance contract does not include which of the following legal requirements? A. The contract can be for any purpose. B. Consideration must be exchanged. C. The applicant must have legal capacity. D. There must be an offer and an acceptance.

Answer 94

A

Question 95

Arbitration (FINRA) typically arises as a result of which of the following? I. A structured settlement dispute. II. A broker's dispute with a customer (client signed an arbitration agreement as part of new account form). III. A customer's dispute with a broker (client signed an arbitration agreement as part of new account form). IV. A business person's dispute with a vendor. A. I, II B. I, IV C. II, III D. III, IV

Answer 95

C - Customers can force brokers to arbitrate. However, brokers may only take to arbitration a customer who signed an arbitration agreement prior to the dispute. Answers I and IV are wrong, so you are forced to choose Answer C.

Question 96

``` Bob has filed for protection under Chapter 7 bankruptcy. Which debts will not be cancelable by bankruptcy? I. Credit card debt II. Government loans III. Child support IV. Personal debt V. Alimony payments A. I, II, IV B. I, IV C. II, III, V D. III, V ```

Answer 96

C

Question 97

``` Jeff had four credit cards in his wallet. The wallet was stolen and the cards used as follows before he could report the loss. Card 1 $500 Card 2 $ 50 Card 3 $400 Card 4 $ 25 How much is Jeff's liability for these transactions? A. $50 B. $175 C. $200 D. $775 ```

Answer 97

B - Jeff's liability is limited to $50 per card, but one card had only $25 charged against it.

Question 98

Express authority is which of the following? A. written, explicit direction from the client to the agent B. written, explicit direction from the agent to the client C. written, explicit direction from the insurance company to the agent D. written, explicit direction from the agent to the insurance company

Answer 98

C

Question 99

Shelley is an agent for an insurance company. She is told not to write policies for day care centers. One day she is approached to write insurance for her longtime friend, Maxine. Maxine just purchased a day care center and is desperate to open up, but can not get insurance coverage. Maxine pleads for coverage, even if temporary. What are Shelley's options? A. Decline to write Maxine the coverage B. Send a binder to Maxine giving her 30 days' coverage C. Write up an application but never send it to the company D. Call the company to get special permission to write the coverage

Answer 99

A - Among the legal duties an agent owes to her principals are the duty to be loyal, the duty not to be negligent, and the duty to obey instructions. Express authority overrides Answer D. She is told not to write policies for day care centers.

Question 100

``` What is the obligation of the agent to the principal? A. None B. Loyalty C. Implied D. Apparent ```

Answer 100

B - Since the agent is a legal agent of the company, he/she must be loyal to company (express).

Question 101

``` Ted has just been denied credit for a new auto. He is protected under which of the following? A. Fair Credit Reporting Act B. Consumer Credit Protection Act C. APR D. Chapter 13 ```

Answer 101

A

Question 102

Dale Jensen (divorced, one dependent child - age 13) closed his sole proprietorship in July 2012. Although his income from the business dwindled to nearly nothing in the last 3 months, his average monthly net income for the last 5 years was about $5,000. He has lived in the same state for the past 15 years. He has a SEP with a balance of $120, 000. He built his primary residence 4 years ago and took out a 15-year mortgage for $120,000. The current FMV of the home is $240,000, and the mortgage balance is $108,000. His state of residence has an unlimited homestead exemption for bankruptcy. Dale's attorney has suggested he file for bankruptcy January in 2008. Which of the following are correct? I. His home is protected under his state's homestead exemption. II. Federal bankruptcy law will treat Dale's SEP as an exempt asset. III. Because Dale's average monthly income is below $6,000, he does not have to complete consumer credit counseling prior to filing for bankruptcy. IV. If Dale opened a 529 account for his daughter last year (prior to filing for bankruptcy), it will be a protected asset under Federal bankruptcy law. V. Because the FMV of Dale's home is over $125,000, it is an unprotected asset under the Federal bankruptcy law. A. I, III B. II, IV, V C. I, III, IV D. I, II E. I, III, V 0

Answer 102

D - Federal law does not preempt state homestead law because Dale lived in the state for more than 730 days and built the home more than 40 months (1215 days) ago. Only traditional and Roth IRAs are protected up to $1,000,000. SEPs, SIMPLES, ERISA plans, and deferred compensation plans are generally protected assets under the 2005 bankruptcy law. ESAs and 529s (for a child) must be opened more than 2 years before filing for bankruptcy to be exempt assets. Everyone must complete a consumer credit counseling program prior to filing Chapter 7. General Principles Final

Question 103

``` A client buys a new car for $20,000. He writes a check for $5,000 and takes out a $15,000 automobile loan. What is the effect on the client's net worth? A. No change B. Increase of $5,000 C. Increase of $15,000 D. Increase of $20,000 ```

Answer 103

A - Use assets (car) increase by $20,000. Cash decreases by $5,000. Liabilities increase by $15,000. Net worth remains unchanged.

Question 104

``` The Watkins obtain a mortgage on their new home for $100,000. The 30-year mortgage payment will be $700/month. How is this transaction reflected on the client's financial statement? A. Assets will increase. B. Liabilities will decrease. C. Net worth will increase. D. Cash outflows will decrease. ```

Answer 104

A - Both assets and liabilities will increase ($100,000 each) while net worth remains unchanged. Cash outflow will probably increase due to mortgage payments.

