Exam 2: Quiz Questions and Class Discussions

Which of the following factors would be the strongest indication that US interest rates might rise? A. selling dollar-denominated assets by foreign investors B. decreasing US government deficits C. decreasing rates of inflation D. weak demand by the US private sector

A

Given that your client, Mary, contributed $50,000 to a 529 Savings Plan for her daughter at the beginning of this year, how much more could she contribute in the current year, without incurring a gift tax liability?

$5000

Your clients want to take tax-free withdrawals to pay for education expenses. Which of the following withdrawals would NOT qualify for a tax-free withdrawal but would be taxed as ordinary income?

$8,400 withdrawal from a US Savings Bond to pay for a computer used at school

All but one of the following responses is appropriate, when active listening. Which of the following response types would generally be avoided?

A: Suggestive response

What are the four (4) elements to emotional intelligence? How can you leverage your understanding of emotional intelligence to become a more effective advisor?

- Awareness of others (understanding their values, interpreting their emotions and anticipating their concerns and feels) - Relationship building - Self-awareness (identifying your own feelings, interpreting your own emotions) - Self-regulations (ability to appropriately express emotion, manage stress, deal with change and adversity)

During a period in which inflation averages 6 percent per year, which of the following of a planner's clients will be hurt? (1) Lenders of funds at a fixed rate of interest (2) Borrowers of funds at a fixed rate of interest (3) Recipients of Social Security retirement benefits (4) Recipients of benefits under a defined-benefit pension plan

1 and 4

In viewing a yield curve, which security characteristics will be the same? (1) coupon rate (2) maturity (3) quality (4) taxation

1 only

Your clients, Genevieve and Henry, want to know about the possibility of their child receiving financial aid. You explain that they will need to fill out a FAFSA form with their child before the deadline because that is the process for determining eligibility for federally financial aid. Which two of the following strategies would best reduce the expected family contribution resulting from FAFSA inputs and thereby increase the probability of qualifying for aid? 1. Shift assets from the parent by contributing to a UTMA custodial account 2. Purchase a permanent life policy by liquidating an investment account 3. Maximize contributions to retirement accounts leading up to start of child's school 4. Sell a bond and invest the proceeds in the parent's 529 plan, with child as beneficiary 5. Set up a 2503 Minor's Trust

2 & 3

The US economy is experiencing a expansion. What actions of monetary policy are appropriate in order to slow down the economy? 1. decrease the discount rate 2. expand the money supply 3. increase the bank reserve requirement 4. raise the margin requirement

3 & 4

Which of the following statements are true?a. Scholarships covering tuition and fees at university are tax free b. Scholarships covering room and board at university are tax free c. Interest from US Savings Bonds, Series EE and I, is tax-free when the bond is redeemed to pay qualified education expenses, subject to phase-out d. Accrued interest on a zero-coupon bond is tax-free, if used to fund education e. Withdrawals from a UTMA account is tax-free, if used to fund tuition f. Withdrawals from a traditional IRA is taxable; however, there is no early withdrawal penalty if the funds are used for your spouse's or child's education

A,C, and F

The Gross Domestic Product is made up of what economic components? (1) Household consumption (2) Business investment in machinery, construction and inventory (3) Annual stock market returns (4) Government purchases (5) Opportunity costs (6) Imports (i.e., purchases of foreign goods) (7) Net foreign expenditures (i.e., net exports)

A: 1, 2, 4, and 7 R: The gross domestic product is the sum of household consumption, business investment, government purchases and net foreign expenditures.

