Practice Quiz (Analyze and Apply questions from the General Financial Principles, Professional Conduct, and Regulations) Flashcards
Frank is a fireman with the local volunteer fire department. He and his wife, Mary, want to retire in 25 years. They expect to live approximately 30 years after retirement and need $50,000 (in today's dollars) annually during retirement. Unfortunately, they have just spent their savings on refurbishing their home and have no retirement savings. Inflation is currently 3% and is expected to continue indefinitely. Frank believes that he can earn an 8% rate of return before retirement but expects to earn only about 6% during retirement because of the change in asset allocation that he expects to occur at retirement. How much does Frank need to accumulate by the time he retires to fund his goal? A) $2,135,766. B) $2,075,320. C) $1,416,270. D) $1,836,170.
A
Step 1: Inflate needs until retirement:
PV = −50,000 n = 25 i = 3 (inflation rate) FV = 104,688.90 Step 2: Discount annual needs to beginning of retirement:
BEG mode PMT = −104,688.90 n = 30 i = 2.9126 [(1.06 ÷1.03) − 1] × 100 (inflation-adjusted discount rate) PVAD = 2,135,766.46, or $2,135,766.46
A client provides the following information regarding his assets and liabilities as of December 31, 2017. Determine which of the items listed below should be presented on his statement of financial position as of December 31, 2017.
- Stock options granted September 30, 2017, exercisable one year from date of grant.
- A bonus receivable of $10,000. The client estimates the bonus based on the prior year’s bonus and cannot determine the precise amount because the board of directors meets February 15, 2018, to determine if and when a bonus will be paid.
- Huge Oil, Inc., stock in the amount of $15,000. The client owns 1,000 shares priced at $10 per share on December 31, 2017. Huge Oil, Inc., declared a $5 per share dividend on December 10, 2017, payable January 15, 2018, to the stockholders of record as of December 31, 2017. The client participates in the company’s dividend reinvestment plan.
- The client is a cosigner on a loan. The proceeds were used by his son to purchase an automobile. The principal balance on the loan is $4,500, and his son has made all payments to date.
- Consulting fees receivable related to services performed by the client’s spouse. The engagement was completed, an invoice was mailed on December 10, 2017, and the credit terms were net 30.
3 and 5
To determine whether the items should be included in the statement of financial position, the asset or liability should have the following characteristics: (1) The asset or liability is a fixed and determinable amount. (2) The receipt or payment is not contingent on the occurrence of a particular event. (3) The receipt or payment does not require future performance of service. Statement 1 is fixed and determinable but requires that one year pass before the options become exercisable. Statement 2 is not fixed and determinable and requires that the board of directors meet and authorize the bonus. Statement 3 addresses the issue of constructive receipt of the dividend. Because the record date was December 31, 2017, and the client held the shares as of that date, the client will receive the payment regardless of whether the client owns the stock after December 31, 2017, and the amount should be shown on the statement of financial position. Statement 4 requires that the client’s son defaults on the loan and, therefore, should not be included in the statement of financial position. Finally, Statement 5 should be included because the spouse is awaiting payment and no further service is required to receive the payment.
John and Marcy have one child Rex. Rex, a single parent, has one daughter, Lauren, and is temporarily living with John and Marcy. John and Marcy have presented the following information to their financial planner regarding their checking and savings accounts: (NOTE: each owner has an equal right of withdrawal)
Marcy and John checking $100,000 Marcy and John savings $30,000 Marcy, John, and Rex checking $60,000 Rex and Lauren checking $80,000 Based on the information provided, what is the total FDIC coverage afforded to John assuming the accounts are held at the same financial institution?
A) $190,000 B) $55,000 C) $85,000 D) $100,000
C
The total coverage afforded to John is $85,000 [(0.5 × 100,000) + (0.5 × 30,000) + (0.333 × 60,000)]. The interests in all joint accounts he owns at the same FDIC-insured depository are added and insured up to a maximum of $250,000.
