Diagnostic Exam and Book 1 Flashcards by Megan Leonard

How does the federal reserve control the money supply?

a. adjusting the discount rate b. open market operations i.e. buying government securities

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Calculate Next year Dividend (D1)

D1 = D0(1+g)

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Forecasted Total Return

[(Forecasted stock $ - Current Price) / Current $] + Dividend yield

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Expected Return (CAPM)

Rf + Beta (risk premium)

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Risk Premium

Market return - risk free rate

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If the forecasted return is greater than the expected return then you should _____ the security

buy

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If the forecasted return is less than the expected return then you should ______ the security

not buy/sell

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What is the double basis rule?

No gain is realized if the donee sells the property for a price between the adjusted basis and the fmv on the date of the gift. Example: Mom gives son property with adjusted basis of $35k and fmv of $30k…the son then sells at $33k…this results in no gain

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Are SSI benefits reduced if at FRA and have earned income?

No the benefits aren’t reduced, but a greater portion will likely be taxable

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Do CFP’s have to be registered as an investment adviser?

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Name four organizations that rate the financial strength of life insurance companies

Standard and Poors, Fitch, Moody’s, and AM Best

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Under Medicare Part A, do skilled nursing facilities benefits provide any coverage for custodial care?

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Which of the following types of student financial aid is(are) need-based?
Subsidized Stafford Loan.
Unsubsidized Stafford Loan.
Parent Loan for Undergraduate Students (PLUS) Loan.
Perkins Loan.

Subsidized Stafford Loans and Perkins Loans

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How long do patients have in a skill nursing benefit period before they must pay the remaining cost?

100 days

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How many days does the skilled nursing facility pay for the entire cost of the patient’s stay?

the skilled nursing facility pays the entire cost of the patient’s stay in a skilled nursing facility for only the first 20 days after certain conditions are met

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Kevin wishes to purchase a yacht in 20 years when he retires. If the yacht currently costs $450,000 and inflation is 2% annually, how much should he deposit at the beginning of each year to have enough to purchase the yacht at the end of 20 years? Assume that Kevin will earn an average compounded after-tax annual return of 5% on his investments.

Pay attention it says beginning of year!
Part 1 Part 2
FV = ? FV = $668,676
N = 20 N = 20
PV = $450,000 PV = 0
I = 2% I = 5%
Pmt= 0 PMT = ? = $19,260

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Do tax payers get an exemption for giving financial support to a non US citizen?

HELL NO

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How much of a rental real estate loss can a tax payer deduct and what are the rules?

$25k but only if they are an active participant and own 10% or more of the property. If MAGI is between $100k and $150k then you can only deduct 50% of the difference between there (MAGI is $120 then can deduct $15k or 50% of $150k - $120k)

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What is a 2-6 year graduated vesting schedule?

20% vested after 2 years then 20% each of the following years 3-6 (year 3 = 20% year 4 = 20% etc)

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What is the minimum vesting requirement for a defined contribution plan?

3 year cliff or 2-6 year graduated

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Constant Growth Dividend Model (Intrinsic Value of Stock)

D1 / r-g

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HCE Ratio Test

(NHC Benefit / Total NHC) / (HCE Benefit / Total HCE )

Has to be greater than or equal to 70% to past test

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Avergage Benefit Test for HCE

NHC average benefit % / HCE average benefit %

Has to be greater than or equal to 70% to past test

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What type of retirement plan is best to use when there are fluctuating cash flows in the business?

Profit sharing plan

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Can ESOPs be integrated with SSI?

Do pension plans offer flexible funding?

Do pension plans limit investment in employer securities?

Yes

Are payments made directly to health care providers considered gifts?

Interest free loans under what amount result in no gift consequences?

$100k if the receiver of the loan has investment income less than $1,000

What is a charitable remainder trust?

An irrevocable trust that pays a % of trusts assets each year and allows for the PV to be deducted as a charitable income tax deduction for the current year (i.e. when the trust was established)

During the current year, Mr. Kabel made gifts of the following items to his son: A bond with an adjusted basis of $12,000 and a fair market value of $40,000. Stock with an adjusted basis of $22,000 and a fair market value of $33,000. An auto with an adjusted basis of $12,000 and a fair market value of $14,000. An interest-free loan of $6,000 for a computer (personal use) on January 1 of the current year; the loan was repaid by the son on December 31 of the current year. Assume the applicable federal rate was 8% per annum. What is the gross amount of gifts includible on Mr. Kabel's gift tax return for the current year?

$87k - Gifts loans of $10,000 or less are not subject to gift tax unless the donee uses the proceeds to purchase income-producing property.

Assume you bought 100 shares of XYZ stock for $60 per share with an initial margin of 50% and a 30% maintenance margin. What will be the amount of the margin call if the stock drops to $40 per share?

$200 40*100= $4,000 .5*60*100= $3,000 (Initial Margin) $4k - $3k = $1k (Current Equity) $4k*.3 = $1,200 (Required Equity) $1,200 - $1,000 = $200 (cash required)

Randy, age 40 and not a key employee, has employer-provided group term life insurance equal to twice his salary of $75,000. He makes a monthly contribution to pay for the insurance of $5. Randy's wife Pamela is the sole beneficiary. The employer's actual cost for Randy's life insurance protection is $0.25 per month per $1,000 of death benefit, and the uniform premium for group term under the Internal Revenue Code is $0.17 per month per $1,000 of death benefit. What annual amount must Randy report for federal income tax purposes as a result of his group term insurance benefit?

Need to know that group term premiums are tax exempt up to $50k in coverage. Find excess coverage over $50k = $75k*2 - $50k = $100k IRC cost per $1k = $.17 Monthly cost = $100k/$1k *.17 = $17 Yearly cost = $17*12 $204 Taxable amount = IRC Cost - annual employee contribution ($60) = $144

Mark, a financial professional, has been providing financial planning services to Peter for 25 years. Peter is widowed and has an adult son who lives in the same city as Peter. When Mark began his professional relationship with Peter, Peter was 50 years old and mentally sharp. Recently, however, Mark has noticed that Peter sometimes seems confused during their meetings and is unable to remember details about his own financial status. Despite his confusion, Peter has asked Mark to update his estate plan and to make major changes to several key provisions of his will. Which of the following actions is(are) appropriate for Mark in this situation? 1. Advise Peter's son of Peter's requests concerning his estate plan and ask him to accompany Peter on any future meetings. 2. Counsel Peter on the advisability of appointing someone, such as his son or an attorney-in-fact, to assist him in handling his affairs. 3. Refer Peter to other professionals, such as medical providers or eldercare specialists, who may be able to help Peter address his diminished capacity.

2 and 3 only

Lance, age 60, has been investing $350 in a tax-deferred fixed annuity at the end of each month for the last 10 years and has been earning a compound return of 6%. If Lance withdraws all of the money from his account today, will he have enough money after paying taxes at 15% to purchase a motor home for $56,000? A)Yes, because he has $57,358 to purchase the motor home. B)Yes, because he has $59,200 to purchase the motor home. C)No, because he has only $55,054 to purchase the motor home. D)No, because he has only $48,754 to purchase the motor home.

John and Patty have newborn twin boys. John, a financial professional, knows the importance of planning ahead and wants to begin saving for their boys' college education. John and Patty estimate the annual tuition to be about $25,000 (in today's dollars) per child. Although inflation has averaged 4% overall, the cost of education has been increasing at an average rate of 6% per year. To fund 4 years of college for each boy beginning in 18 years, how much must John and Patty save at the end of each year for the next 18 years? Assume that John and Patty invest in equities and can earn an after-tax annual return of 9%. (Round to the next multiple of $100.) A)$4,600. B)$6,700. C)$13,300. D)$9,200.

C Step 1 ``` FV = ? N = 18 PMT = 0 PV = - 50,000 I = 6% ``` ``` Step 2 (Need to use beginning mode) PMT = $142,717 (PMT From step 1) N = 4 I = (1.09 / 1.06) - 1 FV = 0 PV = ? ``` ``` Step 3 (switch back to end mode) N = 18 I = 9% PV = 0 FV = PV from step 2 PMT = ? ```

Robert has a net worth of $200,000 before any of the following transactions: Paid off credit cards of $10,000 using funds from his savings account. Transferred $4,000 from his checking account to his IRA. Purchased $2,000 of furniture on credit. What is Robert's net worth after these transactions?

$200k

Which of the following statements regarding Coverdell Education Savings Accounts (ESAs) are CORRECT?: 1. Contributions to an ESA are tax deductible. 2. Distributions from an ESA are tax free if used for qualified education expenses. 3. The ability to make ESA contributions is phased out at higher levels of modified adjusted gross income (MAGI). 4. Contributions to an ESA are limited to $2,000 per year per child.

2, 3, and 4 They are NOT tax deductible ``` Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000. ```

It is important that financial planners used open-ended questions whenever possible. Which of the following questions is(are) open-ended? 1. Do you have an IRA? 2. What are your financial goals in terms of retirement? 3. What are your feelings about investing in the stock market?

2 and 3

Rob built a house several years ago in New Orleans. The replacement value has increased to $200,000. Rob originally purchased insurance on the house under a homeowners broad form HO-2 policy in the amount of $150,000. The policy contains an 80% coinsurance clause. The roof of the house has been damaged by fire. Since the home was built, the roof had depreciated by 25%. The cost to replace the roof will be $20,000. How much will Rob collect from his policy? A)$0; Rob did not meet the coinsurance requirement B)$20,000 less the deductible. C)$15,000 less the deductible. D)$18,750 less the deductible.

D Amount carried / Should have carried ($150k / ($200k*.8) = $150 / $160 = 93.75% 93.75% * $20,000 = $18,750

BCD Corporation is in the process of promoting a new bond issue to a wealthy potential private investor. The bonds will feature a 5.5% coupon, a par value of $1,000, a 30-year maturity, and an A rating. The issue is callable in 10 years for 103% of par value. Assuming the bond will be priced at par, which of the following statements is(are) CORRECT? 1. With an A rating, the bond is not considered investment grade. 2. The yield to call is 5.73%. 3. The call price is $1,030.

2 and 3 Call price = Par Value * 103% = $1,030 ``` Yield to call = FV = $1,030 PV = - $1,000 I/Y = ? * 2 PMT = $55/2 N = 10 *2 ```

Which of the following investment strategies could be considered a protective strategy? A)Selling a stock short. B)Selling a call option on a stock you own. C)Purchasing stock index futures. D)Buying a put on a stock already owned.

Janice, age 50, wants an investment that will offer her the opportunity for long-term growth with moderate risk. She wants a customized portfolio based on an asset-based fee structure. Which of the following would be the best choice for Janice? A)S&P 500 Index exchange-traded fund. B)Growth and income mutual fund. C)Large-cap growth separately managed account. D)Balanced mutual fund.

C The best choice for Janice is the large-cap growth separately managed account. This type of investment account offers a customized portfolio approach and an asset-based fee structure for portfolio management services

Which of the following statements regarding bonds is(are) CORRECT? 1. Lower coupon bonds are more volatile than higher coupon bonds as interest rates change. 2. Bond prices and changes in interest rates have an inverse relationship. 3. A direct relationship exists between coupon rates and duration.

1 and 2

The greater a bond's duration, the ______ the price volatility

greater

The coupon rate and duration of a bond have a ______ relationship

inverse

When bond prices increase, interest rates must be ____

decreasing

Lower coupon bonds are ____ volatile than higher coupon bonds as interest rates change

``` Recently, Vance inherited a large amount of one stock from his late Aunt Carol. Vance's basis in the stock is $500,000. He is concerned that the stock may decline in value in the near future. What is the best investment strategy that he could use to protect the stock from substantial downside risk? A)Stock index futures B)Zero-cost collar C)Purchase a put option D)Write a call option ```

Which of the following statements regarding employee elective deferrals under a Section 401(k) plan is(are) CORRECT? A)These contributions are not subject to federal income tax or FICA. B)These contributions are not subject to FICA but are subject to federal income tax. C)These contributions are subject to FICA but not to federal income tax at the time of contribution to the plan. D)The actual deferral percentage (ADP) for highly compensated employees in a Section 401(k) plan cannot be more than the ADP of the nonhighly compensated employees multiplied by 1.50.

Vicki, age 62, has a net worth of $540,000. Her home has a fair market value of $250,000. She recently had a stroke and is paralyzed. Vicki has 2 children and 6 grandchildren. As her financial planner, which of the following would you recommend? 1. Transfer the house to an irrevocable trust in an effort to qualify for Medicaid immediately. 2. Transfer both the house and contents to a revocable living trust to avoid probate. 3. Give 1 of the adult children a durable power of attorney for health care. 4. Gift $14,000 to every child and grandchild each year.

2 and 3

The Severn Partnership has 4 partners. The partners have entered into a binding buy-sell agreement that requires the surviving partners to purchase the partnership interest of the first partner to die. The partners used a cross-purchase agreement, but the agreement remains unfunded. If the partners decide to use life insurance as a funding vehicle, how many policies will be required? A)4. B)12. C)1. D)16.

``` On January 15, of last year, Tim transferred property to a trust, which he retained the right to revoke. The trust pays Amy 5% of the trust assets valued annually for her life, with the remainder to be paid to a qualified charity. What type of arrangement did Tim create? A)None of these. B)CRAT. C)CRUT. D)CLAT. ```

A CRUT are irrevocable not revocable

A client consults a financial professional for help in formulating an estate plan. The client is in poor health and expects to die within the next 3 to 4 years. He has a large estate and would like to begin taking steps to reduce any estate tax that might be due at his death. The client is a widower with 1 adult daughter. The client owns the following property in his name alone: A life insurance policy insuring his own life, with a death benefit of $5 million A personal residence with a market value of $6 million A brokerage fund with a balance of $10 million Which of the following steps should the client implement first to meet his objectives? A)Transfer ownership of the life insurance policy to his daughter. B)Transfer his residence to an irrevocable living trust. C)Add his daughter's name to the brokerage account as JTWROS. D)Gift the residence to his daughter.

