Sample Test Questions Part 2 Flashcards Preview

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Flashcards in Sample Test Questions Part 2 Deck (82):
1

Under the Fair Credit Billing Act a consumer’s responsibility for unauthorized charges on credit cards is limited to what amount?

(A) $50 per card
(B) a total of $50 on all cards
(C) a total of $500 on all cards
(D) $25 per card and a total of $250 on all cards

The answer is (A).
The consumer’s responsibility is $50 per card on unauthorized charges.

2

Assume a family uses cash to pay a liability. The effect of this transaction would be

(A) To decrease net worth by the amount of the payment
(B) To increase net worth by the amount of the payment
(C) To leave net worth unchanged
(D) To affect the income statement but not the balance sheet

The answer is (C).
Since assets have been reduced by the same amount as liabilities are reduced, net worth remains the same. There is no change.

3

Under the CFP® Board’s Financial Planning Practice Standards, which of the following statements concerning the first step of defining the scope of the engagement is correct?

I. The scope of the engagement need not be in writing.
II. The financial plan requires comprehensive data from the client so the scope of the engagement should not be limited to specific activities.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
The scope of the engagement need not be in writing. The scope can be limited to specific activities.

4

Which of the following income tax credits, tax-advantaged accounts, or deductions are available to taxpayers who are in high income tax brackets?

(A) Coverdell Education Savings Account
(B) Lifetime Learning Credit
(C) Sec. 529 plan
(D) deduction for interest on education loans

The answer is (C).
Sec. 529 plans do not have phase outs or rules limiting their use to any particular income bracket. The other deductions and credits are limited to taxpayers who have AGI below a specified level.

5

Which of the following statements concerning the interview conducted by a financial planner is correct?

(A) The purpose is for the planner to gather relevant data.
(B) It requires the planner to give specific advice.
(C) The planner must direct and control the content of the interview.
(D) Assistance to the client rather than relationship building should be the focus.

The answer is (A).
(B) Is incorrect because the purpose of an interview is for the interviewer (the counselor in this case) to obtain information from the interviewee (the client), not to give advice to the interviewee.
(C) Is incorrect because the interviewee may direct the questioning in a nondirective interview. Assistance to the client will come later.

6

7. Which one of the following events would tend to reduce a family’s net worth?

(A) A decline in the market value of the family’s assets.
(B) A repayment of the client’s debts before their maturity.
(C) The receipt of gifts from the client’s parents.
(D) The crediting of compound interest to the client’s bank savings account.

The answer is (A).
A family’s net worth is the difference between the market value of a family’s assets and the family’s liabilities. (B), (C), and (D) will increase net worth, but (A) will cause net worth to decline, at least temporarily.

7

Which of the following statements concerning active listening is (are) correct?

I. In most cases, the nonverbal message is more accurate than the verbal message.
II. It involves repeating the client’s message verbatim.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
I is correct because generally the nonverbal message is more accurate than the verbal message. II is incorrect because in active listening the counselor should not merely parrot what the client has said.

8

All the following activities are required by the CFP® Board practice standards EXCEPT

(A) CFP® professionals must obtain client statements and financial information when analyzing quantitative goals.
(B) All CFP® professionals’ financial planning engagements must be outlined in writing prior to making recommendations.
(C) CFP® professionals must analyze the client’s information to gain an understanding of the client’s financial situation.
(D) CFP® professionals must consider sufficient and relevant alternatives to the client’s current course of action in an effort to meet the client’s goals.

The answer is (B).
There is no requirement that all engagements be outlined in writing.

9

All the following organizations are self-regulatory organizations (SROs)authorized by the Securities Exchange Act of 1934 EXCEPT

(A) SEC
(B) FINRA
(C) NYSE
(D) National Securities Clearing Corporation

The answer is (A).
The SEC is given responsibility for oversight of the SROs.

10

Which of the following statements concerning the content of a comprehensive financial plan is (are) correct?

I. Each plan should treat all seven major planning areas identified in the Certification Examinations by the Certified Topic List for CFP® Financial Planner Board of Standards.
II. Specialized areas applicable to a client, such as divorce, should not be covered in the plan but should be dealt with separately in asingle-purpose plan.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (C).
A comprehensive plan should treat the seven major planning areas. A specialized area like divorce may not be part of the comprehensive plan and could be treated separately.

11

Which of the following statements concerning disintermediation is (are) correct?

I. Disintermediation occurs when investors seek the increased protection of financial institutions such as banks.
II. The increased accumulation of retirement funds in pensions insured by SIPC is due to disintermediation.

