HS300 Exam Questions Test 1

Question 1

Question 1

Which step in the financial planning process comes before “Monitoring Progress and Updating”?

A) Presenting the Financial Planning Recommendation(s)

B) Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action

C) Understanding the Client’s Personal and Financial Circumstances

D) Implementing the Financial Planning Recommendation(s)

Answer 1

The correct answer is (D).

The final step before “Monitoring Progress and Updating” is “Implementing the Financial Planning Recommendation(s).”

Question 2

Question 2

An example of internal data is

A) The current tax rates.

B) The expected inflation.

C) The client’s goals.

D) The planner’s education.

Answer 2

The correct answer is (C).

Tax rates and expected inflation rates are examples of external data. A planner’s education is neither internal nor external data.

Question 3

Question 3

Which of the following is NOT considered a critical element of an engagement letter?

A) The agreed-upon scope of the work

B) The time horizon for the completion of the work

C) A description of the fees and costs

D) A summary of the planner’s assumptions

Answer 3

The correct answer is (D).

The scope of the work to be performed, the time horizon for the completion of the work, and a description of the fees and costs are all considered to be critical elements of an engagement letter.

Question 4

Question 4

In what order should the steps in the financial planning process occur?

I. Understanding the Client’s Personal and Financial Circumstances
II. Presenting the Financial Planning Recommendation(s)
III. Developing the Financial Planning Recommendation(s)
IV. Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
V. Monitoring Progress and Updating
VI. Implementing the Financial Planning Recommendation(s)
VII. Identifying and Selecting Goals

A) VII, II, I, IV, III, VI, V

B) VII, I, II, III, IV, V, VI

C) I, VII, IV, III, II, VI, V

D) I, II, III, IV, V, VI, VII

Answer 4

The correct answer is (C).

The order of the steps is as follows:
I. Understanding the Client’s Personal and Financial Circumstances
II. Identifying and Selecting Goals
III. Analyzing the Client’s Current Course of Action and Potential Course(s) of Action
IV. Developing the Financial Planning Recommendation(s)
V. Presenting the Financial Planning Recommendation(s)
VI. Implementing the Financial Planning Recommendation(s)
VII. Monitoring Progress and Updating

Question 5

Question 5

During which step of the financial planning process would a planner prepare and analyze financial statements?

A) Identifying and Selecting Goals

B) Understanding the Client’s Personal and Financial Circumstances

C) Analyzing the Client’s Current Course of Action and Potential Course(s) of Action

D) Developing the Financial Planning Recommendation(s)

Answer 5

The correct answer is (C).

The planner would prepare and analyze financial statements in step 3 of the financial planning process, Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action.

Question 6

Question 6

The benefits that accrue to a client from using a financial planner to prepare a financial plan include all the following EXCEPT:

A) The financial planner is subjective and knowledgeable.

B) A professional planner will include metrics in the financial plan.

C) A financial planner will identify risks in the process.

D) The use of a financial planner will provide the client with an increased awareness of opportunity costs.

Answer 6

The correct answer is (A).

The financial planner is objective, not subjective.
All of the other statements are correct.

Question 7

Question 7

Which of the following stated goals of a client is the most workable for financial planning purposes?

A) To have adequate insurance protection

B). To enjoy vacations at various locations outside of the U.S.

C) To get out of debt

D) Of greatest importance, to save enough to pay $10,000 per year for 4 years of college tuition expenses for each of
my three children

Answer 7

The correct answer is (D).

A workable goal for financial planning purposes should be specific, prioritized, measurable, achievable, and realistic. Option (D) is the only choice that meets these criteria.

Question 8

Question 8

Which of the following is the appropriate standard of conduct for a fiduciary?

A) Act in the brokerage firm’s best interest.

B) Act as a prudent investor.

C) Act on a best-effort basis.

D) Act in self-interest.

Answer 8

The correct answer is (B).

Answer choice (A) is incorrect because while acting in the firm's best interest is important, it may not be enough. You must be able to prove in court that you have done what a prudent investor would have done in that situation. 
Choice (C) is incorrect because acting on a best-effort basis may not be enough if a prudent investor would have done more. 
Choice (D) is incorrect because it is never appropriate to act in self-interest unless that happens to coincide with the client's interest.

Question 9

Question 9

You are a relatively new financial planner. You have been working for an investment firm in the United States and have decided that you would like to add more credibility to your practice. Which of the following professional credentials would provide you with the most credibility since it is the oldest and best known?

A) CFP®

B) ChFC®

C) EFP

D) ICFP

Answer 9

The correct answer is (A).

The CFP® certification is the oldest and best-known certification for financial planners.

Question 10

Question 10

Which of the following statements correctly describes the regulatory environment of the financial planning profession?

A) A comprehensive financial planner may be subject to regulations from many state and federal regulators across a
variety of planning agencies.

B) The U.S. Securities and Exchange Commission (SEC) is the primary regulatory authority of the financial planning
industry and, for most advisors, the only relevant authority.

C) Independent advisors must decide whether to be subject to state or federal regulatory authorities.

D) The Dodd Frank Act of 2010 unified and centralized regulation of the financial planning industry at the federal
level.

Answer 10

The correct answer is (A).

The financial planning industry covers areas across a variety of regulatory agencies at both the federal and state level. For example, insurance is generally regulated state-by-state, whereas investing may be regulated at both federal and state levels and certain qualified retirement plans are regulated almost exclusively at the federal level.

Question 11

Question 11

All the following statements are true regarding the step in the financial planning process called “Developing the Financial Planning Recommendation(s)” EXCEPT:

A) This step occurs before recommendations are communicated.

B) During this step, the client’s current financial status is analyzed.

C) During this step, the planner devises recommendations for the client.

D) This step occurs after all necessary information is gathered.

Answer 11

The correct answer is (B).

The advisor develops the recommendations during step 4, Developing the Financial Planning Recommendation(s). All information should have been gathered and analyzed in previous steps. The recommendations are only communicated after they have been developed.

Question 12

Question 12

All the following behaviors would be considered part of step 6 in the financial planning process, Implementing the Financial Planning Recommendation(s), EXCEPT

A) selling a client a life insurance policy.

B) buying or selling securities to adjust a client’s asset allocation.

C) agreeing upon an implementation schedule and responsibilities.

D) updating a client’s goals after a follow-up meeting.

Answer 12

The correct answer is (D).

Updating a client’s goals after a follow-up meeting is part of step 7, Monitoring Progress and Updating. All other options are considered implementing recommendations.

Question 13

Question 13

All of the following are considered to be in line with the developmental paradigm, or the developmental school of thought, EXCEPT:

A) Human development occurs in stages over time.

B) Humans develop and progress in a predictable sequence.

C) Results of disruptions in any stage of an individual’s development are completely unpredictable.

D) Being mindful of a client’s age and life situation can help inform a planner’s recommendations and communication
style.

Answer 13

The correct answer is (C).

The developmental paradigm assumes that all humans develop and progress in a predictable sequence. Regardless of their cause, disruptions at a particular stage of that individual’s development will result in predictable problems, symptoms, and behavior.

Question 14

Question 14

All the following statements concerning guidelines on risk assessment are correct EXCEPT:

A) Objective measures, such as job and income history, can help determine a client’s risk tolerance.

B) The assessment should begin by examining the client’s demographic characteristics and personality makeup.

C) The client’s level of risk tolerance should be ascertained without involving him or her in the assessment.

D) Biases that distort the client’s true level of risk tolerance may be influenced by his or her risk perceptions.

Answer 14

The correct answer is (C).

Assessing the client’s risk tolerance is a cooperative venture. The advisor should use the information he or she collects to start a dialogue with the client about risk tolerance.

Question 15

Question 15

The developmental, humanistic, and cognitive-behavioral approaches to counseling are commonly applied in the financial planning context. Which of the following skills or behaviors is uniquely found among planners who employ the humanistic approach?