A Life insurance of a client is included in their gross estate if client dies and the policy lists he/she as owner. To avoid this the client would need to transfer ownership of the policy more than 3 year prior to his/her death 3 year rule does not apply to gifts of residence to an irrevocable trust or residence to someone else directly

Megan has a financial planning practice in Atlanta, Georgia. She is meeting with her clients, Mason and Della Sinclair, to present them with a financial plan she has developed for them. Mason and Della had communicated to Megan that one of their goals is to follow their families' southern tradition and throw their pre-teen daughter, Dixie, a very expensive debutante party in four years. Megan, having grown up in the Midwest, does not understand the purpose of these kinds of celebrations and feels they are a waste of money. What is the best way for Megan to proceed with her clients? A) Megan should advise the Sinclairs how this goal will impact their overall financial plan. B) Megan should offer Mason and Della her opinion regarding the extravagance of the debutante party. C) Because this is not a good use of the Sinclairs' money, Megan should not include it in their plan as a goal. D) Megan should offer alternatives that would be less expensive.

Edwin, age 83, is a wealthy investor with a net worth of $10 million. He wants to begin gifting his assets to friends and family members, as long as he can do so without incurring any generation-skipping transfer tax (GSTT) or using any of his lifetime GSTT exemption. The people to whom he would like to make gifts include the following: His ex-wife, Lisa, age 40 His former daughter-in-law, Sheila, age 35, who was married to his son, Doug, until 2 years ago His granddaughter, Claire, age 22 All of Edwin's children are still living. Which of the following recommendations will achieve Edwin's objectives of avoiding any generation-skipping transfer tax (GSTT) and not using any of his lifetime GSTT exemption? 1. Make a cash gift of $100,000 to Lisa 2. Make a cash gift of $100,000 to Sheila 3. Make a cash gift of $100,000 to Claire

1 and 2

Which of the following are required to register with the SEC as registered investment advisers? A)Publishers of business and financial publications of general and regular circulation. B)Lawyers or accountants who provide limited advice regarding securities. C)Individuals who advise clients on only Treasury bills, Treasury notes, and Treasury bonds. D)None of these.

Which of the following items would NOT be included on a statement of financial position? 1. Adjusted tax basis of a real estate investment 2. Investment income 3. Fair market value of automobiles 4. Mortgage payments

1, 2, and 4

Louie, a representative for a large pharmaceutical corporation, would like to purchase a home. Up to this point, he has been renting a condo in fear that he may have to relocate within the next three to five years. However, he would like to own a place of his own. If Louie finds the right home for himself, which mortgage should he choose? A)30-year fixed FHA B)5-year adjustable rate mortgage C)None of these choices are appropriate D)15-year fixed conventional

B If expecting to be in home for a short time period then an adjustable rate mortgage (ARM) should be considered

Adjustable rate mortgages usually have __________ interest rates than 30 year conventional mortgages

lower

What is a major downside risk to Adjustable Rate Mortgages?

If interest rates increase, your mortgage payment could also increase

A young, single client approaches a financial planner with $12,000 stating that she would like to develop a financial plan and invest in the stock market. This is her first experience investing and she would like help choosing an appropriate account. What is the financial planner's most appropriate course of action? A)Recommend suitable investments B)Determine whether the client has any consumer debt C)Open and fund a Roth IRA for the current year D)Open a brokerage account

Ryan and Kim have a 2-year old son, Michael. One of their goals is to begin saving now for Michael's high school education at River Oaks Academy. After analyzing Ryan and Kim's financial statements and other relevant information, you conclude that they should save $2,000 at the beginning of the year for the next 12 years. Which of the following education planning vehicles is the most appropriate recommendation for Ryan and Kim? A)Section 529 plan B)Coverdell Education Savings Account C)Series EE savings bonds D)Lifetime Learning Credit

B 529 Plans and Series EE bonds can't be used for high school

What is the lifetime learning credit

tax credit that may be used for post secondary education

John, age 55, is unmarried and retired. He has the following liquid assets on deposit at Allworld Bank, an FDIC-insured financial institution: Account Ownership Balance Certificate of deposit John $225,000 Savings account Joint with son $70,000 Rollover traditional IRA John $150,000 Checking account John $80,000 What amount is insured by the FDIC?

$470,000 All categories of accounts can be insured up to $250k But similar accounts are aggregated together (checking, savings, CDs, etc. Joint accounts are separately insured for $250k

Ed is employed by ABC Trucking, where he is covered by a health insurance plan, a contributory long-term disability insurance plan, and a pension plan. Ed pays $40 per quarter and ABC pays $60 per quarter for a monthly disability benefit of $1,000 following a 60-day elimination (waiting) period. During the current year, Ed was disabled for 5 months. How much, if any, of the disability insurance benefits are taxable to Ed in the current year? A)$0. B)$3,000. C)$1,200. D)$1,800.

D 60 day elimination period means he only got benefits for 3 months $1,000*3 = $3k $3k * % of employer paid premium $3k * 60% = $1,800

Sally purchased a single premium deferred annuity in 1980 at a cost of $42,000. Her lifetime annuity distributions of $833.33 per month will begin on September 1st of the current year, at which time her life expectancy will be 21 years. How much must Sally include in her gross income from this SPDA in the current year? (Round to the nearest dollar.) A)$2,000. B)$667. C)$8,000. D)$2,667.

D $833.33 * 12 * 21 = $210,000 $42k / $210k = 20% That makes 80% taxable 80% * $833.33 * 4 = $2,667

Which of the following statements regarding the death benefit of a universal life (UL) insurance policy is(are) CORRECT? 1. UL policies generally give the policyowner an option to adjust the death benefit. 2. Option A is known as the level death benefit option. 3. Most UL policies allow the policyowner to change insureds as needs change. 4. Option B is known as the increasing death benefit option.

1, 2, and 4

UL Option A provides for a ____ Death Benefit

Level

UL Option B provides for a _____ Death Benefit

Increasing

Can you change insureds on UL policies?

Do UL policies allow the policy owner the option to adjust the DB?

yes

Lisa is 40 years old, but her youthful looks allow her to pass for 35. She just applied for a $20,000 life insurance policy and stated on her application that she was 35 years old. The premium for a 35 year old is $15 per $1,000, which resulted in an annual premium of $300. Had she not misrepresented her age, the premium would have been $25 per $1,000 resulting in an annual premium of $500 for the same policy. Lisa dies unexpectedly just 1 year later at age 41. Assuming the insurance company discovers that she misstated her age on the application, what amount will be paid to Lisa's beneficiary/beneficiaries? A)$10,000. B)$19,800. C)$12,000. D)$0.

C Real coverage = fake premium / real premium * fake benefit $300 / $500 * $20,000

Until yesterday, Fred was employed by Avias Company. The company has a group health insurance plan that covers 24 employees. Fred's health coverage included his spouse and 2 dependent children, ages 5 and 7. Which of the following events would qualify Fred, his spouse, or his dependents for COBRA coverage and for how long? 1. Fred's death (36 months). 2. Termination of employment as a result of dismissal due to downsizing (36 months). 3. Divorce (29 months). 4. Legal separation (36 months).

1 and 4 Qualifying events include death of the covered employee, termination of employment, including retiring, voluntary resignation, being laid off, and being fired for anything except gross misconduct, a change in status (e.g., full time to part time), divorce or legal separation causing the spouse and/or dependent children to lose coverage, child reaching an age where the child is no longer eligible to be covered, employee reaching Medicare age, and spouse and/or dependent child losing coverage as a result. Voluntary or involuntary termination qualifies the individual for 18 months of COBRA coverage. Divorce, legal separation or termination of employment due to death qualifies the individual for 36 months of COBRA coverage.

Jack, age 36, is a self-made millionaire and enjoys taking financial risks. He would like to retire by age 60. He has amassed a sizable portfolio, but he is concerned the allocation is not maximizing growth. He is willing to take risks to achieve higher long-term returns. Which of the following portfolios would be most suitable for Jack to meet his retirement goal? A)Portfolio 1 - 20% S&P 500 Index Fund, 50% Small-Cap Growth Fund, 25% International Stock Fund. B)Portfolio 2 - 50% Russell 2000 Index Fund, 20% Corporate Bond Fund, 20% Biotechnology Fund, 10% Energy Sector Fund. C)Portfolio 4 - 60% S&P 500 Index Fund, 10% Small-Cap Growth Fund, 10% Foreign Stock Fund, 10% Pacific Rim Growth Fund, 10% Corporate Bond Fund. D)Portfolio 3 - 40% Small-Cap Growth Fund, 20% Corporate Bond Fund, 15% Utilities Stock Fund, 15% Foreign Stock Fund, 10% Municipal Bond Fund.

C Portfolio 4 is the best choice for Jack based on his age and risk tolerance. A mix of 90% stocks and 10% bonds is appropriate for an investor who is willing to take risks to achieve higher long-term returns.

Which of the following types of orders might an investor use to purchase stock on an exchange? 1. Stop order. 2. Good-til-cancelled (GTC) order. 3. Stop-limit order.

All of these

MB Mutual Fund had an alpha of 3% and a beta of 1.5 over the past year. If the risk-free rate has been 5% and the actual return for MB Mutual Fund has been 17%, what has been the market risk premium over this same period according to Jensen's alpha?

Non-U.S. Government zero-coupon bonds may be subject to which of the following types of risk? 1. Default risk. 2. Reinvestment rate risk. 3. Purchasing power risk. 4. Interest rate risk.

1, 3 , and 4 Reinvestment rate risk is the risk that interim cash flows cannot be reinvested at a rate of return equal to the yield expected of the underlying investment. This risk does not apply to zero-coupon bonds because cash flows are received only at sale or maturity. Non-U.S. government zero-coupon bonds are subject to default risk, purchasing power risk, and interest rate risk.

The risk that interim cash flows cannot be reinvested at a rate of return equal to the yield expected of the underlying investment

Reinvestment Rate Risk

Darby is single and has 2 dependents. Financial records show the following were received by Darby in the current year: Gift from a friend $12,000 Cash dividends received from domestic common stock $1,200 Prize won in state lottery $1,000 Salary from employer $35,000 Child support received from ex-spouse $6,000 Alimony receieved from ex-spouse $12,000 Long term capital loss $5,000 What is Darby's adjusted gross income (AGI) for the current year?

$46,200 You can only deduct $3k of the LTC loss

Which of the following is included in AMTI for calculating the alternative minimum tax for an individual taxpayer? 1. Excess accelerated depreciation over straight line on equipment. 2. Excess of depletion deduction over the adjusted basis. 3. Excess of fair market value above the exercise price if exercised for freely transferable ISOs. 4. Net appreciation on long-term capital gain property donated to a public charity.

1 , 2, and 3

In the current year, Garrett invested $100,000 for a 20% partnership interest in an activity in which he is a material participant. The partnership reported a loss of $400,000 in the current year and $200,000 in the next year. Garrett's share of the partnership's loss was $80,000 in the current year and $40,000 in the next year. How much of the loss from the partnership can Garrett deduct? A)$80,000 in the current year, $20,000 in the next year. B)$50,000 in the current year, $50,000 in the next year. C)$80,000 in the current year, $40,000 in the next year. D)$0 in the current year, $0 in the next year.

At Risk Rule

can't deduct losses greater than the capital you put in

Which of the following statements regarding the income tax treatment of involuntary conversion of real property is(are) CORRECT? 1. Gain may be deferred if the taxpayer reinvests the amount realized from the converted property in another property. 2. The period for reinvestment is 2 years from the end of the year in which the realization took place for conversion events caused by nature (e.g., fire, earthquake). 3. The reinvestment period for conversion acts caused by government (eminent domain) is 3 years from the end of the year in which realization of the conversion took place. 4. If the conversion was into cash, the nonrecognition treatment is mandatory, not elective.

1, 2, and 3 Gain may be deferred if the taxpayer reinvests the amount realized from the converted property in another property. The period for reinvestment is 2 years from the end of the year in which the realization took place for conversion events caused by nature. The reinvestment period for conversion acts caused by government/eminent domain is 3 years from the end of the year in which realization of the conversion took place. If the conversion is into cash, nonrecognition is elective.

A calendar-year taxpayer made the following charitable contributions in the current year: Basis Fair Market Value Cash to church $5,000 $5,000 Unimproved land to the city of Kenner, Louisiana $40,000 $70,000 The land had been held as an investment and was acquired 5 years ago. Shortly after receipt, the city of Kenner sold the land for $90,000. If the taxpayer's AGI is $120,000, the maximum allowable charitable contribution deduction in the current year is: A)$75,000 if the reduced deduction election is made. B)$25,000 if the reduced deduction election is not made. C)$36,000 if the reduced deduction election is not made. D)$45,000 if the reduced deduction election is made.

D The maximum allowable charitable deduction for the current year is $45,000 if the reduced deduction election is made. The taxpayer has 2 options with respect to the contribution deduction. First, she can deduct the FMV of the land limited to 30% of her AGI. In this case, the total deduction would be $41,000 [$5,000 cash + $36,000($70,000 FMV limited to 30% of $120,000)]. The carryover for the next 5 years is $34,000 ($70,000 FMV − $36,000 current year deduction). Alternatively, she can deduct the adjusted basis, limited to 50% of AGI. The total deduction would be $40,000 for the land and $5,000 for the cash, for a total of $45,000. There would be no carryover with this option but the deduction for the current year would me maximized.

Reduced Deduction Election

allows you to deduct the basis of an asset being gifted to charity up to 50% of your agi

Does the Reduced Deduction Election allow for carry over?

What is the maximum deduction allowed for land if the Reduced Deduction Election is not selected?