(A) I only
(B) Both I and II
(C) Neither I nor II
(D) Neither I nor II

The answer is (D).
Disintermediation is the withdrawal of deposits from financial institutions (intermediaries) and investment in other products. An example of disintermediation was the movement of money from bank deposits to money market mutual funds to achieve higher yields.

12

Which of the following statements concerning an annuity and an annuity due is (are) correct?

I. An annuity is a series of increasing payments or receipts, at the end of each of a specified number of periods.
II. An annuity due is a series of increasing payments or receipts, at the beginning of each of a specified number of periods.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (D).
I is incorrect because an annuity is a series of level payments at the end of specified periods. II is incorrect because annuity dues are a series of level payments at the beginning of specified periods.

13

An investment opportunity offers Rachel 6 percent compound interest over the next 6 years. The second investment opportunity offers her 6 percent compound interest over the next 12 years. Which of the following statements iscorrect?

(A) The amount of interest for 12 years will be more than double that at 6years.
(B) The amount of interest for 12 years will be exactly double that at 6 years.
(C) The amount of interest for 12 years will be less than double that at 6 years.
(D) It is impossible to compare the interest that will be earned without knowing the amount of money that Rachel has to invest.

The answer is (A).
Opportunity cost measures the return forfeited.
(B) Is incorrect because, although there may be some uncertainty about not receiving the dollar later, this is not the definition of opportunity cost. (C) And (D) have nothing to do with the concept of opportunity cost.

14

All the following are attributes of physical attending EXCEPT

(A) Face the other person squarely
(B) Adopt an open posture
(C) Stand straight with posture
(D) Maintain good eye contact

The answer is (C).
Physical attending can take place seated.

15

Which of the following statements concerning the present value of a single sum (PVSS) is (are) correct?

I. The lower the interest rate, the higher the PVSS.
II. The shorter the maturity, the lower the PVSS.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
II is incorrect because as i and n rise, PVSS falls, and as i and n drop, PVSS rises.

16

All the following are logical suggestions for having and conducting a family budget EXCEPT

(A) Account for every dollar that comes in or goes out.
(B) Keep the form and content of the budget consistent overtime.
(C) Use the budget to compare actual results with planned results.
(D) Tailor the budget to the attainment of specific goals.

The answer is (A).
Complete precision is unnecessary. Focus on the major items, and don’t worry about the trivial ones.

17

Rodney has borrowed money from a bank to purchase a tractor. Under the terms of the loan, Rodney is to repay the bank by a series of equal annual sums beginning at the end of each of the next 5 years. Which of the following terms best describes Rodney’s series of payments?

(A) A deferred annuity
(B) An annuity due
(C) An annuity
(D) A life annuity

The answer is (C).
(A) Is incorrect because a deferred annuity is one that begins more than one period into the future.
(B) Is incorrect because Rodney’s payments are to be made at the end of each period.
(D) Is incorrect because the loan payments must be continued even if Rodney dies before the 5 years are over.

18

Which of the following are characteristics of PLUS loans?

(A) Based on financial need
(B) Available only to full-time students
(C) Available only to graduate students
(D) Made by the federal government

The answer is (B).
PLUS loans are available only to full-time undergraduate students and are made by private lenders.

19

Which of the following statements concerning the financial planning pyramid is correct?

(A) The pyramid has one stage for every phase of a person’s financial life cycle.
(B) The pyramid is used to demonstrate the obstacles that consumers must overcome to gain control of their financial fortunes.
(C) The pyramid is important for specifying the responsibilities of each party for implementing a comprehensive financial plan.
(D) The pyramid is an approach for developing a comprehensive financial plan over a period of time and in an orderly way.

The answer is (D).
The financial planning pyramid is an approach for developing a comprehensive financial plan over a period of time and in an orderly way. The approach begins with a foundation of protecting the client against possible financial disasters through insurance coverage, emergency savings, and a will.

20

Which of the following persons must register with the SEC as an investment adviser?

I. an accountant who renders investment advice only incidental to his or her practice of accounting
II. an adviser who advises 10 clients on securities investments but who does not hold himself or herself out to the public as an investment adviser

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (D).
An accountant who renders investment advice only incidental to the practice of accounting qualifies under one of the exceptions to registration. An adviser who advises 10 clients on securities investments but who does not hold himself or herself out to the public as an investment adviser qualifies for the private advise rexemption.

21

Under the CFP® Board’s Financial Planning Practice Standards, what should a financial planning practitioner do when unable to obtain sufficient and relevant quantitative information and documents to form a basis for any recommendation for a client?

(A) Terminate the engagement.
(B) Restrict the scope of the engagement.
(C) Present a hypothetical recommendation.
(D) Advise the client that incomplete information will impact recommendations.