A) Active listening

B) Emphasizing freedom of choice and personal responsibility

C) Identifying environmental causes of behavior

D) A focus on childhood experiences

Answer 15

The correct answer is (B).

Financial planners who use the humanistic approach are most likely to emphasize a client’s freedom of choice and personal responsibility. The other approaches instead tend to emphasize the relative importance of the environment (cognitive-behavioral) or past family dynamics (developmental). All approaches support active listening, reflection, and the supportive challenging of clients’ ideas and behaviors.

Question 16

Question 16

One of the most-reported interruptions or disruptions in passive listening is when

A) a seminar moderator interrupts the presentation.

B) a friend asks you questions about the presenter’s speech.

C) instead of actively listening, the listener is thinking about what he or she may say in response to what is being
discussed.

D) the speaker takes too many breaks.

Answer 16

The correct answer is (C).

One of the most reported interruptions or disruptions in passive listening is when, instead of actively listening, the listener is thinking about what he or she may say in response to what is being discussed.

Question 17

Question 17

Which of the following is probably the start of a closed question?

A) “How…?”

B) “Isn’t it true that…?”

C) “Why…?”

D) “Please explain whether…”

Answer 17

The correct answer is (B).

Open questions usually begin with words such as “how,” “what,” “when,” “where,” “who,” and “why.” Closed questions lead with “is,” “are,” “do,” “did,” “could,” “would,” “have,” or “is it not true that.”

Question 18

Question 18

All the following describe anchoring EXCEPT:

A) Anchoring involves attaching one’s thoughts to a reference point even though the reference point may not be
logically relevant or pertinent to the issue in question.

B) Anchoring is also known as conservatism or belief perseverance.

C) Anchoring is fairly common in situations in which decisions are being made that are repetitive and customary.

D) Anchoring is fairly common in situations in which decisions are being made that are novel to the decision maker.

Answer 18

The correct answer is (C).

Anchoring, also known as conservatism or belief perseverance, involves attaching one’s thoughts to a reference point even though the reference point may not be logically relevant or pertinent to the issue in question. Anchoring is fairly common in situations where decisions are being made that are novel, not repetitive, to the decision maker.

Question 19

Question 19

All of the following are differences between traditional and behavioral finance theories EXCEPT:

A) Only in traditional finance theory is the scientific method applied to understanding investor behavior.

B) Only in behavioral finance theory are investors said to make errors and have biases.

C) Only according to traditional finance theory are markets assumed to be efficient.

D) Only in traditional finance theory are investors said to act rationally.

Answer 19

The correct answer is (A).

The scientific method is applied to both behavioral finance and traditional finance theories. The other answers correctly differentiate the two theories.

Question 20

Question 20

Which of the following is consistent with the disposition effect?

A) Investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks’
values to the purchase prices even after market prices have changed.

B) Investors acknowledge loss in value, referred to as the paper loss.

C) The normal investor considers the stock a loser if it dips in value.

D) The sale of the stock is irrelevant.

Answer 20

The correct answer is (A).

Under the disposition effect, investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks’ values by the purchase prices even after market prices have changed. The investors mark stocks to the market only when the investors sell their stocks and close their mental accounts. Normal investors therefore do not acknowledge the loss in value, referred to as the paper loss, because an open account means that there is still a chance that the stock price will rise. In their mind, the stock is not necessarily a loser; it may still turn into a gain. The normal investor does not consider the stock a loser until the stock is sold, at which time the loss is technically realized in the mind of the normal investor.

Question 21

Question 21

Which of the following is (are) premises in traditional finance?

I. Markets are efficient.
II. Investors are rational.

A) I only

B) II only

C) Both I and II

D) Neither I nor II

Answer 21

The correct answer is (C).

Both are premises of traditional finance.

Question 22

Question 22

The behavioral asset pricing model considers which of the following risk factors when predicting investment returns?

I. The systematic and unsystematic risks that affect the stock or company.
II. Investors’ feelings about the stock or the company.

A) I only

B) II only

C) Both I and II

D) Neither

Answer 22

The correct answer is (C).

When predicting investment returns, the behavioral asset pricing model considers a wide array of factors, such as an investment’s risks, a company’s market capitalization ratios, investors’ likes or dislikes about the stock or company, status factors, social responsibility factors, and so on.

Question 23

Question 23

One of your clients has a habit of quickly buying and selling obscure investments to try to “get rich quick.” When you ask how he decides what to buy and sell with such a large portion of his assets, he replies that he just relies on his gut instincts. Which bias is this client likely exhibiting?

A) The disposition effect

B) Anchoring

C) Overconfidence

D) Hindsight bias

Answer 23

The correct answer is (C).

This client is clearly exhibiting overconfidence. He makes snap decisions without consulting others or conducting thorough research. You could help this client avoid financial ruin by teaching him to slow down and make more reasoned decisions.

Question 24

Question 24

If your financial planning client uses phrases like “see what I mean” or “imagine that,” your client’s learning style is most likely

A) verbal/auditory.

B) visual.

C) both verbal/auditory and visual.

D) neither verbal/auditory nor visual.

Answer 24

The correct answer is (B).

The client is a visual learner, as suggested by his choice of verbs.

Question 25

# Question 25 According to the cash-flow approach, each of the following recommendations will have a positive cash-flow impact EXCEPT: A) Raise insurance deductibles. B) Reduce insurance coverage. C) Increase insurance coverage. D) Cancel insurance coverage.

Answer 25

The correct answer is (C). Of the options listed, the only one that will not have a positive cash-flow impact is increasing insurance coverage.

Question 26

# Question 26 Which of the following approaches involves the client covering the risks and saving and investing in order to reach goals? A) The pie chart approach B) Ratio analysis C) The three-panel approach D) The strategic approach

Answer 26

The correct answer is (C). The three-panel approach involves the client covering the risks and saving and investing in order to reach goals. The pie chart approach provides the planner and the client with a visual aid depicting the balance sheet and the statement of income and expenses. Neither the ratio analysis nor the strategic approach represents a methodology that focuses on risk coverage or savings and investments.

Question 27

# Question 27 Using the information in the table, calculate Marie's savings rate. Marie's Expenses and Account Balances Marie's Annual 401(k) Plan Contribution - $16,500 Marie's Annual Salary - $100,000 Current Liabilities - $24,000 Monthly Housing Costs (P&I and T&I) - $2,167 Cash and Cash Equivalents - $18,000 Monthly Non-discretionary Cash Flows - $6,000 Monthly Debt Payments Other than Housing - $500 Marie's employer makes dollar-for-dollar matching contributions of up to 3% of Marie's salary in Marie's 401(k) plan. A) 16.5 B) 17.5 C) 18.5 D) 19.5

Answer 27

The correct answer is (D). savings rate = (savings + employer match) ÷ gross pay [$16,500 + (3% × $100,000)] ÷ $100,000 = 19.5%

Question 28

# Question 28 A client in the asset-accumulation phase has A) low cash flow and a low debt-to-net-worth ratio. B) high cash flow and a high debt-to-net-worth ratio. C) high cash flow and a low debt-to-net-worth ratio. D) low cash flow and a high debt-to-net-worth ratio.

Answer 28

The correct answer is (D). A client in the asset-accumulation phase has low cash flow and a high debt-to-net-worth ratio.

Question 29

# Question 29 To identify a client's life-cycle position, a financial planner must know about all the following aspects of a client's life EXCEPT: A) Attitudes and/or beliefs B) Marital status C) Dependents D) Age

Answer 29

The correct answer is (A). Options (B) through (D) are features that the planner must be aware of in order to determine a client's life-cycle position.

Question 30

# Question 30 Siobhan met with you recently to make some changes to her insurance needs. You have made several recommendations. Which of these recommendations will have a positive cash-flow impact from an insurance perspective? A) Cancel an insurance policy. B) Change the name of the beneficiary on her life insurance policy. C) Increase coverage on an existing insurance policy. D) Lower the deductible on her auto insurance.