30% of a taxpayer's agi

William is a 17-year-old high school student who has $3,200 of investment income from mutual funds and $5,000 of earnings from a part-time job. His parents claim him as a dependent. How much of William's income is taxed at his parents' highest marginal income tax rate? A)$2,850. B)$0. C)$1,100. D)$2,000.

C Non earned income - kiddie tax allowable amount $3,200 - $2,100 = $1,100

Kidde Tax

a threshold set that requires a dependent child's passive income over a specified amount to be taxed at his/her parent's marginal rate. 2017 amount = $2,100

Duane, a financial planner, is meeting with Lisa, who wants information regarding how several investment sales she has completed this year will impact her income tax return. Lisa has sold the following properties: Section 1202 stock, which Lisa purchased December 12, 2014, for $50,000 and sold December 15, 2017, for its FMV of $65,000. A vacation home Lisa inherited from her uncle, who died in 2015 and who had a basis of $95,000 in the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for $160,000 July 1, 2017. Lisa has used the vacation home only 4 weeks since she inherited it; otherwise it was vacant. Stock Lisa inherited from another uncle, who also died in 2015. His basis in the stock was $20,000 and the FMV in his gross estate was $15,000. Lisa sold it November 1, 2017, for $17,000. What should Duane tell Lisa? 1. 100% of the gain on the sale of the Section 1202 stock is excluded from Lisa's income for both regular income tax and AMT purposes. 2. Lisa must recognize a $2,000 gain on the sale of the stock she inherited from her uncle. 3. Lisa's gain on the vacation home is all capital gain. 4. Lisa must recognize a total gain of $27,000 on the sale of her investments.

2 and 3 Statement 1 is incorrect. Section 1202 stock must be held for 5 years in order for Lisa to exclude the gain from her taxable income. Statement 4 is incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on the Section 1202 stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that the vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the sale of a personal residence only.

How long must section 1202 stock be held in order for an individual to exclude the gain from their taxable income?

5 years

What is section 121 gain exclusion rule?

allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale.

In the current year, Pamela, who is single, had the following capital gains and losses: ``` Short-term capital gains $40,000 Short-term capital losses $32,000 Long-term capital gains $15,000 Long-term capital losses $27,000 What is Pamela's net capital gain or loss for the current year, and how is it treated on her current year's tax return? ``` A) She has a net capital loss of $4,000, fully deductible in the current year. B) She has a short-term capital gain of $8,000 and a $12,000 long-term capital loss. C) She has a short-term capital gain of $8,000 and a $3,000 long-term capital loss with a $9,000 carryover. D) She has a $3,000 deductible long-term capital loss with a $1,000 long-term capital loss carryover.

D Net the long term capital gain consequences - $27k loss + $15k gain = - $12k loss Net the short term capital gain consequences $40k gain - $32k loss = $8k gain Net the total gain consequences - $12k loss + $8k gain = -$4k loss max loss per year = - $3k meaning there is $1k in loss carry forward

Bill and Curt have entered into an exchange of property. Bill gives Curt a fishing boat that has an FMV of $15,000. In exchange, Curt forgives a $20,000 debt that Bill owes him. Bill acquired the boat in an estate auction for a bargain price of $6,000. What is Bill's realized gain in this transaction? A)$14,000 B)$6,000 C)$15,000 D)$9,000

A FMV of Boat - Basis of Boat = $9k gain Debt forgiven - FMV Boat = $5k gain Total = $14k

On January 10 of the current year, Mark sold stock with an adjusted tax basis of $6,000 to his son Les for $4,000 (fair market value). On July 31 of the next year, Les sold the same stock for $5,000 in a bona fide arms-length transaction to Sara, who is unrelated to Les or Mark. What is the proper tax treatment for these transactions? A)Les has a recognized gain of $2,000 in the current year. B)Les has a recognized gain of $1,000 in the next year. C)Mark has a recognized loss of $2,000 in the current year. D)Neither Mark nor Les has a recognized gain or loss in either year.

D This is an application of the related party rules. Neither Mark nor Les has a recognized gain or loss in either year. Mark has a $2,000 realized loss in the first year, but cannot recognize it because of the related party rule. Mark forever loses the ability to take a deduction for the loss because it is the result of a related party transaction. Les has a realized gain of $1,000 in the second year. He can reduce his gain by Mark's loss (up to the amount of gain). Les has no gain or loss in the second year. The remaining $1,000 loss is no longer available to either of them.

What is the related party rule?

If you sold an asset to a related party (spouse, child, etc.) at a loss, you will never be able to deduct the loss on your tax return

Can the receiver of a related party transaction realize a loss if the asset is sold to an unrelated party in the future? If so, how much loss can be realized?

Yes they can realize a loss, but only up to an amount equal to the gain they received when selling the asset. Example: Mark sells stock to his son with basis of $6k and FMV of $4k. Son then sells stock to an unrelated party for $5k. Son has $1k in gain, but can use the loss that Mark never got to realize to offset this gain, but only up to $1k. So the Son would never realize any gain on his tax return nor would he realize a loss due to the offsetting

Richard, who is single, has a traditional IRA that contains a portfolio of mutual funds with a current value of $107,000. He is expected to incur approximately $9,600 in medical bills in the next couple of months. Assuming he qualifies to maintain and fund a HSA and he has not made any contributions to the HSA in the current year, could Richard simply transfer the $9,600 from his IRA into an HSA and pay his medical bills with qualified tax free distributions from his HSA? A)Richard could make a one-time trustee-to-trustee transfer of the maximum amount of $15,000 from his traditional IRA to his HSA. B)No, this type of transfer is not allowed by the Tax Code. C)No. Richard could make a one-time, trustee-to-trustee transfer from his traditional IRA to his HSA, but the estimated medical expenses of $9,600 exceeds the maximum allowable contribution for the current year to a HSA for an insured with single coverage, therefore, Richard's transfer is limited to the maximum contribution allowable. D)Yes, Richard could make a one-time trustee-to-trustee transfer of $9,600 from his traditional IRA to his HSA.

Which of the following employee(s) is(are) highly compensated for qualified plan nondiscrimination testing purposes in the current year? 1. Stephen, a 6% owner of an incorporated law firm. 2. Franklin, who earned $135,000 last year and he was the top-paid employee. 3. Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last year. 4. Margo, a corporate vice president of marketing and 1% owner of the company, whose salary last year was $68,000.

1 and 2

Who is considered a highly compensated employee for 2017 purposes?

5% or more owner or salary over $120k

Which of the following statements regarding nonqualified stock options (NQSOs) and incentive stock options (ISOs) is(are) CORRECT? 1. NQSOs will not create an AMT adjustment upon exercise, but ISOs will. 2. Gain may be included in W-2 wages upon exercise for NQSOs but not ISOs. 3. Once vested, both NQSOs and ISOs can be exercised and the stock can be sold immediately. 4. Typically, on the date of the option grant, W-2 compensation income, which is a type of ordinary income, is created for an NQSO but not for an ISO.

1, 2, and 3

Which of the following pension plans must be covered by Pension Benefit Guarantee Corporation (PBGC) insurance? 1. Cash balance pension plan. 2. Money purchase pension plan. 3. Target benefit pension plan. 4. Traditional defined benefit pension plan.

1 and 4

Only ___ benefit pension plans and ___ ____ pension plans are covered by PBGC

Defined, cash balance

Bob had a cumulative IRA account balance of $450,000 as of December 31 of last year, turned age 70 on April 1 of this year, received a distribution of $15,000 from his IRA on December 31 of this year, and had a life expectancy of 23.5 years as of the same date. Which of the following statements regarding Bob's required minimum distributions is CORRECT? A)Bob will incur a penalty because he failed to take the required minimum distribution by December 31 of the current year. B)Bob's distribution of $15,000 is sufficient to meet his required minimum distribution requirement. C)Bob is not subject to the required minimum distribution rules. D)Bob will not have a penalty for the current year, but he will need to withdraw the balance of his required minimum distribution for the current year by April 1 of next year.

If a taxpayer has is covered by an employer sponsored plan, but doesn't participate in the plan, how much of their IRA contributions are deductible?

All of their contributions would be deductible

If a taxpayer is covered by an employer sponsored plan and participates in the plan, how much of their IRA contributions are deductible?

It depends on their MAGI. If single phase out begins at $62k and ends at $72k. If married phase out begins at $99k and ends at $119k. If one spouse is active and the other is not the active spouse is subject to the $99 - $119k phase out, but the non active spouse is subject to a $186k - $196k phaseout.

A simplified employee pension (SEP) plan: 1. uses an IRA as a funding vehicle 2. must follow the rule regarding non-discriminatory contributions. 3. may include a loan provision. 4. requires a specific employer contribution each year.

1 and 2 employer contributions are discretionary, but if made must be non discriminatory

Calculate the maximum benefit that may be funded for in the current year for Winona, who participates in her employer's traditional defined benefit pension plan. Her highest 3 consecutive years' salaries are shown below. Winona will have more than 10 years of service with the same employer at retirement. Highest Salaries Current year (−2) $ 90,000 Current year (−1) $100,000 Current year $110,000

$100k

Which of the following statements regarding loans from qualified plans is(are) CORRECT? 1. As a general rule, the maximum loan amount cannot exceed $50,000. 2. The limit on the term of a loan is generally 5 years. 3. After-tax employee contributions are available for loans. 4. Generally, loans to a 100% owner employee are permissible as long as they are not discriminatory.

1, 2, and 4

Sharon, single and age 54, retired 2 years ago and is receiving a $600 monthly pension from her previous employer's qualified pension plan. She recently accepted a position in a small CPA firm that has no pension plan. She will receive $5,000 in annual compensation from the CPA firm and will continue to receive $7,200 in annual pension benefits. What is Sharon's maximum deductible contribution to a traditional IRA for 2017?

$5,000 she can't contribute more than her earned income

Only ________ ___________ plans can provide funding flexibility

profit sharing

What is an age based profit sharing plan?

a plan where a company is allowed to make more generous contributions for older employees, so the benefits they receive when they retire are equivalent to those that will be received by younger employees who earn the same salaries

Which of the following retirement plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married plan participant? 1. Traditional defined benefit pension plan. 2. Target benefit pension plan. 3. Profit-sharing plan. 4. Cash balance pension plan.

1, 2, and 4 Pension plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married participant. Generally, a profit-sharing plan does not provide a QPSA or QJSA.

Which of the following are characteristics of property owned as tenants by the entirety? 1. Can only be owned by spouses. 2. Each owner has an equal ownership interest in the property. 3. Transfer of property does not require the consent of the other owner. 4. Includes a right of survivorship.

1, 2, and 4 Any transfer of the property under tenants by entirety requires the approval of both spouses acting as one.

Which of the following property would be included in a decedent's probate estate? 1. Solely owned securities held in a brokerage account. 2. An interest in property held as tenants in common with a brother of the decedent. 3. Life insurance policy death proceeds made payable to the decedent's estate. 4. A condo owned jointly (JTWROS) with the decedent's spouse.

1, 2, and 3

RST stock does not trade on a regular basis. Carl makes a gift of the stock on Thursday, October 5 and the most recent trades for RST stock are as follows: ``` Date Price October 2 $240 October 4 $180 October 9 $265 October 10 $290 What is the value that should be used for the federal gift tax return? ```

$208.33 If the stock is not traded on the date of gift, the gift tax value of the stock is the price following the date of the gift multiplied by the number of days from the stock trade before the date of the gift. Added to this is the stock price directly preceding the gift date multiplied by the number of days (trading days) between the date of the gift and the next trading day. This sum should be divided by the sum of the days before and after the date of the gift. In this case, [(1 × $265) + (2 × $180)] ÷ 3 days (2 + 1) = $208.33.

Which of the following statements regarding a self-canceling installment note (SCIN) 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 who accepts a self-canceling installment note may require security for the note without jeopardizing the estate planning advantages of the SCIN. 3. At the seller's death, the present value of any remaining self-canceling installment note balance is excluded from the seller's gross estate. 4. A self-canceling installment note is a debt that ordinarily is extinguished at the seller's death.

All are correct

Which of the following statements regarding private annuities is(are) CORRECT? 1. The transfer of property under a private annuity does not trigger immediate recognition of all gain to the seller. 2. If the present value of the annuity payable to the seller is at least equal to the fair value of the property transferred, there is no gift and, as a result, no gift tax due. 3. Each annuity payment will generally consist of a partial return of basis, capital gain, and ordinary income. 4. Private annuities cannot be secured by collateral.

All are correct

True or False? | The transfer of property under a private annuity does not trigger immediate recognition of all gain to the seller.

True

True or False? | Private annuities cannot be secured by collateral.

True

Which of the following statements regarding qualified disclaimers is(are) CORRECT? 1. They must be in writing. 2. The disclaiming party cannot have previously benefited from the interest being disclaimed. 3. They generally must be made within 9 months of the creation of the interest. 4. The disclaiming party cannot direct the disclaiming interest to other parties.

All are correct

Mr. Ortego died on December 29 of last year. The assets in his estate were valued on his date of death and alternate valuation date as follows: Asset Date of Death Valuation Alternate Residence $300,000 $350,000 Common stock $6,400,000 $6,450,000 Municipal bonds $180,000 $90,000 Patent $80,000 $65,000 The patent had 8 years of life remaining at the time of Mr. Ortego's death. The executor sold the residence on March 1 of this year for $325,000. If Mr. Ortego's executor properly elects to use the alternate valuation date, what is the value of Mr. Ortego's gross estate?

$6,945,000 The alternate valuation date is 6 months from the date of death. When using the alternate valuation date, the election applies to all assets, with 2 exceptions. One exception is for wasting assets, such as patents, annuities, and installment notes, which must be valued at the date of death. The second exception is for assets disposed of after the date of death, but before the alternate valuation date. These assets are valued as of the date of disposal. Therefore, the calculation would be: residence $325,000 + stock $6,450,000 + bonds $90,000 + patent $80,000 = $6,945,000.