Two years ago, Samantha and Troy hired Mr. Williams, a CFP® professional, to manage their money. The couple started to worry about their asset management account when they noticed the account had lost about 25% of its value while the market as a whole had only lost 7%. After contacting another advisor, they discovered that Mr. Williams was not actively managing their account as stated in both the investment advisory agreement and Form-ADV Part 2A. Instead, Mr. Williams simply purchased securities at the relationship onset and did not bother to rebalance or contact the couple regarding their losses. Based on the information provided, which of the following best describes Mr. Williams' actions with regards to the couple? A) Criminal mischief B) Civil malfeasance C) Breach of contract D) Violation of fiduciary responsibility Explanation If a financial planner has agreed to perform certain services for a client and fails to honestly, properly, and completely perform those contractual duties, the financial planner will be civilly liable to the client for breach of contract.
C
Randy wants to accumulate $300,000 by retirement, but he currently has a limited amount of discretionary funds. Which of the following methods of determining periodic retirement plan deposits would allow him to save the least amount the first year? A) Annuity due. B) Serial payment. C) Average payment. D) Ordinary annuity.
A
Kenneth and Liz, ages 50 and 39, respectively, want to invest $3,000 per year toward the future college expenses of their 8-year-old son, John, who will begin attending college in 10 years. Kenneth and Liz had hoped that John would get an athletic scholarship because he is a talented tennis player. However, due to John's recent elbow injury, his parents have decided to plan for the likely event that he will not get an athletic scholarship. Because they have a modest income they are concerned about qualifying for financial aid. Which of the following investment vehicles would best serve their needs? A) Coverdell Education Savings Account (CESA). B) Roth IRA for Kenneth. C) Roth IRA for Liz. D) Custodial account for John.
B
The Roth IRA for Kenneth is the best choice because it keeps an asset out of the son’s name (for financial aid purposes). The Roth IRA also allows contributions up to $5,500 with an additional catch-up amount of $1,000 for individuals at least 50 years old (for 2017).
Which of the following persons or entities are exempt from registering as an investment advisor under the Investment Advisers Act of 1940?
- Mr. Smith, a local attorney, who conducts a financial planning course at a local community college for a fee.
- Mrs. Jones, an accountant, who provides financial planning advice for her clients for an hourly fee.
- Fizzle brokerage services that provides complimentary investment advisory services to its clients that set up a special brokerage account.
- TBC bank that offers securities through the subsidiary TBC advisers.
Only choices 3 and 4 are correct. Fizzle brokerage will be exempt because they do not charge a separate fee for their financial planning services. TBC bank will not have to register because the planning services are offered through a subsidiary, therefore, just the TBC advisers will be required to register.
Todd and Diana are establishing a college fund for their 14-year-old son, Mike. The couple does not wish to invest aggressively but is willing to take a moderate amount of investment risk. Which of the following investments makes the most sense for the college fund and why?
A)
A variable life insurance policy owned by Mike because it saves taxes and provides a life insurance benefit.
B)
A small-cap stock mutual fund owned by Mike because it provides the best return at a modest level of risk consistent with the time horizon.
C)
A series of taxable zero-coupon bonds owned by Mike because they can provide appropriate funds at the correct times.
D)
A money market checking account jointly owned by Todd and Diana because this account is very safe.
C
Small-cap stock mutual funds are too risky of an investment for a short term time horizon. A variable life insurance policy does not match the investment vehicle to the time horizon of the investment. A money market checking account will probably not provide them with a rate of return that will keep up with inflation. The zero-coupon bond allows the couple to match the time horizon of the investments to the duration of the bonds and avoid reinvestment rate risk.
Barry, a CFP® professional, has been providing financial planning services to Logan for 20 years. During their annual meeting, Logan discloses to Barry that he has been sued and may be liable for a judgment that will exceed his insurance coverage. Logan realizes he may need to file for bankruptcy under Chapter 7. Barry tells Logan that if he files for Chapter 7 bankruptcy, some of his debts may not be dischargeable. Which of the following items will remain Logan’s responsibility even though he files for Chapter 7 bankruptcy?