Question 105

``` Mr. and Mrs. Paul have joint income of $120,000. They own a $130,000 home with a $100,000 mortgage. Mortgage payments are $2,000 per month. Taxes are $3,600 per year, and insurance is $800 per year. What is their PITI as a percentage of income? A. 20% B. 21.9% C. 23.7% D. 28.4% ```

Answer 105

``` C - Mortgage $24,000 Taxes 3,600 Insurance 800 PITI $28,400 Ö $120,000 = 23.7% ```

Question 106

``` Sally purchased a $60,000 promissory note 8 years ago. The note paid 7.5% compounded annually over the last 8 years. How much is the note worth today? A. $33,642.13 B. $103,091.17 C. $106,942.63 D. $107,008.67 ```

Answer 106

D - $60,000 PV, 7.5 i, 8 n = $107,008.67 FV

Question 107

``` If an investor can earn 7.2% nominal return on his investment and inflation is 3.1%, what is the investor's realrate of return? A. 3.8923% B. 3.9767% C. 4.1259% D. 4.2106% ```

Answer 107

B - The answer must be something less than 4.1% (7.2% - 3.1%). [(1.072 Ö 1.031) - 1] x 100 = 3.9767%

Question 108

``` Burt just retired. He rolled 1,000,000 from his employer's qualified retirement plan into an IRA. He asks what amount of distribution he can take at the beginning of the year for the next 25 years so the entire $1,000,000 will be utilized. He believes he can make 10% on the money in the IRA. A. $100,152.79 B. $110,168.07 C. $10,168.07 D. $9,243.70 ```

Answer 108

A Begin mode | $1,000,000 PV, 25 n, 10 i = $100,152.79 PMT

Question 109

Which of the following statements are true about Coverdell ESA accounts? I. The beneficiary must be under 18 in years when contributions are added to the account. II. Contributions are treated as a gift of a present interest from the contributor to the beneficiary. III. Qualified expenses Include religious elementary school expenses. IV. Permissible investments include individual stocks and bonds. A. All of the above B. I, II C. I, II, IV D. II, III E. III, IV Question B Harvey, married, bought a home 5 years ago for $200,000 subject to a $150,000 mortgage. The current fair market value is $225,000 and the mortgage balance is $135,000. How large of a home equity loan can Harvey take out and deduct the interest? A. $0 B. $50,000 C. $90,000 D. $100, 000

Answer 109

A - Coverdell can cover various elementary school expenses.

Question 110

Mr. and Mrs. T's net worth increased from $180,000 to $200,000. During the year, they sold a collectible car for a $3,000 gain above FMV. They bought an oriental rug for $10,000 out of their money market. They had combined taxable income of $100,000 and expenses of $92,000. They invested the difference In new stocks. Income producing assets grew by $5,000. They paid $35,000 on their home mortgage and credit card loans. What was the principal reduction on their loans? A. $4,000 B. $7,000 C. $13,000 D. $16,000 E. $35,000

Answer 110

C - Qualifying home equity debt cannot exceed the difference between the current FMV (225,000) and current in debtness (135,000) or $90,000.

Question 111

Filing under Chapter 7 bankruptcy permits the individual to do which of the following? A. Keep charging on credit cards B. Be forgiven from paying alimony C. Keep homestead-type property D. Escape paying government/student loans

Answer 111

A - | *The $10,000 payment is deducted from the money market and then added as an asset (a wash).

Question 112

Mrs. Charnbers took out a reverse mortgage some years ago to supplement her retirement income. Over the years her health deteriorated, and she recently died. She is survived by three children. Are her children responsible for selling the house and paying off the balance? A. No, the bank still owns the house. B. Yes, they could sell the house and use the sales proceeds to pay off the reverse mortgage balance. C. Yes, they can refinance the mortgage to pay off the reverse mortgage balance. D. Both answers B and C, but not A.

Answer 112

D - The heirs are responsible; otherwise, the bank will foreclose on the house.

Question 113

Which of the following factors should be considered when deciding whether to lease or buy a home? I. Price of the home II. Mortgage interest rate III. Income tax benefits of home ownership IV. The extent to which home prices have increased. V. The period of time a person expects to live in the home. A. All of the above B. I, V C. II, III D. III, IV E. IV, V

Answer 113

A - Considerations shown should be explored.

Question 114

Bart, a private adviser, has only insurance companies as clients (30). Is he exempt from filing as a RIA? A. Yes B. No C. Depends on assets of each company

Answer 114

A - Registration is not required for a private adviser who only advises insurance companies. The number of companies is not a factor; it can be hundreds.

Question 115