Answer 30

The correct answer is (A). Canceling an insurance policy will result in $0 premiums due. Changing the beneficiary of a life insurance policy will not impact the premium or cash flow. Increasing the amount of coverage will increase the premium and negatively impact the cash flow. Lowering deductibles will increase premium payments thus having a negative impact on cash flow.

Question 31

# Question 31 Mina's annual salary is $80,000. She contributes 10% of her salary to her 401(k) plan, and her employer contributes a 5% match of Mina's salary to a profit-sharing plan. Mina also contributes $2,500 per year to an IRA. What is Mina's approximate savings rate? A) 5% B) 10% C) 15% D) 18%

Answer 31

The correct answer is (D). savings rate = (savings + employer match) ÷ gross pay ($8,000 + $4,000 + $2,500) ÷ $80,000 = 18.125%

Question 32

# Question 32 In which of the following situations is the family least likely to need help with budgeting to meet its living expenses? A) The family's cash-flow statement reveals frequent borrowing to meet normal expenses. B) The family's cash-flow statement reveals that assets are being liquidated frequently. C) The family's cash-flow statement reveals large amounts being spent on miscellaneous expenses. D) The family's cash-flow statement reveals a regular pattern of periodic saving.

Answer 32

The correct answer is (D). Choices (A), (B), and (C) suggest that the family may be living beyond its means and may need help with budgeting. A regular, reasonable pattern of saving, on the other hand, suggests that the family is already living within its means.

Question 33

# Question 33 All the following statements are true about savings rates EXCEPT: A) When calculating the savings rate for a family, any contributions to retirement made by the employer should be included. B) The required savings rate for retirement tends to increase with age. C) Any income generated by the portfolio is added to the numerator when calculating the savings rate. D) A couple with many goals will have a higher required savings rate than a couple with fewer goals.

Answer 33

The correct answer is (C). Income generated by the portfolio is NOT added to the savings rate; rather, it increases the value of the portfolio itself. The numerator of the savings rate only includes savings and employer contributions made to the account. The required savings rate also tends to be higher for older clients with many goals.

Question 34

# Question 34 All the following statements about financial ratios are true EXCEPT: A) Debt ratios measure how well a client manages debt. B) Liquidity ratios indicate the ability to meet short-term obligations. C) Ratios for financial security determine the progress that the client is making toward achieving short-term financial security goals. D) Performance ratios determine the adequacy of returns on investments relative to the risk level of the investment.

Answer 34

The correct answer is (C). Ratios for financial security determine the progress that the client is making toward achieving long-term financial security goals. Liquidity ratios measure the ability to meet short-term obligations. Debt ratios indicate how well a client manages debt. Performance ratios determine the adequacy of returns on investments relative to the risk level of the investment.

Question 35

# Question 35 Which of the following approaches helps the client articulate and reach goals by covering the risks and savings and investing? A) The pie chart approach B) Ratio analysis C) The three-panel approach D) The strategic approach

Answer 35

The correct answer is (C). The three-panel approach involves the client covering the risks and saving and investing in order to reach goals. The pie chart approach provides the planner and the client with a visual aid depicting the balance sheet and the statement of income and expenses. Neither the ratio analysis nor the strategic approach represents a methodology that focuses on risk coverage or savings and investments.

Question 36

# Question 36 Which of the following correctly describe(s) an action that would be taken by a financial planner using the strategic approach to financial planning? I. Working with a client to develop goals and objectives II. Drafting a mission statement that captures the big-picture view of the client's philosophy and plan for the future A) I only B) II only C) Both I and II D) Neither I nor II

Answer 36

The correct answer is (C). A financial planner using the strategic approach will work with a client to develop the client's goals and objectives and then codify them in a mission statement.

Question 37

# Question 37 (1 point) According to the three-panel approach, all the following would be considered potentially catastrophic risks EXCEPT: A) A parent of a young child dies prematurely. B) A client has an insufficient emergency fund. C) A business owner has insufficient liability insurance. D) A household's sole breadwinner becomes totally and permanently disabled.

Answer 37

The correct answer is (B). According to the three-panel approach, catastrophic risks include the early death of a parent, disability, and insufficient liability insurance. An insufficient emergency fund would be addressed in the second panel.

Question 38

``` Question 38 (1 point) Ivan and Samantha are married and have a net worth of $20,000 and total assets of $150,000. What is the amount of their total liabilities? ``` Question 38 options: A) $122,000 B) $130,000 C) $138,000 D) $150,000

Answer 38

The correct answer is (B). liabilities = assets − net worth $150,000 − $20,000 = $130,000

Question 39

``` Question 39 (1 point) Sally has the following transactions: ``` Transaction 1: She purchases $5,000 worth of a mutual fund with cash from her savings account. Transaction 2: She spends $6,000 on vacation with cash from her money market account. Transaction 3: She spends $10,000 on new furniture and uses her credit card to make the purchase. What is the combined impact of these transactions on her net worth? Question 39 options: A) A $21,000 decrease B) A $6,000 decrease C) A $15,000 increase D) A $6,000 increase

Answer 39

The correct answer is (B). Transactions 1 and 3 were net washes in terms of Sally's net worth. By trading savings for a mutual fund in transaction 1, she was simply changing the nature of the assets. By obtaining furniture by incurring a liability in transaction 3, Sally was increasing her assets and her liabilities by the same amount. Transaction 2 reduced her assets without providing any corresponding financial gain, resulting in a decrease in net worth.

Question 40

``` Question 40 (1 point) Claire and Byron are married. Based on the data in this table below, what is Claire and Byron's current ratio? ``` Their Current Cash and Cash Equivalents $9,243 Their Current Liabilities $6,921 Their Monthly Nondiscretionary Expenses $4,693 Their Annual Combined Income $70,000 Their Annual Debt Payments (excluding monthly housing costs) $22,084 Question 40 options: A) 0.7958 B) 1.3355 C) 1.9695 D) 5.0387

Answer 40

The correct answer is (B). current ratio = cash and cash equivalents ÷ current liabilities $9,243 ÷ $6,921 = 1.3355

Question 41

``` Question 41 (1 point) Claire and Byron have a gross income of $70,000, monthly housing costs (P&I and T&I) of $1,500, and monthly debt payments of $1,840.33 (excluding monthly housing costs). Which of the following lender thresholds will Claire and Byron meet? ``` Question 41 options: A) The 28% benchmark for Housing Ratio 1 B) The 36% benchmark for Housing Ratio 2 C) Both benchmarks D) Neither benchmark

Answer 41

The correct answer is (A). Housing Ratio 1 (basic ratio) is calculated by dividing housing costs (that is, the principal, the interest, property taxes, and homeowners insurance) by gross pay. If the quotient is equal to or less than 28%, it is within the normal range. $1,500 ÷ ($70,000 ÷ 12) = 25.7% Housing Ratio 2 (broad ratio) is calculated by adding housing costs to debt payments and dividing the sum by gross pay. If the quotient is equal to or less than 36%, it is within the normal range. ($1,500 + $1,840.33) ÷ ($70,000 ÷12) = 57.26%

Question 42

``` Question 42 (1 point) Using the data in the table below, what is Mike's return on assets (ROA) for the year? ``` Mike Smith's Financial Data Total Assets at Year-End $475,000 Total Assets at Beginning of the Year $392,000 Money Contributed to Savings During the Year by Mike $27,000 Employer Match to Mike's 401(k) Plan $5,000 Question 42 options: A) 13.01% B) 15.56% C) 18.37% D) 21.17%

Answer 42

The correct answer is (A). ROA = [ending value of assets − (beginning value of assets + savings)] ÷ beginning value of assets [$475,000 – ($392,000 + $27,000 + $5,000)] ÷ $392,000 = 13.01%

Question 43

``` Question 43 (1 point) Which of the following factors is critical in determining the appropriate benchmark for the investment-assets-to-gross-pay ratio? ``` Question 43 options: A) Investment assets and cash equivalents B) Gross pay C) Retirement time horizon D) Age

Answer 43

The correct answer is (D). Calculating the ratio itself requires dividing the sum of investment assets and cash equivalents by gross pay. However, to determine the appropriate benchmark, you must compare the ratio to the age of the client.

