Practice Exam Questions

Question 1

Which of these activities would be appropriate if you were establishing and defining the client-planner relationship or gathering information necessary to fulfill the engagement?

I. Collecting personal financial information
II. Inquiring about the number of dependents
III. Inquiring about the age or dates of birth of dependents
IV. Determining which stocks to purchase for the client’s investment portfolio

A) I, II, III, and IV
B) III and IV
C) I, II, and III
D) I and II

Answer 1

C) I, II, and III

The correct answer is I, II, and III. Establishing and defining the client-planner relationship does not include determining which stocks or investments to purchase. This occurs in the fourth phase of the financial planning process; developing the recommendations.

Question 2

Which of the following CFP® certificants would likely be considered to be engaged in financial planning or the material elements of financial planning?

I. Lance, who reviews a life insurance sales brochure with his client, Arthur, and completes a variable life insurance application
II. Nadia, who conducts comprehensive data gathering regarding Jason’s investments, life insurance, retirement plans, wills, and trusts and makes recommendations for him

A) II only
B) I only
C) Neither I nor II
D) Both I and II

Answer 2

A) II only

The correct answer is II only. Because Nadia’s services involve several of the financial planning subject areas and she is involved in the elements of financial planning, she is likely providing financial planning. Lance’s service to Arthur is limited, and the engagement would likely not be considered financial planning.

Question 3

According to CFP Board Code of Ethics, Connor, a CFP® professional, is responsible for which of these?

I. Acting in the client’s best interests
II. Avoiding or disclosing and managing conflicts of interest
III. Acting with honesty, integrity, competence, and diligence
IV. Maintaining the confidentiality and protect the privacy of client information

A) III and IV
B) I and II
C) I, II, III, and IV
D) I, III, and IV

Answer 3

C) I, II, III, and IV

The correct answer is I, II, III, and IV. A CFP® professional must:

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.

Question 4

Amanda, a CFP® professional, is enjoying an afternoon at her son’s school playground when she is approached by Tracy, a fellow parent and teacher at a local elementary school. Their conversation covers specifics about Tracy’s personal and financial situation, with emphasis on a recommended investment strategy for her 403(b) account. Amanda is aware that she is providing Financial Advice to Tracy. Identify the correct application of rules from the Code and Standards based on Amanda and Tracy’s interaction.

A) Tracy is technically not a client and the conversation is occurring outside Amanda’s office, therefore, neither the Fiduciary requirements nor Code of Ethics applies.
B) While not necessary, due to the lack Financial Planning, Amanda should consider applying important principles from the Code of Ethics in addition to her Fiduciary Duty.
C) Since only Financial Advice is occurring, Amanda must uphold only her Fiduciary Duty.
D) Although only Financial Advice has been determined, Amanda must uphold her Fiduciary Duty and must follow the Code of Ethics.

Answer 4

D) Although only Financial Advice has been determined, Amanda must uphold her Fiduciary Duty and must follow the Code of Ethics.

The correct answer is although only Financial Advice has been determined, Amanda must uphold her Fiduciary Duty and must follow the Code of Ethics. As a CFP® professional, Amanda is obligated to uphold the Code of Ethics. In addition, since Financial Advice is occurring, Amanda must act as a Fiduciary, in the best interest of Tracy. The introduction of the Code and Standards specifically states “The Code of Ethics applies at all times, and sets forth principles that guide the behavior of CFP® professionals, with elaboration provided in the Standards.”

Question 5

Bill and Sophia have recently retired and want to travel to Europe and then volunteer for local mission work. They would also like to meet with Humphrey, their financial planner, to discuss charitable contributions they would like to make to these local missions. Humphrey should determine Bill and Sophia’s life cycle phase to be

A) the conservation phase.
B) the distribution phase.
C) the asset accumulation phase.
D) the protection phase.

Answer 5

B) the distribution phase.

The correct answer is the distribution phase. The distribution/gifting phase begins subtly when a couple realizes that they can afford to spend on things they never believed possible. The asset accumulation and conservation/protection phases make this phase possible. For many people, there is a period when they are being influenced by all three phases simultaneously, though not necessarily to the same degree.

Question 6

Whitney is designing her new email template which will reflect her recent certification as a CFP® professional. Under her name, she has identified herself as a CFP™. In a tagline at the bottom of the template, she advertises herself as a “CFP® expert.” According to CFP Board’s guidelines regarding how the CFP®” marks may be used, which of the following is CORRECT?

I. Whitney has appropriately identified herself as a CFP™.
II. Advertising herself as a CFP® expert is prohibited by CFP Board.

A) Both I and II
B) I only
C) II only
D) Neither I nor II

Answer 6

C) II only

The correct answer is II only. Statement I is incorrect. Although, Whitney can identify herself as a CFP®, it must be done behind her name, not under it. If Whitney wants to identify herself under her name, she should do so as a ™. Statement II is correct. “CFP®” must always be used with one of CFP Board’s approved nouns (“certificant”, “professional”, “practitioner”, “certification”, “mark”, or “exam”) unless directly following the name of the individual certified by CFP Board. Here, it can be used alone.

Question 7

Maxine, age 57, would like to retire in 10 years. Currently, her debt is decreasing as her cash flow and net worth are steadily increasing. Based on Maxine’s current financial life cycle phase, which of the following goals is she likely to have?

A) Long-term goals, such as estate planning and preservation of capital
B) Long-term goals, such as investing for retirement
C) Short-term goals, such as saving for a down payment on a home
D) Short-term goals, such as protection and maintenance of current lifestyle

Answer 7

B) Long-term goals, such as investing for retirement

The correct answer is long-term goals, such as investing for retirement. Maxine is in the conservation/protection phase of the financial life cycle. As such, her goals are likely longer-term goals, such as investing to provide for future retirement income. In the accumulation phase of the financial life cycle, clients have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals. Finally, in the distribution/gifting phase, estate planning and capital preservation are usually most important.

Question 8

Blanca, a CFP® professional, has recently entered into a financial planning engagement with Simon. As his financial planner, which of the following are Blanca’s roles?

I. Analyzing Simon’s current financial status
II. Assisting Simon in implementing the financial plan
III. Helping Simon identify financial goals and objectives

A) I, II, and III
B) II and III
C) I only
D) I and III

Answer 8

A) I, II, and III

The correct answer is I, II, and III. The financial planner is responsible for analyzing clients’ financial status, assisting clients in implementing their financial plans, and making recommendations based on the client’s goals and objectives.

Question 9

Candice has referred Rochelle, a CFP® professional, to her brother, Nelson. In their initial meeting, Rochelle explains how she can help Nelson develop a comprehensive financial plan. Which of the following would be Rochelle’s roles in a client-planner relationship with Nelson?

I. Assisting Nelson in identifying his goals
II. Analyzing Nelson’s current financial status
III. Recommending strategies that will meet Nelson’s business goals
IV. Providing documentation Rochelle needs to complete the financial plan

A) I and II
B) I, II, and III
C) I, III, and IV
D) II and IV

Answer 9

B) I, II, and III

The correct answer is I, II, and III. Rochelle is responsible for helping Nelson with identifying his goals and making recommendations based on those goals. She is also responsible for analyzing Nelson’s current financial status. Nelson has the duty to provide documentation Rochelle needs to complete the financial plan.

Question 10

In 2012, the average cost of a new home in Oakville was $150,000. In 2014 the average cost rose to $210,000. Due to an economic downturn in 2017, the average cost of a new home fell to $185,000, and the reaction to the decreased cost was positive, even though the new average cost was higher than the 2012 average cost of a new home. This behavior is known as

A) confirmation bias.
B) mental accounting.
C) anchoring.
D) herding.

