Kaplan Mock Exam Flashcards
Jon, a CFP® professional, is reviewing some of the information provided by his new client, Sara, regarding her homeowners insurance on the home she purchased 2 months ago. He discovers the home was purchased for $320,000 but has a replacement value of $300,000. The land value included in the purchase price was $30,000. Sara has a HO-3 policy insuring the home for $232,000. After his analysis is completed, he concludes Sara is underinsured. What is the amount of HO-3 coverage Jon should recommend Sara purchase for full coverage of a complete loss of her home?
A) $256,000 B) $300,000 C) $320,000 D) $240,000
For maximum coverage for a loss on the home, Jon should recommend to Sara that she increase her HO-3 coverage to the full replacement value on the home of $300,000. The price a client pays for home is an indicator of the fair market value of the home and the land but does not reflect how much it would cost to replace the home after a complete loss. Minimum coverage on the home to cover a partial loss would be $240,000 ($300,000 × 0.80) but for full coverage of a complete loss of her home, Jon should recommend a policy at the full replacement value. (Domain 3-Analyzing and Evaluating the Client’s Current Financial Status)
Delores, age 72, owns a chain of pastry shops, which is organized as a C corporation. She consults a CFP® professional for advice on transferring the business to her daughters, who are interested in taking over the business when she dies. After analyzing Delores’s financial status and reviewing her goals, the CFP® professional determines that a transfer using a family limited partnership will best meet Delores’s objectives. She presents the recommendation to Delores, who accepts it and asks the CFP® professional to begin implementing it. All of the following steps may take place in the implementation of this recommendation EXCEPT
The daughters do not obtain any right to control the business by virtue of their ownership of the limited partnership interests they receive as gifts from Delores. Delores retains exclusive control over the business because she is the only partner who owns a general partnership interest. All of the other statements are correct. (Domain 6-Implementing the Recommendation(s))
Which of the following statements is(are) CORRECT?
Fee simple rental property owned by the decedent and the decedent’s half interest in community property owned at death are included in the probate estate.
A Section 529 plan and a Section 2503(b) trust both require all income to be distributed annually to the beneficiary.
Losses on Section 1244 stock gifted to a minor child are limited to $25,000 annually because of the child’s single filing status.
A trust beneficiary receives a Schedule K-1 summarizing the amounts and character of taxable income distributed.
Statement 1 is correct. Statement 2 is incorrect. Only the Section 2503(b) trust requires income to be distributed to the beneficiary annually. A Section 529 plan is a qualified tuition plan and contributions and earning are generally used to pay qualified tuition expenses, tax-free to the beneficiary. Statement 3 is incorrect. A single taxpayer, including a minor, is allowed a maximum $50,000 Section 1244 ordinary loss deduction regardless of the taxpayer’s age. Statement 4 is correct.
Ashely, a CFP® professional, had recently relocated her office to a new building in her city’s financial district. She believed this location would help her market her business in a more professional manner. She found the move to be quite overwhelming and she was arrested for driving while intoxicated (DWI). After careful consideration, she pled guilty to a charge of DWI and bail jumping in court this morning. In addition, she had difficulty being properly prepared for her first client meeting this afternoon. After the meeting, she discovered her client did not adequately complete her firm’s risk-profile questionnaire. Ashley felt she could still prepare the client’s financial plan even though some critical information was missing on the questionnaire. Finally, she just remembered that her CFP® certification was up for renewal soon and she did not have the required number of continuing education hours. Which of the following is (are) required of Ashley?
She has 45 days to report her guilty plea to CFP Board.
She has 30 days to report her change of address to CFP Board.
She should contact her client to request the missing information before proceeding with completing a financial plan.
She must complete any continuing education requirements to retain the right to use the CFP® marks.
A)
2, 3, and 4
B)
1 only.
C)
1, 2, and 3
D)
3 and 4
Statements 1 and 2 are not correct. The Disciplinary Rules and Procedures were updated to reflect a 30 calendar day reporting requirement for criminal matters, such as her guilty plea. Also, she may receive a suspension to use the CFP marks for the DWI and bail jumping. According to Rule 6.3: A certificant shall notify CFP Board of changes to contact information, including, but not limited to, email address, telephone number(s) and physical address, within forty-five (45) days.
Brandon, a CFP® certificant, has been seriously ill. Between losing time at work and his wife staying home to care for him, Brandon has suffered a financial setback from which he is having issues recovering. Brandon is well again and back at work but is at risk of losing his home to foreclosure because of his long-term illness. Some of his clients have stepped forward and offered to loan him money to help relieve him of the financial burden. From which of the following clients may Brandon borrow money without violating the CFP Board’s Rules of Conduct?
