Test Prep Flashcards
During which step of the financial planning process would a planner prepare and analyze financial statements?
A) Identifying and Selecting Goals
B) Understanding the Client’s Personal and Financial Circumstances
C) Analyzing the Client’s Current Course of Action and Potential Course(s) of Action
D) Developing the Financial Planning Recommendation(s)
The correct answer is (C).
The planner would prepare and analyze financial statements in step 3 of the financial planning process, Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action.
Which of the following is (are) premises in traditional finance?
I. Markets are efficient.
II. Investors are rational.
Both are premises of traditional finance
A client in the asset-accumulation phase has
A) low cash flow and a low debt-to-net-worth ratio.
B) high cash flow and a high debt-to-net-worth ratio.
C) high cash flow and a low debt-to-net-worth ratio.
D) low cash flow and a high debt-to-net-worth ratio.
The correct answer is (D).
A client in the asset-accumulation phase has low cash flow and a high debt-to-net-worth ratio.
All of the following economic activities represent governmental fiscal policy EXCEPT:
A) The government increases the amount of purchases of goods and services by cutting taxes.
B) The government cuts taxes to expand the economy.
C) The government cuts the federal funds rate.
D) The government uses higher taxes to reduce the public’s rate of consumption and private investing.
The correct answer is (C).
The Federal Reserve sets the discount rate upon which the federal funds rate is based. The Fed will lower the discount rate when it wants to increase the money supply. Options (A) and (B) represent expansionary fiscal policy, while option (D) represents restrictive fiscal policy.
All of the following are considered to be in line with the developmental paradigm, or the developmental school of thought, EXCEPT:
A) Human development occurs in stages over time.
B) Humans develop and progress in a predictable sequence.
C) Results of disruptions in any stage of an individual’s development are completely unpredictable.
D) Being mindful of a client’s age and life situation can help inform a planner’s recommendations and communication style.
The correct answer is (C).
The developmental paradigm assumes that all humans develop and progress in a predictable sequence. Regardless of their cause, disruptions at a particular stage of that individual’s development will result in predictable problems, symptoms, and behavior.
Siobhan met with you recently to make some changes to her insurance needs. You have made several recommendations. Which of these recommendations will have a positive cash-flow impact from an insurance perspective?
A) Cancel an insurance policy.
B) Change the name of the beneficiary on her life insurance policy.
C) Increase coverage on an existing insurance policy.
D) Lower the deductible on her auto insurance.
The correct answer is (A).
Canceling an insurance policy will result in $0 premiums due. Changing the beneficiary of a life insurance policy will not impact the premium or cash flow. Increasing the amount of coverage will increase the premium and negatively impact the cash flow. Lowering deductibles will increase premium payments thus having a negative impact on cash flow.
Which of the following correctly compares parent PLUS loans with graduate PLUS loans?
A) Parent PLUS loans are not need-based, while graduate PLUS loans are need-based.
B) Graduate PLUS loans are awarded to graduate students, while parent PLUS loans are awarded to undergraduate students.
C) Both parent PLUS loans and graduate PLUS loans are awarded based on the credit history of the borrower.
D) Parent PLUS loans are made only by the federal government, whereas graduate PLUS loans may be made by private lenders.
The correct answer is (C).
Neither parent PLUS loans nor graduate PLUS loans are need-based aid. Both are made by the federal government, and both are awarded based on the credit history of the borrower. Graduate PLUS loans are made to graduate students, and parent PLUS loans are made to the parents of students.
Rose is employed as a loan officer at a bank. Rose recently sat down and visited with her financial planner Julie, a CFP® professional. Rose was in need of cash and borrowed $15,000 from Julie. Based on the Code of Ethics and Standards of Conduct which of the following statements is accurate?
A) Julie is not in violation of the Code of Ethics and Standards of Conduct because Rose is in the business of lending money.
B) Julie is in violation of the Code of Ethics and Standards of Conduct because a CFP® professional must never lend money to a client.
C) Julie is not in violation of the Code of Ethics and Standards of Conduct since she loaned Rose less than $20,000.
D) Julie is in violation of the Code of Ethics and Standards of Conduct.