Answer 10

C) anchoring.

The correct answer is anchoring. When the average cost of a new home rose in 2014 to $210,000, home buyers reset their psychological anchors to that cost. As the price declined in 2017 to $185,000, the reaction was positive because it was considered in light of the higher 2014 price.

Question 11

Recently, Fallon, an avid shopper, has heard from her friends that an investment in Shoes-2-You stock was a wise idea because the shoes sold are very stylish. Even though Fallon’s financial planner has advised her that investing in this stock is a poor decision, she invests in it anyway. Her brother, Stanley, congratulates her on her investment because he feels it is a wise investment. Stanley considers himself to be an expert in investments. Unfortunately, he considers his expertise to be much greater than it actually is. In the past, Stanley has taken credit for any investment decisions that have positive returns but blames the economy when an investment does poorly. Considering Fallon’s and Stanley’s behavior, which of these statements is CORRECT?

A) Fallon’s behavior is an example of mental accounting; Stanley’s behavior is representative of confirmation bias.
B) Fallon’s behavior is an example of anchoring; Stanley’s behavior is representative of mental accounting.
C) Fallon’s behavior is an example of confirmation bias; Stanley’s behavior is representative of overconfidence.
D) Fallon’s behavior is an example of overconfidence; Stanley’s behavior is representative of anchoring.

Answer 11

C) Fallon’s behavior is an example of confirmation bias; Stanley’s behavior is representative of overconfidence.

The correct answer is that Fallon’s behavior is an example of confirmation bias; Stanley’s behavior is representative of overconfidence. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Overconfidence tends to make Stanley believe his level of ability is much higher than what it is. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Mental accounting is putting money into separate “accounts” based on the function of these accounts.

Question 12

Melissa has $8,000 in a savings account, which she has earmarked for an Australian vacation later this year. The roof of her house was damaged recently and it requires considerable repairs. Melissa does not want to spend the money in her savings account to make the repairs because she believes that money is for her upcoming vacation. Instead, she withdraws $4,000 from her traditional IRA to make the repairs. She has to pay income tax of $1,120 plus a penalty of $400 on the IRA withdrawal. This is an example of which of these behaviors?

A) Mental accounting
B) Herding
C) Confirmation bias
D) Self-control bias

Answer 12

A) Mental accounting

The correct answer is mental accounting. Melissa’s irrational financial decision resulted from mentally putting her money into separate “accounts” based on the function of those accounts. Self-control bias occurs when an individual lacks self-discipline and favors immediate gratification over long-term goals. Herding occurs when a person follows the actions of a larger group, whether rational or not. Confirmation bias means people tend to pay attention to information that supports their preconceived opinions while disregarding accurate, unsupported information.

Question 13

Mark is meeting with a new client, Macy. It is important that Mark understand Macy’s psychological ability to deal with uncertain outcomes includes risk tolerance, risk capacity, and risk perception. During what step in the financial planning process should Mark measure Macy’s abilities?

A) Understanding Macy’s personal and financial circumstances
B) Presenting the recommendations
C) Identifying and selecting goals
D) Monitoring progress and updating

Answer 13

A) Understanding Macy’s personal and financial circumstances

The answer is understanding Macy’s personal and financial circumstance. All of the other answer choices are steps that are too late in the process for this measurement.

Question 14

Wendy, a CFP® professional, is meeting with her client, Chrissy, to discuss her goals. Chrissy advises Wendy that one of her goals is to take an expensive hiking trip in the Alps, something her mother and grandfather had done when they were young. She’d like to keep this tradition in her family. Wendy believes that, because of Chrissy’s financial circumstances, this is not the best use of Chrissy’s money. What should Wendy do to best serve her client, Chrissy?

I. Wendy should understand that expensive trips like hiking in the Alps is an important family tradition to Chrissy.
II. Wendy should consider the trip as one of Chrissy’s goals and explain how such a goal would impact her overall financial plan.
III. Wendy should share her opinion with Chrissy and persuade her to abandon this as one of her goals.
IV. Because Wendy, as Chrissy’s financial planner, does not feel taking the trip is a wise financial decision, she should not include it in Chrissy’s financial plan as a goal.

A) II only
B) I and II
C) I, II, and III
D) IV only

Answer 14

B) I and II

The correct answer is I and II. Wendy should respect Chrissy’s wishes and understand that such a trip is part of a family tradition. She should consider the trip as one of Chrissy’s goals; however, she should also let her know how such a goal would impact Chrissy’s overall financial plan. Wendy should not share her opinion with Chrissy or try to persuade her to abandon it as one of her goals.

Question 15

In his financial planning practice, Frank allows his clients’ goals and values to drive his relationships with them. He sees himself as a consultant. Frank’s approach to financial counseling is known as

A) the classical economics approach.
B) the strategic management approach.
C) the cognitive-behavioral approach.
D) the economic and resource approach.

Answer 15

B) the strategic management approach.

The correct answer is the strategic management approach. In this approach, the client’s goals and values drive the client-planner relationship and the planner serves as a consultant. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. The cognitive-behavioral approach believes a client’s attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results.

Question 16

Which of these statements regarding the classical economics approach to financial counseling is CORRECT?

I. This approach features the use of a SWOT analysis.
II. This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory.
III. Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs.
IV. This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes.

A) I and III
B) II, III, and IV
C) III and IV
D) I and IV

Answer 16

C) III and IV

The correct answer is III and IV. Statement I is incorrect; the strategic management approach features the use of a SWOT analysis. Statement II is incorrect; the financial counseling approach that is based on the use of psychoanalytic theory such as Freudian or Gestalt theory is the psychoanalytic approach.

Question 17

Which of these statements regarding open-ended and closed-ended questions is CORRECT?

I. Planners should use as many open-ended questions as possible when developing client goals and expectations.
II. Closed-ended questions facilitate effective communication between the client and planner because they require the client to answer in her own words.

A) I only
B) Both I and II
C) Neither I nor II
D) II only

Answer 17

A) I only

The correct answer is I only. Planners should use as many open-ended questions as possible when developing client goals and expectations. These types of questions require clients to answer in their own words. Open-ended questions facilitate effective communication between clients and planners. Statement II is incorrect. Closed-ended elicit “yes” or “no” answers, and this can restrict communication.

Question 18

Bernie is meeting with his clients, Mike and Alyssa, to define their goals. Mike tells Bernie that one of his goals is purchasing a fishing camp in two years and Alyssa shakes her head. What is the best action for Bernie to take next?

A) Ask Mike and Alyssa if they have any other goals.
B) Get more details regarding the purchase of the camp.
C) Recommend how Mike and Alyssa can pay for the camp.
D) Ask Alyssa if the camp is a mutually agreed-upon goal.

Answer 18

D) Ask Alyssa if the camp is a mutually agreed-upon goal.

The correct answer is ask Alyssa if the camp if a mutually agreed-upon goal. Alyssa’s body language (shaking her head) may express that she does not agree with this goal. Therefore, Bernie should clarify whether or not she is on board with Mike’s idea. If Alyssa is agreeable, Bernie should then get more details regarding the purchase of the camp. Bernie should not move on to other goals before Mike and Alyssa are in agreement regarding this particular one. Lastly, this is not the time to make recommendations without comprehensive information.

Question 19

Which of these statements regarding interpersonal communication between financial planners and their clients are CORRECT?