A) Nelson, for whom Brandon provides asset management services and who works at the mortgage company holding Brandon's mortgage B) Kris, a client who works in the legal field C) John, a friend and client of Brandon D) Meghan, Brandon's sister and client
Rule 3.6 of the Rules of Conduct prohibits a certificant from borrowing money from a client with two notable exceptions:
1) The client is a member of the certificant’s immediate family; or
2) The client is an institution in the business of lending money, and the borrowing is unrelated to the professional services performed by the certificant. Only Meghan falls under one of these exceptions because she is Brandon’s sister. (Domain 8-Practicing Within Professional and Regulatory Standards)
Suppose you purchased 200 shares of XYZ stock on margin at $40 per share. Your initial margin was 50%, and you had a 35% maintenance margin. If XYZ drops to $25 per share, what amount will you be required to deposit?
A) $3,000. B) $1,050. C) $750. D) $0
$40 × 50% = $20 (margin loan per share) $25 − $20 debt = $5 of equity $25 × 35% = $8.75 (required equity) $8.75 − $5 = $3.75 per share required to deposit $3.75 × 200 = $750
Jack is a knowledgeable and astute investor who is considering purchasing a permanent life insurance policy. He wants to achieve stock market-like returns for his cash value and pay a fixed premium. Which of the following insurance products is the most appropriate for him?
A) Whole life. B) Universal life type A. C) Variable life. D) Single premium whole life.
Among the types of life insurance listed, only variable life offers the ability to invest in subaccounts offering returns based on equity investments.
Which of the following statements are correct with regards to the taxation of insurance contract premiums and benefits?
Group qualified long-term care insurance premiums are tax deductible for the employer while the benefits received are tax free up to a limit by the beneficiary.
Group dental insurance premiums paid by the employer are tax deductible for the employer while the benefits are received tax-free by the employee.
The death benefit from a modified endowment contract (MEC) is received tax free by the designated beneficiary assuming the contract is not subject to the transfer-for-value rule.
Any payments from an annuity issued after December 31, 1986 that occur beyond the projected life expectancy of the owner/annuitant, are received as tax-free income by the annuitant.
A)
1 and 3
B)
1, 2, 3, and 4
C)
1, 2, and 3
D)
1, 2, and 4
Benefits paid from the group qualified LTC insurance plan to an individual are generally excludible from taxable income, subject to a $420 per day limitation in 2018. Any payments from an annuity issued after December 31, 1986, that occur beyond the projected life expectancy of the owner/annuitant, are fully taxable as ordinary income to the annuitant in the year received by the annuitant.
Which of the following statements is CORRECT regarding equity-based compensation?
A)
The shares received through the exercise of the NQSOs cannot be sold within two years from the date of the option’s grant and one year from the date of the option’s exercise, otherwise the favorable tax treatment will be lost.
B)
The exercise date for an incentive stock option (ISO) creates an AMT adjustment for the employer but does not create a taxable event for the employee.
C)
The exercise date for a nonqualified stock option (NQSO) creates W-2 compensation income subject to payroll taxes for the employee while providing a deduction for the employer.
D)
The grant date does not create a taxable event for incentive stock options (ISOs) but creates an AMT adjustment for nonqualified stock options (NQSOs).
The grant date does not create a taxable event for an ISO or a NQSO. The exercise date for an incentive stock option (ISO) creates an AMT adjustment for the employee, not the employer. The shares received through the exercise of the ISOs cannot be sold within two years from the date of the option’s grant and one year from the date of the option’s exercise, otherwise the favorable tax treatment will be lost.
CFP Board requires a written agreement by the CFP® certificant or the certificant’s employer if a certificant provides financial planning or material elements of the financial planning process to a client. Which of the following (is)are required elements of this written agreement?
The parties to the agreement The date and duration of the agreement How and on what terms each party can end the agreement Terms under which the certificant will use other entities to meet any of the agreement's obligations A) 4 only B) 1, 2, and 3 C) 2 and 3 D) 1 and 4
Statements 1, 2, and 3 are correct. Statement 4 is incorrect. The terms under which the CFP® certificant will use other entities to meet any of the agreement’s obligations may be communicated verbally or in writing. Another element that must be in writing addresses the services to be provided under the agreement. (Domain 8-Practicing Within Professional and Regulatory Standards)
Heather, age 35, is a registered nurse at a local hospital. She is single and has a history of saving and investing since her early twenties. She has amassed a portfolio of $150,000 and is concerned that her money many not be positioned properly to meet her goals. She has engaged Lewis to help her develop a financial strategy. After a few meetings and analysis, he has prepared a recommendation of a managed account featuring a portfolio of 5 mutual funds. In what order should Lewis have completed the following steps?
Have Heather sign his firm’s letter of engagement.
Provide Heather with the mutual fund prospectuses.
Have Heather complete a risk-return profile questionnaire.
Gather Heather’s financial information, such as brokerage and bank statements.
A)
3, 4, 1, 2
B)
1, 3, 4, 2
C)
4, 3, 1, 2
D)
2, 1, 4, 3
First, Lewis should have gathered Heather’s financial information during the initial interview. Next, Heather should have completed the risk-return profile questionnaire to determine the proper portfolio mix. Third, assuming they decided to work together, he should have had her sign his firm’s letter of engagement before he arrived at the point of making recommendations. Lastly, Lewis should have presented her with the mutual fund prospectuses and any other necessary disclosures.
