Special Circumstances and Basic Economics

Question 1

Harry and Sally’s divorce was finalized on November 30, 2018. Which of the following items qualify as alimony payments to Sally if pursuant to a divorce instrument?

I. Mortgage payments for property owned by Harry but used by Sally
II. Payment of Sally’s rent by Harry
III. Life insurance premiums on Sally
IV. Payments which continue beyond Sally’s death, naming the children as the beneficiaries
V. Payment of Sally’s tuition to State University to become eligible to take the CFP Board Certification Examination
A. All of the above
C. II, III, V E. III
B. I, II, IV, V
D. II, V

Answer 1

D

Any payments made to maintain property owned by the payor are not alimony. Only life insurance premiums on the payor spouse qualifies as alimony. Payments that continue after the payee spouse’s death are considered child support. Tuition
payments on behalf of the payee qualify if made pursuant to the divorce instrument.

Question 2

Child Support Deductibility

Answer 2

Child support payments are non-taxable to the payee and nondeductible by the payor regardless of whether the divorce settlement occurred before or after the TCJA went into effect.

Question 3

Keith Pierce was divorced from his wife, Barbara, in 2013. Barbara has custody of their two children. Keith
was ordered to pay $1,000 per month to Barbara until their youngest child reaches age 18. At that time, the payments are to decrease to $400 per month. What portion, if any, is deductible by Keith as qualifying
alimony?
A. -0- C. $600
B. $400 D. $1,000

Answer 3

B

The $600 is tied to an occurrence related to a minor child (the child reaching age
18). Only $400 is alimony.

Question 4

Longtime companions Artie Swanson and Marty Clark have lived together for the past 20 years in a home
that was left to Marty by his parents. They also operate an event planning business called Marty and
Artie’s Parties. Although the business is informally organized, it produced net revenues of $250,000 last
year. While there has never been a formal adoption procedure, Marty and Artie have raised Lilly. Lilly is the
child of Artie’s brother (both of Lilly’s parents have died). Marty has a sister, Ruth. Ruth disapproves of
Marty’s lifestyle. Marty is seriously ill. Presuming Marty predeceases Artie, Lilly, and Ruth, which of the
statements below best reflects the transfer of his property?

A. Because the party planning business operates virtually as a general partnership, Artie will
automatically own Marty’s interest.
B. Because Artie has lived in Marty’s home for decades, common law marriage is deemed, and Artie
will be the deemed owner of Marty’s home.
C. Presuming Marty has no will, it is unlikely that either Artie or Lilly will inherit his property.
D. Presuming Marty has no will, it is unlikely Ruth will inherit his property.

Answer 4

C

In the absence of effective estate planning through a will or other means, intestacy favors blood relatives over domestic partners. Nothing in the question indicates a succession plan for the business. Partners generally must be married for Artie to receive property if no will exists.

Question 5

The BEST (2) transfer arrangements for unmarried domestic partners?

Answer 5

1. Revocable Trust
2. Tenancy in Common (TIC)

Wrong answers for the test are a will (can be contested by family members).
Trusts are private. Other wrong answers are no will (intestacy) or joint tenancy with rights of
survivorship. A disgruntled partner can siphon the entire account.

Question 6

Are compensatory damages tax free?

Answer 6

Compensatory damages received because of personal physical injuries or physical sickness are generally
tax-free. However, interest paid on a tax-free damage award is taxable

Question 7

Fiscal Policy

Answer 7

Federal Taxation

They control taxation, debt management, expenditures, etc

Question 8

Monetary Policy

Answer 8

Federal Reserve
Reserve requirement
Money supply

Question 9

What can the Fed (monetary policy) do to contract the money supply?

Answer 9

1. Increase reserve requirements
2. Raise discount rate
3. sell bonds

Question 10

Discount Rate

Answer 10

The discount rate is the rate
the Federal Reserve charges its member banks to borrow to meet reserve requirements.

