Practice Quiz 13

Question 1

A legal services plan would probably most benefit which of the following?
A)
Highly compensated employees.
 B)
Middle and lower income employees.
 C)
Key executives.
 D)
Top hat employees.

Answer 1

B

Legal service plans, sometimes called prepaid legal plans, usually provide various legal services to employees (e.g., will and trust preparation, lawsuit defense, criminal defense). Middle and lower income employees would most likely take advantage of this program because they may not as easily afford high cost legal representation. Top hat refers to a type of nonqualified deferred compensation plan and not a type of employee.

Question 2

A policy designed to provide protection against a lawsuit or judgment in excess of the limits of basic liability insurance is:
A)
a self-insurance policy.
 B)
a personal liability umbrella policy (PLUP).
 C)
an excess benefit policy.
 D)
a casualty insurance policy.

Answer 2

B

Question 3

Which of the following statements regarding TSAs/Section 403(b) plans are CORRECT?

1. The sponsor must be a tax-exempt organization that meets the requirements of Section 501(c)(3), a governmental organization, or public educational organization.
2. Lump-sum distributions are eligible for net unrealized appreciation tax treatment.
3. In-service withdrawals may be permitted.
4. The plan can invest in individual stocks and bonds but not options or futures.

Answer 3

1 and 3

Statement 2 is incorrect because net unrealized appreciation tax treatment is not permitted for lump-sum distributions from a TSA. Statement 4 is incorrect. Only annuities and mutual funds are permitted investments in a TSA.

Question 4

Arthur is a full-time employee of the ABC Company. ABC has 18 full-time and 8 part-time employees and provides a group health plan for its full-time employees. This year, Arthur turns 65 and voluntarily terminates his employment with ABC in order to retire. Assuming Arthur was covered by the ABC health plan when he retired, which of the following statements regarding Arthur’s eligibility for COBRA continuation coverage is CORRECT?
A)
Arthur is not eligible for continuation coverage because he voluntarily resigned.
B)
Arthur is not eligible for continuation coverage because he is eligible for Medicare.
C)
Arthur is not eligible for continuation coverage because ABC has fewer than 20 full-time employees.
D)
Arthur is eligible for up to 18 months of continuation coverage.

Answer 4

D

Arthur is eligible for up to 18 months of continuation coverage under COBRA. Termination of employment, including voluntary resignation and retirement, is a qualifying event for purposes of COBRA, as is becoming eligible for Medicare. Each of ABC’s 8 part-time employees counts as a 1/2 employee for purposes of the 20-employee rule, so ABC is subject to the COBRA requirements.

Question 5

Which of the following statements regarding self-canceling installment notes (SCINS) is(are) CORRECT?

1. To be effective, a self-canceling installment note must reflect a risk premium to compensate the seller for the possibility of cancellation.
2. A seller under a self-canceling installment note may accept security without jeopardizing the estate tax benefits.
3. Because of the risk premium, the buyer may end up paying more than the fair market value of the property if the seller lives longer than expected.
4. A self-canceling installment note is a debt that ordinarily is extinguished at the seller’s death.

Answer 5

all are correct

Question 6

If a bond is immunized against interest rate risk, a dollar decrease in the bond's price, resulting from rising interest rates, will be approximately offset by a dollar increase in the:
A)
bond issuer's common stock.
 B)
price of comparable bonds in the market.
 C)
income from coupons reinvested over the investment horizon.
 D)
bond's call price.

Answer 6

C

By investing in bonds that have a duration equal to the investor’s investment time horizon, any bond price/value changes caused by interest rate fluctuations, will be approximately offset by changes in the interest earned on the reinvested coupons.

Question 7

Analyzing financial statements of a company and performing industry analysis would be beneficial under which of the following forms of the Efficient Market Hypothesis (EMH)?