Matt gifts Jim securities in the current year. Matt's adjusted basis for the securities is $48,000, and the fair market value is $40,000. Matt pays $2,000 in gift tax. What is Jim's basis for the stock for gain and for loss? A)$0 for gain and $0 for loss. B)$50,000 for gain and $42,000 for loss. C)$40,000 for gain and $40,000 for loss. D)$48,000 for gain and $40,000 for loss.

D Because the FMV of the property at the time of the gift was less than Matt's adjusted basis, Jim's basis depends on whether he sells the property for a gain or for a loss. His basis for determining gain is Matt's adjusted basis, which is $48,000. His basis for determining loss is the FMV of $40,000. Because this is a gift of loss property, none of the gift tax paid will be added to Jim's basis. i.e. if you are gifted an asset with adjusted basis that is higher than fvm then the adjusted basis is used to determine future gains but the fmv is used for future losses

Rick and Fran were divorced in 2015. Under the divorce agreement, Fran was to receive alimony of $100,000 in 2015, $85,000 in 2016, and $60,000 in 2017 and beyond. Payments were to cease upon death or remarriage. How much alimony, if any, must Rick recapture in 2017? A)$27,500. B)$0. C)$15,000. D)$30,000.

A Front-loading (also referred to as alimony recapture) is a measure to discourage disguising property settlements as alimony. If a $15,000 decrease in alimony payments occurs between any of the first 3 years, alimony recapture may be required. Shortcut for calculating alimony recapture in Year 3: R3 = P1 + P2 − 2P3 − $37,500 R3 = $100,000 + $85,000 − 2($60,000) − $37,500 R3 = $185,000 − $120,000 − $37,500 R3 = $27,500

Mary Sue's salaries from 2003-2016 are shown below. What is the maximum annual compensation that may be used to determine Mary Sue's annual benefit under a traditional defined benefit pension plan for 2017? ``` Salaries: 2003 - 2008 $65,000 2009 $100,000 2010 $120,000 2011 $90,000 2012 $125,000 2013 $110,000 2014 $90,000 2015 $90,000 2016 $90,000 ```

$111.67

``` Which type of bankruptcy filing allows for the reorganization of persons, firms and corporations? A)Chapter 11 bankruptcy. B)Chapter 7 bankruptcy. C)Chapter 13 bankruptcy. D)Bailout bankruptcy. ```

A. Chapter 11

What is chapter 7 bankruptcy?

Liquidation

What is chapter 13 bankruptcy?

Debt adjustment

What is chapter 11 bankruptcy?

Reorganization of persons, firms and corporations

Which of the following are steps in the financial planning process? 1. Establish financial goals. 2. Gather relevant data. 3. Analyze the data. 4. Develop a plan for achieving goals.

All are steps in the financial planning process

Jerry and Sara are concerned because they have not yet begun saving for their son Paul's higher education expenses. Jerry and Sara are both 30 years old, and Paul is 9 years old. Their combined income is $100,000, and they want to begin saving $5,000 per year in a tax-efficient manner. Which of the following is the best investment choice for Jerry and Sara? A)Section 529 plan. B)Coverdell Education Savings Account. C)Uniform Transfers to Minors Act (UTMA) account. D)Loans from the parents' traditional individual retirement accounts (IRAs).

Which of the following items may be discharged in a Chapter 7 bankruptcy? 1. Child support. 2. Tort claim for negligence (nonintentional). 3. Federal taxes (past two years). 4. Consumer debt.

2 and 4

Can child support be discharged under chapter 7 bankruptcy?

Can federal taxes be discharged under chapter 7 bankruptcy?

No, but only if taxes were within last 3 years

Julie and Charlie are meeting with their financial advisor to discuss their current financial situation. They have brought all the required documents to the first meeting. During the discussion, they referred to a number of financial transactions that had taken place during the prior year. Which of the following would increase or decrease their net worth? 1. Repayment of a loan using funds from a savings account. 2. Purchase of an automobile that is 75% financed after a 25% down payment. 3. Increase in the S&P 500 Index when their holdings include an S&P 500 Index mutual fund. 4. Increase in interest rates when they have a substantial bond portfolio.

3 and 4

Which of the following correctly states the relationship between NPV, IRR, and required return? 1. If NPV > 0, then IRR > required return. 2. If NPV = 0, then IRR = required return. 3. If NPV > 0, then IRR < required return. 4. If NPV < 0, then IRR < required return.

1, 2, and 4

A company is considering the purchase of a copier that costs $5,000. Assume a required rate of return of 10% and the following cash flow schedule: Year 1: $3,000 Year 2: $2,000 Year 3: $2,000 ``` What is the project's approximate IRR? A)17%. B)21%. C)14%. D)10%. ```

Which of the following is(are) considered qualified education expenses for the purpose of Coverdell Education Savings Accounts? 1. Private elementary school tuition 2. Room and board at a private boarding school for secondary education 3. College tuition

All are qualified expenses

Bob and Liz have a newborn son and want to make sure they have adequate funds to pay for his college education in 18 years. If they will need $75,000 for college costs in 18 years, approximately how much should they save at the end of each month to accumulate this amount? (Assume 8% interest compounded monthly.) A)$145. B)$156. C)$104. D)$123.

Which of the following statements regarding fiduciary responsibility are CORRECT? 1. Fiduciary relationships include attorney and client, and agent and principal. 2. The fiduciary is expected to act for the sole benefit of the principal. 3. No other interests should be placed before the duty a trustee has to a beneficiary.

All of these are correct

Dean secures a 30-year, $350,000 mortgage with an annual interest rate of 6%. Approximately how much total interest will Dean have paid on the mortgage at the end of 25 years? A)$241,457. B)$388,070. C)$375,960. D)$108,542.

Which of the following statements regarding the decision to buy or lease a home are CORRECT? 1. Generally, many more costs are associated with leasing a home, especially if this arrangement is short term. 2. A client who will be residing in the home for a short period of time should lease the home. 3. The lower the marginal income tax bracket, the greater the advantage of owning a home. 4. The itemized tax deduction for mortgage interest costs is a benefit of home ownership.

2 and 4

All of the following statements regarding the American Opportunity Tax Credit are correct EXCEPT: 1. The credit is available regardless of the taxpayer's adjusted gross income. 2. The credit is available for the first four years of the student's post-secondary education. 3. The maximum credit is $2,000 per eligible student per year. 4. The definition of eligible expenses includes course materials.

1 and 3 the credit is phased out at higher levels of AGI the maximum credit is $2,500 per student per year

Edwina, age 48, owns a modified endowment contract (MEC). Her basis in the policy is $20,000, and the cash value is $35,000. This year, she takes out a policy loan of $10,000. Which of the following statements regarding the income tax consequences of this loan is CORRECT? A)Edwina must include $5,000 in her gross income; the $5,000 is also subject to a 10% penalty. B)Edwina must include $10,000 in her gross income; the $10,000 is also subject to a 10% penalty. C)Edwina incurs no income tax consequences as a result of the loan. D)Edwina must include $10,000 in her gross income, but the 10% penalty does not apply.

B Modified Endowment Contracts are subject to LIFO (last in, first out). Loans from MEC's are considered to consist of taxable earnings until all the taxable earning have been withdrawn Edwina must include the entire $10k in her gross income and is subject to the 10% penalty because she is under 59.5

Cathy Grant, her husband Jack, and their daughter Kelly were in an automobile accident this year in which they all sustained various injuries. They were insured under Cathy's group major medical policy that has a $250 per individual/$500 family deductible, a $5,000 per individual stop-loss limit, and an 80% coinsurance provision. The medical expenses were itemized as follows: Cathy - $12,000; Jack - $10,000; and Kelly - $13,000. Assuming no other medical expenses during the calendar year, how much of these medical expenses did the Grant family have to pay? A)$3,500. B)$6,750. C)$3,600. D)$15,750.

A Grant's would pay the deductible = $500 and then 20% of the stop loss limit of $15,000 ($5k per person)

Which of the following statements concerning employer-provided disability income insurance is (are) CORRECT? 1. To determine whether the benefits under the plan are taxable income, it is necessary to look at whether the employer or the employee pays the premiums. 2. If the entire cost is paid by the employee, benefits are included in gross income.

1 only

Managed care plans developed out of which belief? A)Limiting the number of health care providers to individuals provided economies of scale. B)Capitation was a less expensive way to provide basic health care. C)The use of a gatekeeper could minimize health costs. D)Preventive care was less expensive than treating a serious illness.

Which of the following statements regarding qualified long-term care insurance policies is (are) CORRECT? 1. Premiums are always deductible. 2. Benefits may be received income tax free. 3. Benefits may not be provided for expenses that are reimbursable under Medicare. 4. The policy must be guaranteed renewable.

2, 3, and 4 Premiums for qualified long-term care insurance policies are tax deductible to the extent that they, along with other unreimbursed expenses such as Medicare premiums, exceed a specified percentage of the insured's adjusted gross income

Robert retires on May 31 of the current year and begins to receive a monthly annuity of $1,200 payable for life. His life expectancy at the date of retirement is 10 years. The first annuity payment was received on June 15. Robert contributed $24,000 to the cost of the annuity. He is confused as to the taxation of this payment. As a result, he decides to see Frank, his financial planner. Which of the following statements with regards to Robert's annuity are CORRECT and can be used by Frank in his meeting with Robert? 1. If Robert lives beyond his 10-year life expectancy, every annuity payment received after ten years will be received tax-free. 2. If Robert lives beyond his 10-year life expectancy, every annuity payment he receives after ten years will be fully taxable. 3. Robert can exclude $1,400 of his monthly payments received this year from income tax and $2,400 a year going forward until his 10-year life expectancy is completed. 4. For the first 10 years, Robert cannot exclude any amount of his annuity payments from taxes because each payment is fully taxable.

2 and 3 All annuity payments received after life expectancy will be fully taxable. Because Robert will only receive 7 payments the first year, he will only be able to exclude $1,400 of the annuity payments the first year but he will be able to exclude $2,400 per year going forward until year 11. See calculation below: $24,000 ÷ $144,000 = 0.1666 or 1/6 exclusion ratio (1/6 × $1,200 = $200 exclusion amount) Current year: 7 payments × $200 (exclusion amount) = $1,400 Year 2: (12 payments × $1,200) × ⅙ = $2,400 Year 3 : (12 payments × $1,200) × ⅙ = $2,400 Shortcut: $24,000 ÷ 120 = $200 per month nontaxable

Which of the following perils is (are) ordinarily covered in an open-perils HO-3 policy? 1. Ice damage 2. Lightning 3. Flood 4. Earthquake

1 and 2

Virginia had a basis of $350,000 in her nonqualified fixed annuity. Her life expectancy at age 60 is 25 years. The monthly payment is expected to be $2,700. How much of each monthly payment is going to be included in Virginia's taxable income? A)$18,396. B)$14,004. C)$1,533. D)$1,167.

Mrs. Hopkins has a major medical insurance policy with a $500 deductible and an 80% coinsurance clause. She becomes ill and is admitted to the hospital for several days. When she is discharged, her hospital bill is $7,500 and her doctor bills are $3,250. What amount will her insurance policy pay? A)$8,200. B)$10,250. C)$7,000. D)$9,250.

A Add losses together = $7,500 + $3,250 Subtract deductible = $10,750 - $500 Multiply by coinsurance % = $10,250 * 80% = $8,200

Which of the following statements regarding the various definitions of disability are CORRECT? 1. Under an own occupation definition, an insured may be eligible for benefits even if employed in another occupation. 2. The Social Security definition of disability is more restrictive than those found in private disability income policies. 3. Under the presumptive definition of disability, an insured will be eligible for benefits due to the loss of sight in one eye. 4. A policy containing an any occupation definition of disability is generally the least expensive.

1, 2, and 4

The Goldens are planning to purchase additional life insurance to meet the objectives stated in the case. They want to purchase policies that feature flexible premium payments and that will allow them to invest the cash value in various subaccounts. Which of the following types of life insurance will best meet the Goldens' objectives? A)Variable life. B)Variable universal life (VUL). C)Whole life. D)Universal life.

Which of the following statements regarding health savings accounts (HSAs) are CORRECT? 1. Up to 100% of account contributions are tax deductible up to a maximum limit. 2. A high deductible is required on the insurance policy. 3. An annual maximum out-of-pocket expense limit is associated with the account and insurance policy. 4. An individual can make a one-time, trustee-to-trustee transfer from a traditional IRA to an HSA.

All the statements are correct

Wayne, age 55, owns a non-MEC universal life insurance policy. His investment in the contract is $10,000 and the policy's cash surrender value (CSV) is $25,000. This year, he borrows $5,000 from the policy to go on an extended vacation. Which of the following statements regarding the income tax treatment of this loan is(are) CORRECT? 1. The $5,000 loan is subject to income tax. 2. The $5,000 loan is income tax free. 3. The $5,000 loan is subject to a 10% income tax penalty.

2 only when a life insurance policy is not classified as a MEC, a policy loan is generally tax and penalty free

Which of the following statements concerning a personal liability umbrella policy (PLUP) is (are) CORRECT? 1. The personal liability umbrella policy (PLUP) is designed primarily to provide liability coverage for any legal claims or judgments. 2. The personal liability umbrella policy (PLUP) requires the policyowner to carry certain underlying liability coverages of specified minimum amounts.

2 only 1 is incorrect because PLUP policies are only designed to cover catastrophic legal claims or judgements (i.e. not the primary reason they're designed)

Jamie, age 54, just inherited $500,000. She currently manages the local grocery store and has a salary of $75,000 per year. She is looking for a tax-deferred investment vehicle that will help supplement her retirement income in 11 years and wants to have the opportunity to keep up with inflation. Jamie considers herself a moderate risk taker. She has a portfolio of individual stocks at her local brokerage office. Assuming she has adequate emergency funds outside of the $500,000, which of the following would be most suitable for Jamie to invest these funds? A)Whole life insurance. B)Variable annuity. C)Universal life insurance. D)Fixed annuity.

Jose owns a 30-year corporate bond, with 22 years remaining until maturity, featuring a coupon rate of 6.25% (paid semiannually). If the comparable yield for this quality bond is currently 7%, what should be the intrinsic value of his bond? A)$1,000.00 B)$1,138.38 C)$916.44 D)$906.46

C ``` N = 22*2 PMT = $62.50/2 FV = $1,000 I/Y= 7/2 PV = $916.44 ```

``` An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. If the stock quickly falls to $40 per share, how much additional capital must the investor provide to cover a margin call? A)$200. B)$400. C)$800. D)$600. ```

D Current Market Value = 100 * 40 = $4k Loan Amount = 100 * 75 * 40% = $3k Current Equity = $1k Maintenance margin = 100 * 40 * 40% = $1,600 Additional capital needed = $1,600 - $1,000 = $600

All of the following are characteristics of money market mutual funds EXCEPT: A)The investments within the fund usually mature within one year and have an average maturity of less than 60 days. B)Funds may be withdrawn from the account at any time without penalty by writing a check on the account. C)The rate of return on the fund is highly sensitive to changes in short-term interest rates. D)These funds typically invest in high quality, long-term investments, such as Treasury bonds, REITs, and promissory notes.