Question 11

All of the following tools are used by the Federal Reserve to control the money supply except:
A. Open market operations
B. Setting the discount rate
C. Setting the federal funds rate
D. Setting the reserve requirements

Answer 11

C

Fed Funds are excess reserves maintained at the Fed by member banks. The Federal Funds rate is the charge for overnight loans from one bank to another bank (set by auction). It is not set by the Fed.

Question 12

Fiscal policy activities of the federal government include which of the following?
I. Expenditures III. The money supply
II. Taxation IV. Debt management

Answer 12

A. All of the above
C. I, II, IV
E. I, IV
B. I, II, III
D. II, III
Answer: C The Fed controls the money supply, reflecting monetary policy.

Question 13

If the Fed wanted to tighten credit because of rising inflation, generally the Fed would decrease which
of the following?
A. Margin requirements
C. Discount rate
B. Reserve requirements
D. Purchase of bonds

Answer 13

D If the Fed purchases bonds, it will be pursuing an easy money policy. If the Fed stops buying bonds (decreased purchases), credit will tighten. To tighten credit, the
Fed can increase margins, increase the reserve requirements, increase the discount rate, and sell bonds.

Question 14

Name 3 Leading Economic Indicators

Answer 14

1. Index of consumer expectations
2. Stock prices, 500 common stocks
3. New private housing units
4. Initial claims for unemployment insurance
5. New manufacturing orders

Question 15

Name 1 Coincident Indicator

Answer 15

1. Number of employees on non-agricultural payrolls
2. Personal income less transfer payments (e.g., Social Security, welfare)
3. Industrial production

Question 16

Lagging Indicators

Answer 16

1. Average duration of unemployment
2. Average prime rate charged by banks
3. Commercial and industrial loans outstanding
4. Ratio of consumer installment credit outstanding to personal income
5. Change in the consumer price index for services

Question 17

Does GDP regard inflation?

Answer 17

No,

GDP counts economic activity
without regard to yearly price fluctuations (i.e. inflation).

Question 18

Defensive Industries

Answer 18

Defensive industries include food producers, certain pharmaceuticals, and public utilities.

Question 19

Are Durable Goods cyclical?

Answer 19

Yes, these don’t wear out quickly.

cars, appliances, business equipment, electronic equipment, home furnishings and fixtures, houseware and accessories, photographic equipment, recreational goods, sporting goods, toys and games.

Question 20

Nondurable goods

Answer 20

People need them

FMCGs (fast moving consumer goods) such as cosmetics and
cleaning products, food, fuel, office supplies, packaging and containers, paper and paper products,
personal products, rubber, plastics, textiles, clothing and footwear.

Question 21

If labor productivity is rising and unit labor costs are falling, what stage of the business cycle is probably
occurring?
A. Recovery C. Peak
B. Recession D. Contraction

Answer 21

A

Recovery and expansion operate together on the business cycle. The answer could be expansion. Both answers recovery and expansion probably will not be in an exam question.

Question 22

Which of the following statements about inflation are correct?
I. The consumer price index (CPI) is the leading indicator of inflation.
II. The producer price index (PPI) lags behind the CPI.
III. Demand fuels inflation.
IV. The Federal Reserve Board tries to control inflation by raising interest rates.
V. When the economy makes a trough, the stock market usually goes up.

A. All of the above
C. III, IV
E. III, IV, V
B. II, V
D. I, III, IV

Answer 22

C

The PPI leads the CPI. Although Answer V is probably true, it doesn’t answer the
question about inflation.

Question 23

In the expansion stage of the business cycle, which of the following is likely to occur?
A. Demand is stable
B. Even financially weak or incompetently managed firms may experience increased sales and earnings
C. During this cycle, conservative investors do poorly
D. Contraction or recession follows the expansion or recovery phase

Answer 23

B

During the expansion stage, demand is increasing. Even poor investment decisions may produce acceptable results. An economic peak follows the expansion or recovery phase. Bonds and stocks would perform well.