Question 44

``` Question 44 (1 point) Which of the following statements regarding vertical and horizontal analysis of financial statements is correct? ``` Question 44 options: A) Most planners analyze their client's cash flow either vertically or horizontally. B) A vertical analysis of income lists each line item as a percent of the total annual income. C) A horizontal analysis of a balance sheet would compare assets (on the left) to liabilities and net worth (on the right). D) A vertical analysis of expenses would compare past expenses (at the top) to current expenses (at the bottom).

Answer 44

The correct answer is (B). A vertical analysis compares individual items on a financial statement to the total. A horizontal analysis compares similar line items over time to identify trends. Most planners use both vertical and horizontal analysis.

Question 45

``` Question 45 (1 point) All the following are limitations of balance sheets EXCEPT: ``` Question 45 options: A) Balance sheets do not show how assets were acquired. B) Balance sheets do not show changes in net worth over time. C) Balance sheets do not show a client's liquidity. D) Balance sheets do not show why an asset line item increased in value.

Answer 45

The correct answer is (C). Balance sheets do generally reveal how much of one's assets are in cash or cash equivalent (liquid assets). All the other statements are limitations of a balance sheet.

Question 46

``` Question 46 (1 point) Using the information in the table below, calculate Arthur's emergency fund ratio in months. ``` Arthur's Expenses and Account Balances Arthur's Annual 401(k) Plan Contribution $16,500 Arthur's Annual Salary $100,000 Current Liabilities $24,000 Monthly Housing Costs (P&I and T&I) $2,167 Cash and Cash Equivalents $18,000 Monthly Nondiscretionary Cash Flows $6,000 Monthly Debt Payments Other Than Housing $500 Arthur's employer makes a dollar-for-dollar match of up to 3% of Arthur's salary in his 401(k) plan. Question 46 options: A) 0.25 months B) 1 month C) 2 months D) 3 months

Answer 46

The correct answer is (D). | emergency fund ratio = (cash + cash equivalents) ÷ monthly nondiscretionary cash flows $18,000 ÷ $6,000 = 3 months

Question 47

``` Question 47 (1 point) Which of the following correctly describes the difference between "good" and "bad" debt? ``` Question 47 options: A) Debt is "bad" when the leveraged asset's economic life exceeds the debt payback period. B) "Bad" debt typically involves high levels of long-term debt with high interest rates. C) There is no such thing as "good" debt, as debt should be avoided whenever possible. D) "Good" debt tends to have interest rates above inflation and investment returns.

Answer 47

The correct answer is (B). | Bad debt can involve high interest rates, large amounts of debt, and debt that outlives the economic life of a purchase.

Question 48

``` Question 48 (1 point) One of your clients has a back-end housing ratio, or a Housing Ratio 2, of 40%. Based on this information, which of the following statements is true? ``` Question 48 options: A) Her equity in the home on the date of purchase will be 60%. B) If she can qualify for a home mortgage, she will have a relatively low interest rate. C) She can lower this ratio by paying off other debts. D) This ratio can be lowered by cutting home expenses such as utilities, lawn care, and other maintenance.

Answer 48

The correct answer is (C). The back-end housing ratio is the total of all housing costs and other debt divided by gross pay. A ratio above 36% will require a buyer to pay relatively high interest rates and a large down payment—if the buyer can qualify for a mortgage at all. It can be lowered by paying off other debt. Utilities and maintenance costs are not part of this ratio; while lowering them is good for cash flow, that won't help lower this ratio.

Question 49

``` Question 49 (1 point) You have calculated a client's debt-to-total-assets ratio to be 0.60, or 60%. With absolute certainty, which of the following statements is true? ``` Question 49 options: A) Her net worth would be higher if she had the same assets but less debt. B) Her level of debt is too high and must be reduced quickly. C) Her debts exceed her assets. D) She is relatively young.

Answer 49

The correct answer is (A). She has debts that equal 60% of her assets. If she could somehow keep those assets but lower her debt, her net worth would increase. You cannot conclude that her level of debt is too high, and while young people tend to have higher debt ratios, you cannot deduce her age from her ratio.

Question 50

``` Question 50 (1 point) Betty earns $100,000 working as a doctor in Baton Rouge. The company provides a matching contribution in the 401(k) plan of 50% of their employee's contribution up to a maximum matching contribution of 4% of the employee's compensation. Her 401(k) account contained $60,000 at the beginning of the year. She contributed $15,000 to the plan this year, and the employer made the matching contribution before year-end. The ending balance of the account is $100,000. What is her return on investments this year? ``` Question 50 options: A) 6.68% B) 26.60% C) 29.20% D) 35.00%

Answer 50

The correct answer is (D). ROI = [the ending balance – (the beginning balance + savings)] ÷ the beginning balance [$100,000 – ($60,000 + $15,000 + $4,000)] ÷ $60,000 = 35.00% Note that the match is limited to 4%, or $4,000.

Question 51

``` Question 51 (1 point) Alex and his wife, Dana, recently opened an investment account with the intention of saving enough to purchase the house of their dreams. Their goal is to have $45,000 down in 5 years. Their account will guarantee them a return of 8%, compounded annually. How much do they need to put into the account right now to reach their objective? ``` Question 51 options: A) $46,779 B) $39,546 C) $51,215 D) $30,626

Answer 51

The correct answer is (D). Use the following figures to solve for PV: FV = 45,000 PMT = 0 i = 8 N = 5 This will result in a PV of ‹$30,626.2439›.Alex and Dana should put about $30,626 into their account now.

Question 52

``` Question 52 (1 point) Victor works as a valet at a hotel. He has saved enough tip money to place $100,000 in an investment account that generates 4%, compounded monthly. He wants to collect a monthly income of $4,500 at the beginning of each month for as long as the money lasts. For approximately how many months will Victor receive this income? ``` Question 52 options: A) 22 B) 23 C) 49 D) 56

Answer 52

``` The correct answer is (B). Make sure that your calculator is in BEGIN Mode and then solve for N: P/YR = 12 PV = ‹100,000› FV = 0 PMT = 4,500 i = 4 N will be 23.0469. Victor will receive this income for about 23 months. ```

Question 53

``` Question 53 (1 point) Your client Ryan plans to buy investment property today, hold it for 4 years, and then sell it for $200,000. Ryan expects 11% on any investment he makes, and he expects the cash flows listed in the table. As a financial advisor, what will you tell Ryan he should be willing to pay for the property? ``` ``` Inflows Outflows Net Initial Outlay $0 Year 1 $45,000 $55,000 Year 2 $55,000 $20,000 $35,000 Year 3 $55,000 $20,000 $35,000 Year 4 $255,000 $35,000 $220,000 Question 53 options: ``` A) $189,910 B) $194,589 C) $178,657 D) $191,232

Answer 53

``` The correct answer is (A). Use the following figures to solve for NPV: CF0 = 0 CF1 = ‹10,000› CF2 = 35,000 CF3 = 35,000 CF4 = 220,000 i = 11 This will give you an NPV of $189,910.2888. Ryan should be willing to pay about $189,910 for the investment property. ```

Question 54

``` Question 54 (1 point) Rowena is starting to save for a condo she wants to buy in 5 years for $300,000 dollars. She can earn an 8% return on her investments. How much must Rowena save at the beginning of each year to meet her goal? ``` Question 54 options: A) $47,349 B) $51,137 C) $69,571 D) $75,137

Answer 54

The correct answer is (A). ``` BEGIN MODE N = 5 i = 8% PV = 0 FV = 300,000 Solve for PMT = 47,349 ```

Question 55