The answer is (A).
The practitioner cannot in this instance restrict the scope of the engagement because the practitioner has been unable to obtain sufficient and relevant quantitative information and documents for any recommendation.

22

The opportunity cost of not receiving a dollar today is:

(A) The return forfeited by receiving the dollar in the future, as measured by the interest rate.
(B) The uncertainty of not receiving the dollar in the future.
(C) The cost of printing and distributing the dollar.
(D) The sublimation of future goals.

The answer is (A). Opportunity cost measures the return forfeited.
(B) Is incorrect because, although there may be some uncertainty about not receiving the dollar later, this is not the definition of opportunity cost. (C) And (D) have nothing to do with the concept of opportunity cost.

23

All the following activities are required by the CFP® Board practice standards EXCEPT

(A) CFP® professionals must obtain client statements and financial information when analyzing quantitative goals.
(B) All CFP® professionals’ financial planning engagements must be outlined in writing prior to making recommendations.
(C) CFP® professionals must analyze the client’s information to gain an understanding of the client’s financial situation.
(D) CFP® professionals must consider sufficient and relevant alternatives to the client’s current course of action in an effort to meet the client’s goals.

The answer is (B).
Detailed underwriting information is not a part of the second step in the financial planning process.

24

Under the Rules of the CFP® Board’s Code of Ethics and Professional Responsibility, when may a CFP® Board designee disclose a client’s confidential information?

(A) Under no circumstances
(B) Only with the client’s consent
(C) When the client will not be harmed by disclosure
(D) When authority is implied by the client engagement

The answer is (D).
There are several circumstances in which the client’s consent is not required for disclosure of confidential information, and one circumstance is when the client engagement implies authority to make disclosure. If disclosure is improper, the fact that the client will not be harmed is not sufficient reason to allow disclosure.

25

Under the Fair Credit Reporting Act and Consumer Credit Reporting Reform Act, an individual has all the following rights EXCEPT

(A) The right to a copy of the credit report
(B) The right to remove adverse credit information
(C) The right to file a dispute with a company furnishing information to a credit reporting agency
(D) The right to know the names of anyone who received the credit report in the last 2 years for employment purposes

The answer is (B).
There is no right to remove adverse credit information.

26

All the following are types of counselor leading responses EXCEPT

(A) Interpreting
(B) Inventing
(C) Explaining
(D) Reassuring

The answer is (B).
The types of leading responses are explanation, interpretation, reassurance or encouragement, and advice or suggestion.

27

Jack has earned a performance bonus of $10,000 and upon receipt will immediately use the money to pay down $25,000 of credit card debt. All of the below will happen to Jack’s financial condition EXCEPT

(A) Jack will increase his net worth by $10,000.
(B) Jack will decrease his total liabilities by $10,000.
(C) Jack will increase his accumulated savings by $10,000.
(D) Jack’s total assets will not change.

The answer is (C).
Since Jack is using the income to pay off debt, his accumulated savings will not increase.

28

Which of the following is the logical first step in the budgeting process?

(A) Decide how much is to be saved or invested.
(B) List all the categories and amounts of fixed expenditures.
(C) Estimate all of the income and income sources for the budget period.
(D) Eliminate all discretionary expenditures.

The answer is (C).
Start by estimating income. Then estimate expenses, compute the surplus or shortfall, find a balance between income and expenses, and express all income and expense items as percentages of the total.

29

Which of the following programs entails locking in today’s education costs one or more years prior to the student attending college?

(A) Education Savings Accounts
(B) State-sponsored qualified tuition plans
(C) Hope Scholarship Credits
(D) prepaid tuition plans

The answer is (D).
Prepaid tuition plans enable a student to lock in education costs in advance of attending a college.

30

Which of the following terms applies to the client behavior of missing appointments, lateness, withdrawal, and ambivalence?

(A) Overt hostility
(B) Orientation to values
(C) Differences in values
(D) Covert hostility

The answer is (A).
(B) Is incorrect because the purpose of an interview is for the interviewer (the counselor in this case) to obtain information from the interviewee (the client), not to give advice to the interviewee.
(C) Is incorrect because the interviewee may direct the questioning in a nondirective interview. Assistance to the client will come later.

31

Janice Miller, a CFP® professional, is preparing a brochure to give to prospective clients to disclose information about her firm. According to the Code of Ethics and Professional Responsibility adopted by the Certified Financial Planner Board of Standards, all the following information must appear in the brochure EXCEPT

(A) The identity of the insurance companies that the firm represents and any commission arrangements with those companies
(B) A statement of whether the firm’s compensation will include commissions or fees only
(C) Resumes of the firm’s employees who will provide financial planning services to the client
(D) The identity of the bank or other institution where the firm deposits client funds and securities

The answer is (D).
The Code of Ethics and Professional Responsibility does not require disclosure of the identity of the bank or other institution where the firm deposits client funds and securities. The Code does require disclosure of agency relationships and commission arrangements, such as with insurance companies. Resumes of principals and employees who perform financial planning services must also be included. A statement of fees and commissions must also be included.

