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Question 1

What are the CFP Code of Ethics?

Answer 1

1. Act with honesty, integrity, competence, and diligence.
2. Act in the client’s best interests.
3. Exercise due care.
4. Avoid or disclose and manage conflicts of interest.
5. Maintain the confidentiality and protect the privacy of client information.
6. Act in a manner that reflects positively on the financial planning profession and CFP certification.

Exam Tip: Certificants must follow the letter and spirit of the code.

Question 2

Business Life Cycle Components

Answer 2

• Expansion
  
  • GDP, Inflation and Interest Rates are increasing
  • Unemployment is decreasing
• Peak
  
  • GDP is at its highest
  • Inflation and interest rates are peaking
  • Unemployment is at its lowest levels
• Contraction
  
  • GDP begins to slow
  • Inflation and interest rates begin declining
  • Unemployment begins to increase
• Trough
  
  • GDP, Inflation and interest rates are at their lowest levels
  • Unemployment is at its highest

Question 3

Practice Standards for the Financial Planning Process

Answer 3

1. Understanding the client’s personal and financial circumstances.
2. Identifying and Selecting Goals.
3. Analyze the client’s current course of action and potential alternative courses of action.
4. Developing the Financial Plan Recommendations.
5. Presenting the Financial Plan Recommendations.
6. Implementing Financial Plan Recommendations.
7. Monitoring the Plan.

Uber Is A Drunk Person’s Immediate Motor vehicle

Question 4

What are the Federal Reserve’s Three Main Goals?

Answer 4

1. Maintain Long Term Economic Growth
2. Maintain Price Level Supported by the Economy
3. Maintain Full Employment

Question 5

Return on Equity (ROE)

Answer 5

Earnings Per Share ÷ Stockholders Equity Per Share

Question 6

What are the four tools by which the Fed can influence money supply and interest rates

Answer 6

1. Reserve Requirement
2. Discount Rate
3. Open Market Operations
4. Excess Reserve Rate

Buy Securities → Increase Money Supply → Decrease Interest Rates

Sell Securities → Decrease Money Supply → Increase Interest Rates

Question 7

Duties Owed to Firm and Subordinates

Answer 7

• Use Reasonable Care When Supervising
• Comply with Lawful Objectives of CFP Professional’s Firm
• Provide Notice of Public Discipline
• Must Properly Supervise Subordinates
  
  • Assistants, Paraplanners, other CFP Professionals
• Follow Firm’s Lawful Objectives
  
  • Note: if you violate a firm policy, but not a CFP board code or standard, you will not be subject to regulatory action from the CFP board.

Exam Tip: If a CFP goes on vacation and turns all client info into an intern to make recommendations, the CFP Professional broke the “Supervision Duty”.

Question 8

Limitations of Series 6 and 7

Answer 8

Series 6: Mutual Funds, UITs, and variables (life insurance and annuities)

Series 7: Everything except commodities and futures

Question 9

Exceptions to Registration

Answer 9

• The following need not register and generally are not regulated by the Advisers Act
• Banks and bank holding companies that are not investment companies.
• Any broker/dealer whose advisory services are solely incidental to the conduct of business.
• Lawyers, accountants, teachers and engineers whose advice is solely incidental to their profession.
• Publisher of a bona fide newspaper, magazine or periodical of regular circulation.
• Advisers whose advice and services is related strictly to securities guaranteed by the United States.
• Such person not within the intent of the law as the SEC may designate by rules, regulations or order.

Question 10

The Brochure Rule

Answer 10

• The “Brochure Rule” requires written disclosure to every client of the following:
  
  • Advisory Services and Fees
  • Types of Securities
  • Education and Business Standards
  • Participation/Interest in Securities Transactions
  • Conditions for Managing Accounts
  • This Information must be given to the client at or before the time of entering into a contract
  • Compliance with the Brochure Rule is accomplished by providing client with ADV part 2 (outlines fees)

Question 11

What are the three categories of adverse conduct?

Answer 11

• Conduct that is unacceptable
  
  • felony, revocation of a financial license, violent crime within past 5 years
• Conduct that is presumed to be unacceptable
  
  • Two or more personal or business bankruptcies
  • Felony conviction of violent crime other than murder and rape more than 5 years ago
  • Non-violent crimes including perjury within last 5 years
• Revocation or suspension of a non-financial professional license
  
  • Suspension of a financial professional license
    
    • Exception: Not renewing a license by not paying the fee
• Other Conduct that may reflect adversely upon the individual’s integrity or fitness, the profession, or the CFP certification marks.
  