``` Question 55 (1 point) Roland buys a piece of equipment for $15,000. He pays $5,000 for upgrades in year 1, and the equipment generates $2,000 in cash flow for that year. In year 2, the equipment generates $8,000. In year 3, it generates $4,000, but Roland sells it for $6,000 and pays a $500 commission. What is his IRR? ``` Question 55 options: A) ‹1.18%› B) 1.18% C) ‹0.8%› D) 0.8%

Answer 55

``` The correct answer is (A). Use the following cash flows to solve for IRR: CF0 = ‹15,000› CF1 = ‹5,000› + 2,000 = ‹3,000› CF2 = 8,000 CF3 = 4,000 + 6,000 − 500 = $9,500 This will result in an IRR of ‹1.18›. ```

Question 56

``` Question 56 (1 point) At the beginning of the next 10 years, starting this year, Romera invests $5,000 in an account that yields a fixed 6% return, compounded annually. How much will the account be worth at the end of 10 years, assuming all interest is reinvested at the 6% rate? ``` Question 56 options: A) $51,140 B) $51,396 C) $65,904 D) $69,858

Answer 56

The correct answer is (D). Make sure that your calculator is in BEGIN Mode and then solve for FV: PV = 0 PMT = ‹5,000› N = 10 i = 6 This will result in an FV of $69,858.2132. The account will be worth about $69,858 in 10 years.

Question 57

``` Question 57 (1 point) Alana recently purchased her first home for $220,000. She made a down payment of $20,000 and financed the balance at 6% interest over 15 years. If Alana's first payment is due on October 1 of this year, approximately how much interest will she pay this year? ``` Question 57 options: A) $2,073 B) $2,990 C) $3,289 D) $5,885

Answer 57

The correct answer is (B). Use the following figures to solve for PMT: ``` P/YR = 12 PV = 200,000 FV = 0 i = 6 N = 15 × 12 = 180 PMT equals ‹$1,687.713656›. ``` Then use the amortization function as follows: Amortization – HP 10bii 1 [INPUT] 3 [orange] [AMORT] = Interest = $2,989.67, or about $2,990

Question 58

``` Question 58 (1 point) Gwen purchased a sedan for $19,500. She is financing the purchase at an 11% annual interest rate, compounded monthly for 3 years. What is the payment that Gwen is required to make at the end of each month? ``` Question 58 options: A) $607 B) $637 C) $638 D) $685

Answer 58

The correct answer is (C). Use the following figures to solve for PMT: ``` P/YR = 12 PV = 19,500 FV = 0 i = 11 N = 3 × 12 = 36 This will result in a PMT of ‹$638.4049838›. Tracy will need to make a payment of about $638 at the end of each month. ```

Question 59

``` Question 59 (1 point) All of the following statements regarding NPV and IRR are true EXCEPT: ``` Question 59 options: A) A positive NPV indicates the present value of the cash flows exceeds the initial investment. B) A negative NPV indicates the present value of the cash flows is less than the initial investment C) An NPV equal to zero indicates the present value of the cash flows is equal to the initial investment. D) The internal rate of return is the discount rate that causes the initial investment to exceed the present value of the cash flows.

Answer 59

The correct answer is (D). | IRR sets the initial investment equal to the present value of the cash flows.

Question 60

``` Question 60 (1 point) Seven years ago, Evan purchased 10 shares of an aggressive growth mutual fund at $90 per share, for a total of $900. Today he sold all 10 shares for $4,500. What was his average annual rate of return on this investment, before tax? ``` Question 60 options: A) 17.46% B) 19.58% C) 21.73% D) 25.85%

Answer 60

The correct answer is (D). Use the following figures to solve for i: PV = ‹900› FV = 4,500 PMT = 0 N = 7 The annual rate of return is 25.8498951, or about 25.85%.

Question 61

``` Question 61 (1 point) What is the real rate of return on an investment that earned a 13% nominal return in a year that experienced a 2.5% inflation rate? ``` Question 61 options: A) 5.20% B) 10.24% C) 10.50% D) 19.23%

Answer 61

The correct answer is (B). | The real rate of return is (1 + 0.13) ÷ (1 + 0.025) − 1 = 0.1024, or 10.24%.

Question 62

``` Question 62 (1 point) Your client invested $10,000 in an interest-bearing promissory note that earns an 11% annual rate of interest, compounded monthly. How much will the note be worth at the end of 7 years, assuming that all interest is reinvested at the 11% rate? ``` Question 62 options: A) $13,788 B) $20,763 C) $21,049 D) $21,522

Answer 62

The correct answer is (D). Use the following figures to solve for FV: ``` P/YR = 12 PV = ‹10,000› PMT = 0 i = 11 N = 7 × 12 = 84 This will result in an FV of $21,522.03612, or about $21,522. ```

Question 63

``` Question 63 (1 point) Your best friend's son is about to start college. Your friend wants to put aside a single sum today that can pay his son's tuition and fees at the beginning of each of the next 4 years. Tuition and fees currently cost $25,000 per year and are expected to inflate by 5% each year. If you expect your friend's investment to earn 6% per year, how much must he invest today to meet his goal? Round to the nearest whole number. ``` Question 63 options: A) $93,081 B) $97,664 C) $98,511 D) $98,594

Answer 63

The correct answer is (D). Make sure that your calculator is in BEGIN Mode and then solve for PV: FV = 0 PMT = ‹25,000› I/YR = 1.06 ÷ 1.05 − 1 × 100 = 0.9524 N = 4 This will result in a PV of $98,593.7846, or about $98,594.

Question 64

``` Question 64 (1 point) Which of the following statements is (are) correct? ``` I. Prepaid tuition plans provide for the prepayment of college tuition at current tuition prices (or current tuition prices plus a small premium) for future enrollment. II. A disadvantage of a qualified tuition plan (QTP) is that the owner-contributor must relinquish control of the account and share control of the funds with the student beneficiary. Question 64 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 64

The correct answer is (A). Prepaid tuition plans provide for the prepayment of college tuition at current tuition prices (or current tuition prices plus a small premium) for future enrollment. However, the owner-contributor alone controls a QTP.

Question 65

``` Question 65 (1 point) Which of the following correctly compares parent PLUS loans with graduate PLUS loans? ``` Question 65 options: A) Parent PLUS loans are not need-based, while graduate PLUS loans are need-based. B) Graduate PLUS loans are awarded to graduate students, while parent PLUS loans are awarded to undergraduate students. C) Both parent PLUS loans and graduate PLUS loans are awarded based on the credit history of the borrower. D) Parent PLUS loans are made only by the federal government, whereas graduate PLUS loans may be made by private lenders.

Answer 65

The correct answer is (C). Neither parent PLUS loans nor graduate PLUS loans are need-based aid. Both are made by the federal government, and both are awarded based on the credit history of the borrower. Graduate PLUS loans are made to graduate students, and parent PLUS loans are made to the parents of students.

Question 66

``` Question 66 (1 point) Sam and Olli want to save for their 3-year-old son's education. The cost today, due at the beginning of the year, is $20,000. They expect that cost to inflate at 6% per year and they expect to pay for 4 years of college. If they can earn a 7% return on their investments, how much must they save at the end of each year if they want to make their last savings payment at the beginning of their son's first year of college (when their son is 18 years old)? ``` Question 66 options: A) $6,548 B) $7,006 C) $7,031 D) $7,523

Answer 66

The correct answer is (D). Using the account balance method, make the following calculations: They must first determine the first year's future value. ``` 1 P/YR 15 [N] 6 [I/YR] 20,000 [+/-][PV] 0 [PMT] [FV] ``` The FV is $47,931. Next, calculate the total savings need. ``` 1 P/YR BEGIN MODE 4 [N] [(1.07 ÷ 1.06) − 1] × 100 = 0.9434 [I/YR] 47,931 [+/-] [PMT] 0 [FV] [PV] ``` The PV is $189,053. Finally, calculate the payments. ``` 1 P/YR END MODE 15 [N] 7 [I/YR] 0 [PV] 189,053 [FV] [PMT] ``` The PMT is $7,523.