32

Often referred to as the “truth-in-securities” law, the Securities Act of 1933 has the following objective(s):

I. It requires that investors receive financial or other significant information concerning securities being offered for public sale.
II. This act was also focused on disclosure to the investing public of information of investment company funds.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
II is referring to the Investment Company Act of 1940.

33

Which of the following arrangements of steps is the proper sequence for developing a financial plan?

(A) Monitor the plan, develop the plan, implement the plan, and establish objectives.
(B) Analyze information, develop the plan, monitor the plan, and implement the plan.
(C) Implement the plan, analyze information, monitor the plan, and develop the plan.
(D) Gather data, analyze information, develop the plan, and implement the plan.

The answer is (D).
After setting goals, the financial planner and client should gather data, including objectives, analyze information, develop the plan, and implement the plan. Ongoing monitoring of the plan is the last step.

34

All the following statements concerning The American College Code of Ethics are correct EXCEPT

(A) The code consists of a professional pledge and eight cannon.
(B) Procedures have been specified for enforcement of the code.
(C) The code applies to all advisors who perform comprehensive financial planning.
(D) Violation of the code can result in temporary or permanent suspension of a designation.

The answer is (C). The American College Code of Ethics applies to those who hold an American College designation.

35

As a person’s wealth increases, which of the following types of risk-tolerance have been found to increase?

I. absolute risk-tolerance
II. relative risk-tolerance

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
Absolute risk-tolerance, measured by the dollar amount allocated to risky investments, appears to increase as wealth increases. Research results are much less conclusive, however, on the question of relative risk tolerance, measured by the proportion of wealth that is allocated to risky assets as wealth increases.

36

The Securities Investor Protection Corporation (SIPC) insures investors under what circumstances?

(A) The investor lost government securities bought through a bank or credit union.
(B) The investor lost money or stock due to a securities firm failure.
(C) The investor lost his or her investment when securities became worthless.
(D) The investor lost his or her retirement fund when the employer became bankrupt.

The answer is (B).
The SIPC covers losses of money or securities when a securities firm fails or a broker steals them.

37

Which of the following was an effect of the Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act)?

(A) It allowed financial holding companies to compete more fully in insurance and investment banking.
(B) It eliminated fixed price brokerage commissions.
(C) It allowed banks to parcel out large deposits in $100,000 increments to participating institutions so the deposit is fully insured.
(D) It removed the practice of investment banking firms using stock analyst reports as marketing tools.

The answer is (A).
The Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act) allowed financial holding companies to compete more fully in insurance and investment banking. In effect, it repealed provisions of the Glass-SteagallAct.

38

Which of the following statements concerning qualitative and quantitative approaches to assessing risk-tolerance is (are) correct?

I. The quantitative devices for assessing risk-tolerance are best that contain “norms.”
II. Other things being equal, the fewer the number of questions in a quantitative device for assessing risk-tolerance, the more accurate will be the results.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
I is correct because “norms” help the planner to see how the client’s risk-tolerance compares with a group of similar individuals. I is incorrect because some questions are likely to overestimate risk-tolerance and others to underestimate it. A longer series of questions will thus provide more precise results than a short series.

39

Steven and Jane Spender have a liquidity ratio of 6.2. This ratio suggests that the financial planner should make which of the following recommendations?

(A) The Spenders should increase their level of savings.
(B) The Spenders should reduce their short-term investments.
(C) The Spenders should consider investments that take advantage of additional debt to increase returns.
(D) The Spenders should increase their cash and cash equivalents so they do not face difficulty with paying current debts if income is reduced.

The answer is (B).
Since the Spenders have a high liquidity ratio, they should reallocate some short-term investments.

40

Which of the following questions is (are) closed-ended?

I. either/or questions
II. true/false questions

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (C).
Both either/or and true/false questions are closed-ended questions.

41

Under the Rules of the CFP® Board’s Code of Ethics and Professional Responsibility, a CFP® Board designee’s compensation shall be determined by what standard?

(A) Customary and ordinary compensation
(B) Fair and reasonable compensation
(C) Comparable compensation in the industry
(D) Fair market value for the services

The answer is (B).
A CFP Board designee’s compensation shall be fair and reasonable.

