FP511 Flashcards
(134 cards)
1
Q
Rule of 72
A
Can calculate # of years for an investment to double OR req’d int rate for a set number of years
72/9% = 8 years to double initial investment @ 9% ROR
OR
72/10 years = 7.2% needed to double init invest in 10 years
2
Q
Fixed versus serial payments
A
Fixed are unchanging over entire period.
Serial may change each year (or period) by amount of inflation.
The result is that the initial serial payment is less than its respective fixed payment.
3
Q
Ordinary annuity vs Annuity Due
A
Ordinary Annuity- payments made at end of period
Annuity Due- payments made at beginning of period.
*making systematic investments at the beginning versus end of a period will yield higher results.
4
Q
IRR
A
Compound return
5
Q
Calculating IRR
A
-Use CFj button on calc (cash flow key)
-Cash flows to investor are positive #s, cash outflows are negative
-A cash flow or zero must be entered for every compounding period.
-First cash outflow might be the purchase of an
investment
- Equal consecutive cash flows can be input together using the Nj key (shift CFj)
-IRR/YR is shift CST key
- If Net Present Value (NPV) is being calculated, initial CF entry is zero.
-NPV key = shift PRC key
- IMPORTANT: last payment is added to the final amount being returned- common mistake!
(otherwise you are adding on an extra time period).
6
Q
NPV
A
Net Present Value =
Difference between the total PV of the cash flows and the amount of the initial investment =
PV of cash flows - cost of investment = NPV
- If positive, investment earns a return greater than the req’d rate of return (discount rate).
- If negative, investor earns a return lower than rror.
ex: asking price for home $725k, calc max price to be $786k (intrinsic value for req’d 9% ror)- difference is $61k or NPV.
7
Q
National banks are subject to regulation by which of the following independent federal agencies?
Federal Reserve Board
Securities and Exchange Commission (SEC)
Federal Deposit Insurance Corporation (FDIC)
Office of the Comptroller of the Currency (OCC)
A
Federal Reserve Board
Federal Deposit Insurance Corporation (FDIC)
Office of the Comptroller of the Currency (OCC)
Securities and Exchange Commission (SEC) regulates securities markets.
8
Q
Which of the following statements regarding annuity payments is CORRECT?
A) A serial payment is a set payment that does not change.
B) An ordinary annuity with level payments is called a serial payment annuity.
C) An annuity due has payments at the beginning of each period.
D) An ordinary annuity can have payments at the beginning or end of a period.
A
C)An annuity due has payments at the beginning of each period.
The answer is an annuity due has payments at the beginning of each period.
In contrast, an ordinary annuity has payments at the end of each period.
A level payment does not change, and a serial payment increases for inflation.
9
Q
Annuity Due
A
Has payments at beginning of each period
10
Q
Ordinary Annuity
A
Has payments due at the end of each period
11
Q
Level payment
A
Does not change
12
Q
Serial payment
A
Increases for inflation
13
Q
Which of the following statements regarding financial institutions is CORRECT?
I. A trust company is also known as a thrift institution.
II. A brokerage company facilitates transactions involving the sale of investments or real estate.
III.A credit union, owned by its members, is a financial institution that accepts deposits and makes loans.
IV.A brokerage company is an intermediary that facilitates transactions involving sales of investments or real estate.
A
The answer is II, III, and IV. A savings and loan association (S&L), not a trust company, is also referred to as a thrift institution.
14
Q
Darrin and Marlene Pruett are going to establish an education fund for their daughter. They want to know the best method for accumulating the most money by the time their daughter is ready for college.
Assuming the same return is earned on all of the options, which of the following will provide the greatest accumulation over a specified period of time?
A)$100 per month invested on the first of the month, starting today
B)$1,200 per year invested annually starting one year from now
C)$100 per month invested on the first of the month, starting in 30 days
D)$1,200 per year invested annually starting today
A
The answer is $1,200 per year invested annually starting today. This lump sum will earn interest all year. If the first payment is made in one year, a full year’s return will be lost. If payments are made monthly, only one-twelfth of the money will earn interest for the entire year.
LO 4.1.1
15
Q
Candace is a financial planner who advises clients about specific securities and issues written financial plans. Candace will occasionally sell a client some mutual funds. Candace does not sell insurance, but she does give in-depth advice to her clients about their insurance needs.
With what regulatory agencies is it likely that Candace must register?
I. Securities Exchange Commission (SEC), or her state, as an investment adviser
II. Financial Industry Regulatory Authority (FINRA), Series 6
III.FINRA, Series 24
A) I only
B) II and III
C) I, II, and III
D) I and II
A
The answer is I and II.
The SEC requires anyone (who does not fall into one of the exception categories) doing the work of an investment adviser to register as one, either with the SEC or their state of domicile. Candace gives specific investment advice as an integral part of her practice, so she needs to register. Also, mutual fund sales require a Series 6 license (Series 63 may also be required). Series 24 is for a registered principal.
5.1.3
16
Q
Which of the following types of information must be included in loan documents under Regulation Z of the Truth in Lending law?
A) Charges for late payments
B) Prepayment information
C) Right of rescission
D) All of these
A
D). All of these
The answer is all of these. Charges for late payments, the lender’s right of rescission, and prepayment information are all part of the information required. Other required information includes when payments begin, the amount financed, and the annual percentage rate.
7.2.2
17
Q
The type of bankruptcy in which a person is freed from most debts in exchange for giving creditors assets that legally may be seized is called
A) Chapter 13 bankruptcy.
B) Chapter 7 bankruptcy.
C) Chapter 9 bankruptcy.
D) Chapter 11 bankruptcy.
A
The answer is Chapter 7 bankruptcy. Chapter 11 applies mostly to businesses and Chapter 13 is one in which a plan is created for the debtor to repay outstanding debts within a specified time period.
7.2.1
18
Q
Bernie made off with 5% of his client’s accounts and was convicted for the act. At a hearing with the CFP Board’s Hearing Panel, Bernie makes a $100,000 settlement offer. Bernie’s settlement offer details his embezzlement, his admission that he did indeed commit the crime in question, and an apology. Bernie proposes that the Board suspend his marks for one year instead of revoking his right to use the credentials. Which of the following is not an allowable action in response to Bernie’s offer?
A) The Commission rejects Bernie’s offer and revokes Bernie’s right to use the CFP® marks.
B) The Commission accepts Bernie’s offer.
C) The Hearing Panel makes a counter-offer: Bernie must pay a fine of $200,000 and the suspension will run for one year.
D) Subject to final approval by the commission, the Hearing Panel counters with an offer to suspend Bernie’s right to use the mark for 10 years instead of the one year Bernie proposed.
A
The answer is subject to final approval by the commission, the Hearing Panel counters with an offer to suspend Bernie’s right to use the mark for 10 years instead of the one year Bernie proposed. Article 4.3 of the CFP Board’s Disciplinary Rules and Procedures states that the “Commission may order suspension for a specified period of time, not to exceed five (5) years, for those individuals it deems can be rehabilitated.” Under Article 13 of the Rules and Procedures, the Hearing Panel may negotiate settlements and endorse the Offer of Settlement to the Commission. The Commission has the final decision-making authority to accept or reject an Offer of Settlement according to Article 13.1.
6.2.2
19
Q
Which of the following provisions are not part of the Fair Credit Reporting Act of 1971 (as amended)?
I. A standard method of reporting interest must be used.
II. The issuer of installment credit must provide written disclosures in easy-to-understand language.
III. A creditor who has denied credit must notify the consumer about which credit reporting agency provided information to the potential creditor.
IV. Obsolete information must be deleted from a consumer’s credit report.
A
The answer is I and II.
The Fair Credit Reporting Act requires potential creditors who have denied credit to notify the consumer about which reporting agency provided information to the creditor, and it requires that obsolete information be deleted from a consumer’s credit report.
The establishment of a standard method of reporting interest and the written disclosure requirement both refer to Truth in Lending (Consumer Credit Protection Act).
20
Q
Which of the following statements is true concerning bankruptcy?
A) A debtor is generally not required to relinquish Social Security payments, unemployment insurance, royalties, and alimony payments.
B) A debtor may not file for bankruptcy again under Chapter 7 for six years.
C) Planners can rely on state laws to supersede federal laws in regard to property retention.
D) Student loan debt is often reduced in bankruptcy.
A
C.
The answer is planners can rely on state laws to supersede federal laws in regard to property retention. It is true that planners can rely on state laws to supersede federal laws on property retention. Planners should rely on state laws versus federal laws for property retention. Debtors may be required to relinquish royalties.
21
Q
The federal funds rate will tend to move upward under which of the following conditions?
A) The Federal Reserve is buying government securities.
B) A few banks have reserve deficiencies, and the rest have ample excess reserves.