Question 24

During which phase of the business cycle would one expect the leading economic indicators to turn up
but not the coincident or lagging economic indicators?
A. Peak to contraction
D. Recovery to expansion
B. Contraction to trough
E. Expansion to peak
C. Trough to recovery

Answer 24

C

Question 25

Stagflation Definition

Answer 25

Slow economic growth High unemployment

Question 26

What is the slowing down of price increases called? A. Inflation C. Stagflation B. Deflation D. Disinflation

Answer 26

D Disinflation is a downward movement of inflated prices.

Question 27

Yield Curve

Answer 27

Compare bonds of same 1. YTM 2. Quality 3. Tax Status

Question 27

A yield curve compares interest rates on debt instruments sharing which of the following? I. The same coupon IV. The same quality II. The same maturities V. The same nominal rate III. The same tax status A. I, III C. III, IV B. II, IV, V D. IV, V

Answer 27

C Yield curves relate time to maturity and yields to maturity (not coupon or nominal rates) for bonds of the same risk class.

Question 28

What are the components of the yield curve? I. Yield-to-maturity II. Same tax status III. Term-to-maturity IV. Same bond quality

Answer 28

All the above

Question 28

After a period of low interest rates, the positively sloped curve is starting to shift to a negatively sloped curve because interest rates are going up. Which of these investments would you recommend to your clients? A. 6-month T-Bill B. 5-year Treasury note C. 15-year Treasury bond D. 30-year Treasury bond

Answer 28

A When yield curves are shifting from positively sloped to negatively sloped because interest rates are rising, debt instruments with short durations should decline less than those having longer durations.

Question 28

Mr. and Mrs. Friendly have been your clients for 20 years. You handle most of their financial affairs including insurance, investments and retirement planning. They told you that they are getting a divorce. When the issue of Mr. Friendly’s business value came up, she got so mad that she threw your quality service award at him. She missed him but put a sizeable hole in your office wall. How should you handle these clients? A. Divorce both of them B. Only represent Mr. Friendly C. Only represent Mrs. Friendly D. Let them decide who you represent E. Suggest they hire individual divorce attorneys

Answer 28

E It is the best answer. They both need an attorney to represent them. You can represent one of them, both of them, or neither of them as long as all parties have a clear understanding.

Question 29

Bob Tuttle and Alice Lee are living together. Alice has a child, Chris age 7, by a previous marriage. Bob and Alice have come to you for advice. They are concerned about various issues. They have presented you with the following facts: * The house is titled in Bob’s name. * The beneficiary of Bob’s group life insurance is his estate. * Chris does not want to live with his father. He prefers living with Bob. * Alice’s job provides her and Chris with health insurance * Bob and Alice would like to have a child together but not get married What should they do first? A. Bob should retitle the house in joint tenancy with Alice B. Bob should change the beneficiary of his life insurance to Alice. C. Alice should change her will to make Bob the guardian for Chris. D. They both should see an attorney to have new wills and revocable trusts drawn up.

Answer 29

D This situation presents a series of legal problems. After the will and trusts are drawn up, Bob can place the house and the life insurance in the trust. Her situation is more difficult and only an attorney or the court would determine who Chris would live with. The court may consider that Chris wants to live with Bob.

Question 29

Tally Takeachance bets on the $50 million lotto and wins. She is divorced, childless, and has been out of a job for 6 months. However, for 20 years she worked as a paralegal. Should she take a lump sum payment or payout over 20 years? A. Take a lump sum, pay taxes, and invest the remainder B. Take the payout over 20 years C. Do a time value of money calculation based on a reasonable return over 20 years. D. Consult with an investment specialist to get an estimate of a potential investment return.

Answer 29

C She should do an after-tax comparison of the two options using a reasonable return assumption. Compare PV to PV.

Question 30

To sell variable life insurance contracts, a financial planner must hold which of the following license? A. A series 6 and a series 63 B. A series 7 and a state variable life insurance license C. A series 63 and be a registered investment advisor D. A series 6 and a series 7

Answer 30

Answer: B They could have a Series 6 and still qualify, but a Series 7 will do