42

The following statement are attributes of a Section 529 college savings plan EXCEPT

(A) 529 plans are open to anyone, there are no residency restrictions and there is cap on income.
(B) Funds from Sec. 529 savings accounts can be applied to qualified higher expenses.
(C) Earnings are tax-deferred.
(D) Maximum account balances are set nationally at $500,000.

The answer is (D). Maximum account balances vary by state; they are generally around $250,000.

43

A person will be willing to drive 20 miles to obtain a $10.00 discount on a$50.00 item but will not drive the same distance for the same $10.00 discount on a $100.00 item because of the person’s

(A) Choice shift.
(B) Familiarity bias.
(C) Risk-tolerance levels.
(D) System of mental accounts.

The answer is (D).
“Mental accounts” refer to the system of different value, priorities, and preferences that a person places on given dollar amounts in different situations. For example, a $100 loss may cause more unhappiness than the happiness that would be associated with a $100 gain. Similarly, a $10.00 discount that represents a 20 percent saving may be valued more highly than the same $10.00 discount that represents only a 10 percent saving.

44

Which of the following statements concerning advising is (are) correct?

I. It includes providing options and alternatives.
II. It requires the counselor to project personal needs and values into the advice and to foster increased client dependence on the counselor.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
Advisers should not project their own needs and values into another person’s life. Advice should not foster dependency or take away a client’s right to make decisions.

45

Which of the following terms describes a variety of education and living experiences learned over a period of time?

(A) Genuineness
(B) Orientation to values
(C) Differences in values
(D) Resistance

The answer is (B).
One’s orientation to values is learned and developed over a period of years.

46

Which of the following ways of financing a child’s college education is available to taxpayers in high income brackets?

(A) PLUS loans
(B) Tax-exempt Series EE savings bonds
(C) Federal Perkins Loans
(D) Federal Opportunity Work Credit Program

The answer is (A).
PLUS loans are available regardless of income and asset level. Perkins Loans require exceptional need. The tax-exemption for Series EE bonds is restricted to taxpayers with AGI below the threshold amount.

47

Which of the following are “securities” under the Investment Advisers Act of1940?

I. commercial paper
II. variable life insurance policy

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (C).
Both of the financial products listed fall within the definition of a security contained in the Act, because the definition of “security” is broadly construed.

48

All of the following are characteristics of the business standard set forth by SEC Release IA-770:

I. It is determined by how the financial adviser is compensated.
II. It is determined by how the financial adviser presents himself to the public.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (B).
I is incorrect because IA-770 does not cover compensation.

49

One investment opportunity offers Larry 4 percent compound interest for the next 4 years, and the second investment opportunity offers him 8 percent compound interest for the same 4 years. Which of the following statements is correct concerning Larry’s investment choices?

(A) Interest at the 4 percent rate will be more than half the interest at the8 percent rate.
(B) Interest at the 8 percent rate will be more than double the interest at the4 percent rate.
(C) The amount of interest earned at the 8 percent rate will be exactly double the amount earned at the 4 percent rate.
(D) It is impossible to compare the interest that will be earned without knowing the amount of money Larry has to invest.

The answer is (B).
Due to compounding, the interest at the 8 percent rate will be more than double the interest earned at the 4 percent rate. For example, the FVSS of $1.00 for 8 percent and 4 years is $1.3605. For 4 percent and 4 years it is $1.1699. Note that $.3605 is more than double $.1699.

50

Which of the following statements best describes “availability bias?”

(A) People fear risks that are unknown more than risks that are known.
(B) People believe after the fact that events were more predictable than they actually were.
(C) People judge events that are easy to imagine or remember as more probable than they are in reality.
(D) People place a disproportionately high value on the complete elimination of risk compared with the reduction of risk.

The answer is (C).
(A) Is a correct statement, but it refers to what the text calls “familiarity bias.”
(B) Is a correct statement, but it does not describe availability bias.
(D) Is also probably a correct statement, but it does not describe availability bias.

51

With reference to the preparation of a family’s statement of financial position, all the following statements concerning assets are correct EXCEPT

(A) “Use assets” are typically not liquid and are held for the services they provide.
(B) Assets for the most part are valued at their fair market values.
(C) Assets are often groups into two or three broad categories, such as personal or financial assets.
(D) Inherited assets, financed assets, and rented assets are not shown as assets on the statements.

The answer is (D).
(D) is not a correct statement. Inherited assets and financed assets are shown as assets on the statements, but rented assets are not.

52

Which of the following statements concerning financial statements is (are)correct?

I. Business financial statements are frequently prepared for external audiences.
II. A personal statement of financial position is never created for an external audience.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
I is a correct statement. II is not a correct statement. Personal financial statements are sometimes prepared for an external audience. For example, a person may prepare a personal statement of financial position when applying to a bank for a mortgage loan or for a home equity loan.