C) The Federal Reserve lowers the discount rate.
D) A few banks have excess reserves, and the rest have significant reserve deficiencies.
A
D) The answer is a few banks have excess reserves, and the rest have significant reserve deficiencies.
Short-term interest rates increase when the money supply is being tightened. Among the reasons why the money supply is tight is when banks are unable to meet their reserve requirements and must borrow from the Fed.
If the banks have excess liquidity, then monetary policy is accommodative. When the Fed buys government securities or lowers the discount rate, it is increasing the money supply and interest rates will decrease.
22
Q
BEST
A
B- buy
E-expand: int rates go down
S- sell
T- tighten: Int rates go up
23
Q
Which of the following statements regarding emotional biases is CORRECT?
I. Self-control bias occurs when individuals lack self-discipline and favor immediate gratification over long-term goals.
II. Individuals with regret-aversion bias attach undue weight to actions of omission and do not consider actions of commission.
A) Both I and II
B) I only
C) Neither I nor II
D) II only
A
The answer is I only. Those with regret-aversion bias attach undue weight to actions of commission (doing something) and do not consider actions of omission (doing nothing). Self-control bias occurs when individuals lack self-discipline and favor immediate gratification over long-term goals.
LO 2.1.2
24
Q
In 2010, the average national gas price was $2.79 per gallon. In 2012, the gas price national average rose to $3.64 per gallon. Responses to gas prices were generally negative. Prices fell to an average per gallon of $3.37 in 2014, and the reaction to the decreased price was positive, even though the price was higher than the 2012 price per gallon of $2.79. This behavior is known as
A) confirmation bias.
B) anchoring.
C) herding.
D) mental accounting.
A
The answer is anchoring. When average gas prices rose in 2012 to a $3.64-per-gallon threshold, individuals reset their psychological anchors to that price. As the price declined in 2014 to $3.37, the reaction was positive because it was considered in light of the higher 2012 price.
25
Which of the following statements regarding behavioral finance is CORRECT?
I It relates behavioral and cognitive psychology to financial planning.
```
II It asserts that individuals generally make rational decisions regarding their finances.
A) I only
B) II only
C) Neither I nor II
D) Both I and II
```
The answer is I only. Traditional financial theory asserts that individuals generally make rational decisions regarding their finances. Yet financial planners often encounter cases where emotions and psychology have caused clients to make irrational choices when managing their money. Behavioral finance is a relatively new field of study which relates behavioral and cognitive psychology to financial planning and economics in an attempt to understand why people often act irrationally during the financial decision-making process.
26
Which of the following statements regarding a client's attitudes, beliefs, and values are CORRECT?
I. Values are attitudes and beliefs for which the client feels strongly.
II. The client's attitudes reflect his opinions, values, and wants.
III. Beliefs are a type of attitude because they reveal the client's understanding of some aspect of his life.
IV The planner should pay attention to a client's attitudes, beliefs, and values during the financial planning process.
A) II, III, and IV
B) I and IV
C) I, II, III, and IV
D) I and II
The answer is I, II, III, and IV. The planner must take into account the impact the client's attitudes, values, and beliefs may have throughout the financial planning process, especially during client-planner communication and when developing and presenting the financial plan.
27
When making financial decisions, Bruce tends to pay more attention to information that supports his preconceived opinions and poorly made decisions, while disregarding accurate, unsupportive information. Bruce's behavior is an example of
A) anchoring.
B) confirmation bias.
C) herding.
D) framing bias.
The answer is confirmation bias. Bruce's behavior illustrates confirmation bias.
The framing effect states 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.
Anchoring is making irrational decisions based on information that should have no influence on the decision at hand.
Herding is following the actions of a larger group, whether rational or not.
28
Ernie sees himself as a consultant to his clients and allows their goals and values to drive his relationships with them. What is his approach to financial counseling?
A) Cognitive-behavioral approach
B) Economic and resource approach
C) Strategic management approach
D) Classical economics approach
The answer is strategic management approach.
Ernie uses the strategic management approach. In this approach, the client's goals and values drive the client-planner relationship and the planner serves as a consultant.
The cognitive-behavioral approach believes a client's attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results.
In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures.
29
Which of the following statements regarding the loss aversion theory is CORRECT?
I. This theory asserts that investors generally fear losses much more than they value gains.
II. It occurs when individuals lack self discipline and favor immediate gratification over long-term goals.
A) Neither I nor II
B) I only
C) Both I and II
D) II only
The answer is I only. Under the loss aversion theory, investors generally fear losses more than they value gains. This theory also asserts that individuals prefer avoiding losses to acquiring the same amount in gains. Statement II describes self-control bias.
30
Rochelle is presented with two equal investment opportunities. The first is stated in terms of potential losses, and the second is stated in terms of potential gains. Without having any additional information, Rochelle selects the second investment. Her decision reflects
A) anchoring.
B) loss aversion theory.
C) herding.
D) the framing bias.
The answer is loss aversion theory. Rochelle's decision reflects the loss aversion theory, which states that people fear losses much more than they value gains, and they prefer avoiding losses to acquiring the same amount in gains. Herding occurs when a person follows the actions of a larger group, whether rational or not. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. The framing bias states 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.
31
Which of the following statements regarding behavioral finance concepts is CORRECT?
I.A client's values represent what he believes to be right.
II. Beliefs are a type of attitude because they reveal a person's understanding of some aspect of his life.
III. A client's profile is largely influenced by context, which includes past history or any conditions that presently exist.
IV. A planner should recognize his own attitudes, values, biases, and behaviors and be certain they do not impact recommendations made to clients.
A) II, III, and IV
B) I, II, III, and IV
C) II and IV
D) III only
B- all are correct
32
As a planner, you have just finished developing and presenting your recommendations to your client. These steps being completed, what would be one of the next steps that you would expect to undertake?
A) Select and prioritize goals.
B) Identify, analyze, and select actions, products, and services.
C) Analyze the information.
D) Monitor the client's progress.
The answer is identify, analyze, and select actions, products, and services. The step following development and presentation is implementation, and only identifying, analyzing, and selecting actions, products, and services is part of the implementation step. Selecting and prioritizing goals is actually part of the identify and prioritize step in the process. Analyzing the information is part of step one of the financial planning process, and monitoring the client's progress is carried out in step seven of the financial planning process.
33
After having worked as the financial planner with both husband and wife through their divorce, and managing to successfully keep them both as clients, the husband later admits to you that he hid assets during the divorce proceedings. As a CFP® certificant, what should you do?
A) Advise the husband that he should reveal this to his former spouse, and if he does not do so, then terminate the engagement.
B) End the engagement with the ex-husband immediately while keeping the ex-wife as a client, and reveal to her what has transpired.
C) Do nothing because to do otherwise would be a breach of client confidentiality since both of the former spouses are your clients.
D) Reveal this information to the former spouse because she is also your client and should be informed of this dishonesty.
The answer is advise the husband that he should reveal this to his former spouse, and if he does not do so, then terminate the engagement. To do nothing would be a breach of the Standards of Conduct, duty of integrity. To inform one client of another's activities would breach the Standards of Conduct, duties of confidentiality and privacy, as they are no longer married. To fire the ex-husband in order to tell the wife would also violate the duty of confidentiality.
34
Which of the following is a requirement of one of the Standards of Conduct?
A) A CFP® professional must keep confidential and may not disclose any non-public personal information about any prospective, current, or former client, except as necessary to defend against allegations of wrongdoing made by a governmental authority.
B) In any area of financial planning where a CFP® certificant has minimal professional competence, only general information may be included in any plan presented to a client. Under no circumstances may the planner provide additional information.
C) A CFP® certificant’s compensation shall reflect the average charges for similar services in the same geographic area.
D) A CFP® certificant who obtains any information, not required to be kept confidential by the code, which may raise a question of unprofessional, fraudulent, or illegal conduct by another CFP® certificant or other financial professional, shall not disclose that information.
The answer is a CFP® professional must keep confidential and may not disclose any non-public personal information about any prospective, current, or former client, except as necessary to defend against allegations of wrongdoing made by a governmental authority. A CFP® certificant may reveal personally identifiable information relating to a client relationship under specific circumstances as outlined in the Standards of Conduct.
35
You have been the financial planner for Bob and Mary for almost 10 years. It has recently come to your attention that Bob and Mary have become embroiled in what looks to evolve into a very hostile divorce. Mary has shown up at your office and has asked if you would continue to be her planner after all of this legal business is completed, but in the meantime could you please let her know about any financial interests that Bob may have of which she may not currently be aware. As a CFP® certificant you should do which of the following?
A) Make an appointment to meet with Bob and Mary together for possible reconciliation and to go over all of their financial information with them.