Question 67

``` Question 67 (1 point) Tom and Betty have an AGI of $150,000 and have not planned for their children's education. They have an 18-year-old son and a 17-year-old daughter. The parents anticipate paying $20,000 per year per child for education expenses. Which of the following is the most appropriate plan recommendation to make to Tom and Betty to pay for their children's education? ``` Question 67 options: A) A 529 savings plan B) A PLUS loan C) A Pell grant D) Series I bonds

Answer 67

The correct answer is (B). It is too late for these parents to begin saving for their children's education, so that eliminates the 529 savings plan and Series I bonds. Pell grants are need-based, so they would be unavailable to a couple with an AGI of $150,000. The only answer choice that is accessible to Tom and Betty is a PLUS loan.

Question 68

``` Question 68 (1 point) All of the following are treated as assets of the parent for financial aid EXCEPT ``` Question 68 options: A) a 529 Savings plan. B) prepaid tuition. C) cash and cash equivalents. D) UGMA accounts.

Answer 68

The correct answer is (D). UGMA accounts are considered assets of the child for financial aid purposes because the child has access to the account at age 18.

Question 69

``` Question 69 (1 point) Which of the following statements about the cost of education is (are) correct? ``` I. The inflation rate of education tends to outpace the general inflation rate as measured by the CPI. II. The inflation rate of education tends to outpace most investment returns such that the typical education fund has a negative real rate of return. Question 69 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 69

The correct answer is (A). While the inflation rate of education, currently 2.3% to 3.1%, does tend to outpace the CPI, 1.6%, it is lower than typical investment returns.

Question 70

``` Question 70 (1 point) What is the total amount of American Opportunity Tax Credit and of Lifetime Learning Credit that the Jones family can take, given the following information? ``` * Adriana is a sophomore in college and incurs $5,000 in education expenses. * Carlos is in graduate school and incurs $7,000 in education expenses. * Their mother, Juana, who has a 4-year degree, goes back to school and incurs $4,000 in education expenses. Question 70 options: A) The American Opportunity Tax Credit is $1,650; the Lifetime Learning Credit is $2,200. B) The Lifetime Learning Tax Credit is $1,650; the American Opportunity Tax Credit is $2,200. C) The American Opportunity Tax Credit is $2,500; the Lifetime Learning Credit is $2,000. D) The Lifetime Learning Credit is $2,500; the American Opportunity Tax Credit is $2,000.

Answer 70

The correct answer is (C). The American Opportunity Tax Credit allows families to claim up to $2,500 per student per year for the first 4 years of qualified education expenses incurred during a student's postsecondary education. The credit is calculated as 100% of the first $2,000 of qualified education expenses plus 25% of the second $2,000 of qualified education expenses. Since only Adriana is in her first 4 years of college, the family can only receive the credit based on Adriana's expenses. (100% × $2,000) + (25% × $2,000) = $2,500 The Lifetime Learning Credit provides a tax credit of up to $2,000 per family for up to $10,000 of qualified education expenses, or 20% of up to $10,000 of qualified education expenses. There is no restriction in terms of years for which this credit may be received. Because one cannot claim both the American Opportunity Tax Credit and the Lifetime Learning Credit for the same student in the same year, the family can only claim the credit on Carlos's expenses and Juana's expenses. 20% × 10,000 = $2,000

Question 71

``` Question 71 (1 point) Adam and Eve are a married couple taking graduate school classes in the evening. This year, they incur $5,000 of qualified education expenses each. Eve paid for her expenses from a 529 college savings plan. What lifetime learning credit may they claim this year on their tax return? ``` Question 71 options: A) $0 B) $1,000 C) $2,000 D) $5,000

Answer 71

The correct answer is (B). Because Eve paid for her expenses from a 529 college savings plan, only Adam may claim the lifetime learning credit. Adam and Eve can take a total lifetime learning credit of $1,000, or $5,000 x 20%, in the current year.

Question 72

``` Question 72 (1 point) Sally is the custodian of her daughter June's Section 529 plan. If Sally withdraws funds from the 529 plan to pay for plane tickets for Sally and June to tour colleges, which of the following is true? ``` Question 72 options: A) The withdrawal amount is fully tax-free. B) The withdrawal amount is fully taxable. C) The withdrawal will be partially taxable earnings and partially tax-free withdrawal of principal. D) The withdrawal will be partially taxable earnings and partially tax-free withdrawal of principal, plus a 10% penalty will apply to the taxable portion.

Answer 72

The correct answer is (D). Nonqualified distributions from a Section 529 plan are a partial return of principal and a partial distribution of earnings. The portion that represents earnings is taxable and is also subject to a 10% penalty. A penalty exception applies if the distribution is made due to the beneficiary's death, because the beneficiary has become disabled, or due to the beneficiary's receipt of a tax-free scholarship or fellowship grant.

Question 73

``` Question 73 (1 point) Which of the following education funding techniques is available to parents with incomes over $300,000? ``` Question 73 options: A) An UTMA account B) The Lifetime Learning Credit C) The American Opportunity Tax Credit D) Tax-free growth from Series EE bonds

Answer 73

The correct answer is (A). The Lifetime Learning Credit and the American Opportunity Tax Credit are not available to parents with incomes of over $300,000. The interest on Series EE bonds will not be tax-free to parents with incomes of $300,000. Income earned in an UTMA is taxable to the child and therefore subject to kiddie tax rules, but the parents will have control over the investments and can invest the UTMA funds in tax-advantaged investments, such as growth stocks or municipal bonds.

Question 74

``` Question 74 (1 point) Which of the following statements is (are) true regarding front-loading of annual gift tax exclusions in a 529 college savings plan? ``` I. Up to 5 years of annual exclusion gifts may be contributed to a 529 college savings plan. II. The full value of gifts placed in a front-loaded account will be immediately excluded from the donor's gross estate for estate tax purposes. Question 74 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 74

The correct answer is (A). Statement II is incorrect because if the donor dies within the next 4 years, 5 years (that is the year of the gift plus the next 4 years) of annual exclusions will be brought back into the donor's gross estate. For example, if 5 years of annual exclusion gifts ($75,000) are placed in the 529 plan in 2020 and the donor elects front-loading on the gift tax return and then dies in 2022, he has survived only 3 years of annual exclusions (2020, 2021, and 2022). $30,000 will be included in the gross estate due to the remaining 2 years of annual exclusion gifts previously made.

Question 75

``` Question 75 (1 point) All the following are examples of need-based financial aid EXCEPT ``` Question 75 options: A) a Pell grant. B) PLUS loans. C) a work-study job. D) subsidized Stafford loans.

Answer 75

The correct answer is (B). | PLUS loans are not need-based aid. The other answer choices are all examples of need-based aid.

Question 76

``` Question 76 (1 point) All the following statements concerning educational tax credits and savings opportunities are correct EXCEPT: ``` Question 76 options: A) The Lifetime Learning Credit is equal to 20% of up to $10,000 of qualified educational expenses. B) The American Opportunity Tax Credit (AOTC) is only available for 4 years of undergraduate study and 2 years of post-graduate study. C) The AOTC may be taken for as many students as are claimed on the household's tax return. D) The same educational expense cannot be used for multiple tax benefits.

Answer 76

The correct answer is (B). | The AOTC is available for the first 4 years of postsecondary education.