53

Which of the following series of cash flows is an example of a simple annuity due?

(A) A series of five uneven monthly cash flows beginning immediately on which interest is compounded daily.
(B) A series of five level monthly cash flows beginning after one month on which interest is compounded monthly.
(C) A series of five level monthly cash flows beginning immediately on which interest is compounded monthly.
(D) A series of five level monthly cash flows beginning immediately on which interest is compounded once per year.

The answer is (C).
(A) Is incorrect because the cash flows are not level and because compounding frequency is not monthly, as is the cash flow frequency.
(B) Is incorrect because the cash flows constitute a simple annuity, not a simple annuity due.
(D) Is incorrect because the cash flows constitute a complex annuity due, not a simple annuity due.

54

Which of the following statements concerning responding to social styles in the advisor-client relationship is (are) correct?

I. A planner should seek to establish an advisor-client relationship only with clients displaying social styles compatible with the planner’s.
II. To facilitate the financial planning process, a planner will need to communicate differently with clients having different social styles.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (B).
The financial planning process will be facilitated when the planner communicates in a manner appropriate for the client’s social style. The planner can enter into relationships with clients having different social styles.

55

Which of the following would be an inappropriate savings or investment vehicle in which to maintain an emergency fund?

(A) A 5-year certificate of deposit
(B) A money market mutual funds
(C) A savings account
(D) A U.S. Treasury bill

The answer is (A).
A 5-year CD would not be appropriate because emergency funds should be kept in highly liquid savings or investment instruments. Five years is too long to wait for emergency funds. Also, most CDs impose heavy interest penalties for withdrawal of funds prior to maturity.

56

Under the Investment Advisers Supervision Coordination Act of 1996, which of the following investment advisers is (are) subject to federal registration?

I. an adviser who has $10 million of assets under management
II. an adviser who is regulated in his or her state

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (D).
I is incorrect because the threshold is $30 million. II is incorrect because it is one who is not regulated at the state level who must register with the SEC.

57

SEC Release No. IA-770 sets forth a compensation test for investment advisers. Which of the following statements concerning the compensation test is (are)
correct?

I. The test is met if the adviser is compensated by commissions rather than a separate fee for advice on securities.
II. A professional who provides advice about securities may meet the test even if he or she receives no compensation for the advice.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
II is incorrect because the compensation test requires that the investment adviser receive compensation in some form.

58

Which of the following statements concerning the role of ethics is correct?

(A) In essence, ethics is important in business because ethics is largely about public relations.
(B) If a person keeps a clear view of their own ethical vision, then others will see the same vision.
(C) It is important to remember that the fundamental purpose of business is competition and not ethics.
(D) The quality of work performed by individuals and the promptness of their responses are matters of ethical behavior.

The answer is (D).
Ethics is not public relations. Ethics is a matter of prompt responses and quality work as much as honesty and trustworthiness. Even though we may be clear about our own ethical vision, others may not have the same vision.

59

If Jack uses $25,000 in accumulated savings to pay off $25,000 of credit card debt, what is true about Jack’s financial condition?

(A) Jack has increased his net worth by $25,000.
(B) Jack has decreased his net worth by $25,000.
(C) Jack has increased his accumulated savings by $25,000
(D) Jack has neither increased nor decreased his net worth.

The answer is (D).

A reduction of assets combined with an equal increase in liabilities will leave net worth unchanged.

60

How is the net present value of an investment opportunity calculated?

(A) Subtract all money outflows from all money inflows.
(B) Sum the outflows and the inflows.
(C) Subtract the present value of money outflows from the present value of money inflows.
(D) Multiply the money inflows by the present value of an annuity of $1.00 for the number of years and applicable interest rate.

The answer is (C).
The net present value is found by subtracting the present value of the outflows from the present value of the inflows associated with the investment.

61

Which of the following statements concerning a family’s net worth is correct?

(A) Net worth represents the amount available to a family that sold all its assets at their stated values and paid all of the family’s liabilities.
(B) When net worth is negative in the statement of a family’s financial position, that family is legally bankrupt.
(C) A year-to-year increase in a family’s net worth indicates that a family’s liquidity position is improving.
(D) A family’s net worth can be approximated by subtracting expenses from income.

The answer is (A).
(B) Is not correct because there must be completion of a legal court procedure to be declared a bankruptcy.
(C) Is not correct because the year to year increase may not necessarily be composed of liquid assets.
(D) Is not correct. Net worth is the positive difference between total assets and total liabilities.

62

Which of the following statements concerning the Risk/Return Investment Pyramid is (are) correct?