  • Customer Complaints
  • Arbitration and other Civil Proceedings
  • Felony Conviction for non-violent crime more than 5 years ago.
  • Misdemeanor convictions
  • Employer investigations or terminations

Question 12

Dividend Payout Ratio

Answer 12

Common Stock Dividend ÷ Earnings Per Share

Question 13

Registered Investment Advisors

Answer 13

• Dodd-Frank:
  
  • Assets less than $100M → Register with the State
  • Assets greater than $110M → Register with the SEC
    
    • between $100M and $110M - choice to register with State or SEC
    • Mid-Sized Advisors are those with assets under management between $25M and $100M.
  • Cannot Use the letters RIA after your name.
  • May only use the words “Registered Investment Advisor”.
  • Advisory Contracts cannot be assigned without the client’s consent → if selling your business.

Question 14

Exemptions to Registration

Answer 14

• The following meet the definition of Investment Adviser but do not need to register. However, they are subject to the anti-fraud provisions of the Advisers Act.
• Advisers whose clients reside in their state of business and who do not provide advice, services, analysis or reports regarding nationally listed securities.
• Advisers not providing advice about securities traded on a national exchange.
• Advisers whose only clients are insurance companies.
• Advisers solely to venture capital funds.
• Advisers solely to private funds less than $150M.
• Foreign advisers without a place of business in the U.S.

Exam Tip: VIPs are SAFE from exemptions

Question 15

Dividend Yield

Answer 15

Dividend Yield = Dividend ÷ Stock Price

Question 16

Efficient Market Hypothesis

Answer 16

• Investors cannot consistently achieve above-average market returns.
• Prices reflect all information that is available and change very quickly to new information.
• Stock prices will follow a “random walk.”
• Investors who believe in the efficient market hypothesis believe a passive investment strategy is appropriate, such as buy and hold an index

Question 17

Three Forms of the Efficient Market Hypothesis

Answer 17

1. Weak Form.

• Historical information will not help investors achieve above-average market returns.
• The weak form rejects technical analysis and asserts that fundamental analysis will help an investor achieve above-average returns.
• Holds that security prices reflect all price and volume data.
• Is in direct contradiction with technical analysis, which attempts to predict future pricing based on the study of past pricing and volume patterns.

2. Semi-Strong Form.

• The semi-strong theory asserts that both historical and public information will not help investors achieve above-average market returns.
• The semi-strong theory rejects both technical and fundamental analysis but inside information will lead to above-average market returns.

3. Strong Form.

• The strong theory asserts that historical, public and private information will not help investors achieve above-average market returns.
• The strong theory suggests that stock prices reflect all available information and react immediately to any new information.

Question 18

3 Types of Municipal Bonds

Answer 18

1. General Obligation Bonds (backed by full faith, credit and taxing authority of the issuing municipality)
2. Revenue Bonds
3. Private Activity Bonds

Question 19

Coupon Rate

Answer 19

Coupon Payment ÷ Par

Question 20

Current Yield

Answer 20

Coupon Payment ÷ Price of the Bond

Question 21

What is the relationship between Coupon, Current Yield, YTM and YTC

Answer 21

Question 22

Yield Ladder

Answer 22

Question 23

Bond Duration

Answer 23

• The bigger the duration, the more price sensitive or volatile the bond is to interest rate changes.
• Duration is the moment in time the investor is immunized from interest rate risk and reinvestment rate risk.
• Modified Duration is a bond’s price sensitivity to changes in interest rates.
• A bond portfolio should have a duration equal to the investor’s time horizon to be effectively immunized.

Question 24

How to Calculate a Convertible Stock’s Conversion Value

Answer 24

CV = PAR / CP (conversion price) X P_s (stock price)

Question 25

Net Operating Income

Answer 25

Net Income + Interest Expense + Depreciation

Question 26

Capitalized Value (property)

Answer 26

Net Operating Income (NOI) / Capitalization Rate

Question 27

Intrinsic Value of an Options Contract

Answer 27

Call Option: Stock Price - Strike Price

Put Option: Strike Price - Stock Price

Intrinsic Value cannot be less than 0

(Time Value = Premium - Intrinsic Value)

Question 28

Treatment of Gains and Losses for Different Asset Types

Answer 28

Question 29

Maximum Deductions for Property and to Charity

Answer 29