``` Saving methods or techniques for college include which of the following? I. Coverdell ESA II. UGMA/UTMA account III. Tax-exempt municipal bonds IV. Saving bonds A. I, II B. I, IV C. II, IV D. All of the above ```

Answer 115

D - Even Coverdell is an answer for college.

Question 116

Are attorneys an exception to registering as investment advisers? A. Yes, attorneys are an exception if the investment advice is solely incidental to their practice. B. No, if they meet the definition for determining who an investment adviser is (A, B, C tests); they are subject to the IAA. C. Both answers A and B

Answer 116

C - Both answers A and B are correct.

Question 117

Barry is a registered representative of a major securities firm. Throughout a typical business day, he advises customers as to which stock, bonds, and mutual funds to buy or sell. Barry receives handsome commissions for his customers' securities transactions. His brother, Larry, holds both the CPA and the CFP designations. He performs comprehensive financial planning for several dozen clients although only 30% of the financial plans he prepares cover investments. Larry is paid on an hourly basis. Which of the followi ng statements regarding Investment adviser registration requirements for these brothers is correct? A. Neither Barry nor Larry is required to register because Investment advice is incidental to their main professions. B. Although Barry must register because he renders investment advice on a regular basis, his brother Larry is exempt from the adviser registration requirements because he is a CPA. C. Although Barry is excluded from the adviser registration requirements because he represents a broker- dealer and charges no special fees for advice, Larry must register because he holds himself out as financial planner and is paid for his work. D. Both Barry and Larry must register because they provide investment advice on a regular and professional (paid) basis.

Answer 117

C - Broker-dealers and their representatives are exempt from adviser registration requirements unless they charge special fees for investment advice/management. Barry receives only commissions. Regarding Larry, planning for dozens of clients is not incidental.

Question 118

A local business person approaches a CFP licensee for assistance with an investment-related tax problem. The client's previous tax preparer suggested the purchase of a variety of tax-advantaged investments to reduce the client's current and future tax burden. Time passed; the client's income dropped, and tax laws changed. The client does not believe the tax preparer misrepresented the situation on the initial sale but still wants to know what recourse is available with respect to the tax preparer. The CFP certificant should do which of the following? I. Explain to the client that this issue is beyond the scope of the CFP certiflcant's professional expertise. II. Advise the client that no recourse is available III. Advise the client to contact an attorney IV. Contact the tax preparer A. IV B. I, III C. II, IV D. I, II, III

Answer 118

B - Statement I applies because there is no indication that the CFP certificant has tax expertise.

Question 119

You, a CFP certificant, are invited to a fully reimbursable due diligence meeting sponsored by XYZ mutual fund. Is it unethical to be reimbursed for the meeting? A. There is a direct rule which prohibits such a reimbursement. B. There is a rule which prohibits such a reimbursement. C. As part of your disclosure to clients (source of compensation), you should disclose such reimbursement. D. This happens all the time. Inever paid any attention to the reimbursement.

Answer 119

C - Rule 2.2 requires you to disclose to clients sources of compensation. Such a reimbursement may be considered compensation. However, there is no direct rule which prohibits such a reimbursement.

Question 120

Larry Jones, CFP, a Registered Investment Adviser and Registered Representative, receives funds from his client to purchase XYZ stock when the stock's price reaches a low of $13. In complying with the CFP code of ethics, can Larry accept these funds? A. Larry's B/D may accept the funds, but they cannot be commingled with the planning firm's general accounts. B. Larry may not accept these funds and should instruct his client that the purchase must be made by the client's stockbroker. C. Larry may not accept these funds but must make the purchase immediately. D. Larry may accept these funds and can place them in his account at the local bank, giving a receipt to his client.

Answer 120

A - Answer A is probably the best answer. Technically, he can't receive the funds. His B/D can. The issue with the question is the commingling of client funds in Larry's account.

Question 121

Your para-planner sends out unauthorized information to your client. Your client acts on the information. Are you responsible? A. You are not responsible for the para-planner's actions. B. You are responsible only if the client acts on the information. C. You are responsible. D. You are not responsible because the client never consulted you.