B) Provide information that they request only as it pertains to their own personal financial plan, and do not take either Bob or Mary on separately as clients.
C) Remain impartial and neutral throughout the entire process and provide information only as requested by attorneys for legal purposes and as required by law.
D) Tell Mary that you cannot assist her in any capacity until all of the legal proceedings are completed, then you would be happy to be her financial planner.
The answer is provide information that they request only as it pertains to their own personal financial plan, and do not take either Bob or Mary on separately as clients.
This answer directly addresses the Standards of Conduct, duties of confidentiality and privacy. Though one is required to turn over materials properly and legally requested by attorneys, there is no restriction preventing a planner from providing information directly to clients. Though it would be best practice to provide information to the requesting party, if there is a legal separation in place or divorce proceedings have begun, it is appropriate to provide only materials that are proprietary to that party in order to maintain confidentiality.
Also, it would be ill-advised to take sides or take either one or both of these former clients on as a future client.
36
The following question was previously used on the CFP® Certification Examination, and is used with permission of CFP Board.
A client, Tom, informs a CFP® professional that his daughter, Susie, graduated from college last month and landed her first job. Tom wants to establish a Roth IRA for Susie. Tom wants to make a $5,000 contribution for Susie and explains that she does not know about investing and probably would not have the money to contribute. How could the CFP® professional best accomplish Tom's objective?
A) Open the account in Susie’s name and then gift the assets to Susie.
B) Explain to Tom that Susie must complete a risk questionnaire before Tom can open the account.
C) Explain to Tom that he can contribute to an IRA for Susie.
D) Request Tom set up a joint meeting with Susie to complete the planning process with her.
The answer is request Tom set up a joint meeting with Susie to complete the planning process with her. Susie will be the client and account owner and will need to be involved in the process and also "known" by the CFP® professional.
37
Joyce has become more risk averse and is not focused on accumulating assets, but maintaining the values of the ones she has. Joyce is in which financial life cycle phase?
A) Distribution/gifting phase
B) Conservation/protection phase
C) Asset accumulation phase
D) Preretirement phase
The answer is conservation/protection phase. People generally become more risk averse in the conservation/protection phase and become aware of the risks that were ignored in the asset accumulation phase.
38
Harry Harris owns a financial planning firm with $8 million under management. The CFP Board recently told Harry that his rights to use the CFP marks were being suspended for six months. Harry immediately removed the marks from his stationery, business cards, and website. Thirty calendar days before the suspension was over, Harry filed an affidavit with the board stating that he had fully complied with the terms of the suspension, then immediately added the marks back. Did Harry violate any Rules of Conduct?
A) Yes, Harry did not notify his employees that his right to use the marks had been suspended.
B) Yes, Harry did not notify his existing clients that his right to use the marks had been suspended.
C) Yes, Harry must wait for written confirmation that the suspension ended before adding the marks back to his business.
D) No, he immediately removed the marks from all aspects of his business.
The answer is B) yes, Harry did not notify his existing clients that his right to use the marks had been suspended.
According to Rule 4.7 of the Rules of Conduct, Harry must advise all current clients of any suspension or revocation received from the CFP Board. If Harry had been an employee he would have an obligation to report the suspension to his employer, but as the owner there is no obligation to notify the employees. Any suspension that lasts less than one year will automatically end upon the certificant's filing with the CFP Board within 30 calendar days of the expiration of the period of suspension an affidavit stating that the suspended certificant has fully complied with the order of suspension unless such condition was waived by the Commission.
39
Which of the following is NOT a correct use of the CFP marks?
A) CFP® planner
B) CFP® practitioner
C) CFP® exam
D) CFP® certificant
The answer is CFP® planner.
The Guide to Use of the CFP Certification Marks clearly lists the correct usage of the marks.
CFP® certification marks must be followed by one of the approved nouns: "certificant," "professional," "practitioner," "certification," "mark," or "exam."
40
Candace is a financial planner who advises clients about specific securities and issues written financial plans. Candace will occasionally sell a client some mutual funds. Candace does not sell insurance, but she does give in-depth advice to her clients about their insurance needs.
With what regulatory agencies is it likely that Candace must register?
I. Securities Exchange Commission (SEC), or her state, as an investment adviser
II. Financial Industry Regulatory Authority (FINRA), III. Series 6
IV. FINRA, Series 24
A) I, II, and III
B) I and II
C) II and III
D) I only
The answer is I and II.
The SEC requires anyone (who does not fall into one of the exception categories) doing the work of an investment adviser to register as one, either with the SEC or their state of domicile. Candace gives specific investment advice as an integral part of her practice, so she needs to register. Also, mutual fund sales require a Series 6 license (Series 63 may also be required). Series 24 is for a registered principal.
41
Which of the following statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are CORRECT?
I. The NCUSIF is backed by the full faith and credit of the U.S. government.
II. The fund is administered by the National Credit Union Administration (NCUA).
III. Up to $500,000 of a member's account balances are insured by the NCUSIF.
IV. The NCUSIF insures member accounts of all federal credit unions.
A) I and IV
B) I, II, and III
C) III and IV
D) I, II, and IV
The answer is I, II, and IV.
The NCUSIF insures member accounts of all federal and most state-chartered credit unions up to $250,000. All of the other statements are correct.
42
Trenton, age 59, is unmarried and retired. He has the following assets on deposit at Riverview Bank, an
FDIC-insured financial institution:
Account Ownership Balance
Checking account Trenton $70,000
Savings account Joint w daughter, Bailey. $80,000
Certificate of deposit (CD) Trenton $225,000
Rollover traditional IRA Trenton $150,000
What amount is insured by the FDIC?
A) $525,000
B) $325,000
C) $250,000
D) $480,000
The answer is $480,000.
The FDIC insures separate legal categories of accounts of a legal institution. As a result, the individual accounts owned by Trenton (CD and checking account) are aggregated and are insured up to a total of $250,000.
The joint account is insured for $80,000.
The individual retirement account (IRA) will be insured up to $250,000.
Total amount insured is $480,000 ($250,000 max on CD and checking account + $80,000 joint savings account because titled differently + $150,000 rollover traditional IRA).
43
Which of the following types of accounts are covered by Federal Deposit Insurance Corporation (FDIC) insurance?
I. Securities
II. Certificates of deposit
III. Money market mutual funds
IV. Money market deposit accounts
A) III and IV
B) II and IV
C) II, III, and IV
D) I, II, and III
The answer is II and IV.
Certificates of deposit are afforded FDIC protection. Securities are not. Money market deposit accounts, not money market mutual funds, are covered by FDIC insurance.
44
Identify the number of steps in the Practice Standards for the Financial Planning Process.
A) Eight
B) Six
C) Seven
D) Fifteen
c) seven
45
Which activity that takes place during the financial planning process is generally the most demanding?
A) Communicating the recommendations
B) Analyzing and evaluating the client's current financial status
C) Gathering information necessary to fulfill the engagement
D) Prospecting for new clients
B)
46
Identify the steps included CFP Board's Practice Standards for the Financial Planning Process.
I. Mutually Defining the Terms
II. Presenting Goals
III. Establishing and Defining the Client-Planner Relationship
IV. Developing the Financial Planning Recommendation(s)
A) III and IV
B) IV only
C) II and III
D)I, II, III, and IV
B) The answer is IV only.
CFP Board's Practice Standards for the Financial Planning Process are as follows:
Understanding the Client's Personal and Financial Circumstances
Identifying and Selecting Goals
Analyzing the Client's Current Course of Action and Potential Alternative Course(s) of Action
Developing the Financial Planning Recommendation(s)
Presenting the Financial Planning Recommendation(s)
Implementing the Financial Planning Recommendation(s)
Monitoring Progress and Updating
47
The Code of Ethics is composed of ____ principles.
A) 7
B) 3
C) 15
D) 6
D) 6
48
Select the principles that are included in the Code of Ethics.
I. Act in the client's best interests.
II. Maintain the confidentiality and protect the privacy of client information.
III. Exercise due process.
IV. Avoid conflicts of interest.
A) III and IV
B) II only
C) I, II, III, and IV
D) I and II
D) The answer is I and II.
Statement III and statement IV are incorrect.
The six principles of the Code of Ethics are as follows:
Act with honesty, integrity, competence, and diligence.
Act in the client's best interests.
Exercise due care.
Avoid or disclose and manage conflicts of interest.
Maintain the confidentiality of and protect the privacy of client information.
Act in a manner that reflects positively on the financial planning profession and CFP® certification.
49
A person in the conservation/protection phase of the financial life cycle is likely to have which of the following goals?
A) Short-term goals, such as protection and maintenance of current lifestyle
B) Long-term goals, such as estate planning and preservation of capital
C) Long-term goals, such as investing for retirement
D) Short-term goals, such as saving for a down payment on a home
C) The answer is long-term goals, such as investing for retirement.