I. Mirroring is accomplished by imitating the client’s body language or verbal style.
II. Body language can impact how clients receive and interpret messages more than any other type of communication.
III. Emotional intelligence includes the ability to recognize emotional expressions and select socially appropriate responses.

A) I, II, and III
B) I and III
C) I and II
D) II and III

Answer 19

A) I, II, and III

The correct answer is I, II, and III. Also, effective interpersonal communication involves the application of both oral and non-verbal skills, such as the effective use of body language.

Question 20

Oscar and Kathryn have a net worth of $250,000 before each of the following transactions:

• Purchased $3,000 of appliances on credit
• Transferred $2,000 from their checking account to a personal savings account
• Paid off a credit card with a balance of $6,000 using a personal savings account

What is the net worth of Oscar and Kathryn after these transactions?

A) $253,000
B) $250,000
C) $247,000
D) $244,000

Answer 20

B) $250,000

The correct answer is $250,000. None of these transactions will change Oscar and Kathryn’s net worth. The checking and savings account transactions offset each other and, although the addition of the appliances will increase the clients’ assets by $3,000, the use of credit will increase their liabilities by the same amount.

Question 21

Which of the following financial statements provides a snapshot of the client’s net worth at any given point in time, usually at the end of a calendar year?

I. Personal tax return
II. Cash flow statement
III. Net worth statement
IV. Statement of financial position

A) IV only
B) III and IV
C) I, III, and IV
D) II only

Answer 21

B) III and IV

The correct answer is III and IV. A statement of financial position, also known as a personal balance sheet or net worth statement, provides a snapshot of the client’s net worth at any given point in time, most often at the end of a calendar year.

Question 22

Which of the following statements regarding a financial planner’s analysis of a client’s cash flow statement is CORRECT?

I. The analysis of the client’s cash flow statement can help the planner determine whether the client is living within his financial means.
II. The analysis of the client’s cash flow statement helps determine the client’s net worth, or total cash surplus, by tracking cash inflows and outflows over a period of time.
III. Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement.

A) I, II, and III
B) II only
C) I and II
D) I and III

Answer 22

D) I and III

The correct answer is I and III. Statement II is incorrect. The analysis of the client’s cash flow statement helps determine the client’s savings level, or total cash surplus, by tracking cash inflows and outflows over a period of time. Net worth is determined in a statement of financial position.

Question 23

You have gathered the following information from Edgar’s financial statements:

Net income: $75,000
Gross income: $110,000
Total assets: $190,000
Total debt: $45,000
Consumer debt: $20,000

Based on this information, which of the following statements is CORRECT?

I. Edgar’s total debt ratio exceeds the generally recommended maximum.
II. Edgar’s consumer debt ratio exceeds the generally recommended maximum.

A) II only
B) Both I and II
C) I only
D) Neither I nor II

Answer 23

B) Both I and II

The correct answer is Both I and II. It is generally recommended that total debts do not exceed 36% of gross income. Edgar’s total debt ratio is 40.9%, greater than the 36% maximum ($45,000 / $110,000 = 40.9%). The consumer debt ratio is the ratio of consumer debt payments to net income. Edgar’s consumer debt ratio is 26.67%, which exceeds the generally recommended maximum of 20% ($20,000 / $75,000 = 26.67%)

Question 24

Which of the following are considered fixed cash outflows?

I. Clothing expenses
II. Mortgage payments
III. Insurance premiums
IV. Auto loan payments

A) I, III, and IV
B) II, III, and IV
C) II only
D) II and IV

Answer 24

B) II, III, and IV

The correct answer is II, III, and IV. Clothing expenses are a variable outflow because they typically do not occur on a regular basis and the amount tends to vary. The other choices represent fixed outflows because they tend to occur regularly and the amount is more predictable.

Question 25

Peter, age 35, has requested your expertise in developing a college funding plan for his five-year-old daughter, Brooke. He has presented you with the following information:

Current annual salary—$115,000
Monthly mortgage payment—$1,700
Credit card debt—$3,000 (16.5% fixed)
Checking account balance—$1,345
Long-term group disability insurance—60% of salary to age 65, 60-day elimination period
Life insurance—1x salary (group), $400,000 20-year term (individual)

After completing a budget with Peter, you have determined that he has $350 per month in surplus cash flow. He tells you he would like to use this amount to fund a college plan for Brooke. Based on the information provided, what should Peter do first?

A) Pay off his credit card balance
B) Establish an emergency fund
C) Establish a college education plan for Brooke
D) Purchase additional life insurance

Answer 25

B) Establish an emergency fund

The correct answer is establish an emergency fund. At this point, Peter should use his surplus cash flow to establish an emergency fund. He does not have access to immediate cash, and, in the event of disability, he does not have enough set aside to cover his elimination period. Paying off his credit card debt, purchasing additional life insurance, and establishing a college plan for Brooke should be considered after establishing the emergency fund.

Question 26

Mickey has decided he needs to increase the balance of his emergency fund. Which of the following are ways Mickey can save for this purpose?

I. Cancel his audiobook subscription.
II. Choose a more economical cell phone plan.
III. Use an overdraft feature on his debit cards.
IV. Decrease the deductible on his automobile insurance policy.

A) II, III, and IV
B) I, II, and III
C) I, III, and IV
D) I and II

Answer 26

D) I and II

The correct answer is I and II. Using an overdraft feature on debit cards may entice Mickey to spend money he does not have available in his account. Decreasing insurance deductibles increases premiums, which is not a savings strategy.

Question 27

Aaron, a financial planner, has advised Macy that she needs to increase her savings. What might you recommend as a good savings strategy?

I. Limit the number of lattes she purchases.
II. Use an overdraft feature on debit cards.
III. Increase her deductible on her car insurance policy.
IV. Limit her credit card purchases to those she can pay off in full in one year.

A) II and IV
B) I, II, III, and IV
C) I and III
D) I, III, and IV

Answer 27

C) I and III

The correct answer is I and III. Macy can use the money she saves by limiting the number of lattes she purchases to increase her savings. Using an overdraft feature on debit cards may tempt her to spend money she does not have available in her account. Increasing insurance deductibles decreases premiums, which is a good savings strategy. If credit cards are used, they should be paid off in full at the end of each month.

Question 28

Over the years, Quinn has made timely payments on four of his credit card accounts, all which have balances near the available credit limits. He did pay off a fifth credit card account, which he had for 20 years, and immediately closed it. Which of the following statements regarding Quinn’s credit score is CORRECT?

I. By immediately closing his long-standing account when it was paid off, Quinn likely decreased his credit score.
II. Having four credit card account balances near their available credit limits will in all likelihood adversely affect Quinn’s credit score.

A) Both I and II
B) Neither I nor II
C) II only
D) I only

Answer 28

A) Both I and II

The correct answer is both I and II. Immediately closing long-standing accounts will likely decrease Quinn’s credit score. Keeping account balances near the available credit limit has a negative effect.

Question 29

Craig is refinancing his current 7.5% 30-year fixed-rate mortgage for $150,000 into a new 5.75% 30-year mortgage for $150,000. How much is his new monthly payment and how much per month will he save on this payment?

A) New payment = $1,048.82, savings = $196.80
B) New payment = $1,048.82, savings = $173.46
C) New payment = $875.82, savings = $341.70
D) New payment = $875.36, savings = $173.46

Answer 29

D) New payment = $875.36, savings = $173.46

The correct answer is new payment = $875.36, savings = $173.46.