Answer 121

C - The principal is responsible for the negligent acts of his/her agents.

Question 122

Which of the following is a true statement? A. A CFP certificant may use the initials RIA or R.I.A. following a CFP certificant's name in advertising if she is a registered investment adviser. B. The Investment Advisers Act of 1940 requires registration of investment advisers with the U.S. Securities and Exchange Commission with more than $100 million of assets under management. C. Investment advisers are not required to register in states since the advisers have registered with the U.S. Securities and Exchange Commission. D. Original records supplied by the client become the property of the CFP certificant and need not be returned. E. A CFP certiflcant cannot practice any other profession if working in the area of financial planning.

Answer 122

B - Even if you register with the SEC, you may have to register with your state. The dollar amount is now $100 million.

Question 123

``` The CFP Board has a guide to the use of the CFP Certification Marks. There are two certification marks that must be used. Which of the followi ng is (are) used incorrectly? I. CFPª II. Certified Financial Planner III. Tom Able, CFP IV. C.F.P. A. I, II B. I, III C. I, II, IV D. III ```

Answer 123

C - CFPª is not acceptable. In addition, the initials should always be used with on of the CFP Board's approved nouns (such as certificant). CFP should never use periods. CERTIFIED FINANCIAL PLANNERª, when spelled out, must be all capital letters.

Question 124

``` Principle number 4 of the CFP Code of Ethics and Professional Responsibility embodies which of the following? A. Competence B. Confidentiality C. Fairness D. Objectivity ```

Answer 124

C - Remember IOC/FCPD. Covered in Lesson 2

Question 125

Which of the following are covered under the rules of conduct? I. Obtaining clients through false advertisements. II. Obtaining a loan from a client. III. Providing professional advice unless they are competent. IV. Commingling client funds. A. All of the above B. I, II, III C. II, IV D. III, IV

Answer 125

A - Loans from a client are covered by Rule 3.6. Competence is covered under Rule 4.2. Commingling funds with the funds of the CFP certificant is covered under Rule 3.8. False advertisements are covered under 2.1. The exam will not ask for the actual rule number.

Question 126

Which of the following is not a prescribed form of discipline for a CFP certificant? A. Private censure B. Public letter of admonition C. Permanent revocation of the rights to use the CFP marks D. CFP Certification Examination retake

Answer 126

D

Question 127

A client is shopping for a financial planner. The client has already provided his full financial information to another financial planner. During the initial interview, the client says he is too busy to review all the information again. What should you do first? A. You should try to get all the information from the other financial planner. B. You should explain the services you provide, the process of planning, and the documents required to do a complete financial plan. C. You should decline the client. D. You should try to work with the other financial planner on a joint engagement with the client.

Answer 127

B - Answer B is the first step in the financial planning process. If the client will not complete the first step (answer B), then decline the client (answer C) but go through the first step before you decline the potential client.

Question 128

Which of the following distributions is generally tax-free? I. A lump-sum compensatory damage settlement on account of personal injury. II. An annuity payout of lottery winnings in installments over time. III. A lump-sum punitive damage settlement on account of wrongful death. IV. A fixed annuity payout of compensatory damages where the injured person had no right to the discounted present value of the payments or control over the investment of the present value. A. All of the above B. I, III, IV C. I, IV D. II E. III

Answer 128

B - The lottery winning will always be taxable.

Question 129

Which of the following statements are true? I. A CFP certificant may not commingle client funds with the funds of the financial planning firm. II. Client funds can be commingled in a common client investment account. A. I B. II C. I and II D. Neither I or II

Answer 129

C - Answer I is correct. Ken Zahn cannot have a check made to Kenneth Zahn, Inc. for a client investment since that is the planning firm. The check can be made out to the investment firm.

Question 130

``` As the economy passes through trough into recovery, which industry tends to outperform other industries? A. Pharmaceutical manufacturing B. Gold mining C. Public utilities D. Automobile manufacturing ```

Answer 130

D - Auto sales historically lead the cycle into both expansion and contraction (cyclical industry). Answers A and C are defensive industries and will have little sensitivity to the business cycle. The price of gold tends to mirror the fear of inflation. Inflation normally appears closer to the peak in a business cycle.

Question 131

``` A financial planner makes a recommendation that a client buy a particular stock using his instinct but no research. The client invests in that security. The financial planner is guilty of of which of the following? I. Negligence II. A tort III. Violation of a fiduciary responsibility IV. A contract violation V. Subject to arbitration A. All of the above B. I, III, IV, V C. III D. II, IV, V E. V ```

Answer 131

C - The planner could be negligent which is an unintentional tort. She failed to live up to his fiduciary responsibility. He may be subject to arbitration, but that is not what the question asks (guilty of).