1. Weak.
2. Semistrong.
3. Strong.
4. Semiweak.

Answer 7

1 only

Question 8

For disability income insurance purposes, \_\_\_\_\_\_\_\_\_ means that a proportionate benefit is paid to an insured whose earned income is reduced because of a disability.
A)
Accidental disability.
 B)
Residual disability.
 C)
Temporary disability.
 D)
Nonoccupational disability.

Answer 8

B

Question 9

All of the following are considerations for converting distributions from qualified plans or a traditional IRA to a Roth IRA EXCEPT:

A)
the Roth IRA conversion becomes more appropriate the longer the period of distributions.
B)
the Roth IRA conversion is more appropriate when the income tax rate is lower at the time of distribution than at the time of conversion.
C)
one advantage of a conversion to the Roth IRA is that the Roth IRA will not be subject to required minimum distributions (RMD) during the life of the original owner.
D)
any portion of an IRA can be converted to a Roth IRA.

Answer 9

B

Question 10

All of the following statements regarding modern portfolio theory are correct EXCEPT:
A)
the optimal portfolio for an investor depends upon the investor’s ability to assume risk.
B)
the optimal portfolio has the lowest risk for a given level of return.
C)
the optimal portfolio offers the highest return for a given level of risk.
D)
the optimal portfolio will always lie above the efficient frontier.

Answer 10

D

Question 11

Many employers are now making cafeteria plans available to employees. Which of the following is NOT an advantage of cafeteria plans?
A)
Cafeteria plans are less complex and less expensive to design and administer than individual employee benefits.
B)
Cafeteria plans help provide employees with an appreciation of the value of their benefit package.
C)
The flexibility of a cafeteria benefit package helps meet varied employee needs.
D)
Cafeteria plans can help control employer costs for the benefit package because the cost of providing benefits that employees do not need is minimized.

Answer 11

A

Question 12

Which of the following financial issues are critical in a property settlement agreement between nonspouse cohabitants?

1. Responsibility for minor children.
2. Titling of assets acquired during the relationship.
3. Titling of assets acquired prior to the relationship.
4. Allocation of debts if the relationship terminates or one party dies.

Answer 12

all are important

Question 13

Which of the following is(are) NOT subject to 20% mandatory federal income tax withholding if a rollover is not a direct transfer?

1. SEP plan rollovers.
2. Section 403(b) plan/TSA rollovers.
3. Money purchase pension plan rollovers.
4. Profit-sharing plan rollovers.

Answer 13

1 only

Of those listed, only SEP plans are not subject to 20% withholding (regardless of the type of rollover). In contrast, all qualified plan and Section 403(b) plan distributions require withholding in the absence of a direct trustee-to-trustee transfer. SEP plans are a type of IRA and do not require 20% withholding.

Question 14

During the current year, Bill sustained a serious injury in the course of his employment. As a result of this injury, Bill received the following payments:

Workers’ compensation $3,000
Reimbursement from his employer’s accident and
health plan from medical expenses paid by Bill $2,400
Compensatory damages for physical injuries $6,000
Punitive damages for physical injuries $5,000
What amount should be included in Bill’s gross income this year?

A)
$0.
 B)
$5,000.
 C)
$3,000.
 D)
$16,400.

Answer 14

B

The question relates to inclusion in gross income. All punitive damages are included in income. Workers’ compensation is intended to make a person whole and is excluded. Compensatory damages for physical injuries are also excluded. Reimbursements from an employee medical plan are not generally included either.

Question 15

A premature distribution from a qualified retirement plan is allowed at age 52 without a 10% additional tax when a participant:

1. Becomes obligated for payment of plan benefits to an alternate payee under a qualified domestic relations order (QDRO).
2. Separates from service and takes an accepted form of systematic payment.
3. Remains with current employer but elects to take systematic payments over the life of the participant and spouse.

Answer 15

1 and 2

Statement I is correct because this scenario is generally imposed by a judge. Statement II is correct because participants may begin to receive substantially equal payments at any age as long as the payments continue until the greater of 5 years or the attainment of age 59½ by the participant.