END Mode
12, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL

Old payment:

150000, PV
30, DOWNSHIFT, N = 360
7.5, I/YR
Solve for PMT = −1,048.82 or $1,048.82
END Mode
12, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL

New payment:

150000,PV
30, DOWNSHIFT, N = 360
5.75, I/YR
Solve for PMT = −875.36 or $875.36

Savings = $1,048.82 − $875.36 = $173.46

Question 30

Which of the following actions would most likely help an individual improve their credit score?

A) Close a long-standing credit card account that has been paid off.
B) Take advantage of several offers for new credit cards.
C) Maintain account balances near the credit limit.
D) Make the minimum payment on time each month.

Answer 30

D) Make the minimum payment on time each month.

The correct answer is to make the minimum payment on time each month. Although making a minimum payment on a credit card will mean an individual will pay significant interest over the years, it shows creditworthiness and, over time, would increase a credit score.

Question 31

Which of the following statements regarding the decision to buy or lease a home are CORRECT?

I. The itemized tax deduction for mortgage interest is a benefit of home ownership.
II. A client who will be residing in the home for a short period of time should lease the home.
III. The lower the marginal income tax bracket, the greater the advantage of owning a home.
IV. Generally, more costs are associated with buying a home, especially if this arrangement is short term.

A) II, III, and IV
B) I and II
C) I only
D) I, II, and IV

Answer 31

D) I, II, and IV

Correct answer is I, II, and IV. Individuals in higher marginal income tax brackets benefit more from owning a home than those in lower tax brackets. More costs are associated with purchasing a home, regardless of the length of the lease.

Question 32

Paul and Carmen recently moved to the Gulf Coast. Paul is in the Secret Service and would like to live on the beach until he gets his next work assignment in three years. Paul and Carmen want to purchase a home; however, they expect to move for Paul’s next assignment. Which of the following mortgages is best for Paul and Carmen if they want to keep their monthly mortgage payments to a minimum?

A) An adjustable rate mortgage with an interest rate cap
B) A 15-year fixed-rate mortgage
C) A reverse mortgage
D) A 30-year fixed-rate mortgage

Answer 32

A) An adjustable rate mortgage with an interest rate cap

The correct answer is an adjustable rate mortgage with an interest rate cap. Given Paul and Carmen’s relatively short time in their new home, an adjustable rate mortgage (ARM) is their best option. A reverse mortgage is a special type of home loan where the payment stream is reversed (that is, the lender pays the homeowner a stream of income secured by the considerable amount of equity in the home).

Question 33

At the beginning of each year for the past 15 years, Betty, who is Angela and Avery’s aunt, has put $5,000 into an account earning 5.5% annually for their benefit. How much is the account worth today and which process must take place to calculate the value?

A) $113,287.46; compounding
B) $107,892.82; compounding
C) $112,043.32; annuitizing
D) $118,205.70; annuitizing

Answer 33

D) $118,205.70; annuitizing

The correct answer is $118,205.70; annuitizing.

This is a future value of an annuity due calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows:

BEG mode (DOWNSHIFT, Beg/End)
1, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
5000, +/-, PMT
5.5, I/YR
15, DOWNSHIFT, N
Solve for FV = 118,205.6999, or $118,205.70. This is done using annuitizing. Compounding is the process of interest being earned on increasing sums over time.

Question 34

Frank purchased an antique table today for $30,000. Experts advised him the table will increase in value at a rate of 3% annually for the next six years. Approximately how much will the table be worth at the end of the sixth year if his expected return is achieved?

A) $35,822
B) $35,730
C) $34,397
D) $36,472

Answer 34

A) $35,822

The correct answer is $35,822. This is a future value of a single sum calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows:

END Mode
1, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
30000, +/-, PV
3, I/YR
6, DOWNSHIFT, N
Solve for FV = 35,821.5689, or approximately $35,822.

Question 35

Zach expects to receive $20,000 in eight years from his uncle Bradley. How much is this worth in today’s dollars assuming a 6% after-tax interest rate, compounded annually?

A) $10,805
B) $12,603
C) $14,099
D) $12,548

Answer 35

D) $12,548

The correct answer is $12,548. This requires a present value of a single sum calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows:

END Mode
1, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
20000, FV
6, I/YR
8, DOWNSHIFT, N
Solve for PV = −12,548.2474, or $12,548.

Question 36

Charley invested $100,000 12 years ago. Today, it is valued at $250,000. What is the rate of return for Charley’s investment?

A) 9.60%
B) 7.35%
C) 6.95%
D) 7.93%

Answer 36

D) 7.93%

The correct answer is 7.93%. This requires an interest rate calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows:

END Mode
1, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
100000, +/-, PV
250000, FV
12, DOWNSHIFT, N
Solve for I/YR = 7.9348, or 7.93%.

Question 37

Annie deposits $2,500 into an account earning an annual interest rate of 6.25% compounded monthly. Assuming she makes no withdrawals or additions to this account, approximately how many years will it take for Annie to have $5,000 in her account?

A) 11.43 years
B) 11.12 years
C) 12.13 years
D) 10.25 years

Answer 37

The correct answer is 11.12 years. This is a number of periods calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows:

END Mode
12, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
2500, +/-, PV
5000, FV
6.25, I/YR
Solve for N = 133.4305 months ÷ 12 = 11.1192, or 11.12 years.

Question 38

Phil secures a $350,000, 15-year mortgage with an annual interest rate of 5.5%. What will be the unpaid principal balance on Phil’s mortgage at the end of 10 years?

A) $200,281.78
B) $168,128.00
C) $149,718.22
D) $145,238.22

Answer 38

C) $149,718.22

The correct answer is $149,718.22. The unpaid principal balance on Phil’s mortgage at the end of 10 years will be $104,761.78. The keystrokes on the HP 10bII/HP 10bII+ are as follows:

END mode
12, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
350000, PV
15, DOWNSHIFT, N = 180
5.5 , I/YR
Solve for PMT = –2,859.7921
1, INPUT, 120
DOWNSHIFT, AMORT; (pressing the = key toggles you through amortization totals for months 1 through 120); = – 200,281.7762 (total principal paid through 120 months) = –142,893.2758 (total interest paid through 120 months) = 149,718.2238 (remaining principal balance through 120 months of payments)

Question 39

As a financial planner you must be familiar with several different economic and interest rates, and how to use them in calculations that are important to your clients. Assume the following rates:

Prime rate: 5.5%; Interest rate − Investment A: 8.0%
Inflation rate: 2.5%; Discount rate: 2.0%

Considering all the interest rates above, calculate the inflation-adjusted return for investment A.

A) 5.37%
B) 3.20%
C) 2.37%
D) 5.88%

Answer 39

A) 5.37%

The correct answer is 5.37%.
[(1.08 ÷ 1.025) − 1] x 100 = 5.3659, rounded to 5.37%

This can also be calculated using the method below.

1.025, INPUT
1.08, DOWNSHIFT, % CHG
Solve for I/YR = 5.37%

Question 40

What would the inflation-adjusted interest rate be with a 2.5 % inflation rate and a 6% rate of return? Round to two decimal places.

A) 3.41%
B) 0.97%
C) 1.03%
D) 2.40%

Answer 40

A) 3.41%

The correct answer is 3.41%

[(1.06 ÷ 1.025) − 1] x 100 = 3.4146, rounded to 3.41

Note: Alternate calculation would be

1.025, INPUT
1.06, DOWNSHIFT, % CHG
Solve for I/YR = 3.41%

Question 41

Bryan wants to open a photography studio in four years. To do so, he needs to accumulate $175,000 (in today’s dollars) to adequately finance this venture. He assumes he can earn an 8% compound annual after-tax rate of return on investment and inflation will average 3.5%. What will be Bryan’s serial payment at the end of the third year?