Question 132

``` Which of the following are considered assets of the student for financial aid calculations? A. EE education bonds B. Coverdell ESAs accounts C. UTMA account D. 529 plan accounts ```

Answer 132

C - EE education bonds must be owned by a parent or some one age 24 or older.

Question 133

If the U.S. is experiencing high unemployment, falling stock prices, and declining consumer spending, then what actlon(s) will Congress or the Fed take? I. The Fed will lower the prime rate. II. The Fed will sell securities. III. The Congress will authorize spending programs. IV. The Fed will raise the discount rate. V. The Fed will take a tight money policy. A. I, III, V B. II, III, V C. II, IV, V D. III, V E. III

Answer 133

E - The Fed does not set the prime rate. If the Fed sells securities or it raises the discount rate, it tightens credit.

Question 134

What is a responsibility of a CFP certificant toward a client? I. To take his or her obligations seriously II. To demonstrate an appropriate level of knowledge III. To have realistic goals IV. To keep financial information confidential A. I, II, III B. I, II, IV C. III, IV D. III

Answer 134

B - Clients should have realistic goals. It is asking about which party should have the goals.

Question 135

``` What investment would you recommend to a widow seeking conservative, steady income in light of a negatively sloped yield curve that is declining to the normal/positive curve (going from YC1 to YC2)? Yield YC1 YC2 Years To Maturity A. T-bills B. T-notes C. 1year CD D. Treasury bonds Frank and Kathy Campbell Case (questions 35 - 41) Frank Frank, age 33, is an engineer. After graduating from college S years ago, he took a job at XLM, Inc. His current yearly salary is $51,000. Kathy Kathy, age 27, operates a mail-order business from their home. She runs the business as a sole proprietorship. The business has two full-time employees. It is profitable enough so that Kathy can take a monthly wage of $2,000. Kathy feels the business is worth $25,000. Kathy will be satisfied to make $24,000 a year and stay at home with her daughter. Frank and Kathy Frank and Kathy have been married for 5 years. They have one child, Sara, age 3. They plan to have a second child when Sara is 5 or 6. They haven't yet set aside money for Sara's college education. They feel they will need the equivalent of $20,000 in 'today's dollars' for each of the 4 years of college for Sara at age 18. They would like to fund for college at the end of each month. They feel they can earn a 9% after-tax return with college costs Increasing by 5% annually. Retirement plans Frank's employer maintains a profit sharing 401(k) plan. Frank contributes 6% of his monthly salary, and the company matches 50% (3% maximum). His plan assets are diversified. The plan has been achieving a 9% return, and Frank is satisfied with that over the long term. Last year, Kathy adopted a SEP. Her two employees are new and are not yet participating In the plan. She realizes the SEP eligibility rules may require contributions for these employees in the future. Kathy is very conservative. The SEP is invested in a GNMA fund returning 6%. She is satisfied with that over the long term. Frank and Kathy expect to retire in 30 years. Frank and Kathy expect to five at least 30 years after retirement. They feel confident they can earn a 9% after-tax return on their overall investments and business interests. They have determined that their annual retirement income need is $70,000 in today's dollars. Frank and Kathy Campbell Statement of Financial Position For the year ending December 31,20XX Assets Checking account (JT) $ 4,000 Liabilities Credit Card $ 1,000 Money market account (JT)1 10,000 Automobile loan4 15,000 $14,000 Mortgage5 72,633 $ 88,633 Invested assets Business interest (K) $ 25,000 Profit sharing 401(k)2 (F) 20,000 SEP (K) 3,500 Life insurance cash value 7,500 Mutual funds (JT)3 5,000 $ 61,000 Net worth $ ? Use assets Home (JT) $100,000 Personal property (JT) 25,000 Automobiles (JT) 25.000 $150,000 TOTAL ASSETS TOTAL LIABILITIES AND NET WORTH $ ? $ ? 1Pays yearly dividends of $500 in cash 2 Use annual contributions at the end of the year for calculation purposes 3 Frank and Kathy have been dollar-cost averaging ($200/mo.) into an S&P 500 Index fund at the end of each month. They expect a return of 9% over the long term. The fund provides no dividends or capital gains. 4 Brand new car, original cost $20,000, trade-in $5,000, 3-year loan, 9% fixed interest paid monthly - They also have a 2nd car worth $5,000 with no loan against it. 5 Original 30-year mortgage of $75,000 taken out 3 years ago, 7.2% fixed interest, paid monthly Frank and Kathy Campbell Yearly Cash Flow Statement For the year ending December 31, 20XX Inflows Frank's salary [net of 401(k) deferral] $ 47,940 Draw from business 24,000 Dividends 500 Total $ 72,440 Fixed ouflows Mortgage payments $ 6,109 Auto payments 5,724 Insurance 6,200 Property tax 1,500 Subtotal - 19,533 Variable outflows Home maintenance $ 3,000 Food 6,000 Utilities 2,500 Clothes 3,000 Charitable gifts 4,000 Vacation 5,000 Entertainment 2,500 Miscellaneous 2,000 Subtotal - 28,000 Taxes Income taxes $ 9,500 FICA taxes 3,900 Self-employment taxes 3,100 Subtotal - 16,500 Savings $ ? Insurance Information Life Insurance (Individual) Person Insured Frank Type of policy Variable universal life Face amount $200,000 Beneficiary Arrangement Kathy, if living; if not, Sara Current Cash Value $7,500 Premium $2,400 Life Insurance (Group) Person Insured Frank Face Amount 2x Salary, Maximum $100,00 Beneficiary Arrangement Kathy, if living; if not, Sara Premiums Paid by XLM, Inc Health Insurance Person(s) Insured Frank, Kathy, and Sara Type of plan PPO Deductible $250 Premiums Frank's premium is paid by XLM, Inc The Premium on Kathy and Sara is $200/month (total) Home Owners Insurance Type HO-3 Coverage $80,000 Premium $400 per year Auto Insurance Type Personal Auto Policy BI/PD $100,000/300,000/50,000 UM $100,000/300,000 Collision $250 Deductible Other than Collision $250 Deductible Premium $500 Semiannual+ Economic environment The current economic environment indicates a stable long-term inflation rate of 3.5%, low unemployment, moderate profit growth, low short-term rates, and moderately high long-term rates. Client Objectives -Maintain their current lifestyle upon retirement (age 63) -Ensure the surviving spouse can maintain his or her current lifestyle should the other spouse die prematurely (75%of current earned income) ```