When your client, Carolyn, brought you her records you asked for to complete her income tax return for last year, you noted there were 3 receipts for charitable donations. Carolyn made the following contributions:
A cash donation to the Red Cross of $400
Oil painting valued at $3,500 donated to the local art museum
Sculpture valued at $7,000 donated to Feed-the-Homeless charity
Carolyn expects to be able to deduct these contributions on her income tax return. You have determined her AGI is $21,000.The 3 charities are all public charities. What do you do next?
A)
Because only basis is deductible, you should ask Carolyn for the receipts for the purchase of the painting and the sculpture.
B)
You should ask Carolyn for detailed records on the painting and the sculpture and how the FMV was determined.
C)
You should calculate the maximum donation allowed on the painting and the sculpture for public charities.
D)
You should tell Carolyn she will have to carry forward $1,400 of her donation to a future year because her contributions exceed 50% of her AGI.
To determine the basis of the painting and the sculpture, you need documentation on the purchase of the items. You also need to discover how FMV was determined. The substantiation letters from the charities will tell you what information they received from Carolyn but you need to validate both FMV and basis before determining the allowable income tax deduction.
Lisa, a CFP® professional, has a client in the 35% marginal federal income tax bracket who would like to purchase a bond for her investment portfolio. The client is not subject to a state income tax. After making her calculations for the highest after-tax yield, which of the following bonds should Lisa recommend to her client?
A) 2.55% U.S. Treasury note B) 4.00% general obligation municipal bond C) 3.75% private activity municipal bond D) 5.15% corporate debenture
Lisa should recommend her client purchase the general obligation bond based on the following after-tax yield calculations (Domain 4-Developing the Recommendations):
U.S. Treasury note [2.55% × (1 − .35)] 1.66%
Corporate debenture [5.15% × (1 − .35)] 3.35%
General obligation bond (tax-free municipal bond) 4.00%
Private activity bond (tax-free municipal bond) 3.75%
Thomas was the designated beneficiary of his 72 year-old mother’s qualified profit-sharing plan when she died earlier this year. The plan was valued at $1.5 million in his mother’s gross estate. Thomas has elected not to receive a lump sum distribution from the plan. He also sold stock to a friend for $12,000. He had purchased the stock 2 years ago for $13,000 from his brother whose basis was $9,000. He contributed the proceeds from the stock sale to a Section 529 plan he established for his daughter. Which of the following statements you make to Thomas after your analysis is(are) CORRECT?
Thomas will have an income tax deduction for some of the estate taxes paid on the profit-sharing plan by his mother’s estate if he has taken distributions during the year.
Thomas must receive a distribution before December 31 of this year because his mother died after her required beginning date; gifts to a Section 529 plan are always prorated over 5 years.
Thomas is not required to receive a distribution from the profit-sharing plan until next year; he must include any distribution in his gross income for the year it is received.
The related party rules do not apply to the stock sale; the cash he added to his daughter’s Section 529 plan is eligible for the annual exclusion.
A)
1, 3, and 4
B)
2 only
C)
3 and 4
D)
1 and 3
Statements 1, 3, and 4 are correct. Statement 2 is incorrect; Thomas is not required to begin distributions from the profit-sharing plan until the year after the year of his mother’s death. Also, contributions to Section 529 plans are not always prorated over 5 years; a special rule allows a donor to contribute up to 5 times the gift tax annual exclusion amount in 1 year and have the contribution covered by the annual exclusion.
Your client, Doug, owns a AA rated corporate bond with a current market value of $1,014.56 and a Macaulay duration of 3.7540 years. The bond has a coupon rate of 4.5% (paid annually) and a yield to maturity of 3.5%. Just today, the bond’s YTM changed from 3.5% to 4.25%. Which of the following statements are CORRECT?
The estimated change in the price of Doug’s bond is +2.72%.
The new market price of Doug’s bond should be approximately $1,009.
Doug’s bond is considered to be investment grade.
Before the YTM change, the current yield of Doug’s bond was 4.435%.
A)
2 and 3
B)
1 and 2
C)
2, 3, and 4
D)
1, 3, and 4
Only statement 1 is not correct. The estimated change in the price of this bond is -2.72%.
ΔP/P = -3.7540 × [(0.0425 - 0.035) ÷ 0.035]
ΔP/P = -3.7540 × (0.0075 ÷ 0.035)
ΔP/P = -0.0272, or -2.72%
Given the inverse relationship of bond prices and the movement of market interest rates, this means that the price of the bond has to decrease by 2.72%; specifically, the bond should sell for $1,008.54 (or $1,036.74 × .9728) in the secondary market. We can also cross-check this result by simply solving for the intrinsic value of the bond using a 4.25% YTM:
N = 4
I/YR = 4.25
PMT = 45
FV = 1,000
Solve for PV = 1,009.02, or $1,009
Any bond rating higher than BBB- (Standard & Poors) is considered to be investment grade. The current yield was 4.435% ($45 annual coupon payment ÷ $1,014.56 previous market price).