A) $40,997.88
B) $42,432.81
C) $45,455.08
D) $43,917.96

Answer 41

C) $45,455.08

The correct answer is $45,455.08.

END mode
175,000, FV
4.3478, I/YR [(1.08 ÷ 1.035) − 1] × 100
4, N
0, PV
PMT = (40,997.8820) × 1.035 = 42,432.8078 (change sign)
42,432.8078 × 1.035 = 43,917.9561
43,917.9561 × 1.035 = $45,455.08

Question 42

John would like to purchase his friend’s action figure collection in eight years for $12,000. His father will give him $2,000 toward the purchase of the collection at that time. John wants to save monthly for the balance of the purchase price. What is the approximate required monthly payment at the beginning of each month to accumulate the $12,000, including his father’s gift, at an assumed interest rate of 5%?

A) $101.50
B) $101.92
C) $84.58
D) $84.93

Answer 42

C) $84.58

The correct answer is $84.58. This requires an annuity due calculation. The amount to be funded is $10,000 ($12,000 - $2,000). The keystrokes on the HP 10bII/HP 10bII+ are as follows:

BEG mode
12, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
10000, FV
5, I/YR
8, DOWNSHIFT, N = 96
Solve for PMT = −84.5801, or $84.58.

Question 43

You’ve determined the net present value (NPV) of your client’s investment to be $32,500. If your client’s required rate of return is 8%, which of the following is most likely to be the investment’s internal rate of return (IRR)?

A) 0%
B) 3%
C) 7%
D) 9%

Answer 43

D) 9%

The correct answer is 9%. If the net present value (NPV) of the investment is a positive number, the investment’s IRR must be greater than or equal to the investor’s required rate of return. Here, the investor’s required rate of return is 8%, so the IRR must be greater than or equal to 8%.

Question 44

Wes is considering investing in a new printing press for his printing business. The purchase price of the printing press is $225,000 and he expects to be able to sell it for $150,000 at the end of five years. During the five-year period, he expects the equipment to increase her annual cash flows by $45,000 (year 1), $32,000 (year 2), $24,000 (year 3), $16,000 (year 4), and $10,000 (year 5). If his opportunity cost is 7%, what is the net present value (NPV) of this investment?

A) −$16,192.73
B) -$9,118.62
C) -$22,998.56
D) -$16,248.49

Answer 44

B) -$9,118.62

The correct answer is -$9,118.62. The keystrokes on the HP 10bII/HP 10bII+ are as follows: 225,000 +/- CFj (year 0); 45,000 CFj (year 1); 32,000 CFj (year 2); 24,000 CFj (year 3); 16,000 CFj (year 4); 160,000 CFj (year 5; final annual cash flow of $10,000 plus the anticipated sales price of $150,000); 7 I/YR [DOWNSHIFT] NPV = -$9,118.6248, or -$9,118.62.

Question 45

Johanna is considering purchasing a greenhouse for use in her business that will cost $25,000. She anticipates selling this machine at the end of five years for $7,500. The machine is projected to produce the following cash flows:

End of year 1: $500
End of year 2: $750
End of year 3: $1,000
End of year 4: $2,100
End of year 5: $4,300

Calculate the net present value (NPV) of purchasing the machine if Johanna’s opportunity cost is 10%.

A) -$19,070.01
B) −$2,377.59
C) −$14,413.11
D) +$1,700.06

Answer 45

C) −$14,413.11

The correct answer is −$14,413.11. Keystrokes on the HP 10bII/HP 10bII+ are as follows:

25000, +/−, CFj
500, CFj
750, CFj
1000, CFj
2100, CFj
11800, CFj
10, I/YR
DOWNSHIFT, NPV = –14,413.1052, or −$14,413.11

Question 46

What is the ability to meet current and future financial obligations and the financial freedom of choice to maintain a desired lifestyle?

A) Integrated financial planning
B) Exterior finance
C) Financial therapy
D) Financial well-being

Answer 46

D) Financial well-being

This is the definition of financial well-being. Integrated financial planning involves exterior finance (relating to clients’ traditional financial matters) and interior finance (clients’ emotional relationships with money). Financial therapy is a process informed by both therapeutic and financial expertise that helps clients think, feel, and behave differently with money to improve overall well-being. It addresses financial well-being at a deep level.

Question 47

Which of these statements regarding financial transparency is CORRECT?

I. Partners should be transparent regarding their finances only if they have joint accounts.
II. If partners appear uncomfortable discussing the details of their finances, the planner should avoid the discussion.

A) I only
B) Neither I nor II
C) Both I and II
D) II only

Answer 47

B) Neither I nor II

The answer is neither I nor II. Partners must be clear and unambiguous about income, spending, assets, and liabilities. Ideally, this should be the case even when couples have separate accounts, assets, or debt; especially if there are common goals shared by partners. When decisions related to family financial goals are discussed openly, the planner can make relevant recommendations that will put clients on track to meet the agreed-upon goals. This requires that partners provide details of their finances, even if they are uncomfortable doing so.

Question 48

Which of these statements regarding financial conflict is CORRECT?

A) To decrease conflict between parents and the adult children they support, it is prudent to have general conversations regarding expectations for each party.
B) Because married partners with dissimilar risk tolerance levels can present challenges during investment planning, there must be open and honest discussion between them regarding how joint funds should be invested.
C) To identify potential financial conflict, financial planners should place more emphasis on what client partners discuss than how they discuss it.
D) Although it is important to notice nonverbal behaviors, it is more important to pay attention to spoken words.

Answer 48

B) Because married partners with dissimilar risk tolerance levels can present challenges during investment planning, there must be open and honest discussion between them regarding how joint funds should be invested.

Because married partners with dissimilar risk tolerance levels can present challenges during investment planning, there must be open and honest discussion between them, facilitated by the planner, regarding how joint funds should be invested. To identify potential financial conflict, financial planners should give equal importance to what partners say and how they say it. Nonverbal behaviors, which are important to notice, are equally important as the spoken word. To lessen conflict between parents and adult children they support, it is prudent to establish detailed guidelines with the adult children, preferably in a written agreement with detailed terms.

Question 49

Which of these indicate financial conflict among partners during meetings?

I. No eye contact between partners
II. Partners sitting far from one another
III. One partner speaking more frequently than the other
IV. One partner pausing longer than the other before answering questions directed at them

A) I and II
B) I, II, and III
C) III and IV
D) I, II, III, and IV

Answer 49

B) I, II, and III

The correct answer is I, II, and III. One partner pausing longer than the other before answering questions directed at them does not necessarily indicate financial conflict. One partner may simply take more time than the other to gather their thoughts and process information. All of the other actions indicate financial conflict.

Question 50

John, age 55, is unmarried and retired. He has these assets on deposit at Allworld Bank, an

FDIC-insured financial institution:

Checking account-John: $80,000
Savings account-Joint with son: $70,000
Certificate of deposit (CD)-John: $225,000
Rollover traditional IRA-John: $150,000

What amount is insured by the FDIC?

A) $525,000
B) $325,000
C) $470,000
D) $250,000

Answer 50

C) $470,000

The correct answer is $470,000. The FDIC insures separate legal categories of accounts of a legal institution. As a result, the individual accounts owned by John (CD and checking account) are aggregated and are insured up to a total of $250,000. The joint account is insured for $70,000. The individual retirement account (IRA) will be insured up to $250,000. Total amount insured is $470,000 ($250,000 + $70,000 + $150,000).