Aggregate demand measures the nation's total demand for goods and services. Greater demand will shift the curve up and to the right (when supply plotted on x-axis and demand on y-axis) and lower demand will shift it to down and to the left. Which of the following would contribute to a falling aggregate demand (downward shift in the curve)? (1) Less availability of consumer credit (i.e., higher interest rates) (2) Greater government spending (3) Lower disposable income (4) Rising energy prices (5) Lower unemployment (6) Higher level of investment by corporations

A: 1, 3, and 4

During your meeting to communicate planning recommendations to the client, you remain alert for non-verbal cues. Which of the following would suggest resistance to your planning recommendations? (1) After recommending that the client consider cutting back on discretionary spending in order to fund their retirement need, you notice that the client crosses their arms and leans back in their chair. (2) When discussing the dollar of savings that could be gained by refinancing the mortgage, you notice that the client leans forward and takes notes. (3) When pointing out that the client did not meet with the attorney to set up a trust, the client interrupts and changes the subject. (4) When covering investment planning, you recommend that the client move money from their bank account to equity mutual funds (i.e., stocks), the client's voice gets louder as he talks about how much money he lost in 2009. (5) After explaining the importance of purchasing a personal long-term disability policy, the client shares a story about her friend who was disabled for nearly a year and suffered financial hardship. Correct!

A: 1, 3, and 4

If the Federal Reserve is a seller of government securities in open-market operations, than what is the impact on the economy? (1) Interests rates will rise (2) Interest rates will drop (3) Money supply increases (4) Money supply contracts (5) Prices for existing bonds will rise (6) Prices for existing bonds will fall

A: 1, 4 and 6 R: Selling government securities will decrease the money supply (i.e., less money in bank reserves). That means that credit will be harder to obtain and with more businesses chasing lower levels of credit, then interest rates will increase. Higher rates have a negative impact on existing bonds. Fed selling is an indicator of a contractionary policy. Buying government securities will increase the money supply. That is because the bank, financial intermediary or owner of the security will receive a deposit from the Fed. That money is now available for lending to individuals and businesses (users of capital). The secondary impact of Fed buying is an easing of interest rates. There is more available money and with a greater supply comes lower equilibrium pricing. Lower rates will have a positive impact on existing bond prices. Fed buying is an indicator of an expansionary policy.

Yield curves offer important information about a particular segment of the bond market. When looking at a yield curve, what do you know are common variables of all debt securities represented by the curve? (1) each bond offers the same coupon rate (2) each bond has the same tax status (i.e., taxable or tax-exempt) (3) each bond has the same number of years to maturity (4) each bond has the same (very similar) quality rating (5) each bond was issued by the same municipality or corporation

A: 2 and 4 R: The yield curve graphs yield to maturity for bonds of similar risk and tax status. Each point along the curve reveals the yield to maturity for a debt security that matures in that particular period. The coupon rate doesn't have to be the same because the security is priced on yield to maturity, which includes the coupon and return of the bond's face value and their timing (i.e., time value of money). The bonds are not just securities of a particular municipality or corporation but rather securities of similar quality and tax status.

Open-ended questions and statements are consistently used in counseling as a way to promote client sharing. The following list includes both open- and closed-end questions and statements. Which of the following are open-ended questions or statements? (1) What is the date of your planned trip? (2) How do you picture yourself living during your 70s and 80s? (3) Is this important to you? (4) When do you expect to retire? (5) Please share with me your most regretful investment experience. (6) Why do you think you need to do that?

A: 2, 5, and 6

Which of the following statements regarding IRC Section 529 Plans are correct? Taxpayers may be phased out from contributing Earnings grow on a tax-deferred basis and withdrawals for qualified educational expenses are tax-free. A 529 Plan can be opened by anyone but the beneficiary has to be a family member. Control of the 529 stays with the owner, which means the owner can change the beneficiary to another family member of the original beneficiary The annual gift tax exclusion or 5-year aggregate gift-tax exclusion can be used to shelter contributions from gift-tax liability. Contributions to a 529 must end by the time the beneficiary reaches age 18. 529 assets are protected from creditor alienation, subject to two-year look-back

A: 2,4,5 and 7

Your clients, Lori and Nate, want to pre-fund their child's education, room and board. You recommend that a 529 savings plan would be appropriate. Which of the following recommendations is most appropriate given that the client's objective is to frontload the account as much as possible in a tax-efficient manner. a. Contribute $16,000 into the 529 this year and make another contribution next year b. Contribute $80,000 into the 529 this year and not make any additional contributions over the next five years c. Contribute $160,000 into the 529 this year and not make any additional contributions over the next five years d. Contribute enough money into the 529 as will be reasonably needed to fund projected costs and make no further contributions

C since they want to front load the account as much as possible.