Question 77

``` Question 77 (1 point) All of the following economic activities represent governmental fiscal policy EXCEPT: ``` Question 77 options: A) The government increases the amount of purchases of goods and services by cutting taxes. B) The government cuts taxes to expand the economy. C) The government cuts the federal funds rate. D) The government uses higher taxes to reduce the public's rate of consumption and private investing.

Answer 77

The correct answer is (C). The Federal Reserve sets the discount rate upon which the federal funds rate is based. The Fed will lower the discount rate when it wants to increase the money supply. Options (A) and (B) represent expansionary fiscal policy, while option (D) represents restrictive fiscal policy.

Question 78

``` Question 78 (1 point) Which of the following debts are dischargeable in bankruptcy? ``` Question 78 options: A) Child support B) Student loans C) Alimony D) Personal loans

Answer 78

The correct answer is (D). | Of the listed debts, only personal loans are dischargeable in bankruptcy.

Question 79

``` Question 79 (1 point) The Dodd-Frank Wall Street Reform and Consumer Protection Act permanently increased the FDIC limit to what amount? ``` Question 79 options: A) $100,000 B) $250,000 C) $500,000 D) An unlimited amount

Answer 79

The correct answer is (B). | Dodd-Frank made the FDIC increase from $100,000 to $250,000 permanent.

Question 80

``` Question 80 (1 point) The country's leading brand of chicken feed was recently contaminated. Millions of bags went out before the company was aware of the contamination. As a result, chicken mortality rate has increased significantly. What can you expect to happen? ``` Question 80 options: A) The price of other forms of meat will likely decrease. B) The demand for other forms of meat will likely increase. C) The supply curve for chicken will shift to the right. D) The price of compliments to chicken will likely increase.

Answer 80

The correct answer is (B). The higher mortality rate for chickens will cause the supply of chicken to go down and the price of this type of meat to go up. As a result, the demand for other forms of meat will increase. Statement (A) is incorrect because the price of other forms of meat will likely increase. Statement (C) is incorrect because the supply curve for chicken will shift to the left. Statement (D) is incorrect because the price of compliments to chicken will likely decrease; on the other hand, the price of substitutes for chicken will likely increase.

Question 81

``` Question 81 (1 point) Decreasing inflation, or deflation, and decreasing interest rates tend to correspond with which phase in the business cycle? ``` Question 81 options: A) Expansion B) Peak C) Recession/Contraction D) Troug

Answer 81

The correct answer is (C). | Decreasing prices and interest rates tend to correspond with recessions/contractions.

Question 82

``` Question 82 (1 point) All of the following are primary responsibilities of the Federal Reserve EXCEPT: ``` Question 82 options: A) Facilitate long-term economic growth. B) Facilitate fair practices between securities dealers. C) Maintain price levels. D) Maintain full employment.

Answer 82

The correct answer is (B). The goals of the Federal Reserve are to maintain long-term economic growth, to maintain price levels, and to maintain full employment.

Question 83

``` Question 83 (1 point) The supply of coffee has been drastically reduced due to a drought resulting in substantially higher prices. Which of the following statements is (are) correct? ``` I. The supply curve for coffee will shift to the right. II. The demand curve for coffee creamer will shift to the left. Question 83 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 83

The correct answer is (B). Statement I is not correct. A systematic event like a drought would cause the supply curve to shift to the left. A decrease in supply would cause an increase in the price of coffee. Statement II is correct because coffee creamer is a complementary product. If the price of coffee is increasing, fewer people will purchase coffee and its compliments. Therefore, the demand curve for creamer will shift to the left.

Question 84

``` Question 84 (1 point) Inflation refers to which one of the following? ``` Question 84 options: A) The increase in prices without a corresponding increase in productivity B) Declining interest rates C) Poverty D) The opposite of stagflation

Answer 84

The correct answer is (A). | Inflation is an increase in prices without a corresponding increase in productivity.

Question 85

``` Question 85 (1 point) The Securities Investor Protection Corporation (SIPC) insures investors under what circumstances? ``` Question 85 options: A) The investor lost government securities that were bought through a bank or credit union. B) The investor lost money or stock due to the failure of a securities firm. C) The investor lost his or her investment when the securities became worthless. D) The investor lost his or her retirement fund when the employer declared bankruptcy.

Answer 85

The correct answer is (B). The SIPC covers losses of money or securities when a securities firm fails or when the money or securities are stolen by the investor's broker.

Question 86

``` Question 86 (1 point) Phyllis had three credit cards stolen. Before she realized they were stolen, the following amounts were already fraudulently charged: ``` * American Express®: $2,000 * VISA: $500 * MasterCard®: $40 How much is Phyllis's expected liability for the fraudulent charges? Question 86 options: A) $50 B) $140 C) $150 D) $2,400

Answer 86

The correct answer is (B). The maximum liability is limited to the lesser of $50 or the actual charges incurred. Since more than $50 was charged on both her American Express card and her VISA card, Phyllis will only need to pay $50 for each card. However, since only $40 was charged on her MasterCard, Phyllis will need to pay the total amount for that card. (2 × $50) + $40 = $140

Question 87

``` Question 87 (1 point) Two of your clients just told you that they cut up all of their credit cards and closed all of their credit accounts. Based on this information, which of the following statements is (are) true? ``` I. Their credit score is likely to increase in the next month. II. Their ability to meet financial hardships has decreased. Question 87 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 87

The correct answer is (B). Without access to easy credit, their ability to handle financial hardship has decreased. Also, their credit score is likely to decrease, making it more difficult for them to find new, affordable credit.

Question 88

``` Question 88 (1 point) Which of the following are securities under the Investment Advisers Act of 1940? ``` I. Mutual funds II. Variable life insurance policies Question 88 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 88

The correct answer is (C). Both of the financial products listed fall within the definition of security contained in the Act because the definition of "security" is broadly construed.

Question 89

``` Question 89 (1 point) Tricia is a new client for Stephan, a CFP® professional, and has asked for Stephan's help with her financial planning. Specifically, she wants a complete analysis of her retirement situation, including retirement projections, and wants Stephan to evaluate the type and amount of investments that she should purchase. Which of the following is correct according to the Code of Ethics and Standards of Conduct? ``` Question 89 options: A) Stephan is not providing financial advice and should ensure that any products recommended are suitable for the client. B) Stephan is engaged in financial planning only if he performs all seven steps covered in the practice standards. C) Stephan is not engaged in financial planning, but he should still put the client's interest first. D) Stephan is engaged in financial planning and should act in the best interest of the client.

Answer 89

The correct answer is (D). Option (D) is correct because according to the CFP Board's Code of Ethics and Standards of Conduct, Stephan is providing financial advice and financial planning. This requires him to act as a fiduciary to the client. The fiduciary standard requires the CFP® professional to act in the best interest of the client. Tricia clearly asked for help with financial planning, and Stephan is integrating multiple financial planning subject areas. These two factors make it clear that a financial planning engagement exists. Option (A) is incorrect because according to the CFP Board's Code of Ethics and Standards of Conduct booklet, communications that are specific to a client's individual goals and circumstances are financial advice. Financial planning engagements and financial advice require a fiduciary responsibility to act in the best interest of the client. Option (B) is not correct because according to the CFP Board's Code of Ethics and Standards of Conduct, it is not necessary for all seven steps to be followed for a financial planning engagement to exist. Option (C) is incorrect because Stephan is in a financial planning engagement, which requires a fiduciary responsibility to act in the best interest of the client.

Question 90

``` Question 90 (1 point) Often referred to as the truth-in-securities law, the Securities Act of 1933 has the following objective(s): ``` I. It requires that investors receive financial or other significant information concerning securities being offered for public sale. II. This act also established regulations on investment companies and their relationship with the investing public. Question 90 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 90

The correct answer is (A). | Statement II is incorrect because it refers to the Investment Company Act of 1940 and not the Securities Act of 1933.

Question 91

``` Question 91 (1 point) Which of the following convictions, if any, will always bar a candidate from becoming a CFP® professional? ``` I. Conviction for tax fraud II. Conviction for passing a bad check Question 91 options: A) I only B) II only C) Both II and II D) Neither I nor II

Answer 91

The correct answer is (A). A conviction of tax fraud will always bar a candidate from becoming a CFP® professional, but a conviction for passing a bad check will not always bar a candidate from being a licensee.

Question 92

``` Question 92 (1 point) Which of the following statements is (are) correct? ``` I. The revocation of the right to use the CFP® mark may last up to 5 years. II. It is standard for the CFP® Board to publish revocations online. Question 92 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 92

The correct answer is (B). | It is standard to publish revocations online and revocation is always permanent.