Question 51

Which of these statements regarding the business cycle is CORRECT?

I. Usually, the economy is either in an expansion or contraction phase.
II. The business cycle reflects movements in economic activity and illustrates the concepts of supply and demand.

A) Neither I nor II
B) I only
C) II only
D) Both I and II

Answer 51

D) Both I and II

The answer is both I and II. These statements regarding the business cycle are correct.

Question 52

All of these statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are CORRECT except

A) Up to $500,000 of a member’s account balances are insured by the NCUSIF.
B) The NCUSIF insures member accounts of all federal credit unions.
C) The fund is administered by the National Credit Union Administration (NCUA).
D) The NCUSIF is backed by the full faith and credit of the U.S. government.

Answer 52

A) Up to $500,000 of a member’s account balances are insured by the NCUSIF.

The NCUSIF insures member accounts of all federal and most state-chartered credit unions up to $250,000, not $500,000.

Question 53

Which of these statements describe characteristics of deflation?

I. Prices are falling in absolute terms.
II. The rate of inflation has declined.

A) Both I and II
B) I only
C) Neither I nor II
D) II only

Answer 53

B) I only

The correct answer is I only. Disinflation, not deflation, is characterized by a decline in the rate of inflation. Deflation is characterized by prices that are falling in absolute terms.

Question 54

Mandy, your financial planning client, would like you to advise her of tax-efficient estate planning strategies that preserve her family’s wealth and incorporate charitable donations. What are the relevant elements in Mandy’s financial planning engagement?

I. Address estate and legacy matters
II. Pursue philanthropic interests
III. Preserve or increase wealth
IV. Identify tax considerations

A) II, III, and IV
B) II and III
C) I and IV
D) I, II, III, and IV

Answer 54

D) I, II, III, and IV

The correct answer is I, II, III, and IV. All of these are relevant elements in Mandy’s financial planning arrangement.

Question 55

When providing financial planning services to a client, a certificant needs to provide these services with integrity. Which of these are characteristics of the duty of Integrity?

I. Integrity ensures that information is accessible only to those authorized to have access.
II. Integrity demands honesty and candor, which must not be subordinated to personal gain an advantage.
III. Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot coexist with deceit or subordination of one’s principles.

A) I and II
B) III only
C) II and III
D) II only

Answer 55

C) II and III

The correct answer is II and III. The duty of confidentiality and privacy ensures that information is accessible only to those authorized to have access.

Question 56

Choose the duties that must be fulfilled for a CFP® professional to act as a fiduciary.

I. Duty of Loyalty
II. Duty of Care
III. Duty to Follow Client Instructions

A) I only
B) I and II
C) I, II, and III
D) II and III

Answer 56

C) I, II, and III

The answer is I, II, and III. At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled: 1) duty of loyalty, 2) duty of care, and 3) duty to follow client information.

Question 57

To which of these groups do the CFP Board Fitness Standards apply?

I. CFP® candidates
II. A CFP® practitioner acting in a supervisory capacity
III. Respondents in a CFP Board investigation
IV. Professionals Eligible for Reinstatement

A) II, III, and IV
B) I, II, and III
C) I and IV
D) II only

Answer 57

C) I and IV

The correct answer is I and IV. The Fitness Standards apply to CFP® candidates and Professionals Eligible for Reinstatement (PER). PER includes both individuals who are not currently certified but have been certified by CFP Board in the past and individuals are eligible to reinstate their certification without being required to pass the current CFP® Certification Examination.

Question 58

Reinstatement by CFP Board is possible under which of these circumstances?

I. Revocation
II. Suspension of one year or less
III. Suspension of more than one year
IV. Temporary bar of more than one year

A) III and IV
B) II, III, and IV
C) I and II
D) II and IV

Answer 58

B) II, III, and IV

The correct answer is II, III, and IV. Revocation is permanent. There will be no opportunity for reinstatement.

Question 59

Wholesome Bakery supplies restaurants with bread and biscuits. The price of bread increases, resulting in a higher profit margin. As a result, the bakery chooses to reduce the supply of biscuits and to increase the supply of bread to take advantage of increased profits. Based on this information, which of these statements is CORRECT?

A) The supply curve for bread would remain unchanged.
B) The supply curve for biscuits would shift to the right.
C) The supply curve for bread would shift to the left.
D) The supply curve for biscuits would shift to the left.

Answer 59

D) The supply curve for biscuits would shift to the left.

The supply curve for biscuits would shift to the left. Other non-price related factors that may shift supply include technological advances, suppliers leaving the industry, and changes in the cost of the resources used to produce a good.

Question 60

To enact monetary policy, the Federal Reserve may use which of these tools?

I. Taxation
II. Discount rate
III. Reserve requirements
IV. Open market operations

A) II, III, and IV
B) I, II, and IV
C) I, II, and III
D) III and IV

Answer 60

A) II, III, and IV

Statement I is incorrect. Taxation is a tool used in fiscal policy decisions, which are made by Congress and the president (the Administration). All of the other tools are used by the Fed to enact monetary policy.

Question 61

Which of these are characteristics of Chapter 13 bankruptcy provisions?

I. A repayment plan is implemented.
II. The debtor is typically required to relinquish assets.
III. Debt payments may be reduced so payments are more manageable for the debtor.
IV. Generally, Chapter 13 bankruptcy is more favorable for creditors than Chapter 7 bankruptcy.

A) I, III, and IV
B) III and IV
C) I, II, and III
D) I and III

Answer 61

A) I, III, and IV

Chapter 13 bankruptcy is generally more favorable for creditors because they receive at least some portion of what is owed. In a Chapter 13 bankruptcy, the debtor repays at least a portion of the debts over a specified time. Creditors may not receive any payments under a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, debtors are typically not required to relinquish assets.

Question 62

Which of these are state law exemptions found in Chapter 7 of the Federal Bankruptcy Code?

I. Disability income benefits
II. An exemption for one’s homestead
III. Property held as tenants by the entirety
IV. Existing cash value of life insurance policies

A) I, II, III, and IV
B) I and II
C) I and III
D) II and IV

Answer 62

A) I, II, III, and IV

Other state law exemptions include the proceeds of any annuity contracts.

Question 63

All of these statements regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 are CORRECT except

A) the use of Chapter 7 is limited to the liquidation of credit bills or loans that are not secured.
B) debtors who want to file for Chapter 7 must first undergo credit counseling.
C) lenders must provide consumer information about the dangers of paying only minimum required payments on credit card debt.
D) people who have the ability to pay their debts can choose between filing under Chapter 7 and filing under Chapter 13.

Answer 63

D) people who have the ability to pay their debts can choose between filing under Chapter 7 and filing under Chapter 13.

Under the 2005 Bankruptcy Act, people who have the ability to pay their debts must file under Chapter 13 (reorganization) rather than having their debts canceled entirely under Chapter 7.

Question 64

Which of these are state law exemptions found in Chapter 7 of the Federal Bankruptcy Code?

I. Pension and retirement plan rights (ERISA plans)
II. A limited amount of personal property
III. Proceeds from annuity contracts
IV. Disability income benefits

A) I and II
B) I, II, III, and IV
C) II and IV
D) I and III

Answer 64

B) I, II, III, and IV

Other state law exemptions include an exemption for one’s homestead and the existing cash value of any life insurance policies.

Question 65

Which of these statements concerning the Consumer Credit Protection Act is CORRECT?