What actions might the Federal Reserve take if they feel that the economy is rolling over into a recession? (1) Increase taxes to slow down individual spending (2) Employ fiscal constraints in order to help balance the budget (i.e., decrease government spending) (3) Lower the discount rate (4) Raise bank reserve requirements (5) Buy bonds in open market operations

A: 3 and 5 R: The Federal Reserve does not have the power to change taxes or affect government spending. That is the Government (President and Congress). Rather, the Fed has the ability to manage the economy by altering discount rates, buy and sell securities in the open market, set bank reserves and set margin requirements. Lowering the discount rate makes money more accessible, and that would tend to invigorate the economy. Raising bank reserves would take money out of the system, since more money has to be left in reserves, and that would slow down growth. Buying bonds in the open market put money into the system, while would make more credit available to spur economic growth.

All but one of the following reasons support the effort to become a more culturally-competent adviser. Which of the following is NOT a valid reason?

A: A client's non-negotiable values are generally consistent across cultures.

Which of the following is the most appropriate response to client resistance once you recognize it during the client-planner meeting?

A: Bring the issue up immediately before moving forward with the agenda

Which of the following indicators is not a leading indicator of economic activity?

A: Consumer Price Index R: Leading indicators of economic activity include: the average weekly manufacturing hours, average weekly claims for unemployment insurance, manufacturing new orders for consumer goods, ISM Index of new orders, manufacturers new orders (nondefense capital goods), building permits, S&P 500 stock prices, leading credit index, interest rate spread and the average consumer expectations for business conditions.

During your presentation to the client regarding life insurance recommendations, he stops you and states, "Why should I spend any of my money on life insurance? I'm young and single. I'd rather spend the money on a vacation. You don't realize how hard I've been working for the last year." Which of the following responses would least represent a suitable response based on active listening?

A: I double-checked with an insurance agent who is very well respected in the area, and he agreed that you definitely need to purchase a life policy. I will help you purchase the policy so that it is in place by the end of the month.

Which of the following statements regarding supply and demand is incorrect?

A: If the demand curve drops (moves to the left) and the supply curve remains unchanged, then the price of the good will rise.

Which of the following is consistent with the concept of prospect theory?

A: Investors feel more pain with a loss as compared to the happiness associated with a comparable gain

Jan, a CFP® Professional, is working with her client, Jason. During the meeting Jason seems a bit confused. Jan states, "....and that is why this recommendation will help you achieve your goal. Do you see that?" Jason responds by saying, "I just don't feel that it works. Why do you think that it will help me?" Based on the discussion, there is a communication disconnect. Given just this information, how would you categorize Jan and Jason's learning styles?

A: Jan - Visual; Jason - Kinesthetic

Which of the following behaviors by a financial counselor would be inappropriate, when attending to the client?

A: Lean back in the chair and get relaxed by crossing your legs or arms.

A CFP® Professional recommends a diversified portfolio to Jack, a new client, with an expected annual return of 8.6%. Jack immediately declines the recommendation because he was able to generate a 24% return last year with his Robinhood trading account. "Why should I go with 8.6% portfolio when I'm able to get a much higher return on my own?" What type of behavioral bias does his represent?

A: Overconfidence

Three important client issues that need to be understood are 1) risk tolerance, 2) risk capacity and 3) risk perception. They are interconnected but not the same. Which of the following statements regarding risk tolerance is NOT correct?

A: The financial planning professional is in a better position to establish the client's tolerance for risk, since portfolio allocation needs to reflect the need, the time horizon and the planner's knowledge of the markets.