George has a 5-year bond with a coupon rate of 3.65% (paid semiannually). If the comparable yield for this quality bond is 4.85%, what should be the intrinsic value of his bond? A)$1,179.84 B)$1,054.39 C)$1,000.00 D)$947.28

D ``` N = 5 *2 I/Y = 4.85/2 PMT = 36.5/2 FV= $1,000 PV= $947.28 ```

Jillian recently purchased a 30-year, investment-grade, state of Louisiana municipal bond, from her broker. She paid $972 plus commission for the bond, which has an annual coupon rate of 3.5% (paid semiannually). Which of the following statements is(are) CORRECT? 1. The bond will be subject to high purchasing power risk. 2. Interest paid by the bond will not be subject to federal income taxation. 3. If the bond is sold in three years for $1,000, the gain will be considered income tax-free. 4. The bond will be subject to a high level of default risk.

1 and 2

Investment grade bonds are subject to _____ default risk

Low

Longer term bonds are subject to ____ purchasing power risk

greater

.Which of the following bonds has the greatest duration? A)20-year maturity, 8% coupon. B)20-year maturity, 12% coupon. C)10-year maturity, 8% coupon. D)10-year maturity, 12% coupon.

The bond with the greatest duration will have the ____ term to maturity and ____ coupon.

longest, smallest

Which of the following statements regarding the various performance measures are CORRECT? 1. A positive alpha indicates that the manager consistently underperformed the market on a risk-adjusted basis. 2. Jensen's alpha indicates how much the realized return differs from the required return, as per the capital asset pricing model (CAPM). 3. The Sharpe ratio is not useful for evaluating the performance of non-diversified portfolios. 4. The Treynor ratio does not indicate whether a portfolio manager outperformed or underperformed the market portfolio.

2 and 4

Is the sharpe ratio useful for measuring performance of both non-diversified and well-diversified portfolios?

Yes

Greg buys a call option on the stock of LMN Corporation for an option premium of $1.50. Which of the following statements is(are) CORRECT? 1. Greg hopes that the price of LMN stock will decline. 2. Greg's maximum loss on the option is $150.

2 only

If you buy a call option, you want the price to ____

Increase

What is the maximum loss when you buy a call option?

the premium paid

what is the maximum loss when you buy a put option?

the premium paid

``` If Mary earned a 3% return from dividend reinvestment, a 2% return from capital gain reinvestment, and a 9% return from share price appreciation on her mutual fund, what would be Mary's total return? A)14%. B)5%. C)12%. D)3%. ```

Harry has an investment that has produced the following returns: Year 1: 10%, Year 2: 5%, Year 3: -7%, Year 4: -3%, Year 5: 12%. What is the arithmetic mean return on this investment? A)3.40%. B)17.00%. C)6.75%. D)8.50%.

A Just find the average if it's asking for the arithmetic mean

FLY company is a publicly owned airline. The company has a capital structure consisting of 85% stock and 15% bonds. Investors in the common stock of FLY are subject to all of the following risks EXCEPT A)default risk. B)business risk. C)interest rate risk. D)market risk.

A Common stockholders of FLY are not subject to default risk because the company is not obligated to make dividend payments.

Which of the following is the definition of standard deviation? A)Standard deviation is a computation of the relative measure of total risk per unit of expected return. B)Standard deviation is an absolute measure of the variability of the actual investment returns around the average or mean of those returns. C)Standard deviation measures the extent to which two variables move together, either positively or negatively. D)Standard deviation measures the systematic risk associated with a Monte Carlo simulation.

The issuer-specific component of the variability in a stock's total return that is unrelated to overall market variability is known as a type of: A)nondiversifiable risk. B)unsystematic risk. C)fundamental risk. D)systematic risk.

How do you reduce unsystematic risk?

By diversifying

Market Risk Synonyms

non diversifiable, systematic

All of the following statements concerning municipal securities are correct EXCEPT: A)because municipals are exempt from federal taxes, a taxable equivalent yield (TEY) can be calculated to make the return on these bonds comparable to those of taxable bonds. B)one type of municipal security is the revenue bond, which is repaid from the revenues generated by the underlying project. C)one type of municipal security is the general obligation bond, which is backed by the 'full faith and credit' of the issuer. D)because municipals are issued by political entities other than the federal government (such as states and cities), the bondholder is not able to avoid state and/or local taxes.

D Some states encourage investors to purchase municipal bonds by not imposing state income tax on the interest payments.

Assume a taxpayer is in the 35% marginal income tax bracket and has enough deductions to itemize. Calculate the equivalent tax credit that would provide the same tax benefit as a $3,000 itemized deduction. A)$1,950. B)$8,571. C)$1,050. D)$3,000.

C A tax credit is a dollar for dollar reduction against the individual's tax liability, while a tax deduction decreases taxable income. The formula is: deduction × marginal tax rate or $3,000 × 0.35 = $1,050.

Valerie and her husband, Mark, own a used car business. This year, they purchased a parcel of raw land for business expansion. They paid $150,000 for the land, incurred legal fees of $4,500 associated with the purchase, and paid a broker $4,000 for his services. What is their adjusted basis in the land? A)$154,500. B)$154,000. C)$150,000. D)$158,500.

D The adjusted basis is calculated by starting with the original purchase price ($150,000) and increasing it by certain allowable costs. In this case, the allowable costs to increase basis are legal fees and broker commission (4,000 + 4,500). Therefore, the adjusted basis is 150,000 + 8,500 = 158,500.

Which of the following statements regarding adjusted gross income (AGI) is CORRECT? A)It is the amount of income that is taxable. B)It may result in a phaseout of certain deductions. C)It is the first step in the process of calculating taxable income. D)It represents a ceiling for certain deductions, such as medical expenses and miscellaneous itemized deductions.

C Adjusted gross income equals gross income less certain items that are specifically allowed as adjustments to income. Taxable income equals adjusted gross income less allowable deductions (itemized or standard) and personal exemptions. The level of adjusted gross income does impact the deductibility of certain items, such as medical expenses and miscellaneous deductions by setting floors on the amount deductible.

``` Beverly purchased a painting for $10,000. Years later, when the painting had a FMV of $5,000, she gave it to her mother, Peggy, as a gift. Six months later, Peggy sold the painting at auction for $4,000. Assuming no gift taxes were paid on the gift when Peggy received it, what is her net gain or loss on the sale of this painting? A)$1,000 loss. B)$4,000 gain. C)$6,000 loss. D)$0 gain, $0 loss. ```

A To determine the loss on the sale of a gift, the donee's basis is the lower of the donor's basis or the FMV of the property when the donee receives it. Although Beverly's basis was $10,000, the value of the gift when Peggy received it was $5,000, which becomes her basis. Therefore, Peggy realized a net loss of $1,000 when she sold the painting for $4,000.

Mary Sue and Bob are married and file a joint return. They provided over 50% of the support for Becky, Rachel, and Vicki during the current year. Their daughter, Becky, a full-time college student, earned $4,100 during the year. Mary Sue and Bob's married daughter, Rachel, filed a joint return with her husband. Vicki, who is Mary Sue's mother, lives in a retirement community for which Mary Sue and Bob pay $18,000 per year. Vicki's only income during the year was $5,200 of Social Security benefits, and she used that entire amount for her own support. Which of the following statements with respect to Mary Sue and Bob's options is(are) NOT correct? 1. Mary Sue and Bob can claim Becky as a dependent only if she is younger than 19 or is a full-time college student younger than 24. 2. Mary Sue and Bob may claim Rachel as a dependent if neither Rachel nor her husband was required to file a return. 3. Mary Sue and Bob may not claim Vicki as a dependent because Vicki's gross income is too high.

3 Only While Vicki's Social Security benefits are not included in her gross income, if she used any amount for her own support, it is used to decide whether or not the taxpayer provided more than 50% of her support. The $18,000 in payments by the taxpayers for her home in the retirement community satisfies this test. Therefore, she does not fail the gross income test and may be claimed by Mary Sue and Bob as a dependent. Statement 1 is correct because Becky does not fail the gross income test if she is a student and under age 24. She would be a qualifying child. Statement 2 is correct because Rachel may file a joint return and qualify as long as neither Rachel nor her husband is required to file a return.

Can a married tax payer claim their child as a dependend if they are married as well?

Yes, as long as the child and their spouse didn't have to file a return

Sara wishes to make an anonymous gift of $1 million to her alma mater. She is determined that no one know she made the gift. As her planner, you tell her there are rules that must be followed if she also wants a tax deduction for the gift. Which of the following factors determine the amount of the tax deduction allowed for Sara's charitable gifts? 1. The donee's identity as a 30% or 50% organization. 2. The fact that Sara is an individual and not a corporation. 3. The type of property given away. 4. Sara's adjusted gross income.

All statements are correct. Charitable contributions are deductible, but only up to certain limits determined by the donor's identity (individual vs. corporate) and the recipient's identity (30% or 50% organizations). The donor's adjusted gross income affects how much of a deduction is allowed in any one year. The type of property that is given away also determines the amount of the deduction. The charity can honor Sara's wishes and tell the public the gift is anonymous but the charity must know her name in order to provide proper substantiation of the gift for tax purposes for Sara.

Which of the following statements regarding exclusion for gain realized upon the sale of a principal residence is (are) CORRECT? 1. To claim the exclusion, the taxpayer must have owned and used the home as a principal residence for an aggregate time period of 2 years out of the 5-year period immediately preceding the home's date of sale and may claim the exclusion only once every 2 years. 2. The maximum amount of realized gain that may be excluded from gross income is $300,000 for married individuals filing jointly and $150,000 for all other taxpayers.

1 only

Amount of gain eligible for exclusion on sale of a property for married taxpayers?

$500k

Your client, who has a taxable income of $180,000, is concerned about being subject to the alternative minimum tax (AMT). Which of the following itemized deductions used in calculating your client's taxable income are adjustments to regular taxable income in arriving at alternative minimum taxable income (AMTI)? 1. Casualty losses. 2. State income taxes paid. 3. Employee business expenses in excess of 2% of the employee's AGI. 4. Donation made to the local university.

2 and 3 only Statement 1 is incorrect because casualty losses are deductible for both regular tax and AMT. Statement 2 is correct because state taxes are not deductible for AMT purposes. Statement 3 is correct because miscellaneous itemized deductions that exceed the 2% of AGI floor are only deductible for regular tax purposes, not for AMT purposes. Statement 4 is incorrect because charitable contributions are deductible for both regular tax and AMT.

Are casualty losses deductible for both regular tax and AMT?

Yes

Are state taxes deductible for AMT purposes?

Are charitable contributions deductible for both regualr tax and AMT?

Yes

True or False miscellaneous itemized deductions that exceed the 2% of AGI floor are only deductible for regular tax purposes, not for AMT purposes

True

After 5 years of marriage, Beth and Rudy, who have 2 children, file for divorce. The court grants the divorce and orders Rudy to pay $1,000 per month in alimony and $1,500 per month in child support. How much is Beth required to include in gross income for each year she receives these payments? A)$28,000. B)$18,000. C)$30,000. D)$12,000.

D Payments of alimony or separate maintenance are taxable to the payee spouse in the year received. Payments are deductible by the payor spouse, who does not have to itemize in order to receive the deduction. Child support is not taxable to the payee nor deductible by the payor.

True or False? Student loan interest is an above the line deduction

True

True or False? Union dues are below the line (itemized) deductions

True

True or False? Charitable contributions are above the line deductions

False, they are below the line (itemized)

True or False? Personal casualty losses are below the line (itemized) deductions

True

For the first time in his working life, Jake is self-employed. He has always had an employer who took care of things such as payment of payroll taxes but now it is Jake's responsibility. He has come to you, his financial planner, for clarification on what he pays and what his employees pay for payroll taxes. Which of the following statements regarding FICA are correct? 1. Both Jake and his employees will pay FICA on his employees' earnings. 2. Jake must pay both the employer and the employee portions of the self-employment payroll tax on his income from his business. 3. The employer share of the payroll taxes on his employees' earnings and on his self-employment income are both deductible by Jake. 4. Because Jake is self-employed, he can deduct the total self-employment taxes paid on his net self-employment income.

1, 2, and 3

Do self employed individuals pay FICA taxes on their employees' earnings?

Yes

Can self employed individuals deduct the employee share of the FICA taxes?

No, only the employer share

Christopher, who has an interest in multiple businesses, has the following income for 2017: Net Schedule C income: $80,000 Dividends and interest: $11,000 General partnership K-1 income: $10,000 S corporation K-1 income: $29,000 What is Christopher's total self-employment tax for 2017? (Round up to nearest dollar.)