In the accumulation phase of the financial life cycle, individuals have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals.
In the conservation/protection phase, individuals' financial goals are likely to change to longer-term goals, such as investing to provide for future retirement income.
Finally, in the distribution/gifting phase, estate planning and capital preservation become most important.
1.1.2
50
When a client-planner engagement involves Financial Advice for which Financial Planning is required, and the client agrees to enlist the planner for services, the Planner must abide by
I. the Fiduciary Duty.
II. the Code of Ethics.
III. the Practice Standards for the Financial Planning Process.
IV. the Suitability Standard.
I,II & III
51
Analyze the list to determine CFP Board's approved nouns to use following "CERTIFIED FINANCIAL PLANNER™."
I. professional
II. certificant
III. candidate
IV. test
all of these
52
Johnny, a CFP® professional, is speaking to Jamie about a Financial Planning donation he made to his daughter's preschool fundraiser. Their conversation covers broad planning topics, none related to Jaime's personal or financial situation, and Johnny correctly determines neither Financial Advice nor Financial Planning are occurring. Identify the correct application of rules from the Code and Standards based on Johnny and Jaime's interaction.
A) While not necessary, due to the lack of Financial Advice and Financial Planning, Johnny should consider applying important principles from the Code of Ethics.
B) Neither Financial Advice or Financial Planning are occurring, Johnny is not bound to uphold the Code of Ethics.
C) Fiduciary Duty must be upheld in this instance, observation of the Code of Ethics is unnecessary due to the lack of Financial Advice or Financial Planning.
D) Although Financial Advice and Financial Planning are not occurring in his conversation, Johnny is still required to uphold the principles of the Code of Ethics.
D)
53
Standard A.1 states that at all times when providing Financial Planning to a Client, a CFP® professional must act as a fiduciary and, therefore, act in the best interests of the client. Identify the circumstances under which the Code of Ethics principle to "Act in the client's best interests" must be upheld.
A) When providing Financial Advice
B) At all times
C) When providing Financial Advice that requires Financial Planning
D) When providing Financial Planning
C)
54
Analyze the list to determine CFP Board's approved nouns to use following "CERTIFIED FINANCIAL PLANNER™."
I. professional
II. certificant
III. candidate
IV. test
The answer is I and II.
CFP Board's approved nouns include "certificant," "professional," "practitioner," "certification," "mark" or "exam."
55
To properly use the CFP® marks on documents or marketing materials, certain guidelines must be followed. Identify the items that are required when the words "CERTIFIED FINANCIAL PLANNER™" are used.
I. Always use capital letters or small cap font
II. Always use the ™ symbol
III. Always associate with CFP Board
IV. Always use with one of CFP Board's approved nouns ("certificant," "professional," "practitioner," "certification," "mark" or "exam") unless directly following the name of the individual certified by CFP Board
The answer is I, II, and IV.
If the words "CERTIFIED FINANCIAL PLANNER" are used, they must be presented in capital letters or small cap font followed by a ™ because the words are subject to trademark law. Statement III is incorrect; the words must always associate with the individual(s) certified by CFP Board. "CERTIFIED FINANCIAL PLANNER" must always be used with one of CFP Board's approved nouns ("certificant," "professional," "practitioner," "certification," "mark" or "exam") unless directly following the name of the individual certified by CFP Board.
1.2.1
56
The Mitchells have decided to set up an appointment with Justin, a CFP® professional, in order to get their finances in order. Up to this point, the Mitchells had been making their financial decisions on an as-needed basis, without any concrete plan or overall strategy. Currently, they believe that their life insurance coverage is inadequate and they need to update their wills due to the birth of their second child, Ryan. Unfortunately, they have been spending indiscriminately and are unable to build their savings and investments. What should be Justin's first step in working with the Mitchells after receiving all their documentation and analyzing their cash inflows and outflows?
A) He should assist the Mitchells in preparing a budget.
B) He should have the Mitchells review their wills with an attorney Justin recommends.
C) He should advise the Mitchells that they should consult with their life insurance agent about purchasing additional policies.
D) He should recommend that the Mitchells start an investment plan with their broker.
The answer is he should assist the Mitchells in preparing a budget. Developing a budget is one of the most important ways to help clients in the savings process. The budget can reveal both problem spending areas and help clients adjust their cash flow.
57
Madison, a CFP® professional, offers financial planning services to high net worth clients in her Registered Independent Advisory firm. Select the services that Madison provides that are considered relevant elements of financial planning according to CFP Board's Code and Standards.
I. Managing cash flow
II. Developing client goals
III. Preserving or increasing wealth
IV. Providing for educational needs
A) II and IV
B) III only
C) I, II, III, and IV
D) I, II, and III
All of these
58
A professional financial planner often participates in a financial planning team to ensure an efficient and effective plan. Which of the following may be a step in working as a member of the cooperative?
I. Establish what services each member can provide to help the client achieve his goals.
II. Determine services the other advisors have already provided for the client.
III. Share information with other members, provided the client has given permission.
IV. Meet with other members to be certain the client has been provided services that enable him to meet his goals.
All of these
59
The tendency of individuals to take a course of action based on the outcomes of prior events is known as
A)overconfidence.
B)confirmation bias.
C)outcome bias.
D) anchoring.
The answer is outcome bias. This behavior is the tendency of individuals to take a course of action based on the outcomes of prior events.
Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information.
Overconfidence occurs when an investor considers his abilities to be much better than they actually are.
Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.
60
Outcome bias
his behavior is the tendency of individuals to take a course of action based on the outcomes of prior events
61
Cofirmation bias
Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information.
62
Overconfidence
Overconfidence occurs when an investor considers his abilities to be much better than they actually are.
63
Anchoring
Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.
64
Which of the following statements regarding behavioral finance is CORRECT?
I. Representativeness is based on a belief that the past will persist and new information is classified based on past experience or classification.
II. Behavioral finance tries to explain the biases that people have when making financial decisions.
A) Both I and II
B) II only
C) I only
D) Neither I nor II
Both I & II
65
In determining a client's psychological ability to deal with uncertain outcomes, which of the following refers to a client's assessment of the magnitude of the risks being traded off?
A) Emotional intelligence
B) Risk capacity
C) Risk tolerance
D) Risk perception
D) Risk perception
66
In determining a client's psychological ability to deal with uncertain outcomes, which of the following refers to a client's assessment of the magnitude of the risks being traded off?
A) Emotional intelligence
B) Risk capacity
C) Risk tolerance
D) Risk perception
C) risk tolerance
67
The following statements regarding behavioral finance concepts are CORRECT except
A) a client’s profile is largely influenced by context, which includes past history or any conditions that presently exist.
B) a planner should recognize his own attitudes, values, biases, and behaviors and be certain they do not impact recommendations made to clients.
C) a client’s context represents what he believes to be right.
D) beliefs are a type of attitude because they reveal a person’s understanding of some aspect of his life.
C)
68
Which of the following statements regarding verbal mirroring is CORRECT?
I. In verbal mirroring, the planner uses the client's body language.
II. In verbal mirroring, the planner imitates the client's word use, tone of voice, and communication method.
III. The use of verbal mirroring can improve rapport with clients.
IV. Verbal mirroring includes the inflection of voice or emphasis on certain words.
A)I, II, III, and IV
B) I and II
C) II and III
D) II and IV
C). The answer is II and III.
Statement I is incorrect because the use of the client's body language is physical mirroring.
Statement IV is incorrect because voice tone is the inflection of voice or emphasis on certain words.
69
Which of the following statements regarding a financial planner's analysis of a client's cash flow statement is CORRECT?
I. The analysis of the client's cash flow statement can help the planner determine whether the client is living within his financial means.
II. Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement.
III. The analysis of the client's cash flow statement helps determine the client's savings level, or total cash surplus, by tracking cash inflows and outflows over a period of time.
A) I only
B) I, II, and III
C) II only
D) I and III
B)
70
While reviewing the finances of the Stewarts, Ms. Brown, a CFP® certificant, is calculating a variety of financial ratios. The Stewarts have provided the following information:
```
Principal and interest $1,200 per month
Property insurance $600 per year
Property taxes $2,400 per year
Gross income $5,000 per month
Based on the information provided, calculate the Stewarts' housing cost ratio.
```
A)0.84
B)0.50
C)0.29
D)3.45
The answer is 0.29. The formula for the housing cost ratio is as follows: housing cost ratio = all monthly nondiscretionary housing costs ÷ monthly gross income ≤ 28%. All monthly nondiscretionary housing costs include the following: principal, interest, taxes, and insurance. To compute the Stewarts' housing cost ratio, the property insurance and property taxes provided need to be adjusted to monthly expenses ($600 ÷ 12 = $50; $2,400 ÷ 12 = $200). Therefore, the Stewarts' ratio equals 0.29, or 29% ($1,450 ÷ $5,000) and this would be very close to the acceptable range.