Which of the following personality-preference pairings, as offered by Myers-Briggs, describes the way that clients make decisions?

A: Thinking and feeling

During your last investment planning meeting a client makes the following statement, "I heard that the ABC stock is a sure winner. Please buy me 5,000 shares today." What behavioral bias does this represent?

A: herding R: Herding is the emotional bias of going with the crowd (momentum) without conducting one's independent research. Information cascading is similar but refers to when an investor comes to their own investment decision but then sets that aside to be swayed by the flow of information from financial resources (e.g., CNBC).

Which of the following is a characteristic of a recessionary stage of the business cycle?

A: manufacturing output declines R: The recessionary stage of the business cycle is characterized by lower employment levels, lower manufacturing capacity utilization, lower investment in fixed investments (e.g., homes, machinery), lower consumer sales and falling interest rates and inflation.

Your client's daughter, Megan, incurred $10,000 of qualified undergraduate education expenses during the last tax year. Which of the following tax planning strategies would NOT be allowed?

Claim $2,500 AOTC credit and claim $1,200 Lifetime learning credit

If economists see clear signs of an economic bubble, which of the following policies would you expect to see from officials who believe in Keynesian theory?

A: raise income taxes, decrease government spending and reduce the Federal budget R: Keynesians believe that it is effective to use government spending and taxation to create or reduce economic demand. The Federal government (Congress and the President) has the ability to impact federal income taxes, government spending and deficits. In a recession, the logical action would be to lower taxes, increase government spending and increase the national deficit. Property and sales taxes are controlled by the states, not the Congress and President. The Federal Reserve does not have the power to change taxes or affect government spending. Rather, the Fed has the ability to manage the economy by altering discount rates, buy and sell securities in the open market, set bank reserves and set margin requirements. Lowering the discount rate makes money more accessible, and that would tend to invigorate the economy, not slow it down. Raising bank reserves would take money out of the system, since more money has to be left in reserves, and this would help to moderate the growth. Selling bonds in the open market would take money out of the system, again slowing down the pace of economic growth.

A downward sloping yield curve conveys all of the following information except for one. Which of the following is not a correct interpretation of a downward sloping yield curve?

A: the market expects an expanding economic environment R: A downward sloping curve signals that future rates will be lower than current rates. That occurs when there is an economic slowdown. Inflation drops during an economic slowdown. Remember - The yield curve graphs yield to maturity for similar bonds across a range of different durations. Typically, we see some version of a normal yield curve, which has lower yield on shorter-term bonds and higher yields on longer-term bonds. An inverted yield curve may be a precursor to an impending recession because the market expects interest rate to drop during the recessionary period.

Allie decided to "super fund" at 529 plan for her daughter with a $45,000 contribution on January 15th. She receives a $10,000 bonus on May 1st and elects to add that to the 529. How much of the $10,000 would be considered a taxable gift? a. $0 b. $3,000 c. $7,000 d. $11,000

B R: 45/5= 9,000 a month already contributed; adding 10,000 would be 3,000 (19,000 total) over the 16,000 limit for that year

What is the "day 1" lump sum needed to fund four years of tuition and fees given the following? • Freshman tuition of $18,000 • Education inflation rate of 6% • Portfolio reinvestment rate 4.5% • Withdrawals occur beginning of year

BEG Mode N=4 I= (1.045/1.06)-1 = -1.41054% PV= ? PMT= -18000 FV= 0 so the lump sum needed is $73,565.13

A CFP® Professional is working with a client who holds 80% of their investment portfolio in one security. Which of the following statements would be most appropriate, given the situation. a. My firm believes in diversifying portfolios, so we will need to sell a sizeable portion of the security holding b. I am concerned about the potential loss of this one position and based on my experience you need to sell the shares. c. This oversized position puts your wealth accumulation goal at risk. Diversification would improve the probability that you will reach your future need. d. I know that you feel strongly about not selling the position, so I will need you to sign this document which shows that I recommended selling part of the position.