$12,717 Christopher's self-employment income is $90,000. The dividends and interest and the K-1 distributions from the S corporation are not self-employment income. The self-employment tax is calculated as follows: $90,000 × .9235 = $83,115 net self-employment earnings. Total self-employment tax is $12,717 ($83,115 × .1530).

Nancy donated a professional stove to a qualified charity that cooks and delivers meals for the elderly and disabled. The stove is not new and has a fair market value of $2,500. What does Nancy need in order to be able to take a charitable deduction for this donation? 1. Nancy needs a receipt from the charity that describes the stove, has the date of the donation, and name of the charity. 2. Nancy must have a professional appraisal of the fair market value of the stove on the date of donation.

1 only An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, Nancy may wish to get an independent appraisal to support the deduction claimed.

At what value do you need to have an appraisal to prove the amount of charitable deduction you are taking?

Anything greater than $5,000 for 2017 (non cash gifts)

When calculating income tax liability the individual taxpayer arrives at taxable income by: A)deducting the greater of itemized deductions or the standard deduction from gross income, then reducing that result by allowable adjustments, such as alimony paid. B)reducing gross income by allowable adjustments, such as alimony, to arrive at adjusted gross income, then deducting the greater of the standard deduction or itemized deductions, as well as personal and dependency exemptions. C)consulting the tax tables accompanying IRS Form 1040. D)None of these.

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump sum distribution is CORRECT? The NUA portion is: A)taxed as ordinary income in the year of the distribution. B)taxed at the capital gains rate when the stock is sold. C)taxed as ordinary income when the stock is sold. D)received tax free.

B The NUA portion of the distribution is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.

Which of the following services are covered under Part A of Medicare? 1. Skilled nursing facility services. 2. Home health care services. 3. Hospice care. 4. Outpatient hospital services.

1, 2, and 3 Outpatient hospital services are covered under Medicare Part B, not Part A.

True or False Medicare Part A covers skilled nursing facility services

True

True or False Medicare Part A covers home health care services

True

True or False Medicare Part B covers hospice care

False Part A covers hospice care

True of False Medicare Part A covers outpatient hospital services

False Part B covers outpatient hospital services

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA? 1. Contributions are made with pretax dollars. 2. A withdrawal from the account will not be subject to tax if the account has been established for at least three years and the funds (up to $10,000) are being used for a first time home purchase. 3. Distributions are not taxable if they are attributable to disability and the account has been established for at least 5 years. 4. If the account has been open for at least 5 years and the account owner is age 59½, distributions are penalty free and income tax free.

3 and 4 Contributions to a Roth IRA are made with after-tax dollars. Distributions from a Roth IRA are income tax and penalty free if the owner has maintained the account for at least 5 years AND the distribution is attributed to one of the following: death disability first-time home purchase ($10,000 lifetime maximum) attainment of age 59½

What are the exceptions to the Roth age 59.5 distribution rule?

death disability first-time home purcahse ($10k lifetime max)

Michael is an employee of JJ Enterprises (JJE), where he earns $75,000. JJE sponsors a Section 401(k) plan with a 50% match for contributions up to 6% of salary. Michael always defers the maximum. In addition, JJE sponsors a cash balance plan that provides for a 3% contribution with a guaranteed return equal to 85% of the 5-year Treasury rate. Michael is also a Cajun chef who does catering on the weekends. He typically earns $20,000 from his catering business after his expenses. He is a rather frugal individual and wants to defer as much of his income from catering as possible. However, he does not want to have to worry about administrative issues because of his busy schedule. What retirement plan would you recommend? A)Target benefit plan. B)SIMPLE. C)Cash balance plan. D)SEP plan.

D Focusing on his goals, he wants to save the most money from his catering business without many administrative responsibilities. A SIMPLE or SEP plan would be appropriate. Because he is already contributing maximum elective deferrals for the year into the JJE Section 401(k) plan, he would not be permitted to defer a portion of his salary into a SIMPLE. Therefore, a SEP plan is the best choice.

Which of the following statements regarding the skilled nursing facility benefit under Medicare Part A is(are) CORRECT? 1. After 100 days of coverage in a benefit period, the patient must pay the entire cost of remaining in the facility. 2. The skilled nursing facility benefit pays the entire cost of the first 30 days while the patient is in the facility. 3. The skilled nursing facility benefit pays for custodial care received in a nursing home.

1 only

Charles was an employee of ABC Corporation for 20 years. He received a lump sum distribution from his qualified retirement plan in 2017. The distribution was comprised entirely of ABC stock valued at $100,000 on the date of distribution. The value of the stock contributed to Charles's individual account in the plan over the years was $70,000. If Charles does not sell the stock this year, what amount is included in his gross income in 2017 as a result of the distribution? A)$30,000. B)$0. C)$70,000. D)$100,000.

Which of the following statements regarding old age insurance under Social Security is NOT correct? A)A worker who is fully insured is eligible to receive reduced monthly retirement benefits as early as age 60. B)Old age insurance benefits are based on a worker's primary insurance amount (PIA) which is a function of the worker's average indexed monthly earnings (AIME) on which Social Security taxes have been paid. C)A person is fully insured for purposes of receiving Social Security retirement benefits if the worker has 40 Social Security credits. D)A worker is eligible for retirement benefits under the old age provisions of Social Security if the worker is fully insured under Social Security.

Carol has a retirement need of $30,000 annually in today's dollars. She will retire in 15 years and projects a retirement period of 20 years. Carol believes she can achieve a 6% after-tax rate of return and is assuming a 4% annual rate of inflation. She has accumulated $175,000 toward her retirement plan. What lump-sum amount should Carol have accumulated over the next 15 years to support her retirement income need? A)$732,144. B)$503,707. C)$907,144. D)$873,553.

C Carol's first year retirement income need is $54,028. PV = -$30,000 i = 4 n = 15 FV = $54,028 The total capital required to support this need for 20 years is $907,144. In BEGIN mode (the client will make annual withdrawals at the beginning of each year) PMT = $54,028 n = 20 i = 1.9231 [(1.06 ÷ 1.04) - 1] × 100 PVAD = -$907,144

Which of the following workers must have Medicare taxes withheld from their earnings? 1. A household worker, unrelated to the employer and age 25, who is paid $10,000 in 2017 2. An agricultural worker who paid in excess of a specified threshold

Both would have medicare taxes withheld

Which of the following will cause an increase in the amount of capital needed on hand at the onset of retirement to fund a client's retirement income objective? 1. All other things being equal, an increase in the assumed rate of return 2. All other things being equal, an increase in the retirement life expectancy 3. All other things being equal, an increase in the assumed inflation rate 4. All other things being equal, a decrease in the wage replacement ratio

2 and 3

The look-back period applicable to asset transfers intended to impoverish a donor to become eligible for Medicaid is A)60 months. B)6 months. C)12 months. D)36 months.

A The Medicaid look-back period is 60 months. If a transfer is made during the look-back period, the donor is not eligible for Medicaid for a period equal to the amount transferred divided by the average monthly cost of nursing care in the donor's region.

``` Which of the following government programs may pay for Harry's nursing home expenses, assuming his only asset is his home and he requires only custodial care? A)Medicaid. B)Medicare Part A. C)Medicare Part D. D)Medicare Part B. ```

A Medicaid may pay for custodial nursing home care if the patient is indigent. Medicare Part A pays some nursing home expenses if the patient needs skilled nursing care, but does not pay for custodial care. Medicare Part B does not cover nursing home expenses, and Medicare Part D covers prescription drugs.

Does Medicare B cover nursing home expenses?

What does Medicare part D cover?

Prescription Drugs

Maryellen, age 63, is receiving Social Security retirement benefits. She also works part time and her earnings are $10,000 more than the earnings limit. Her Social Security retirement benefits this year will be reduced by A)$10,000. B)$5,000. C)$7,500. D)$0.

Which of the following types of Medicaid assets generally count when calculating one's eligibility for Medicaid? 1. Checking and savings account 2. Life insurance with a face amount of under $1,500 3. Certificates of deposit 4. Stocks and bonds

1, 3, and 4 Statement 2 is incorrect. Life insurance with a face amount under $1,500, one motor vehicle, personal property and household belongings, and one's primary residence with some limitations generally do not count when calculating eligibility for Medicaid.

Which of the following statements regarding a payable-on-death (POD) account is(are) CORRECT? 1. A payable on death account is a bank or savings account controlled by the depositor so long as living, but with a provision that the account is payable to another if still open when the depositor dies. 2. Payable-on-death accounts are included in the depositor's probate estate. 3. Payable-on-death accounts are considered a will substitute. 4. Payable-on-death accounts could create guardian problems if paid to a minor beneficiary.

1, 3, and 4 not included in a probate estate

Jackie and Carmen are sisters who own real estate together. Jackie owns an undivided 35% interest in the property and Carmen owns an undivided 65% interest. Jackie and Carmen both have the right to sell their interest in the property or to leave their interest to anyone they choose under their wills. Which of the following describes this form of concurrent ownership? A) Tenancy by the entirety B)Community property C)Tenancy in common D) Joint tenancy with right of survivorship (JTWROS)

Can tenancy in common be used by non spouse owners?

Yes

Can community property be used by non spouse owners?

Can tenancy by the entirety be used by non spouse owners?

On January 15 of the current year, Kermit transfers property to an irrevocable trust. The trust is to pay Holly 5% of the trust assets valued annually each year for her life, with the remainder to be paid to a qualified charity. On September 1 of the next year, Kermit dies. Which of the following statements is(are) CORRECT? 1. This is a charitable remainder unitrust (CRUT). 2. Kermit receives a charitable income tax deduction equal to the present value of the remainder interest in the current year. 3. The value of the trust assets will be included in Kermit's gross estate.

1 and 2

Dave and Jessica are both successful professionals. They have been married for 30 years and have 3 grown children and 2 grandchildren. Their simple wills were executed in 1993. Since that time, they have acquired significant assets, including a beachfront cottage in another state which Dave inherited from his brother. In addition, Jessica has inherited a substantial amount of rare antiques from her mother. The couple would like to provide for their grandchildren, as well. They travel together quite often and are becoming concerned about the need to revise their wills. They also want to expedite the transfer of their estate assets. As their financial planner you recommend that they: 1. Make a lifetime transfer of the beachfront real estate. 2. Include a simultaneous death clause in their new wills. 3. Establish testamentary trusts for their grandchildren.

All statements are correct A lifetime transfer of property Dave owns in another state will avoid the expense and delays of ancillary probate. A simultaneous death clause may be useful if both spouses die in a common accident. Determining the order of death is important when settling their estates and allocating the marital deduction. Testamentary trusts allow the couple to accomplish their objective of providing for the grandchildren.

Robin inherited 10 acres of land from her father, who died during the current year. A federal estate tax return was filed, and the land was valued at $25,000, its fair market value at the date of her father's death. Her father had purchased the land several years ago for $5,000. What is Robin's basis in the land? A)$10,000. B)$15,000. C)$25,000. D)$5,000.

C The basis for inherited property is the fair market value at the date of death or the alternate valuation date if it is elected. The alternate valuation date was not elected, so Robin's basis in the land is $25,000.

Conrad owns a sizeable portfolio of income producing investments. In preparing his estate plan, he plans to leave the portfolio to a testamentary trust. He wants to leave his wife, Edna, an interest in the trust but he wants to ensure that no portion of the trust assets will be included in her gross estate when she dies. Which of the following interests could he leave to Edna and still accomplish his goal? 1. The right to income from the trust for life. 2. The right to income from the trust for life, plus the power to invade the principal for her health, education, maintenance, and support (HEMS). 3. The right to income from the trust for life, plus a general power of appointment over the principal.

1 and 2 Statement 1 is correct. Conrad can give Edna the right to the trust income for life (a life estate) without the trust assets being included in her gross estate. Statement 2 is correct; if Edna's right to invade the principal is limited to an ascertainable standard such as HEMS (health, education, maintenance, and support) the assets will not be included in her gross estate. Statement 3 is incorrect; if Edna has a general power of appointment over the trust assets, the trust assets will be included in her gross estate when she dies.

If one spouse creates a trust and gives general power of appointment to the other spouse will the trust be excluded from the second spouse's gross estate when they die?

Which of the following statements regarding sale-leasebacks is(are) CORRECT? 1. In a sale-leaseback, a senior family sells fully depreciated business property to a junior family member and then leases it back. 2. The senior family member can deduct the lease payments made to the junior family member if there is a valid business purpose for the sale and an arm's-length rental payment.

Both are correct

Which of the following statements regarding the gift tax annual exclusion is(are) CORRECT? 1. The gift tax annual exclusion amount for 2017 is $14,000. 2. The annual exclusion applies to as many donees each year as the donor chooses. 3. The annual exclusion applies only to gifts of future interests.

1 and 2

Elizabeth executes a qualified disclaimer of property left to her under her uncle's will. As a result of the disclaimer, the property passes to Elizabeth's cousin, Roger. Which of the following statements regarding the effects of this disclaimer is(are) CORRECT? 1. Elizabeth is treated as having made a gift to Roger. 2. Elizabeth is treated as never having received the property.

2 only

Mike wants to immediately transfer some of his business property to his son James. Mike has made no previous gifts and is in great health. However, during the remainder of his life he will need income on which to live. He has asked his financial planner for advice on which device will achieve his objectives. Which of the following devices should the financial planner recommend as most likely to achieve Mike's objectives? A)Grantor retained annuity trust (GRAT). B)Buy-sell agreement to take effect at death. C)Qualified person residence trust (QPRT). D)Outright gift.

Ron and Barbara, age 65, have decided that, in order to best pay their $3,000,000 federal estate tax bill, they will purchase a second-to-die life insurance policy. In order to keep the proceeds out of their estate, they were advised to create an irrevocable life insurance trust. Jack and Jill applied for the insurance and the policy was issued to them. An irrevocable trust was drafted. The policy was transferred into the irrevocable trust, and 90 days later both Jack and Jill were killed in a plane crash. The Internal Revenue Service wants to include the insurance in the estate for tax purposes. Which statement(s) is (are) CORRECT? 1. The insurance will be included in the estate because the trust was drafted after the insurance was approved. 2. The insurance will be included in the estate because the premiums were a gift from the insured. 3. The insurance will be included in the estate because the insureds transferred the policy within three years of death. 4. The Internal Revenue Service is has made an error-the insurance will not be included in the estate.

3 only

To qualify for the marital deduction, property must pass to the surviving spouse. How can property pass and still qualify for the deduction? 1. By will 2. By survivorship 3. By intestacy 4. By power of appointment

All are correct

Which of the following are features of the QTIP trust? 1. The surviving spouse receives the income from the trust for life. 2. Generally, property in the QTIP trust must be included in the surviving spouse's gross estate to the extent it is not consumed during the surviving spouse's lifetime.

Both are correct

Which of the following statements regarding a living trust is (are) CORRECT? 1. The trust assets do not pass through probate. 2. A living trust is a probate-avoidance method in which property is transferred to a trust during an individual's lifetime and is distributed according to the terms of the trust.

Both are correct

Generally, which of the following property is subject to probate? 1. Property owned outright in one's own name at the time of death (fee simple). 2. An interest in property held as tenants in common. 3. Life insurance and other death proceeds payable to the decedent's estate. 4. The decedent's half of any community property.

All of these statements are correct

Which of the following statements regarding probate is(are) CORRECT? 1. Probate may be costly and create delays in the distribution of assets. 2. Probate is open to public scrutiny. 3. Probate protects creditors. 4. Probate provides heirs and/or legatees with clear title to property.

All of these statements are correct

the process of determining whether and how an individual can meet life goals through the proper management of financial resources

Financial planning

What are the 8 job task domains of CFP's?

1. Establishing and defining the client - planner relationship 2. Gathering necessary data 3. Analyzing and evaluating clients current financial status 4. Develop recommendations 5. Communicate the recommendations 6. Implement recommendations 7. monitor the recommendations 8. practice within professional and regulatory standards

What is the 6 step financial planning process?

1. Establish and define client-planner relationship 2. Gather necessary info/data to fulfill engagement 3. Analyze and evaluate client's financial status 4. Develop and communicate relationships 5. Implement recommendations 6. Monitor recommendations

What are the 3 Life Cycle phases of Financial Planning?

1. Asset Accumulation 2. Conservation/Protection 3. Distribution/Gifting

When does the asset accumulation phase take place in a client's life?

ages 20 - 45 sometimes 25-45

Stages of asset accumulation phase