The correct answer is (D).
Julie has violated rule A.15.a of the Code of Ethics and Standards of Conduct, which states that a CFP® professional shall not lend money to a client UNLESS that client is a member of the certificant’s immediate family or the certificant is an employee of an institution in the business of lending money and the money lent is that of the institution, not the certificant. In this instance, neither of the exceptions apply, and Julie is in violation of the rule. Option (A) is incorrect because neither Rose nor Julie meets the exceptions that would allow a certificant to lend money to her client. Rose is not a member of Julie’s family, and Rose being in the business of loaning money has no effect on Julie’s ability to lend money. Option (B) is incorrect because a certificant is allowed to lend money to a client under certain circumstances. Option (C) is incorrect because rule A.15.a makes no reference to the amount of money that is loaned.
The Securities Investor Protection Corporation (SIPC) insures investors under what circumstances?
A) The investor lost government securities that were bought through a bank or credit union.
B) The investor lost money or stock due to the failure of a securities firm.
C) The investor lost his or her investment when the securities became worthless.
D) The investor lost his or her retirement fund when the employer declared bankruptcy.
The correct answer is (B).
The SIPC covers losses of money or securities when a securities firm fails or when the money or securities are stolen by the investor’s broker.
The American Opportunity Tax Credit
allows families to claim up to $2,500 per student per year for the first 4 years of qualified education expenses incurred during a student’s postsecondary education. The credit is calculated as 100% of the first $2,000 of qualified education expenses plus 25% of the second $2,000 of qualified education expenses
The Lifetime Learning Credit
a tax credit of up to $2,000 per family for up to $10,000 of qualified education expenses, or 20% of up to $10,000 of qualified education expenses. There is no restriction in terms of years for which this credit may be received.
Which of the following correctly describe(s) an action that would be taken by a financial planner using the strategic approach to financial planning?
I. Working with a client to develop goals and objectives
II. Drafting a mission statement that captures the big-picture view of the client’s philosophy and plan for the future
The correct answer is both
A financial planner using the strategic approach will work with a client to develop the client’s goals and objectives and then codify them in a mission statement.
The supply of coffee has been drastically reduced due to a drought resulting in substantially higher prices. Which of the following statements is (are) correct?
I. The demand curve for coffee will shift to the right.
II. The demand curve for creamer will shift to the left.
The correct answer is II only.
Statement I is not correct. A shift to the right would indicate an increase in demand, while a shift to the left would indicate a decrease in demand. A decrease in supply usually results in an increase in price and therefore a decrease in demand. Since the reduced supply of coffee has led to an increase in the price of the bean, demand for this product will decrease. Statement II is correct because coffee creamer is a complementary product. Therefore if the demand for coffee is decreasing, the demand curve for creamer will shift to the left.
Return on Assets calculation
ROA = [ending value of assets − (beginning value of assets + savings)] ÷ beginning value of assets
Jonathan, a CFP® practitioner, filed for bankruptcy as a result of financial difficulties related to a divorce. Which of the following is required under the CFP Board’s Code of Ethics and Standards of Conduct?
A) Jonathan must disclose the bankruptcy to the CFP Board, but because it was not a result of his inability to manage his financial affairs responsibly, he is not required to disclose it to clients.
B) Jonathan is not required to disclose to his firm any public discipline by the CFP Board related to the bankruptcy.
C) Jonathan is required to provide written disclosure of the bankruptcy to clients when providing financial advice.
D) Jonathan is required to provide written disclosure of the bankruptcy to clients when providing financial planning, including the location of any public website where additional information can be found.
The correct answer is (D).
Option (A) is incorrect because Jonathan is required to disclose the bankruptcy to both the CFP Board (within 30 calendar days of filing) and his clients. Option (B) is incorrect because Section E.3 of the Code of Ethics and Standards of Conduct requires Jonathan to promptly advise his firm of any public discipline by the CFP Board. Option (C) is incorrect because the disclosure can be made orally or in writing when providing financial advice but must be in writing when providing financial planning. Option (D) is correct because by providing financial planning, Jonathan is required to provide written disclosure of the bankruptcy to clients, including the location of any public website where additional information can be found (for example, PACER.gov or the federal court website containing the bankruptcy information).