Answer 135

D - A negatively sloped yield curve (YC1) argues for investing in short-term bonds in order to earn the highest rates. The client may want to execute this strategy only if he or she expects rates to remain unchanged or to increase. The shift from investing in long-term to short term, however, will not benefit from a decline ln interest rates. If the yield curve, in fact returns to its normal positively slope (YC2), then acquiring short-term securities precludes the opportunity to lock in currently high long-term rates. With these thoughts, the best selected answer is Treasury bonds. For example, in 1981, T-bills were paying 18% and 30-year T-bonds were paying 15% when we had a negatively sloped curve. The curve returned to a positively sloped curve and the T-Bonds are still paying 15%.

Question 136

``` What is Frank and Kathy's net worth? A. $128,367 B. $128,867 C. $136,367 D. $136,867 ```

Answer 136

``` C - Frank and Kathy Campbell Statement of Financial Position Assets Liabilities Checking account (JT) $ 4,000 Credit card $ 1,000 Money market account (JT)1 10,000 Automobile loan4 Mortgage2 15,000 72,633 Invested assets 88,633 Business interest (K) $25,000 Profit sharing 401(K)2 (F) 20,000 SEP (K) 3,500 Life insurance (F) 7,500 Mutual Funds (JT)3 5,000 61,000 Net worth $136,367 Use assets Home (JT) $100,000 Personal property (JT) 25,000 Automobiles (JT) 25,000 $150,000 Total assets $225,000 Total liabilities and net worth $225,000 ```

Question 137

``` What is frank and Kathy's PITI percentage? A. 8.09% B. 8.62% C. 10.08% D. 10.61% E. 11.06% ```

Answer 137

D - Mortgage payments Insurance $6,109 ($509.09 x 12) 400 Property tax 1,500 $8,009 PITI Gross Ö Income = $8,009 Ö $75,500 = 10.61% Remember, PITI % is based on gross income. Frank's salary is shown as a net figure on the cash flow statement. His gross salary ($51,000) appears in the first case paragraph. His $51,000, her $2,000 per month plus dividends of $500 in cash total $75,500. This is also shown on cash flow statement.

Question 138

``` What is Frank and Kathy's yearly savings net of the 401(k) deferral? A. $7,907 B. $8,407 C. $10,807 D. $11,467 E. $17,667 ```

Answer 138

``` B - Frank and Kathy's yearly savings is $8,407. See the cash flow statement below. $72,440 - ($19,533 + 28,000 + 16,500) = $8,407 Inflows Frank & Kathy Campbell Yearly Cash Flow Statement Frank's salary $ 47,940 [$51,000 less 6% 401(k)] Draw from business 24,000 Dividends 500 Gross Income $ 72,440 Fixed outflows Mortgage Payments $ 6,109 ($509.09 x 12) Auto Payments Insurance1 5,724 ($477.00 x 12) 6,200 Property Tax 1,500 $19,533 Variable Outflows Home Maintenance $ 3,000 Food 6,000 Utilities 2,500 Clothes 3,000 Charity 4,000 Vacation 5,000 Entertainment 2,500 Misc. 2,000 $28,000 Taxes Income Taxes $ 9,500 FICA 3,900 Self-employment taxes 3,100 $16,500 Savings $ 8,407 Life Insurance $2,400, Homeowners Insurance $400, and auto insurance $1,000 ```

Question 139