I. The only way to avoid the risk/return trade-off is to invest in the risk-free Treasury bills offered by the U.S. Treasury.
II. The most conservative investments appear at the apex of the pyramid where the risk of loss of purchasing power and risk of loss of capital are lowest.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (D).
There is no way to avoid the risk/return trade-off. The most conservative investments appear at the base of the pyramid where the risk of loss of purchasing power is highest and risk of loss of capital is lowest.

63

In order to be classified as an investment adviser, a person’s activities must satisfy any one of the elements of the three-pronged test. All the following are “prongs” in the three-pronged test EXCEPT

(A) The person provides general or specific advice about securities.
(B) The person provides general advice that is incidental to a non-advisory investment business and receives no compensation for services provided.
(C) The person provides investment advisory services for compensation that is not incidental.
(D) The person charges either a separate fee or receives compensation in the form of commissions.

The answer is (B).
The first prong of the test for an investment adviser is that the person provides advice or performs analyses relating to securities. The advice may be specific or general. The second prong is the so-called "business" standard. A person is not in the business of advising if advice is incidental to a primary business and that primary business is not investment advising, the advice is not specific, and the person is not compensated. (B) Describes a person who is not in the business and not an investment adviser. The third prong is that the person receives compensation for these services of advising
concerning securities.

64

All the following should be acquired during the second step in the financial planning process EXCEPT

(A) Client demographic information
(B) Assess the strengths and weaknesses of the clients financial situation
(C) Assess the client’s risk exposures and tolerances
(D) Assess the client’s level of knowledge and experience with current financial matters

The answer is (B).
Assessment of the strengths and weaknesses occurs in the third step.

65

All the following statements correctly describe restrictions on a registered investment adviser under the Investment Advisers Act of 1940 EXCEPT

(A) An RIA must provide in the advisory contract that no assignment is permitted without the client’s consent.
(B) An RIA must disclose all material facts in connection with a security transaction.
(C) An RIA must file a form annually to update information files with the SEC.
(D) An RIA must maintain records of transactions with client for 2 years.

The answer is (D).
An RIA must provide in the advisory contract that no assignment is permitted without the client's consent. An RIA must disclose all material facts in connection with a securities transaction. An RIA must file a form annually to update information filed on Form ADV with the SEC. An RIA must maintain records of transactions with clients and other documents for 5 years.

66

Which of the following ratios is the debt service ratio?

(A) Total Debt Payments ÷ Net Income
(B) Net Worth ÷ Total Debt
(C) Liquid Assets ÷ Total Current Debts
(D) Total Current Debt ÷ Gross Cash Flow (including gifts)

The answer is (A).
Debt Service Ratio = Total Debt Payments ÷ Gross Income

67

Which of the following statements concerning a CFP® Board designee’s responsibility for a client’s funds is (are) correct?

I. Commingling of one client’s funds with the funds of other clients is not permitted.
II. The standard of care required of a CFP® Board designee who takes custody of client funds for investment is to commit no gross negligence in caring for the property.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (D).
Commingling of one client’s funds with the funds of other clients is permitted provided accurate records are kept and there is compliance with legal requirements. A CFP® Board designee who takes custody of client funds for investment is required to exercise the care of a fiduciary. This standard is higher than avoiding gross negligence.

68

All the following are characteristics of Perkins loans EXCEPT

(A) Administered by the student’s college
(B) Federally supported
(C) Based on academic achievement
(D) Available to undergraduate and graduate students

The answer is (C).
Perkins loans are based on financial need.

69

All the following statements concerning the relationship that exists among the three major components for a family’s statement of financial position are correct EXCEPT

(A) Assets equal the sum of the family’s net worth and its liabilities.
(B) Net worth is the residual amount after liabilities are subtracted from assets.
(C) A conventional test of a family’s solvency is having the family’s liabilities covered or equated by the sum of the family’s assets plus its net worth.
(D) The family’s liabilities are always equal to the value of the family’s assets minus the value of the family’s net worth.

The answer is (C).
(C) is not a correct statement. The sum of the assets and net worth means that net worth is counter twice. This is so because a family’s assets are equal to its liabilities plus the family’s net worth. (A), (B), and (D) are correct statement. (D) is correct because we subtract liabilities
from the value of total assets to determine net worth.

70

Which one of the following clients is least likely to need help with budgeting to meet the family’s living expenses?

(A) The family’s cash flow statement reveals frequent borrowing to meet normal expenses.
(B) The family’s cash flow statement reveals that assets are being liquidated frequently.
(C) The family’s cash flow statement reveals large amounts being spent for “miscellaneous” expenses.
(D) The family’s cash flow statement reveals a regular pattern of periodic saving.