3.1.3
71
Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT?
I. This process is primarily subjective.
II. A planner may rely on financial ratios to assist in making this determination.
A)II only
B)Neither I nor II
C)Both I and II
D)I only
C) both
72
Nick and Maria have a combined income of $178,000. Their fixed expenses are $68,820 and their variable expenses are $79,180, excluding taxes. Their assets include $109,000 in qualified plans, $38,000 in their checking account, $18,000 in their money market, $22,000 in a one-year CD, and $150,000 in stocks and bonds. They wish to have six months' reserves. What figure comes closest to representing the gap between what they have and what they need in an emergency fund?
A)$45,333
B)$30,333
C)$18,000
D)$0; no gap
B) The answer is $30,333.
The combination of variable and fixed expenses equals $148,000. Emergency funds are based on expenses, not income, so six months' reserves would be half of this, or $74,000. Because their monthly expenses are $12,333, they have $25,667 excess in their checking, and $18,000 in their money market. When you add these together, you have $43,667. This creates a gap of $30,333. The CD is not appropriate to use because it is a 1-year maturity. The stocks and bonds are not appropriate to use for emergency funds.
73
Which of the following statements regarding a client's credit score is CORRECT?
I. Too many credit inquiries may lower a credit score, but likely not by much.
II. Opening several new accounts in a short amount of time reflects a good use of credit and therefore can increase a credit score.
A)II only
B)Both I and II
C)I only
D)Neither I nor II
The answer is I only. Opening several new accounts over a short period can lower, not increase, a client's credit score. Too many credit inquiries may lower a client's credit score but will likely not have a great impact.
3.3.1
74
Which of the following will likely lower a FICO score?
I. Several new credit accounts in a short amount of time
II. An increasingly high percentage of amount owed to total amount of credit
III. Closing existing accounts
IV. A recent bankruptcy
A)I, II, III, and IV
B)I and II
C)II, III, and IV
D)I, II, and IV
Explanation
The answer is I, II, and IV. With the exception of closing existing accounts, all the activities listed will likely lower a client's FICO score. Closing accounts in and of itself does not remove the credit history for these accounts from a credit report.
75
Clayton wishes to start saving for a lump-sum amount of $75,000 (in today's dollars) that is needed in seven years. He assumes an inflation rate of 2% and an investment rate of return of 9%. Assume Clayton wishes to save annually using the level payment method. What is his required deposit? (Round to the nearest dollar.)
A) $9,364
B) $8,590
C) $8,766
D) $9,551
The answer is $9,364. The required annual savings deposit under the level payment approach is $9,364, with keystrokes as follows on the HP: 10bII/HP 10bII+:
Step 1: Inflate the lump-sum in today's dollars into the future need.
75,000, +/−, PV
7, N
2, I/YR
Solve for FV = 86,151.4251
Solve for the required annual level payment using the inflated lump-sum value.
(Be sure to clear your calculator)
SHIFT, C ALL
FV = 86,151.4251
7, N
9, I/YR
Solve for PMT = –9,363.8429, or $9,364 (rounded
76
Max acquires a $200,000 mortgage with a 30-year repayment term and an annual interest rate of 5%. What is the balance of Max's mortgage after 12 payments?
A) $190,067
B) $197,049
C) $198,229
D) $193,333
The answer is $197,049. The remaining mortgage balance after 12 payments is $197,049.
The keystrokes on the HP 10bII/HP 10bII+ calculator are as follows:
END mode; 200,000, PV;
5 ÷ 12 = 0.4167, I/YR; 30 × 12 = 360, N;
PMT = –1,073.6432.
Without clearing the calculator, enter:
1, INPUT, 12, SHIFT, AMORT; = –2,950.73 (total principal paid through 12 months) = –9,932.9884 (total interest paid through 12 months) = 197,049.27 (remaining mortgage balance at the end of 12 months).
77
Nick purchased 100 shares of a limited partnership for $150 per share. At the end of two years, he sold all the shares for $250 per share. At the end of each year, the investment paid a dividend of $1.50 per share. What was the investment's internal rate of return (IRR) over the 2-year period?
A) 29.99%
B) 19.07%
C) 12.45%
D) 21.82%
The answer is 29.99%.
The keystrokes on the HP 10bII/HP 10bII+ are as follows: 15,000, +/‒, CFj (year 0); 150, CFj (year 1); 25,150, CFj (year 2); SHIFT, IRR/YR = 29.9871, or 29.99%
78
Mary must make payments to Don at the end of each year for the next four years. The payments will be $6,000, $6,600, $7,250, and $8,100, respectively. How much should Mary have in her account today to meet these payments, assuming her account earns an annual interest rate of 8.5%?
A) $25,296
B) $22,657
C) $27,950
D) $28,253
The answer is $22,657.
Uneven Cash Flow Method
0, CF0
6,000, CF1
6,600, CF2
7,250, CF3
8,100, CF4
8.5, I/YR
SHIFT, NPV = 22,657.1942, or $22,657
79
Adam is interested in investing $50,000 in the stock of a new company. The stock will pay no dividends, but Adam anticipates he will be able to sell the investment for $75,000 in two years. If his required rate of return is 9%, what is the net present value (NPV) of this investment?
A) $13,126
B) $113,126
C) $18,807
D) −$13,126
The answer is $13,126.
The keystrokes on the HP 10bII/HP 10bII+ are as follows:
50,000, +/–, CFj (for year 0); 0, CFj (for year 1); 75,000, CFj (for year 2); 9, I/YR; SHIFT, NPV = 13,125.9995, or $13,126.
80
Dylan is opening his own registered investment adviser (RIA) firm, DLB Financial, Inc., in August 2019. What are Dylan's registration requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?
I. If Dylan has $50 million in assets under management, he must register with the state in which he maintains clients.
II. If Dylan has more than $100 million in assets under management, he must register with the SEC.
A)I only
B)Both I and II
C)II only
D)Neither I nor II
B) Both I & II
81
Which of the following are exempt from registration under the Investment Advisers Act of 1940?
I. Foreign private advisers
II. Charitable organizations and plans
III. Commodity trading advisers
IV. Private fund advisers
A) I, II, III, and IV
B) IV only
C) I, III, and IV
D) I and II
A)
82
Which regulation generally requires delivery of a written disclosure statement detailing the investment adviser's background and business practices?
A)McCarran-Ferguson Act of 1945
B)Securities Exchange Act of 1934
C)Investment Advisers Act of 1940
D) Securities Investor Protection Act of 1970
Explanation
The answer is Investment Advisers Act of 1940. The Investment Advisers Act of 1940 imposes this requirement on investment advisers entering into an advisory contract with a client, not those merely selling investment products.
83
Which of the following requires an individual to be registered as an investment adviser under the Investment Advisers Act of 1940?
I. The individual provides advice about securities.
II. The individual is in the business of providing advice about securities.
III. The individual receives compensation for providing advice.
IV. The individual is a CFP® practitioner.
A) I, II, III, and IV
B) III and IV
C) I, II, and III
D) IV only
c)
84
The registration and regulation of investment advisers was established by
A) the Consolidated Omnibus Budget Reconciliation Act of 1986.
B) the Investment Advisers Act of 1940.
C) the Securities Investors Protection Act of 1940.
D)the Securities Exchange Act of 1934.
Explanation
The answer is the Investment Advisers Act of 1940. The Investment Advisers Act of 1940 contains antifraud provisions and gives the SEC the right to adopt rules to prevent fraudulent and manipulative practices.
85
Which of the following regulations established the Securities Investor Protection Corporation (SIPC)?
A) Securities Exchange Act of 1934
B) Investment Company Act of 1940
C) McCarran-Ferguson Act of 1945
D) Securities Investor Protection Act of 1970
The answer is Securities Investor Protection Act of 1970.
The SIPC was created by the Securities Investor Protection Act of 1970 to insure investors against losses arising from the failure of any brokerage firm.
86
Which of the following statements regarding securities and insurance regulation legislation are CORRECT?
I. The Securities Act of 1933 requires the registration of new issues of securities or issues in the primary market.
II. The Securities Investor Protection Act of 1970 is designed to protect individual investors from losses as a result of brokerage house failures.
III. The Investment Company Act of 1940 assures investor safety of investment value in companies engaged primarily in investing, reinvesting, and trading in securities.
IV. The Investment Advisers Act of 1940 requires that persons or firms advising others regarding securities must register with the Securities and Exchange Commission.
A) I, II, and IV
B) II and IV
C) I, II, III, and IV
D) I and III
The answer is I, II, and IV. Investors are not assured of safety when investing and trading in securities.