``` stage 1 low net worth to start usually high % of debt to net worth lack of concern for risks stage 2 increase in cash for investing less debt as a % of net worth higher net worth ```

When does the conservation/protection phase take place in a client's life?

age 45-60 (or 45 to retirement age) In some cases could last until death

Do people become more or less risk averse in the conservation/protection phase?

More, they start to fear losing money that they had built up for so many years

This phase begins when a person realizes that he/she can afford to spend money on things he/she may have never believed possible

distribution/gifting phase

An investor's willingness to accept risk

Risk tolerance

sometimes described as the tradeoff a client is willing to make between risks and rewards

Risk tolerance

A client's assessment of the magnitude of the risks being traded off

Risk perception

the degree to which a client's financial resources can cushion risks

Risk capacity

this theory involves clients valuing gains and losses differently and as a result making decisions based on perceived gains rather than perceived losses

Loss aversion

the ability to recognize emotional expressions in oneself and the client, as well as selecting socially appropriate responses to both the circumstances and the client's emotions

Emotional Intelligence

paying full attention to what the client is saying and responding by paraphrasing the client's comments

Active listening

guide the client to give more detail

Leading responses

nonverbal messages involving facial expressions, gestures, abd body posture

Body Language

a client's past history or conditions

Context

Liabilities due within one year

current liabilities

Liabilities due in more than a year

long term liabilities

Examples of variable outflows/expenses

food, utilities, medical, clothing

Examples of fixed outflows/expenses

Mortgage payments, auto insurance, life/disability insurance

Current Ratio

current assets/current liabilities

indicates the ability to meet short-term obligations

Current ratio

assets that can be converted into cash within one year

currect assets

do you want a lower or higher current ratio?

higher

a current ratio greater than __________ indicates that the client can pay off existing short term liabilities with available liquid assets

Consumer debt ratio

non-housing monthly debt payments/monthly net income

Your consumer debt ratio should not exceed_____%

20%

housing cost ratio

all monthly non-discretionary housing costs / monthly gross income

Your housing cost ratio should not exceed _______%

28%

Debt to income ratio (total debt ratio)

all monthly debt payments and housing costs / gross monthly income

Your debt to income ratio should not exceed_____%

36%

Savings ratio

savings per year / gross income

How much should a client have saved up in an emergency fund?

3 to 6 months worth of non discretionary cash flows 3 months if both spouses work 6 months if single or only one spouse works

what are some examples of non discretionary expenses?

mortgage, auto payments, taxes

a recurring or nonrecurring expense for an item or service that is nonessential or more expensive than necessary

Discretionary expense

What are some examples of fixed discretionary expenses?

club dues premium tv packages video game subscriptions

What are some examples of variable discretionary expenses?

Vacation Entertainment Alcohol Gambling

a recurring or nonrecurring expense for an item or service that is essential for an individual to maintain his/her life

Nondiscretionary expense

What are examples of fixed nondiscretionary expenses?

Housing costs Insurance premiums Loan payments

What are examples of variable nondiscretionary expenses?

food clothing taxes

If a client has multiple debt obligations, which one should they attempt to pay off first, the higher interest rate or lower interest rate debt?

The higher interest rate debt

Mortgages that have a level interest rate for the term of the loan

Fixed mortgages

Fixed mortgages have ____ payment amortization schedules

fixed

With fixed rate mortgages, the _______ the term, the higher the monthly payment will be given the same interest rate

shorter

mortgages where interest rates might change

Variable / adjustable rate mortgages

What could happen when an Adjustable Rate Mortgage does not have any caps?

Negative amortization could occur, meaning the mortgage balance may become greater than the home value

mortgages guaranteed by the federal government

FHA Loans | Federal Housing Administration

Do FHA loans typically have low or high down payments?

low

Can FHA Loans have lower interest rates than other loans?

sometimes since they are guaranteed by the government

Is mortgage insurance required with FHA loans?

Yes

____ is a policy that protects lenders against losses that result from defaults on home mortgages

Mortgage Insurance

FHA requirements include mortgage insurance primarily for borrowers making a down payment of less than ____%

20%

Mortgages for veterans of the U.S. military

Veterans Administration Mortgage | VA Mortgage

True or False? | VA Mortgages don't require a down payment

True

True or False? | VA Mortgages don't require mortgage insurance

True

True or False? | VA Mortgages have the same federal guarantee as FHA mortgages

True

Mortgages where the borrower only pays the interest on a monthly basis

Interest only mortgages

When a borrow selects an interest only mortgage what are they hoping happens?

They hope the value of the home increases enough that at the time of sale they can use the proceeds to pay off the principal balance of the mortgage

Interest only mortgages are ___ risky

very

mortgages where the lender pays the homeowner an income stream secured by equity in the home

Reverse Mortgages

what are reverse mortgage payments based off of?

value of home and age of homeowner

how old must you be to use a reverse mortgage?

62 or older

Is the initial rate on an adjustable rate mortgage higher or lower when compared to a fixed rate mortgage?

Lower

How often does an adjustable rate mortgage reset it's interest rate?

usually once per year

What are the typical caps on adjustable rate mortgages?

2% per year and 6% lifetime

Which type of mortgage loan requires less income for qualification purposes, fixed or adjustable rate?

adjustable rate

fees paid directly to the lender at closing in exchange for a reduced interest rate

mortgage points

Mortgage payments consist of four components, what are they?

Principal Interest Taxes Insurance

Two biggest advantage of owning a home over renting?

Equity | Tax deductions

True or False? | A depositor does not have to be a US citizen or even a resident of the US to be covered by FDIC insurance

True

True or False? | FDIC insurance protects deposits that are made payable in the US and overseas

False | Only US

True or False? | securities, mutual funds, and similar investments are covered by FDIC Insurance

false

What is the maximum amount insured by the FDIC?

$250,000

Is accrued interest included when calculating FDIC coverage?

Yes

a state law that allows an adult to make an irrevocable gift to a minor

Uniform Gift to Minor Act

True or False? | funds received from a Uniform Gift to Minor are included in the receiver's single ownership accounts for FDIC purposes

True

Are legal entities such as corporations and partnerships eligible for joint account deposit insurance?

If joint account owners don't have the same ownership/signature rights, will the account be insured as joint?

If a joint account specifies a specific dollar amount for owners to withdraw, will the account be insured as joint?

Yes

What is the maximum value a revocable trust is insured for?

$1,250,000

In a revocable trust, what is the maximum insurable limit for each beneficiary?

$250,000

What happens in regards to insurance when the revocable trust is greater than $1,250,000 and there's more than 5 beneficiaries?

The FDIC coverage is the greater of $1,250,000 or the aggregate of all beneficiaries proportional interest limited to $250k per bene

________ insures credit union member's accounts

National Credit Union Share Insurance Fund (NCUSIF)

_______ are licensed financial institutions that specialize in the selling and buying of securities

brokerage companies

________ provides protection for assets and income against various insurable risks through risk sharing and risk transfer

Insurance Companies

Mutual Funds are also known as ______

open-end invesment companies

What are the 4 goals of state regulations regarding insurance companies

Keep insurers solvent Safeguard policyholders against substandard insurer practices Ensure that coverage is available to all individuals Maintain competition among companies

What is the maximum credit allowed under the American Opportunity Tax Credit?

$2,500

Under the American Opportunity Tax Credit, _____% of qualified expenses up to $2,000 and _____% of the next $2,000 are available for the credit

100% and 25%

What are the Income Phaseouts for the American Opportunity Tax Credit?

AGI MFJ: $160-180k All other tax payers: $80-$90k

A student must be enrolled at least ____ ____ to use the American Opportunity Tax Credit

half time

Are room and board considered qualified expenses for the american opportunity tax credit?

True or False? | If a tax payer owes no taxes they can still use the American Opportunity Tax Credit?

Yes

____% of the American Opportunity Tax Credit is eligible for a tax refund

40%

provides tax payers reimbursement for qualified tuition and related expenses on a per family basis

Lifetime Learning Credit

What is the maximum credit available with the lifetime learning credit?

$2,000

To get the maximum credit available with the lifetime learning credit, how much do qualified expenses need to be?

$10,000

Is half time enrollment required for the lifetime learning credit?

True or False? | The lifetime learning credit can be claimed for an unlimited number of years?

True

During what years can a tax payer use the American Opportunity Tax Credit?

Only the first 4 years of post secondary education

What are the income phaseouts for the lifetime learning credit?

AGI MFJ: $112-$132k All others: $56-$66k

True or False? | Tax payers can claim both the American Opportunity Credit and the Lifetime Learning Credit for the same child

False

How much of an employer's educational assistance program can be excluded from the employee's income?

$5,250

Can an employee claim a lifetime learning credit or american opportunity tax credit if their employer's educational assistance program pays for the same expenses? is there an exception?

No | Yes, the employee will be able to use a credit for expenses in excess of $5,250

What is the maximum amount of student loan interest that is deductible?

$2,500 per year

What is are the 2017 income phaseouts for student loan interest deduction?

MAGI MFJ: $135-$165k Single: $65-$80k

529 plans that allow contributors to prepay tuition today at a particular school for an individual in the future

Prepaid Tuition Plans

Two risks associated with Prepaid Tuition Plans

The beneficiary may choose a different school | The beneficiary may not be acepted to the school

Type of 529 plan that allows an individual to make contributions today into a savings fund?

College Savings Plan

True or False? | Contributions of property can be made to 529 plans

False

What are some advantages to 529 plans?