I. Credit terms must be disclosed before extending credit.
II. Consumer liability for a lost or stolen credit card is limited to $100.
III. Interest must be reported in terms of annual percentage rate (APR).
IV. Credit bureau reports must include accurate, relevant, and recent information.

A) II, III, and IV
B) I, II, III, and IV
C) I and II
D) I and III

Answer 65

D) I and III

Statement II is incorrect because a cardholder is liable for only $50 in unauthorized charges if he reports the card as lost or stolen. Statement IV is incorrect as it is a requirement of the Consumer Credit Reporting Act, not the Consumer Credit Protection Act. The Consumer Credit Protection Act also requires that applicants who are denied credit must be offered the reason.

Question 66

Meghan is planning for her son’s college education. She would like her son, who was born today, to attend a public university for four years beginning at age 18. Tuition is currently $15,000 a year and has increased at an annual rate of 6%, while inflation has only increased at 2.5% per year. Meghan can earn an investment rate of return of 9%. How much must she save at the end of each year if she wants to make the last payment at the beginning of her son’s first year of college? Round to the nearest dollar.

A) $4,236
B) $3,650
C) $2,945
D) $3,979

Answer 66

D) $3,979

The correct answer is $3,979.

Keystrokes on the HP 10bII/HP 10bII+ are as follows:

Uneven Cash Flow Method

Step 1: Determine the PV of the years of tuition at age 18:

0, CFj
0, CFj
17, DOWNSHIFT, Nj
15000, CFj
4, DOWNSHIFT, Nj
[(1.09 ÷ 1.06) − 1] × 100 = 2.8302 I/YR NPV = $34,834.5585

Step 2: Determine the annual payments needed to fund college tuition costs:

34834.5585, PV
18, N
9, I/YR
PMTOA = ($3,978.5347), rounded to $3,979

Question 67

Henry’s son, Brock, turned six years old today. Henry has plans for Brock to attend a four-year private university at age 18. Currently, tuition is $46,500 per year and is expected to increase at 6.5% per year. Henry can earn an annual compound investment return of 9%. Calculate the lump sum that he needs on Brock’s first day of college to be able to pay for his entire college education.

A) $262,206.96
B) $283,591.79
C) $382,594.77
D) $250,605.70

Answer 67

C) $382,594.77

The correct answer is $382,594.77.

Step 1 Determine the future cost of college for the first year:

46,500 +/– PV
6.5 I/YR
12 N
Solve for FV = 99,002.9752, or $99,002.98

Step 2 Determine the account balance necessary to fund college education:

BEG mode (money is needed at the beginning of college)
99,002.9752 +/– PMT
2.3474 I/YR [(1.09 ÷ 1.065) – 1] × 100 = 2.3474
4 N
Solve for PV = 382,594.7657, or $382,594.77

Question 68

Which of these statements regarding the Expected Family Contribution (EFC) as it relates to student financial aid is CORRECT?

I. Parental assets include almost everything owned by the parents with notable exceptions.
II. Student income includes taxable and nontaxable income from the year preceding the award year, reduced by an income protection allowance and taxes.
III. Student assets include the value of everything the student owns or that has been saved on his behalf.
IV. Parental assets and income are assigned a higher rating in the EFC calculation than student assets and income.

A) III and IV
B) I, II, and III
C) I, II, III, IV
D) I only

Answer 68

B) I, II, and III

Parental assets and income are assigned a lower rating in the EFC calculation than student assets and income.

Question 69

Dionne, Danielle, and Daphne are currently college students eligible for federal student aid. Dionne owes a refund on a federal student grant. Danielle has been unable to maintain satisfactory academic progress. Daphne is experiencing financial difficulties and has defaulted on her federal student loan. Which of these students are likely to lose federal student aid eligibility?

A) Dionne, Danielle, and Daphne
B) Dionne and Danielle
C) Danielle and Daphne
D) Dionne only

Answer 69

A) Dionne, Danielle, and Daphne

All three of these students are likely to lose federal student aid eligibility.

Question 70

Ed recently began studying for his master’s degree earlier this year on a half-time basis. He has applied for a Pell Grant and a Federal Supplemental Educational Opportunity Grant (FSEOG). Assuming Ed demonstrates financial need, for which of these is he likely to be approved?

A) Both the Pell Grant and the FSEOG.
B) The FSEOG only.
C) The Pell Grant only.
D) Neither the Pell Grant nor the FSEOG.

Answer 70

D) Neither the Pell Grant nor the FSEOG.

The answer is neither the Pell grant nor the FSEOG. Because he is a graduate student, Ed will not qualify for either grant.

Question 71

Justin and Molly have become parents today with their first-born child, Harper. They would like to start saving for Harper’s college education and would like her to attend college at National University for four years starting at age 18. As Justin and Molly’s financial planner, you have determined that the total amount needed to fund Harper’s college education is $175,000. If the expected annual return for deposits into a 529 plan is 9%, what is the amount of the quarterly deposits that must be made into a 529 plan?

A) $971.66
B) $323.84
C) $993.52
D) $863.49

Answer 71

C) $993.52

The correct answer is $993.52.

The payment is calculated as follows:

END Mode
4, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
175000, FV
9, I/YR
18, DOWNSHIFT, N = 72
Solve for PMT = -993.5239, or $993.52

Question 72

Derrick wants to establish an education fund that may be used to pay for his son’s primary and secondary education expenses. Which of these will meet Derrick’s needs?

I. Section 529 plan
II. Coverdell Education Savings Account(CESA)

A) Neither I nor II
B) II only
C) I only
D) Both I and II

Answer 72

D) Both I and II

Coverdell Education Savings Accounts (CESAs) and Section 529 plans may be used to pay for primary and secondary education expenses.

Question 73

Which of these education funding plans provides tax advantages regardless of the contributor’s adjusted gross income (AGI)?

I. Section 529 plan
II. Series EE or Series I savings bonds
III. Coverdell Education Savings Account (CESA)

A) II and III
B) I only
C) I, II and III
D) III only

Answer 73

B) I only

This plan offers significant tax advantages regardless of the contributor’s adjusted gross income (AGI). The tax advantages of CESAs and education savings bonds are phased out at higher levels of AGI.

Question 74

Bobbi is a full-time employee at an insurance agency and is enrolled in night classes on a part-time basis in pursuit of her MBA. Her employer offers reimbursements for qualified expenses through the Educational Assistance Program. This year Bobbi has incurred these educational expenses:

Books: $800
Tuition: $3,000
Enrollment Fees: $200
Computer Lab Fee: $100
Clothing for school: $150

Based on these expenses, identify the amount of reimbursement for which Bobbi can receive under the Educational Assistance Program.

A) $4,100
B) $4,250
C) $5,000
D) $3,300

Answer 74

A) $4,100

An employer can reimburse an employee’s tuition (both graduate and undergraduate), enrollment fees, books, supplies, and equipment, and these benefits are excluded from the employee’s income up to $5,250 per year. Bobbi’s qualifying expenses equal $4,100 ($200 + $3,000 + $800 + $100).

Question 75

Max and Marlene have three children, Annie, Stephanie, and Joshua, attending college full-time. Which of these statements regarding education tax credits is CORRECT?

I. An American Opportunity Tax Credit may be claimed by Max and Marlene for each child.
II. Max and Marlene may claim a Lifetime Learning Credit for the entire family.

A) II only
B) I only
C) Both I and II
D) Neither I nor II

Answer 75

C) Both I and II

In addition, a Lifetime Learning Credit may be claimed for one child and an American Opportunity Tax Credit may be claimed for the other two.