Question 93

``` Question 93 (1 point) Today Walter is submitting his initial application for CFP® certification with the CFP Board of Standards. Four years earlier, Walter signed a Letter of Acceptance, Waiver and Consent with FINRA, as part of a FINRA arbitration hearing. As part of the arbitration settlement, Walter consented to a 30-day suspension, a fine of $100,000, and 20 hours of continuing education. Which action is most appropriate for Walter to take when completing his initial application for CFP® certification? ``` Question 93 options: A) Walter cannot disclose the FINRA arbitration because if he reports the arbitration to the CFP Board, he would be disclosing confidential client information. B) Walter should disclose the FINRA arbitration to the CFP Board. C) Walter may disclose the FINRA arbitration, but he is not required to disclose the arbitration because the matter was settled more than 5 years prior to Walter's applying for initial certification as a CFP® certificant. D) Section F of the CFP Board's Code of Ethics and Standards of Conduct requires Walter to disclose any and all arbitration, civil suits, or criminal suits.

Answer 93

The correct answer is (B). Section E.2 of the current Code of Ethics and Standards of Conduct requires that the CFP® professional refrain from adverse conduct. Section E.3 requires that such conduct be reported to the CFP Board. Option (A) is incorrect because the candidate for CFP® certification is not required to release confidential client information during the initial application for CFP® certification. The only requirement is to advise the Board of the arbitration and findings. Option (C) is incorrect because the candidate for CFP® certification is required to disclose all arbitrations or other civil proceedings. There is no look-back period limited to 5 years for arbitration, civil suits, or criminal suits. Option (D) is incorrect because Section F of the Code Ethics and Standards of Conduct prohibits circumvention; it does not address disclosure requirements.

Question 94

``` Question 94 (1 point) Tom, a CFP® professional, has developed a financial plan for his client. Based on the CFP Board's practice standards, which of the following should Tom do next? ``` Question 94 options: A) Review the plan with the client's CPA and attorney. B) Implement the financial plan. C) Present the financial plan to his client. D) Monitor financial planning recommendations.

Answer 94

The correct answer is (C). Based on the CFP® practice standards, the next step for a CFP® professional after developing the financial plan is to present the plan. Option (A) is incorrect because reviewing the plan with the client's CPA and attorney is not required in the practice standards. Option (B) is incorrect because Tom must first present the plan to the client before implementing the plan. Option (D) is incorrect because monitoring is the last step in the financial planning process.

Question 95

``` Question 95 (1 point) Jonathan, a CFP® practitioner, filed for bankruptcy as a result of financial difficulties related to a divorce. Which of the following is required under the CFP Board's Code of Ethics and Standards of Conduct? ``` Question 95 options: A) Jonathan must disclose the bankruptcy to the CFP Board but he is not required to disclose it to clients. B) Jonathan is not required to disclose to his firm any public discipline by the CFP Board related to the bankruptcy. C) Jonathan is required to provide written disclosure of the bankruptcy to clients when providing financial advice or financial planning. D) Jonathan is required to provide written disclosure of the bankruptcy to clients when providing financial planning but not when providing only financial advice.

Answer 95

The correct answer is (D). Option (A) is incorrect because Jonathan is required to disclose the bankruptcy to both the CFP Board (within 30 calendar days of filing) and his clients. Option (B) is incorrect because Section E.3 of the Code of Ethics and Standards of Conduct requires Jonathan to promptly advise his firm of any public discipline by the CFP Board. Option (C) is incorrect because the disclosure can be made orally or in writing when providing financial advice but must be in writing when providing financial planning. Option (D) is correct because by providing financial planning, Jonathan is required to provide written disclosure of the bankruptcy to clients.

Question 96

``` Question 96 (1 point) From time to time, a financial planner will refer clients to third-party professionals and otherwise limit engagements with clients to topics with which she has experience and expertise. This behavior is most clearly in line with which duty? ``` Question 96 options: A) Competence B) Complying with the law C) Diligence D) Confidentiality and privacy

Answer 96

The correct answer is (A). | Limiting engagements and utilizing the services of other experts are examples of the duty of competence.

Question 97

``` Question 97 (1 point) Which of the following is (are) requirements of the fiduciary duty under the Code of Ethics and Standards of Conduct? ``` I. Under the duty of loyalty, the CFP® professional must place the interests of the client ahead of the interests of the CFP® professional or the CFP® professional's firm. II. Under the duty of care, the CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise considering the client's goals, risk tolerance, objectives, and circumstances. Question 97 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 97

The correct answer is (C). Statements I and II are both requirements. The duty of loyalty also requires that the CFP® professional avoid or disclose and manage conflicts of interest, and act without regard to the financial or other interests of the CFP® professional, the CFP® professional's firm, or any other individual or entity other than that of the client.

Question 98

``` Question 98 (1 point) John, a CFP® professional, works for a firm that requires that any investment products offered to a client be proprietary products of the firm. His client Jack is 55 years old and has a moderate risk tolerance. John's firm has an S&P 500 index fund with a reasonable fee structure. John has discussed the fund's performance and costs with Jack, and they have agreed that 60% of his equity portfolio will be allocated to this index fund. Which of the following is true according to the Code of Ethics and Standards of Conduct? ``` Question 98 options: A) John is prohibited from providing financial planning because he may not be able to offer the client the best available option. B) John may provide financial planning as long as the limitations concerning the proprietary products are discussed with Jack. C) John may provide financial planning, but the limitations concerning the proprietary products must be disclosed in writing to Jack. D) John could enter into a limited engagement related to Jack's specific insurance needs next year with no written disclosures other than those required by regulatory bodies.

Answer 98

The correct answer is (C). Option (A) is not correct because the Board's definition of "best available options" in connection with the fiduciary standard associated with a financial planning engagement allows for limitations on the certificant's recommendations (such as proprietary products) so long as those limitations are disclosed to the client. Option (B) is not correct because Section A.10.b. of the Code of Ethics and Standards of Conduct requires that the disclosure be in writing when the professional is engaged in financial planning; this would make option (C) correct. Option (D) is not correct because once a client becomes a financial planning client, subsequent limited engagements would be considered a part of the continuing financial planning engagement.

Question 99

``` Question 99 (1 point) Rose is employed as a loan officer at a bank. Rose recently sat down and visited with her financial planner Julie, a CFP® professional. Julie was in need of cash and borrowed $15,000 from Rose. Based on the Code of Ethics and Standards of Conduct which of the following statements is accurate? ``` Question 99 options: A) Julie is not in violation of the Code of Ethics and Standards of Conduct because Rose is in the business of lending money. B) Julie is in violation of the Code of Ethics and Standards of Conduct because a CFP® professional must never lend money to a client. C) Julie is not in violation of the Code of Ethics and Standards of Conduct since she loaned Rose less than $20,000. D) Julie is in violation of the Code of Ethics and Standards of Conduct.

Answer 99

The correct answer is (A). The Code of Ethics and Standards of Conduct states that a CFP® professional shall not borrow money from a client UNLESS that client is a member of the certificant's immediate family or the certificant is an employee of an institution in the business of lending money. Because Rose is in the business of lending money, Julie is not in violation of the Code.

Question 100

``` Question 100 (1 point) A fee-based CFP® professional may receive compensation from which of the following sources? ``` I. Fees paid directly by clients II. Commissions on the sale of insurance or investment products Question 100 options: A) I only B) II only C) Both I and II D) Neither I nor II

Answer 100

The correct answer is (C). Fee-based planners may be compensated by both client fees and by commissions. Fee-only planners may only be compensated by their clients' fees.