5.1.2
87
Which of the following is the act that extended the regulation of securities to the secondary market or exchanges?
A) The Securities Act of 1933
B) The Investment Company Act of 1940
C) The Investment Advisors Act of 1940
D) The Securities Act of 1934
5.1.2
Explanation
D) The answer is the Securities Act of 1934.
In addition, this act also established the SEC (Securities and Exchange Commission) as the primary regulatory body overseeing the sale and purchase of securities by a potential investor. The 1934 act deals with the people involved in the subsequent sale and purchase of previously registered securities.
88
Which of the following is governed by the Securities Exchange Act of 1934?
A) Registration of investment companies with the SEC (Securities and Exchange Commission)
B) The purchase and sale of securities in the secondary market
C) New issues of securities in the primary market
D) All of these
Explanation
The answer is the purchase and sale of securities in the secondary market. New issues come under the Securities Act of 1933. Investment company registration comes under the Investment Company Act of 1940.
89
Which federal agency extensively regulates the issuance and sale of corporate securities and administers the Securities Act of 1933 and the Securities Exchange Act of 1934?
A) Financial Industry Regulatory Authority (FINRA)
B) Securities Investor Protection Corporation (SIPC)
C) Federal Deposit Insurance Corporation (FDIC)
D) Securities and Exchange Commission (SEC)
D) The SEC
90
Liability under the Securities Act of 1933 would involve which of the following?
I. New issues of investment securities or initial public offerings(IPOs).
II. Publicly traded investment securities in the secondary market.
A) I only
B) Neither I nor II
C) Both I and II
D) II only
A) I only
91
FINRA-licensed individuals
I. are issued a Central Registration Depository (CRD) number.
II. must meet continuing education requirements, known as the firm element, through their broker/dealer each year.
III. must meet additional continuing education requirements (known as the "regulatory element") at regular intervals.
IV. must always maintain an active Series 7 license.
A) I, II, and III
B) I, II, III, and IV
C) IV only
D) I, II, and IV
The answer is I, II, and III.
Only statement IV is incorrect. A Series 7 license is not always a requirement for financial service professionals. This license requirement would be dependent on the types of products that are being offered by the professional
92
Mason has decided to pursue a career selling financial products. He currently holds a Series 7 license and a state variable insurance license. In addition to the Series 63 registration required by his state, what other license(s) must he obtain to sell both variable life insurance and mutual funds?
A) Mason must obtain a FINRA Series 6 license.
B) Mason must FINRA Series 65 license.
C) Mason must obtain a FINRA Series 24 license.
D) Mason has the appropriate licenses to sell variable life insurance and mutual funds.
D). The answer is Mason has the appropriate licenses to sell variable life insurance and mutual funds. Mason can sell both variable life insurance and mutual funds with his current licenses. He need not obtain a Series 6 license because his Series 7 license, along with his state variable insurance license, allows him to sell these products.
5.1.3
93
Which of the following FINRA licenses entitles the holder to provide investment advice to clients within the holder's primary state of residence?
I. Series 7
II. Series 63
III. Series 65
IV. Series 66
A) III only
B) III and IV
C) I, II, and III
D) IV only
B) The answer is III and IV.
Individuals with Series 65 licenses can provide investment advice to clients within their primary states of residence. Series 66 registration entitles holders to not only provide advice within their primary states of residence, but in any state.
94
You have acquired the Financial Industry Regulatory Authority (FINRA) Series 6 and Series 63 licenses and are appropriately state insurance licensed. Which of the following are you permitted to sell?
I. Mutual funds
II. Variable life insurance
III. Individual stocks
IV. Options
A) I and II
B) I, II, and III
C) III and IV
D) I, II, III, and IV
A) The answer is I and II.
Holding the FINRA Series 6 and Series 63 registrations and the appropriate insurance licenses qualifies an individual to sell mutual funds, variable life insurance, variable annuities, and initially offered unit investment trusts (UITs).
A Series 7 license is required to sell individual stocks and options.
95
Which of the following statements regarding the Financial Industry Regulatory Authority (FINRA) is CORRECT?
I. FINRA is a self-regulatory organization.
II. FINRA has primary authority regarding the registration of investment advisers.
A) II only
B) I only
C) Both I and II
D) Neither I nor II
The answer is I only.
Any planner or broker/dealer, or the representative of a broker/dealer that wishes to sell securities, must register with FINRA, a self-regulatory organization. The SEC has primary authority regarding the registration of investment advisers.
96
Olivia is a Financial Industry Regulatory Authority (FINRA) Series 6 licensed registered representative. Assuming she also holds the appropriate state insurance licenses, which of the following products can she sell?
I. Individual stocks
II. Variable annuities
III. Exchange-traded funds (ETFs)
IV. Open-end investment companies
A) I, II, III, and IV
B) II and IV
C) II, III, and IV
D) III only
The answer is II and IV.
Olivia cannot sell individual stocks or exchange-traded funds holding only a FINRA Series 6 license. She needs a Series 7 license to sell these products. She can, however, sell variable annuities and open-end investment companies (mutual funds) because she holds a Series 6 license and the appropriate state insurance licenses (for variable annuities).
5.1.3
97
Justin has the following assets:
Assets Ownership Balance
Checking account (ABC Bank) Joint with brother $50,000
Savings account (ABC Bank) Joint with son $100,000
Savings account (ABC Bank) Justin $225,000
Traditional IRA (ABC Bank is custodian) Justin $300,000
Certificate of deposit (ABC Bank) Justin $75,000
Money market mutual fund (ABC Bank Advisors) Justin $80,000
What amount of Justin's money is insured by the Federal Deposit Insurance Corporation (FDIC)?
A) $650,000
B) $775,000
C) $600,000
D) $575,000
The answer is $575,000. The amount insured by the FDIC is $575,000. FDIC insurance coverage is $250,000 for the savings account and certificate of deposit (CD) owned solely by Justin. The values total $300,000; however, the maximum FDIC coverage for assets with the same ownership is$250,000. Justin's portion of FDIC insurance coverage of the joint checking account is $25,000, for the joint savings is $50,000, and the IRA is insured for the $250,000 limit for IRAs even though its balance is $300,000. The money market mutual fund is not a money market deposit account and, therefore, is not covered ($250,000 + $25,000 + $50,000 + $250,000 = $575,000).
98
Savings and loan associations (S&Ls)
A) are regulated by the Office of Comptroller of the Currency, if federally chartered.
B) are permitted to provide demand deposits.
C) are also known as trust companies.
D) provide small business loans as a primary line of business.
Explanation
The answer is are regulated by the Office of Comptroller of the Currency, if federally chartered. S&Ls are also known as thrift institutions, not trust companies. S&Ls are not permitted to provide demand deposits, such as checking accounts. However, they can offer interest-bearing NOW accounts, which are similar to demand deposit accounts. As a result of the Dodd-Frank Act, federal and many state-chartered S&Ls once regulated by the Office of Thrift Supervision are now regulated by the Office of the Comptroller of the Currency. The main purposes of S&Ls are to accept savings and provide home loans.
99
Which of the following statements regarding financial institutions is CORRECT?
I. A trust company is also known as a thrift institution.
II. A mutual fund company pools money from shareholders and invests the funds in various types of securities.
III. A credit union, owned by its members, is a financial institution that accepts deposits and makes loans.
IV. A brokerage company is an intermediary that facilitates transactions involving sales of investments or real estate.
A) I, II, III, IV
B) II, III, and IV
C) I and III
D) IV only
B) II, III and IV
100
Which of the following statements regarding credit unions are CORRECT?
I. Loans are typically offered at reduced interest rates.
II. Earnings from loan interest and investments are paid to members in the form of shares.
III. Deposits in a credit union are insured up to $100,000 per qualifying account by the National Credit Union Share Insurance Fund (NCUSIF).
IV. Each credit union member may use a vote to elect the board of directors.
A) III and IV
B) I and IV
C) II and IV
D) I, II, and III
Explanation
The answer is I and IV. Statement 2 is not correct because earnings from loan interest and investments are paid to members in the form of dividends, not shares. Statement 3 is not correct because deposits in a credit union are insured up to $250,000 per qualifying account by the NCUSIF.
101
Which of the following statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are CORRECT?
I. The NCUSIF insures member accounts of all federal credit unions.
II. The fund is administered by the National Credit Union Administration (NCUA).
III. The NCUSIF is backed by the full faith and credit of the U.S. government.
IV. Up to $500,000 of a member's account balances are insured by the NCUSIF.
A) I and II
B) I, II, and III
C) II and III
D) I, III, and IV
Explanation
The answer is I, II, and III. The NCUSIF insures member accounts of all federal and most state-chartered credit unions up to $250,000.