``` What amount should Frank and Kathy allocate to their emergency fund? A. $11,883.25 B. $16,008.25 C. $22,566.50 D. $23,766.50 E. $32,016.50 ```

Answer 139

D - Fixed expenses $19,533 Variable expenses 28,000 They need 6 months' expenses 1/2 (6 months) = $23,766.50. $47,533 Currently, Kathy has only a limited income, but she plans to have a second child. The emergency fund only uses fixed and variable expenses, not taxes. Be prudent for the exam as we realize this is a subjective question/answer.

Question 140

``` If Frank and Kathy's return assumptions are accurate, what amount will be in their S&P 500 Index fund at retirement? A. $366, 148.69 B. $368,894.81 C. $439,801.57 D. $442,547.69 ```

Answer 140

``` C Ð There is no indication of inflation in the question. The question just uses the word Òreturn.Ó 10B/17BII (12 P/YR) End mode $5,000 ± PV $200 ± PMT 9i 30 gold x P/Yr $439,801.57 FV 12C End mode $5,000 CHS PV $200 CHS PMT .75i (.75 is 9 Ö 12) 360n (30 x 12) $439,801.57 FV ```

Question 141

``` Presuming the anticipated return is achieved, what amount will be in Frank's profit sharing 401(k) at retirement based on current annual contributions (use annual - not monthly - employer and employee contributions) at the end of the year? A. $625,952 B. $681,960 C. $891,005 D. $947,314 ```

Answer 141

``` C - 10B End $20,000 +/- PV $4,590 +/- PMT 9i 30N FV $891,005 12C (End) $20,000 CHS PV $4,590*CHS PMT 9i 30n FV $891,005 *51,000 x (.06 + .03) = $4,590 The 6% is the deferral and the 3% the match. ```

Question 142

``` Which of the following is a strength of Frank and Kathy's financial position? A. Frank has sufficient life insurance. B. They have established an educational program for Sara. C. Their emergency fund is more than sufficient. D. They live within their income. E. Kathy has sufficient life insurance. John and Mary Walsh Case (questions 42 - 49) John, age 40, and Mary, age 39, have furnished you with the following data. They have one son Tom who is age 10. They want to fund for Tom's education within their means. If John or Mary dies, the survivor would like life insurance to provide an income stream to supplement the surviving spouse's income. They feel they can make 10% on all current and future investable assets. Inflation will be 4% over the long run. Statement of Financial Position For the year ending December 31, 20xx Assets Checking $ 4,000 Liabilities Credit cards (paid monthly) $ 3,850 Savings 8,000 Mortgage 136,150 CDs (maturing) 6,000 $140,000 $18,000 Invested assets IRAs $ 50,000 Growth & Income MF 22,000 Corporate bonds 12,000 Growth stock MF 12,000 $96,000 Net worth $256,000 Use assets Residence $220,000 Automobiles 30,000 Personal property 32,000 $282,000 TOTAL ASSETS $396,000 TOTAL LIABILITIES AND NET WORTH $396,000 Cash Flow Statement For the year ending December 31,20XX Inflows Salaries1 $130,000 Dividends and interest 4,000 Total Inflows $134,000 Fixed outflows Mortgage note $ 14,000 Insurance2 1,500 Property taxes 3,500 Total fixed -19,000 Variable outflows Food $10,000 Transportation 2,000 Clothing/personal care 9,000 Entertainment/vacation 12,000 Medical/dental care 3,000 Utilities/household expenses/misc. expense 33,000 Total variable -69,000 Taxes Federal, state, and local $23,000 FICA 10,000 Total taxes - 33,000 IRA contributions - 4.000 Savings $9,000 1John's $65,000, Mary's $65,000 2 Homeowner's insurance $500 and auto insurance $1,000 ```

Answer 142

D - Strengths and weaknesses are aligned with Answer D. Strengths - Debt management (housing and total) is excellent. The checking account amount is less than one month of fixed and variable expenses. - Savings and investing [including 401(k) and SEP] are excellent. - Lifestyle is within their income. - Amount of net worth is sufficient for their age. Weaknesses - Emergency fund is below the 3-month requirement. They only have $10,000 available the checking account - Is not usable because it is below the fixed and variable monthly cost. Please revisit Lesson 3. - Frank does not have enough life insurance, and Kathy has no life insurance. - No education program is set up for Sara. - They will need substantial saving to meet their retirement goal. NOTE: This is somewhat opinionated, but it does not affect this answer. I do not believe this has ever been tested. It is here for your benefit.

Question 143

Do John and Mary have an adequate emergency fund? A. Yes, their cash/cash equivalents are sufficient. B. No, their emergency fund is underfunded and is a weakness. C. No, their emergency fund is insufficient for 6 months of fixed and variable expenses. D. Yes, their cash/cash equivalents represent a strength.

Answer 143

B - They need 3 months of fixed and variable (1/4 of $88,000 = $22,000). They have $14,000. Only the savings and CD are available.

Question 144