The answer is (D).
(A), (B), and (C) all suggest that the client may be living beyond his or her means and may need help with budgeting. A regular, reasonable pattern of saving, on the other hand, suggests that the client is already living within his or her means.

71

Susan adopts a child in 2015. Legal fees totaled $5,000; court costs of$1,000 and travel expenses of $8,000. What is the maximum Tax Credit for Adoption expenses Susan can qualify for in 2015?

(A) $5,000
(B) $6,000
(C) $12,150
(D) $14,000

The answer is (B).
Legal and court costs are allowed towards the adoption tax credit. Travel is not.

72

Which of the following types of communication is distinguished by giving specific guidance or suggestions to clients?

(A) Direct interview
(B) Advising
(C) Indirect interview
(D) Counseling

The answer is (B).
(A) and (C) are incorrect because interviews are designed to get information FROM the client. (D) is incorrect because counseling avoids specific direction.

73

The Depository Institutions Deregulation and monetary Control Act of1980:

I. Established “NOW Accounts”
II. Established a $250,000 limit on FDIC Insurance

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
II is incorrect because the 1980 act established an initial ceiling of $100,000.

74

Joanne can invest $9,000 at compound interest of 8 percent. Approximately how long will she have to wait to have $18,000?

(A) 7 years
(B) 8 years
(C) 9 years
(D) 10 years

The answer is (C).
According to the Rule of 72, the money will double in approximately 9 years (72 divided by 8 = 9).

75

What kind of financial institution underwrites security offerings and advises corporations on mergers and acquisitions?

(A) Retail bank
(B) Merchant bank
(C) Investment bank
(D) Consumer bank

The answer is (C).
An investment bank underwrites security offerings and advises corporations on mergers and acquisitions.

76

Under the Rules of the CFP® Board’s Code of Ethics and Professional Responsibility, a CFP® Board designee must promptly inform the appropriate regulatory authority of illegal conduct in which of the following circumstances?

I. The CFP® Board designee has knowledge not required to be kept confidential which raises a substantial question of illegal conduct by another CFP®Board designee.
II. The CFP® Board designee has reason to suspect illegal conduct in the CFP® Board designee’s organization.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (A).
When the CFP® Board designee suspects illegal conduct in the organization, the designee must make timely disclosure to the designee’s immediate supervisor or to the owners. The CFP® Board designee must alert regulatory authorities only where appropriate measures are not taken to correct the problem in the organization.

77

According to the Rules and Practice Standards of the CFP® Board’s Code of Ethics and Professional Responsibility, which of the following statements concerning the financial planning practitioner’s duty to obtain information from the client is (are) correct?

I. Before entering into an engagement, a financial planning practitioner must obtain sufficient information about the client’s needs and objectives to learn that an engagement is warranted.
II. Before making a recommendation, the financial planning practitioner must obtain sufficient quantitative information about the client relevant to the scope of the engagement.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (C).
Both statements are correct.

78

The CFP® Board’s Financial Planning Practice Standards apply to which of the following groups?

I. CFP® designees who perform tasks not involving personal financial planning.
II. CFP® designees who are compensated by commission rather than fee only.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (B).
The standards apply to CFP® designees when performing personal financial planning regardless of the method of their compensation.

79

What are the benefits of the financial planning process?
I. Utilizing the process helps prevent malpractice and errors in data gathering.
II. The financial planning process addresses monitoring recommendations after they are put in place.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (C). Both I and II are correct with regard to the financial planning process.

80

Which of the following statements concerning the relationship between law and ethics is (are) correct?

I. The law sets minimum as well as optimum standards for professional behavior.
II. A business that is focused on legal compliance has implicitly accepted a code of ethical mediocrity.

(A) I only
(B) II only
(C) Both I and II
(D) Neither I nor II

The answer is (B).
The law sets minimum, not optimum standards for professional behavior.

81

All of the following are district periods in life-cycle financial planning EXCEPT

(A) Retirement
(B) Peak accumulation
(C) Pre-career
(D) Career development

The answer is (C).
Pre-career is not a period of the life cycle.

82

All the following statements concerning liabilities in a personal statement of financial position are correct EXCEPT

(A) A purchase, where the invoice has not been received, would be excluded.
(B) Any items that must be paid sometime in the future must be included.
(C) Short-term liabilities are incurred for convenience, while long-term liabilities are typically incurred to purchase use assets.
(D) Mortgage loans are listed separately, rather than as installment loan balances.

The answer is (A).
(A) is not a correct statement. If a purchase is not for cash, it creates a liability for the purchaser. It doesn’t matter that the purchaser has not yet received
an invoice. (B), (C), and (D) are correct statements.