102
If the demand for a product is inelastic, it means that
A) an increase in the price would have no effect on the total amount spent on purchases of the product.
B) the price of the product cannot be increased or decreased.
C) an increase in the price would lead to an increase in the total amount spent on purchases of the product.
D) an increase in the price would lead to a decrease in the total amount spent on purchases of the product.
Explanation
C). The answer is an increase in the price would lead to an increase in the total amount spent on purchases of the product.
Theoretically, if a product exhibits inelastic demand characteristics, an increase in the price would lead to an increase in the total amount spent to purchase the product.
103
Deflation is
I. characterized by rising unemployment.
II. caused by a reduction in the money supply.
III. the opposite of inflation.
IV. a decline in the rate of inflation.
A) I and IV
B) II and III
C) I, II, III and IV
D) I, II, and III
Explanation
The answer is I, II, and III.
Disinflation, not deflation, is characterized by a decline in the rate of inflation.
7.1.4
104
Which of the following best describes deflation?
A) Prices are falling in absolute terms, bond prices rise, and purchasing power increases
B) A decline in the general price level and is often caused by a reduction in the money supply and consumer demand
C) Occurs when inflation and unemployment rise and the general growth of the economy is slow as business output falls
D) Indicates a decline in the rate of inflation
Explanation
A) The answer is prices are falling in absolute terms, bond prices rise, and purchasing power increases.
A deflationary period also can be a time during which real assets perform poorly, thus real estate, collectibles, and gold and other precious metals are likely to fall in value.
105
Which of the following claims will NOT be discharged in bankruptcy?
A) A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral
B) All of these claims will be discharged
C) A claim brought by a judgment creditor whose judgment resulted from the debtor's negligent operation of a motor vehicle
D) A claim that arises from alimony or maintenance other than a lump-sum property settlement
Explanation
D) The answer is a claim that arises from alimony or maintenance other than a lump-sum property settlement. Debts arising from alimony, maintenance, and child support may not be discharged in bankruptcy court. This does not include lump-sum property settlement awards.
106
Which of the following items may be discharged in a Chapter 7 bankruptcy?
I. Child support
II. Tort claim for negligence (nonintentional)
III. Federal taxes (past two years)
IV. Consumer debt
A) I and IV
B) II and III
C) I, II, and IV
D) II and IV
The answer is II and IV.
Child support and federal taxes due within the past three years are not dischargeable.
Nonintentional tort claims and consumer debt may be discharged.
107
All of the following statements regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the 2005 Bankruptcy Act) are correct except
A) lenders must provide consumer information about the dangers of paying only minimum required payments on credit card debt.
B) people who have the ability to pay their debts can choose between filing under Chapter 7 or filing under Chapter 13.
C) the use of Chapter 7 is limited to the liquidation of credit bills or loans that are not secured.
D) debtors who want to file for Chapter 7 must first undergo credit counseling.
Explanation
B) The answer is people who have the ability to pay their debts can choose between filing under Chapter 7 or filing under Chapter 13.
Under the 2005 Bankruptcy Act, people who have the ability to pay their debts must file under Chapter 13 (reorganization) rather than having their debts canceled entirely under Chapter 7.
108
Which of the following assets are generally exempt from creditor claims in bankruptcy?
I. Home
II. Veterans benefits
III. Existing cash value of life insurance policies
IV. Pension and retirement plan rights (ERISA plans)
A) I and IV
B) I, II, III, and IV
C) II and IV
D) I, II, and III
B) All of them
109
After going through a costly divorce, coupled with a significant downturn in her business, Mary is loaded with debt and does not have enough cash flow to meet her monthly payment obligations. As a result, she is considering personal bankruptcy as an option. Mary's attorney has explained that she will be freed from most of her debts in exchange for giving creditors those of her assets that legally may be seized. Which type of bankruptcy is Mary considering?
A) Chapter 11 bankruptcy
B) Chapter 13 bankruptcy
C) Chapter 9 bankruptcy
D) Chapter 7 bankruptcy
Explanation
The answer is Chapter 7 bankruptcy. Chapter 7 bankruptcy involves liquidation of most (but not necessarily all) assets. Chapter 13 bankruptcy involves creation of a repayment plan, and the debtor usually gets to keep most assets. Chapters 9 and 11 are generally used by businesses or municipalities to reorganize debt.
110
Which of the following are characteristics of the Consumer Credit Reporting Act?
I. Protection against unauthorized credit card use is provided.
II. Applicants who are denied credit must be offered the reason.
III. Access to a credit file is limited to bona fide users of financial information.
IV. Credit bureau reports must include accurate, relevant, and recent information.
A) II, III, and IV
B) I, II, and IV
C) I, II, III, and IV
D) III and IV
A). The answer is II, III and IV.
Statement I is incorrect; protection for unauthorized credit card use is provided by the Consumer Credit Protection Act.
111
Landry Plumbing, Inc., filed for bankruptcy under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code. A plan of reorganization was confirmed, and a final decree closing the proceedings was entered. Which of the following statements is CORRECT?
A) Landry Plumbing, Inc., will now be liquidated.
B) A trustee will continue to operate the debtor's business.
C) Landry Plumbing, Inc., will not be allowed to continue in the same business.
D) Landry Plumbing, Inc., will have negotiated with all creditors, except as otherwise provided in the plan and applicable law.
Explanation
D) The answer is Landry Plumbing, Inc., will have negotiated with all creditors, except as otherwise provided in the plan and applicable law.
At the conclusion of Chapter 11 proceedings, a corporate debtor has negotiated with creditors for most of the debts of the business. Exceptions to negotiated debts include debts that are provided for in the plan of reorganization (approved by the creditors and the court) and certain nondischargeable debts.
112
Dave is planning to refinance his mortgage with a local bank. While meeting with his banker, he is given a loan packet detailing the amount to be financed, the annual percentage rate (APR), and the loan's terms and conditions. What legislation requires the bank to disclose this information to Dave?
A) The Fair Debt Collection Practices Act
B) Consolidated Omnibus Budget Reconciliation Act
C) The Consumer Credit Protection Act
D) The Banking Act of 1933
The answer is C) the Consumer Credit Protection Act.
Also known as the Truth in Lending Act, the Consumer Credit Protection Act requires lenders, before extending credit, to disclose both the dollar amount of finance charges and the annual percentage rate (APR), as well as other loan terms and conditions. The Act also limits consumer liability for a lost or stolen credit card to the amount charged or a maximum of $50 per card, whichever is less. The requirements of this Act are often encountered when a consumer enters into a mortgage agreement with a lender and closes on a personal residence.
113
Which of the following is NOT characteristic of the Consumer Credit Reporting Act?
A) Access to a credit file is limited to bona fide users of financial information.
B) Applicants who are denied credit must be offered the reason.
C) Protection against unauthorized credit card use is provided.
D) Credit bureau reports must include accurate, relevant, and recent information.
C)
Protection for unauthorized credit card use is provided by the Consumer Credit Protection Act.
114
Leading Indicators
Precede actual economic change.
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Ex's
Housing starts
New claims for unemployment
Bond Yields
Indexes of stock prices
Orders for durable goods
Changes in investor sentiment
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115
Coincident indicators
Occur simultaneously during the business cycle/ confirm stage of the economy.
Ex's:
Industrial production
Level of personal income
Amt of corporate profits
116
Lagging (or confirming) indicators
Change after the economy has passed through one business cycle into the next. Allow confirmation of a previous economic environment.
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Ex's
Prime interest rates
Changes in CPI (esp for services)
Amt of business and consumer loans outstanding
Avg duration of unemployment
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117
Inflation
A rise in the average level of prices of goods & services
118
CPI
Consumer Price Index
produces monthly data on changes in the prices paid by urban consumers for a basket of goods & services.
119
PPI
Producer Price Index
Measures avg changes over time in the sales prices rec'd by domestic producers for their output.
120
Consumer Credit Protection Act
aka Truth in Lending Act
Passed in 1968/ updated in 1996.
Purpose is to have lenders make certain uniform disclosures, enabling consumer to evaluate credit terms.
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Regulation Z req's disclosures for:
APR
When payments begin
Charges for late payments
Prepayment info
Amt financed
Right of recession
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Also, disclosures must be easy to understand
Prohibits cc co's from issuing cards consumer hasn't requested.
Protects consumer from unauthorized cc use (max of $50- often $0)
121
Which of the following statements regarding Pell Grants is CORRECT?
I. They are the primary type of grant disbursed directly to students.
II. They are need-based.
III. They are available both to undergraduate and graduate students.
IV. These programs provide students attending college with part-time jobs.
A) II and III
B) I, II, and III
C) IV only
D) I and II
The answer is I and II.