``` John and Mary feel they need $750,000 in investments. Ignoring their checking and savings accounts, CDs, and IRAs, how much do they need to save by the end of each of the next 25 years? A. $2,558 B. $6,932 C. $7,626 D. $9,827 ```

Answer 144

A - Remember, they already have $46,000 in investments. It says 10% in case datA. $750,000 FV $46,000 PV +/- for 10B, CHS for 12C* 10 i, 25 n = $2,558 PMT *It must go in as a negative

Question 145

``` What percent of their gross income is for housing (PITI)? A. 13.43% B. 14.18% C. 14.62% D. 15.16% ```

Answer 145

A Mortgage note Insurance/property $14,000 + 4,000 ($500 + $3,500) $18,000 Ö $134,000 = 13.43%

Question 146

``` What tax-favored funding methods are available and appropriate to John and Mary to fund their son's college education? I. 419 plan II. UTMA account III. Coverdell ESA IV. Education EE bonds V. Pell Grant A. All of the above B. II, III, IV, V C. II, III D. II, IV ```

Answer 146

C - 419 plans are retirement plans. John and Mary's income is above the phaseout level for education EE bonds ($105,000+). Their income is too large to qualify for a Pell grant. Therefore, these are not methods available to them.

Question 147

``` If John and Mary open an UTMA account, is this likely to cause a kiddie tax problem if they deposit $8,000/yr. into an account paying 6% per year? A. Yes B. No C. Yes, in about 4 years D. Never ```

Answer 147

C - $8,000 PMT, 6 i, 3 n = $26,997 at the beginning of 3 years (age 13) $26,997 x 6% = $1,619 (age 13) In 4 years, $37,096 x 6% = $2,226 causes a kiddie tax problem. All I am trying to show is that in 4 years an $8,000 deposit causes a kiddie tax problem which continues from year to year.

Question 148

John and Mary took out a $142,000, 30-year mortgage 5 years ago. The interest rate at that same time was 9%. They are now considering refinancing the remaining note. They can obtain a 7.2% 15-year mortgage but must pay $2,000 in points (will come from their money market account). How much will their monthly payments on the new note be? A. $1,231.63 B. $1,239.03 C. $1,257.23 D. $1,284.55

Answer 148

``` B - You did not need to calculate the remaining mortgage principal; it appeared in the financial statement. The points are paid. They are not refinanced. 10B 12C 12 P/YR 136,150 CHS PV 136,150 ± PV .6i (7.2 Ö 12) 7.2i 180n (15 x 12) 15 Gold xP/YR $1,239.03 ```

Question 149

If John and Mary take out a new mortgage loan (Question 47), how much would their net worth increase based on the following information? - $2,000 in points paid to obtain the new mortgage. - $6,000 of the mortgage payment is principal reduction. - $4,000 is contributed to a UTMA for Tom (from their money market account). - $10,000 from cash flow is saved and invested. - $4,000 from cash flow is contributed to their IRAs. A. $6,000 B. $10,000 C. $12,000 D. $14,000 E. $18,000

Answer 149

D - Trickier than you thought Change in assets Points - $ 2,000 (from money market) UTMA - 4,000 (from money market, gifted to son, now son's asset) Savings + 10,000 (from cash flow) IRA +$ 4,000 (from cash flow) Net Change +$ 8,000 in assets Assets - liabilities = net worth $8,000 - ( - $6,000) = $14,000 The $6,000 of the mortgage payment is principle reduction.

Question 150

``` In which order would you place their priorities? I. UTMA account for Tom II. Emergency fund III. Mortgage refinancing IV. Investments for retirement V. Life insurance purchase A. V, II, III, I, IV B. I, III, V, IV, II C. II, V, IV , I, III D. IV, I, V, II, III E. III, IV, I, II, V ```

Answer 150

A - There is no mention of any existing life insurance in the case material. Therefore, I would list it first, followed by the emergency fund. This is subjective but important in light of family needs and goals.