A fee-based CFP® professional may receive compensation from which of the following sources?
I. Fees paid directly by clients
II. Commissions on the sale of insurance and investment products
The correct answer is BOTH.
Fee-based planners may be compensated by both client fees and by commissions. Fee-only planners may only be compensated by their clients’ fees.
Which of the following is consistent with the disposition effect?
A) Investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks’ values to the purchase prices even after market prices have changed.
B) Investors acknowledge loss in value, referred to as the paper loss.
C) The normal investor considers the stock a loser if it dips in value.
D) The sale of the stock is irrelevant.
The correct answer is (A).
Under the disposition effect, investors create mental accounts when they purchase stocks, and the investors continue to mark the stocks’ values by the purchase prices even after market prices have changed. The investors mark stocks to the market only when the investors sell their stocks and close their mental accounts. Normal investors therefore do not acknowledge the loss in value, referred to as the paper loss, because an open account means that there is still a chance that the stock price will rise. In their mind, the stock is not necessarily a loser; it may still turn into a gain. The normal investor does not consider the stock a loser until the stock is sold, at which time the loss is technically realized in the mind of the normal investor.
Which of the following statements regarding vertical and horizontal analysis of financial statements is correct?
A) Most planners analyze their client’s cash flow either vertically or horizontally.
B) A vertical analysis of income lists each line item as a percent of the total annual income.
C) A horizontal analysis of a balance sheet would compare assets (on the left) to liabilities and net worth (on the right).
D) A vertical analysis of expenses would compare past expenses (at the top) to current expenses (at the bottom).
The correct answer is (B).
A vertical analysis compares individual items on a financial statement to the total. A horizontal analysis compares similar line items over time to identify trends. Most planners use both vertical and horizontal analysis.
Phyllis had three credit cards stolen. Before she realized they were stolen, the following amounts were already fraudulently charged:
- American Express®: $2,000
- VISA: $500
- MasterCard®: $40
How much is Phyllis’s expected liability for the fraudulent charges?
The maximum liability is limited to the lesser of $50 or the actual charges incurred. Since more than $50 was charged on both her American Express card and her VISA card, Phyllis will only need to pay $50 for each card. However, since only $40 was charged on her MasterCard, Phyllis will need to pay the total amount for that card.
(2 × $50) + $40 = $140
All of the following are primary responsibilities of the Federal Reserve EXCEPT:
A) Facilitate long-term economic growth.
B) Facilitate fair practices between securities dealers.
C) Maintain price levels.
D) Maintain full employment.
The correct answer is (B).
The goals of the Federal Reserve are to maintain long-term economic growth, to maintain price levels, and to maintain full employment.
Often referred to as the truth-in-securities law, the Securities Act of 1933 has the following objective(s):
I. It requires that investors receive financial or other significant information concerning securities being offered for public sale.
II. This act was also focused on disclosure of information of investment company funds to the investing public.
The correct answer is I only.
Statement II is incorrect because it refers to the Investment Company Act of 1940 and not the Securities Act of 1933.
All of the following are differences between traditional and behavioral finance theories EXCEPT:
A) Only in traditional finance theory is the scientific method applied to understanding investor behavior.
B) Only in behavioral finance theory are investors said to make errors and have biases.
C) Only according to traditional finance theory are markets assumed to be efficient.
D) Only in traditional finance theory are investors said to act rationally.
The correct answer is (A).
The scientific method is applied to both behavioral finance and traditional finance theories. The other answers correctly differentiate the two theories. .
emergency fund ratio =
emergency fund ratio = (cash + cash equivalents) ÷ monthly nondiscretionary cash flows
All the following are examples of need-based financial aid EXCEPT
A) a Pell grant.
B) PLUS loans.
C) a work-study job.
D) subsidized Stafford loans.
The correct answer is (B).
PLUS loans are not need-based aid. The other answer choices are all examples of need-based aid.
The three-panel approach
involves the client covering the risks and saving and investing in order to reach goals.