Statement III is incorrect; Pell Grants are available to undergraduates only. Statement IV is incorrect; Federal Work-Study (FWS) programs provide students attending college with part-time jobs.
122
Which of the following statements regarding education grants is CORRECT?
I. Supplemental Educational Opportunity Grants (SEOGs) are federal grants for which priority is given to students who also receive Pell Grants.
II. Pell Grants are dispersed to the educational institution for the benefit of the qualifying student.
III. Federal Work-Study programs provide students attending college with part-time jobs.
IV. Pell Grants are available to both undergraduate and graduate students.
A) II, III, and IV
B) III only
C) I and III
D) I, II, and IV
The answer is I and III
SEOGs, which are federal grants, give priority to students who also receive Pell Grants. Federal Work-Study programs provide students attending college with part-time jobs; in turn, the institution disburses the earned funds to students. Pell Grants are dispersed directly to students and are available only to undergraduate students.
123
Which of the following statements concerning education tax credits and savings opportunities is CORRECT?
A) The Lifetime Learning Credit is equal to 100% of qualified education expenses up to a certain limit.
B) The American Opportunity Tax Credit is only available for the first two years of postsecondary education.
C) The American Opportunity Tax Credit reduces a family's tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified education expense and 25% of the next $2,000.
D) The contribution limit for Coverdell Education Savings Accounts (CESAs) is applied per year per donor.
The answer is the American Opportunity Tax Credit reduces a family's tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified education expense and 25% of the next $2,000. A parent who claims a child as a dependent is entitled to take the American Opportunity Tax Credit for the education expenses of the child. The Lifetime Learning Credit is equal to 20% of qualified education expenses up to a certain limit. The American Opportunity Tax Credit is available for the first four years of postsecondary education. The contribution limit for CESAs is applied per year per student (not donor).
124
The Keaton family has decided to invest $375 each month into a 529 for their newborn daughter, Annie. Ideally, Annie will attend the Keaton's alma mater, Central State University. The current tuition is $15,000 per year, education inflation is expected to be 5.25%, and the anticipated rate of return on their 529 is 8%. Annie will attend school beginning at 18 years old for 5 years.
Using these facts, calculate to determine whether the current investment plan ($375 monthly deposits), will meet the education savings goal.
A) Fall short of the goal by $44,091,48
B) Exceed the goal by $994.50
C) Fall short of the goal by $44,679.30
D) Exceed the goal by $2,194.72
The answer is exceed the goal by $994.50.
Step 1: Determine the future cost of college for the first year.
15,000 +/– PV
5.25 I/YR
18 N
Solve for FV = 37,678.1126, or $37,678.11
Step 2: Determine the account balance necessary to fund college education.
BEG mode (money is needed at the beginning of college)
37,678.1126 +/– PMT
2.6128 I/YR [(1.08 ÷ 1.0525) – 1] × 100 = 2.6128
5 N
Solve for PV = 179,037.7955, or $179,037.80
Step 3: Calculate future value of current payments.
375 +/– PMT
(8 ÷ 12) 0.6667 I/YR
(18 × 12) 216 N
Solve for FV = 180,032.2980, or $180,032.30
Step 4: Subtract future education need from future value of current payments.
$180,032.30 ‒ $179,037.80 = $994.50
125
The simple formula to determine the net cash flow (surplus or deficit) of a client and establish whether saving for education needs can occur is
A) assets – liabilities.
B) inflows + outflows.
C) inflows – outflows.
D) fixed outflows – variable outflows.
The answer is inflows – outflows. The net cash flow (surplus or deficit) of a client can be determined by subtracting outflows from inflows.
126
Which of the following is a characteristic of a prepaid tuition plan?
A) Market-based performance
B) Suitable for a risk-tolerant investor
C) Usually restricted college enrollment options
D) No state-guaranteed return
Explanation
C) The answer is usually restricted college enrollment options. In addition to usual restricted enrollment options, inflation-based performance is also a characteristic of a prepaid tuition plan. This plan is suitable for risk-averse investors and may offer a state-guaranteed return on assets.
8.2.3
127
The Whites want to establish a Section 529 plan for their granddaughter, Amy. They want to fund the plan with a one-time contribution in 2018 using gift splitting. What is the maximum contribution they can make to the plan in 2019 without any gift tax consequences?
A) $15,000
B) $150,000
C) $75,000
D)$30,000
Explanation
The answer is $150,000. Because the Whites are using gift splitting, they can make a total contribution of $150,000 in 2019 without any gift tax consequences. The $150,000 represents five years' worth of gift tax annual exclusion (5 × $15,000) × two because of the gift splitting.
128
Two years ago, Tammy was convicted of a drug felony. Currently, she is enrolled full time in college and is pursuing a degree. She is claimed as a dependent on her parents' income tax return. Her parents' modified adjusted gross income is $90,000. Which of the following credits may Tammy's parents claim on their federal income tax return?
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American Opportunity Tax Credit
Lifetime Learning Credit
A) I only
B) II only
C) Both I and II
D) Neither I nor II
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The answer is II only.
The American Opportunity Tax Credit is not available because of Tammy's felony drug conviction. This restriction does not apply to the Lifetime Learning Credit.
129
Walker, age 24, is single. He occasionally takes courses at a local college to follow personal interests, but he is not pursuing a degree. He is enrolled on less than a half-time basis. He pays tuition expenses of $2,000, and his modified adjusted gross income (MAGI) is $45,000. Which of the following tax credits may Walker claim on his federal income tax return?
I.American Opportunity Tax Credit
II. Lifetime Learning Credit
A) Both I and II
B) I only
C) Neither I nor II
D) II only
Explanation
The answer is II only. Walker is eligible for the Lifetime Learning Credit, but he is not eligible for the American Opportunity Tax Credit because he is not pursuing a degree and is not enrolled on at least a half-time basis.
130
George and Barbara have three dependent children in college. Cameron is a senior, Lauren is a junior, and Cheryl is a freshman, and each has qualifying education expenses in excess of $10,000 annually. When George and Barbara file their income tax returns for 2020, they want to use the American Opportunity Tax Credit and/or Lifetime Learning Credit to their greatest benefit. They are eligible for both credits. Which of the following statements describing their options is CORRECT?
A) They can use the American Opportunity Tax Credit for the qualified education expenses of Cameron, Lauren, and Cheryl.
B) They can use only one of the credits and should use whichever credit will provide the greatest benefit.
C) They can use the American Opportunity Tax Credit for the qualified education expenses of Cheryl only and the Lifetime Learning Credit for Cameron and Lauren.
D) They can use the American Opportunity Tax Credit individually for Cameron, Lauren, and Cheryl and an additional Lifetime Learning Credit for the same expenses as a family tax credit.
The answer is they can use the American Opportunity Tax Credit for the qualified education expenses of Cameron, Lauren, and Cheryl. The American Opportunity Tax Credit may be used for qualifying education expenses for the first four years of college for each student. The Lifetime Learning Credit is allowed once per year per family but cannot be claimed for the same student for which an American Opportunity Tax Credit is claimed. The Lifetime Learning Credit would most likely not be claimed because the American Opportunity Tax Credit provides a larger tax credit for the family.
131
Brandon's employer is willing to assist him in the cost of higher education. What is the maximum that Brandon's employer can provide to him in educational assistance and qualify for the employee exclusion from income?
A) $4,000
B) $5,250
C) $2,000
D) $12,000
B) The answer is $5,250.
An employer may provide up to $5,250 of educational assistance to an employee during any one year as a tax-free employee benefit under Section 127 of the Internal Revenue Code. This benefit may be provided either for job-related or non-job-related education and may also be granted for either undergraduate or graduate study.
132
The employer educational assistance program covers all of the following expenses except
A)books.
B)graduate tuition.
C)enrollment fees.
D)housing.
Explanation
The answer is housing. Under the educational assistance program, an employer can reimburse an employee's tuition (both graduate and undergraduate), enrollment fees, books, supplies, and equipment, and these benefits are excluded from the employee's income up to $5,250 per year.
8.3.2
133
All of the following are employer guidelines associated with implementing an educational assistance program except
A) the program must be offered to all employees.
B) employers that provide their employees educational assistance benefits may not deduct these costs as a business expense.
C) employers must have a written qualified program that applies exclusively to their employees
D) the program cannot favor highly compensated employees.
The answer is employers that provide their employees educational assistance benefits may not deduct these costs as a business expense. Employers that provide their employees with educational assistance benefits can deduct these costs as a business expense.
134
Credit Mix
How many different credit cards a person has. It is generally better to have a mix of credit cards than just a single type of card. Credit mix measures the various types of credit a person has, not just the types of credit cards. A good credit mix will include credit cards, retail accounts, installment loans, and mortgages.