Tax deferred growth Tax free distributions if used for qualified expenses Contributions aren't phased out Many states offer state income tax deductions for contributions Owner can change bene at anytime

What are the qualified expenses under 529 plans?

``` Tuition Books Fees Supplies Some room and board expenses ```

When is the 10% penalty of funds not used for qualified education expenses waived

Death Disabled Beneficiary receives a scholarship and the distributed funds are less than or equal to the value of scholarship

True or False? | Contributions to a Coverdell Education Savings Account can't be made after a beneficiary reaches age 18

True

What are the income phaseouts for Coverdell plans?

MAGI Single: $95-$110k MFJ: $190-$220k

What is the maximum contribution that can be made to a coverdell plan?

$2,000 per beneficiary | combined from all sources

When must all funds in a Coverdell be distributed by?

The beneficiary's age 30 (+30 days)

How are Series EE and I bonds taxed in regards to their interest?

Accumulated interest is taxed when bond is cashed in, but the interest may also be non taxable if a family member has qualified higher education expeneses

How low and how high can face values of series EE bonds be?

low = $25 | high=$10,000

Rules for Series EE bonds to have a tax free status

Owned by the parent or parents of the student/child Parent(s) must be 24 years old before the first day of the month the bond was issued Owners must redeem the bonds in the same year that the student's qualified expenses are paid

What is the largest need-based student aid program?

Federal Pell Grants

a form of student aid in which the government gives outright gifts to a student based on needed and the cost of attending the chosen school

Federal Pell Grants

Who is eligible for Federal Pell Grants?

Only undergraduate students who have not received a bachelors degree previously

a student aid grant program managed by colleges for the benefit of undergraduate students with substantial financial need

Federal Supplemental Educational Opportunity Grant | SEOG

True or False? Students are automatically considered for Federal Supplemental Educational Opportunity Grants when they complete their FASFA

True

a student loan program that is federally funded and administered by the colleges

Federal Perkins Loan Program

Loan limits associated with Perkins Loan Program

$5,500 per year for undergrad $8,000 per year for grads $27,500 for undergrad ---- cumulative total $60,000 for undergrad + grad ---- cumulative total

Perkins Loans have ____% fixed interest rates

Perkins Loans have a maximum of ____ years to repay the loan

Perkins Loans have a ____ month grace period upon graduation

a student aid program where students work 10-15 hours per week at a job that is typically on campus, to earn a portion of their financial aid package

Federal College Work-Study Program

Student loans that allow parents of undergraduate student to borrow up to the total cost of education less other financial aid awards

Federal PLUS Loans

True or False? | Federal PLUS Loans are made on a needs basis

False

Federal PLUS Loans require repayment to start within____ days of disbursement

60 days

True or False? | Subsidized Stafford Loans are not needs based

False | They are needs based

True or False? | The government pays the interest on subsidized stafford loans while the student is enrolled

True

How long is repayment of subsidized stafford loans deferred?

Until 6 months after the student graduates, leaves school, or drops below half-time status

What is the biggest difference between subsidized and unsubsidized stafford loans?

Government does not pay interest while student is in school

True or False? | Both subsidized and unsubsidized loans are available to undergrad and grad students

True

Can a student have subsidized loans and unsubsidized loans?

Yes

True or False? The 10% penalty for withdrawing funds from an IRA or Roth before age 59.5 is waived if used for qualified education expenses

True

True or False? A taxpayer will not owe tax on a distribution from an IRA or Roth if under 59.5 and the funds are used for qualified education expeneses

False

True or False? If home equity is considered in the financial aid equation, a HELOC could decrease home equity and possibly improve ones eligibility for financial aid

True

What are the two main reasons that demand for a good decreases as prices for the good rise?

Substitution effect | Income effect

Name some factors that affect demand of a good

``` Price Income of consumers Substitute goods Population tastes and preferences expectations about future economic conditions (price) ```

What does the supply curve show in regards to relationships?

relationship between the goods market price and the amount of the good producers are willing to produce or sell

What is the main force when a producer or seller is determining how much of a good to supply?

Profit and therefore cost of production

_________ are goods that can be readily substituted for one another in the production process

related goods

True or False? a reduction in tariffs and quotas on foreign goods will open the market to foreign producers and will tend to increase supply

True

If a market becomes monopolized, the price at each level of output will _____

Increase

What are some factors that affect the supply of a good?

``` The price technology input prices prices of related goods special influences, such as government tax incentives ```

is the responsiveness of the quantity demanded of a good to changes in the good's price

Price elasticity

Are necessities elastic or inelastic?

inelastic - demand won't change much if price changes

When a good is elastic the quantity demanded responds ____ to price changes

greatly

When demand is price inelastic, a price decrease ____ total revenue because quantity stays relatively constant

reduces

When demand is price elastic, a price decrease _________ total revenue because quantity will ____ drastically

increases, increase

What causes defaltion?

a reduction in money supply

a reduction in the rate at which prices rise

Disinflation

What are the two specific areas that inflation affects the real economy?

Total output and economic efficiency

The ___ the inflation rate, the greater the changes in relative prices

Greater

the total market value of all goods and services produced within the domestic US over the course of a give year

GDP

measures the change in the average price of the market basket of goods

GDP deflator

measures the market price of a basket of goods and services such as food, clothing, shelter, fuel

CPI (Consumer Price Index)

True or False? | The GDP deflator includes prices for capital goods and other goods/services purchased by businesses and governments

True

measures the average change over time in selling prices received by domestic producers of goods and services

Producer Price Index

True or False? | CPI accurately captures changes in quality of goods

False

Expansionary monetary policy _____ money supply and ultimately leads to a ____ in interest rates

Increases, decrease

Restrictive monetary policy ______ money supply and leads to a ____ in interest rates

decreases, increase

As the reserve requirement increases, there will be ___ money to lend to consumers

less

As the reserve requirement increases, money supply becomes ____

restrictive

the rate at which member banks can borrow funds from the federal reserve to meet reserve requirements

discount rate

when the fed increases the discount rate, money supply becomes___

restricted

when the fed decreases the discount rate, the money supply will ____

increase

the overnight lending rate between member banks of the federal reserves

Fed Funds Rate

True or False? | Open market operations is the method most commonly used by the fed to control money supply

True

The process of the federal reserve to purchase and sell government securities in the open market

open market operations

When the Fed buys government securities money supply will ____ and interest rates will ____

increase, decrease

When the fed sells government securities money supply will ___ and interest rates will___

decrease, increase

the group in charge of open market operations

Federal Open Market Committee

As tax rates increase, the price of equities may ____

decrease

occurs when expenditures exceed revenues of the government

deficit spending

Real rate of return = _____

(1+nominal rate / 1+inflation rate) - 1 x 100

Why would equity prices drop when tax rates increase?

company gets taxed more cutting into revenues which then may cause smaller dividends to be paid to stock holders

During the ____ phase business sales fall, unemployment increases, and GDP growth falls

contraction

During the ____ phase business sales rise, unemployment decreases, and GDP grows

expansion

During the ____ phase businesses are operating at their lowest capacity and unemployment increases/reaches its peak

Trough

During the ___ phase businesses are operating at high capacity and employment reaches its peak

Peak

a decline in real GDP for two or more successive quarters

recession

___ indicators are used to predict changes in the business cycle because they tend to precede and anitcipate changes

Leading

What are some examples of leading indicators?

bond yields, housing starts, investor sentiment, durable good orders

___ indicators occur simultaneously during the business cycle in order to confirm the current state of the economical cycle

Coincident

What are some examples of coincident indicators?

level of unemployment, consumer income, industrial production

____ indicators change after the economy has shifted to another stage of the business cycle

Lagging

What are examples of lagging indicators?

average duration of unemployment and prime interest rates

Two main differences between GDP and GNP

1. GNP includes income generated by domestic individuals both domestically and internationally 2. GNP does not include income generated domestically by a foreign firm

What are the two objectives of the Securities Act of 1933

1. Requires investors to receive financial and other important information concerning the securities being offered 2. Prohibit misrepresentation and fraud in the sale of securities

What are the 4 types of securites that are exempt from the registration requirements?

1. Intrastate offerings 2. Securities of municipal, state, and federal governments 3. Offerings of limited size 4. Private offerings to a limited number of persons or institutions

a law (act) that prohibited commercial banks from acting as investment bankers

Glass-Steagall Act

a law (act) that established the Federal Deposit Insurance Corporation

Glass-Steagall Act

a law (act) that prohibited commercial banks from paying interest on demand deposits

Glass-Steagall Act

Difference between the Securities act of 1933 and the securities act of 1934

1933 focused on new issued securities where the 1934 act focused on securities sold in secondary market

the act that brought the OTC market under SEC regualtion

Maloney Act of 1938

the act that requires firms or sole practitioners compensated for advising others about securities to register with the SEC

Investment Adviser Act of 1940

Generally, only advisers with _____million of AUM or advise a registered investment company must register with the SEC

$100 million

the act that clarified insurance was to be regulated at the state level

McCarran Ferguson Act of 1945

the act that established the SIPC to insure investors against losses arising from the failure of any brokerage firm

Securities Investor Protection Act of 1970

small advisers are those with less than $____ million AUM

$25 million

mid sized advisers are those with AUM between ____million and _____million

$25million and $100 million

Large Advisers aare those with AUM greater than ____million

$100 million

act that reformed the US regulatory system in a number of areas including consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance, disclosure, and transparency

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Organization responsible for monitoring registered investment advisors

SEC

a person who does any of the following: provides advice or issues reports regarding securities is in the business of providing such services provides such services for compensation

Investment Adviser

this documents should clearly spell out the details of the advisory relationship and other business interests of the adviser

ADV Part 2A

this documents is used to withdraw ones-self as an investment adviser

ADV-W

the act that includes reforms for corporate responsibility, increased financial disclosure, and reduced coporate/accounting fraud

Satbanes-Oxley Act of 2002

liability based on ___ states that a financial planner has a duty to exercise the same standard of care that a reasonably prudent and skillful financial planner in the community would exercise under the same or similar circumstances

negligence

How long does a credit cardholder have to make a dispute after they receive their bill?

60 days

How long does the credit card company/lender have to acknowledge receipt of the dispute?

30 days

How long does the credit card lender have to resolve the dispute?

90 days

act that requires a person to receive a summary of the information in a credit report if they are declined credit or employment because of the info in a credit report

Fair Credit Reporting Act

act that allows a credit cardholder a limited right to withhold payment if there is a dispute concerning goods that were purchased

Fair Credit Billing Act

act that requires consumers who report suspected identity theft or fraud to a consumer reporting agency be provided with a summary of their rights at no charge

Fair and Accurate Credit Transactions Act of 2003

act that prohibits discrimination based on race, religion, national orgin, color, sex, marital status, age

Equal Opportunity Credit Act

allows consumers to receive a free copy of their credit report annually from each nationwide consumer reporting agency

Fair and Accurate Transactions Act of 2003

act that makes utilization of bankruptcy protection more difficult for debtors who have the capacity to pay

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Examples of Debt that cannot be discharged under Chapter 7

Back taxes up to 3 years Alimony and child support debts associated with fraudulent activities debt due to international tort claims student loans consumer debt of more than $650 for luxury goods or services owed to a single creditor within 90 days of the order for relief

involves individuals making irrational decisions based on info that should have no influence on the decisions at hand

anchoring

the tendency to emphasize the recent past when considering historical info

recency

theory that states investors fear losses more than they value gains

prospect theory

states that people tend to pay more attention to info that supports their perceived opinions and poorly made decisions, while disregarding accurate info

Confirmation bias

asserts that people are given a frame of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions. People generally choose what they perceive is positive versus negative, winning versus losing, or receiving something of high value versus low value

framing efect

a financial counseling approach that focuses on obtaining and analyzing quatitative data such as cash flows, assets, and debt

Economic and resource approach

states that clients are assumed to be rational and will change to the most favorable behavior if given the appropriate counseling

economic and resource approach

a financial counseling approach that believes in increasing financial resources or reducing financial expenditures will result in an improved financial life

classical economics approach

a financial counseling approach where a client's goals and values drive the client-planner relationship

strategic management approach

a financial counseling approach where planners try to substitute negative client beliefs with positive attitudes that should lead to better financial results

cognitive behavioral approach

What are the 7 ethical principles of a CFP?

``` Integrity Objectivity Competence Fairness Confidentiality Professionalism Diligence ```

this principle states that the CFP must act honestly and with candor, and must not be subordinated to personal gain or advantage. Act in client's best interest because the client trusts you

Integrity

this principle states that the CFP must act with intellectual honesty and impartiality. Must leave personal prejudices out of the equation

objectivity

this principle state that the CFP must have knowledge and skill in the services they are providing to a client and that if skill is lacking in an area of need that the CFP has the skill to refer client to a different professional

competence

this principle state that the CFP must be fair and reasonable in all professional relationships and disclose conflicts of interest

fairness

this principle states that the CFP must protect the confidentiality of all client info and only share that info with those authorized

confidentiality

this principle states that the CFP must act in a manner that demonstrates poise and civility towards clients and other professionals. Must be kind and courteous to clients

professionalism

this principle states that the CFP must be thorough in the services they provide and act in a timely manner. Use all client info at hand to make a recommendation

diligence

set forth the high standard expected of CFP's and explains the level of professionalism required of all certificants

Rules of Conduct

True or False? If the CFP's services include financial planning or material elements of the financial planning process there must be a written agreement between the client and the CFP

True

What four things should be included in the financial planning agreement between a client and CFP?

1. date agreement started 2. services to be provided 3. how each party can terminate the agreement 4. the parties assocaited with the agreement

Which rule of conduct states that a CFP should discuss his compensation and the compensation of any other parties that may be involved throughout the planning process?

Rule 1- defining the client-planner relationship

True or False? Prior to a financial planning agreement, The CFP must put into writing the compensation that could be received by other professionals during the planning process (i.e. attorney fees or life insurance commission)

False it is not a requirement but is strongly recommended

True or False? | While a financial planning agreement is in-force, all compensation must be described in writing for a client to review

True

How long does a CFP have to notify the CFP board of a change in contact info?

45 days

How long does a CFP have to notify the CFP board of a conviction of a crime?

30 days

True or False? | A CFP must disclose the cope of the engagement with the client before any services can be provided

True

What should a CFP do when they do not have adequate material to move forward with the planning services?

Restrict the scope of the engagement to the relevant info you have or terminate the engagement

Practice Standards 100 series involves what?

Establishing and defining the relationsip with the client

Practice Standard 200 series involves what?

Gathering Data

Practice Standard 300 Series Involves what?

Anaylze and Evaluate Data

Practice Standard 400 Series involves what?

Develop and present recommendations

Practice Standard 500 series involves what?

Implement recommendations

Practice Standard 600 series involves what?

Monitor plan

What are the 4 forms of discipline for CFP Respondents?

1. Private Censure 2. Public Letter of Admonition 3. Suspension 4. Permanenet revocation of the right to use the CFP marks

A disciplinary form that is an unpublished written reproach mailed by the disciplinary and ethics commission to a censured respondent

Private Censure

A disciplinary form that is a publishable written reproach of the behavior - usually published by press release

Public Letter of Admonition

True or False? | If a CFP (respondent) gets suspended it can last longer than 5 years

False

Are suspensions of a respondent made public?

Yes

True or false? | The CFP board has a legal responsibility to notify a professional's employer in the case of complaint

False

used to ensure an individuals conduct does not reflect adversely on their fitness as a candidate for the CFP certification or upon the profession

Candidate Fitness Standards

Diagnostic Exam and Book 1 Flashcards

(519 cards)