- Student loans
- Child support
- Debt due to intentional tort claims
- Alimony
all items will remain Logan’s responsibility
Shane estimates his opportunity cost on investments at 10.5% compounded annually. Which of the following is the best investment opportunity for Shane?
A)
To receive $45,000 today.
B)
To receive $5,500 at the beginning of each year for 15 years.
C)
To receive $120,000 at the end of 10 years.
D)
To receive $5,500 at the end of each year for 19 years.
A
find the PV of each option
Katy and Robert, ages 24 and 26 respectively, have just bought their first home. They each have a professional career and discovered Kate is pregnant with their first child. They have decided that they should meet with a financial planner to discuss their insurance and retirement plans. Even though the couple adamantly tells the planner they wish to purchase some additional life insurance to supplement their minimal group insurance, the planner tells them not to worry about this issue but, rather, start investing in a traditional IRA. If one of the them should die, the planner may have subjected himself to liability for which of the following? A) Negligence B) Breach of contract C) Criminal misfeasance D) Attractive persuasion
A
While reviewing the Stewarts’ finances, Ms. Brown, a CFP® professional, is calculating a variety of financial ratios. The Stewarts have provided the following information:
Principal and interest $1,200 per month Insurance premiums $600 per year Property taxes $2,400 per year Gross income $5,000 per month Based on the information provided, calculate the Stewarts' housing cost ratio.
A) 3.45 B) 0.50 C) 0.84 D) 0.29
D
pay attention to year or monthly cost (all costs should be converted to monthly)
Jackie has decided to refinance her current mortgage balance of $175,900 with 15 years remaining on the note. Her current interest rate is 7.85%. She would like to reduce her principal and interest payment to below $1,500 per month and she is willing to pay all closing costs from her savings. In addition, she has a reputation for being slightly risk averse. She has been provided with the following information by her mortgage broker:
Mortgage Type Interest Rate Closing Costs
15-year fixed 5.45% 1 point
30-year fixed 6.15% ½ point
3-year ARM 2/6 3.00% 2 points
Based on the information provided, which of the following mortgages would best suit Jackie’s needs?
A) 15-year fixed rate mortgage B) 30-year fixed rate mortgage C) None of these choices would be appropriate D) 3-year adjustable rate mortgage with 2/6 cap
A
The 15-year fixed rate mortgage is the best choice for Jackie. Because she is risk averse, she may tend to feel uncomfortable with an ARM. Also, the 30-year mortgage has a higher interest rate and the time frame to pay off the mortgage may be too long considering she has only 15 years left on her existing mortgage.
In order to give the stock price a boost, a corporate officer posts favorable, yet slightly inaccurate information, about his company's earnings in an internet chat room. After a few days of posting and blogging, the stock starts to rise a couple of points after which the officer decides to exercise a number of stock options in order to make a sizable profit. Which of the following acts did this officer violate by his actions? A) The Investment Advisers Act of 1940 B) Securities Exchange Act of 1934 C) The Investment Company Act of 1940 D) Securities Act of 1933
B
This officer may have violated the price manipulation provisions of the Securities Exchange Act of 1934. Price manipulation includes schemes such as wash sales, pools, circulation of manipulative information, and false and misleading statements about securities.
Jane, age 26, is having a difficult time saving any money. She would rather spend her money on clothes and entertainment. However, Jane is realizing that she should start to save for her future needs and goals. She works as a dental assistant and has a current salary of $35,000 annually. She is newly eligible for the company’s Section 401(k) plan. What would be the best method to recommend in order to encourage her save?
A)
Purchase savings bonds from her bank and place them into a safety deposit box.
B)
Place a portion of her income into a money market mutual fund via an automatic debit from her checking account.
C)
Contribute the maximum percentage allowed into a Section 401(k) plan using payroll deduction.
D)
Implement a systematic withdrawal plan from her checking account into a Traditional IRA.
B
Given that Jane has no real savings or a history of savings, she should develop a strategy in which money is automatically directed into liquid savings.