Question 76

Which of these expenses qualify for an employer’s Educational Assistance Program?

I. Enrollment fees
II. On-campus housing
III. Full-time, graduate school tuition
IV. Part-time, undergraduate tuition

A) I, II, and III
B) I, III, and IV
C) IV only
D) I, II, and IV

Answer 76

B) I, III, and IV

With the Educational Assistance Program, an employer can reimburse an employee’s undergraduate and graduate tuition, enrollment fees, books, supplies, and equipment, and these benefits are excluded from the employee’s income up to $5,250 per year. Meals, transportation, and lodging are not qualified.

Question 77

(Martin Case Study)

Ryan and Nicole have decided to contribute equally to the cost of a $16,000 used car for Joshua when he graduates from college in two years. Ryan can earn a 5% annual after-tax rate of return. Calculate the amount Ryan must save at the beginning of each month, starting today, to reach this goal.

A) $632.67
B) $316.32
C) $309.72
D) $317.67

Answer 77

B) $316.32

The correct answer is $316.32.

Use BEG mode because this is an annuity due calculation.
12, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
8000, FV (Ryan’s share of the cost)
5, I/YR
2, DOWNSHIFT, N = 24
Solve for PMTAD = –316.32, or $316.32

Question 78

(Martin Case Study)

Assuming the Martins’ original 30-year fixed mortgage loan amount was $200,000, what is the interest rate on the loan?

A) 8.75%
B) 10.75%
C) 10.5%
D) 9.75%

Answer 78

C) 10.5%

The correct answer is 10.5%

END Mode
12, DOWNSHIFT, P/YR
C ALL
200,000, PV
30, DOWNSHIFT, N
1,829.50, +/-, PMT (Mortgage payments from Statement of Cash Flows ÷ 12)
Solve for I/YR = 10.5%

Question 79

(Martin Case Study)

Assume the Martins:

• paid $2,000 of their credit card debt using a gift from Emile and Dee;
• financed the purchase of an $800 laptop using a new line of credit; and
• bought Justin a vintage trombone, valued at $500, online for $300 using their checking account debit card.

Calculate the Martins’ net worth after these transactions.

A) $218,753
B) $219,653
C) $219,053
D) $220,153

Answer 79

A) $218,753

Paying $2,000 of credit card debt reduces the Martins’ liabilities by this amount. This has a positive effect of $2,000 on net worth. Although the purchase of the laptop will increase the Martins’ assets by $800, the use of credit will increase liabilities by the same amount; therefore, this transaction has no effect on net worth. Using checking account funds (via a debit card) of $300 to purchase the vintage trombone valued at $500 will result in an increase in assets of $200 ($500 − $300). This results in a total net worth of $218,753 ($216,553 net worth from Statement of Financial Position + $2,000 + $200).

Question 80

(Martin Case Study)

The Martins ask you whether their consumer debt ratio is at an acceptable level without considering the projected income earned by Sherri. What should you advise them? (Exclude any Section 401[k] plan loan payments.)

A) Their ratio is 9.30%, which is very good.
B) Their ratio is 8.53%, which is excellent.
C) Their ratio is 36.53%, which is very poor.
D) Their ratio is 18.72%, which is acceptable.

Answer 80

The correct answer is a ratio of 8.53%, which is excellent.

Monthly debt payments

Debt payments* = $80 + $253.33 = $333.33

Monthly net income ($71,050 - [$22,855 + $1,320]) / 12 = $3,906.25

Consumer debt ratio = $333.33 / $3,906.25 = 8.53%

NOTE: Monthly credit card payments, boat loan payments, and all sources of income from Statement of Cash Flows without considering the projected income earned by Sherri.

A generally accepted rule in personal financial planning is that the consumer debt ratio should not exceed 20%. Thus, a consumer debt ratio of 8.53% is considered excellent.

Question 81

(Martin Case Study)

From your meetings with Ryan, you realize he has a tendency to follow the actions of a larger group of people when making financial decisions, whether those actions are rational or not. Choose the behavioral finance theory that explains Ryan’s behavior.

A) Confirmation bias
B) Anchoring
C) Overconfidence
D) Herding

Answer 81

D) Herding

Ryan’s behavior is known as herding. Confirmation bias is the tendency to pay attention to information that supports one’s preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when an investor considers his abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.

Question 82

(Martin Case Study)

Calculate the Martins’ savings from refinancing their home loan over the first year of the new loan. Assume they refinance with a 30-year loan. The result is

A) $7,716.72.
B) $1,829.50.
C) $1,186.44.
D) $643.06.

Answer 82

A) $7,716.72.

The correct answer is $7,716.72.

Current monthly mortgage payment—$1,829.50

Mortgage payment after refinancing—$1,186.44

END Mode
12, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
197888, PV
6, I/YR
30, DOWNSHIFT, N = 360
Solve for PMT = -1,186.4385, or $1,186.44

Monthly savings—643.06 × 12

Savings over the first year of the loan—$7,716.72

(Do not factor in closing costs because they are being paid from separate funds.)

Question 83

(Martin Case Study)

Under which of the Duties Owed to Clients principles in CFP Board’s Code of Ethics and Standards of Conduct are you, as a CFP® certificant, required to disclose material conflicts of interest to the Martins?

A) Duty of Care
B) Duty to Follow Client Instructions
C) Duty of Diligence
D) Duty of Loyalty

Answer 83

D) Duty of Loyalty

In CFP Board’s Code and Standards, the Duty of Loyalty states that “a CFP® professional must avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict.”

Question 84

(Martin Case Study)

Analyze the following scenario. Ryan’s neighbor, Dan, asked you to prepare his tax return and financial statements for the previous year. You do this for Dan and meet with him when the documents are completed. During your meeting, you present an investment plan for Dan based on the information he provided for the tax return preparation. Dan thanks you for completing the tax return and financial statements and pays you a fee for your work. Dan, however, tells you he is not interested in an investment plan at this time but may contact you in the future if circumstances change. Assuming you are competent to prepare the tax return and financial statements, did you provide financial planning for Dan based on the facts presented?

A) No, because a client or prospective client request for a singular service never rises to the level of a financial planning engagement.
B) Yes, because you created an investment plan for Dan and investment planning is one of the financial planning subject areas.
C) Yes, because you charged Dan a fee for his services.
D) No, because Dan did not ask you to prepare, nor did he expect you to create, an investment plan.

Answer 84

D) No, because Dan did not ask you to prepare, nor did he expect you to create, an investment plan.

Dan expected no more from you than the preparation of his tax return and financial statements; he did not request any of the financial planning subject areas be addressed. The fact that Dan paid you a fee for your services, and that Dan is Ryan’s neighbor, does not make the assistance you provided to Dan financial planning. In some cases, a client’s request for a singular service may rise to the level of financial planning. Depending on the depth and breadth of a service and the intent of the client, as well as the comprehensiveness of information gathered, a service might be considered financial planning.

Question 85

Which of the following activities would be appropriate if you were establishing and defining the client- planner relationship or gathering information necessary to fulfill the engagement?

I. Determining which stocks to purchase for the client’s investment portfolio
II. Inquiring about the number of dependents
III. Collecting personal financial information
IV. Inquiring about the age or dates of birth of dependents

A) I and III
B) II, III, and IV
C) I only
D) II and IV

Answer 85

B) II, III, and IV

Establishing and defining the client-planner relationship does not include determining which stocks or investments to purchase. This occurs in the fourth phase of the financial planning process, developing the recommendations.