Question 16

Which Financial Planning Practice Standard states, “a financial planning practitioner and client shall mutually define monitoring responsibilities”?
A)
600-1-Defining Monitoring Responsibilities.
B)
300-2-Analyzing and Evaluating the Client’s Financial Status.
C)
500-1-Agreeing on Implementation Responsibilities.
D)
400-1-Identifying and Evaluating Financial Planning Alternatives.

Answer 16

A

Question 17

Doris has three grandchildren. Due to the escalating costs of higher education, Doris would like to help fund each of their education funds by opening three Section 529 plans (QTPs). Which of the following statement(s) regarding QTPs is (are) CORRECT?

1. Doris can transfer investment securities into each account.
2. Doris’s grandchildren will pay taxes at capital gains rates when distributions are made.
3. In the event that a grandchild does not choose to obtain higher education, Doris can change the name of the beneficiary.

Answer 17

3 only

Payments made to QTPs must be in cash and not in-kind property, such as securities. Distributions made for qualified education expenses are tax exempt.

Question 18

Which of the following is(are) NOT Principles found in the CFP Board Code of Ethics and Professional Responsibility?

1. Independence.
2. Diligence.
3. Confidentiality.
4. Fairness.

Answer 18

1 only

Question 19

Which of the following services is (are) covered by Part B of Medicare?

1. Physicians’ services.
2. Outpatient hospital services.
3. Diagnostic tests and x-rays.
4. Hospice care.

Answer 19

1, 2, and 3

Hospice care is covered under Part A, not Part B.

Question 20

Which of the following is (are) considered to be covered autos under a personal auto policy?

1. Any vehicle listed in the policy.
2. Newly-acquired vehicles.
3. Boats owned by the insured.
4. Automobiles used as delivery vehicles.

Answer 20

1 and 2

Four classes of vehicles are considered to be covered autos. They are any vehicle listed in the policy, a newly-acquired vehicle, a trailer owned by the insured, and a temporary substitute auto. Automobiles used as delivery vehicles are specifically excluded.

Question 21

Given the following information for Greg Brown:

Checking account	$3,000
Mortgage balance	$150,000
Money market account	$17,000
Gross income	$100,000
Personal residence (fair market value)	$200,000
Annual expenses	$60,000
Personal use assets	$95,000
Investment assets	$150,000
What is Greg's emergency fund ratio?

Answer 21

Greg’s emergency fund ratio is 4 months.

$20,000 ÷ ($60,000 ÷ 12) = 4.0

Question 22

Which of the following statements regarding the incidental death benefit test for life insurance inclusion in a qualified plan is(are) CORRECT?

1. For defined contribution plans, no more than 25% of the retirement plan’s assets may be in the form of universal life insurance.
2. For defined benefit pension plans, the life insurance death benefit cannot exceed 100 times the expected monthly benefit for an employee.

Answer 22

2 only

For defined contribution plans, no more than 25% of the employer contributions (not plan assets) can be used to purchase universal life or term insurance. No more than 50% of the employer contributions in a defined contribution plan can be used to purchase whole life insurance.

Question 23

Which of the following statements concerning derivatives is (are) CORRECT?

1. The value of a derivative security is derived from its underlying security.
2. Similar to equity instruments and fixed-income securities, derivatives represent either an ownership interest or a credit interest in a corporation.
3. An option is the right to buy or sell stock at a specified price within a specified period of time.
4. An option’s intrinsic value is the worth of the underlying asset.

Answer 23

1 and 3

Derivatives give the holder certain rights and options under certain specific conditions. They represent neither an equity (ownership) nor a debt (credit) interest in a corporation.

Question 24

All of the following statements concerning bond yield measurements are correct EXCEPT:
A)
if the bond is selling at a discount, the market price is less than the par value.
B)
if the bond is selling at a premium, the coupon rate is greater than the YTM.
C)
if the current yield is less than the yield to maturity (YTM), the bond is selling at par.
D)
if the current yield is 7% and the coupon rate is 6%, the bond is selling at a discount.

Answer 24

C