C

A client is very nervous about market volatility. He asks the CFP® Professional to sell his equity holdings and move to cash. What is the best course of action? a. Sell the equity holdings and reposition proceeds in cash equivalent assets b. Explain to the client why he is wrong c. Reexamine the original investment strategy and discuss the long-term implications of the requested sale d. Shift the portfolio allocation to a more conservative mix but retain some exposure to equities

C

What actions will the Federal Reserve take given that the economy is experiencing a recession? a. Sell government securities and increase the margin rate b. Raise the bank reserve rate and lower the margin rate c. Lower discount rate charged to banks and buy government securities d. Lower taxes and lower the discount rate e. Increase spending and buy government bonds

C

Your client's goal is to fund four years of higher education for their daughter (age 6), Lucy. The child was born with a physical disability. Which of the following would be the following savings vehicles would be the least tax-efficient solution? a. 529 savings plan b. Coverdell ESA c. UGMA account d. ABLE account

C

A CFP® Professional has been working with a young couple. Recently, the husband passed away in a car accident. After a period of time, the professional calls the surviving spouse to schedule a meeting. The widow responds, "I'm not as interested in finances as my husband was so why don't you do what you consider best." Which of the following responses would be appropriate? a. OK, I have some definite ideas and will implement them. b. Well, I can keep the accounts as they are and call you back in six months or so. c. I understand that this is difficult. How about if you as your parents or siblings to come with you. d. I understand that you are going through a difficult period but it's important that we talk about your goals and priorities and the changes now impacting your family

D

What type of education savings vehicle would be most appropriate given that the object is to help fund insurance and travel? a. 529 Savings Plan b. Coverdell Education Savings Account c. U.S. Savings Bond - Series EE d. UGMA account

D

What is the end of month contribution need, given the following: • Day 1 lump sum need = $156,000 • Portfolio reinvestment rate = 6.2% • Start of school 14 years • Current savings for education = $22,400

END mode FV= $156,000 I = 6.2%/12 N = 14* 12 PV = $22,400 Solve for PMT = $385.61

Which of the following statements regarding the ABLE Account is incorrect?

More than one ABLE account can be opened for the individual by multiple contributors

Harold and Mary Anne Miler are a married couple in their early 40s with three children, ages 7, 10 and 12. Harold earns $350,000 per year as General Counsel of a mid-sized IT firm, and Mary Anne is a homemaker. They have major assets of $1.5M cash and $1M in stock options. College planning is of great concern to the Millers; currently they have no plan in place. They estimate that they will need $150,000 for each child in current dollars to fund their education. The Millers have constructed a budget and have determined that their household expenses are currently $12,000 per month, after tax. Assume that the Millers are in the 35% federal tax bracket and 6% state tax bracket. The Millers would like to set aside money to cover all of the required funding for their children's education. They are not confident that children will be able to handle money by age 21. Which of the following is most appropriate for the Millers?

Section 529 Qualified College Savings plan

Which of the following statements regarding the Coverdell Educational Savings Account is correct?

Taxpayers may be phased out from making a Coverdell contribution.

During our last class, we discussed five different categories of "counseling microskills." Identify any two (2) of those skillsets and describe why they are valuable in working with clients

The five categories of counseling microskills that were discussed in class follow: 1) establishing rapport, 2) being present (attentiveness), 3) applying active listening, 4) using effective questioning and 5) paying attention to non-verbal body language.

Which of the following statements regarding Federal PLUS Loans is incorrect?

The parent's payment on a PLUS loan will begin 6 months after the student graduates

Your clients are convinced that they would be better off funding a custodial account (UGMA or UTMA) rather than a 529 Savings Plan. Which of the following statements is correct and supports their argument?

There will be no tax penalty given that the assets are withdrawn to pay non-educational expenses.

Which of the following statements about supply and demand are true?

a) If demand increases and supply decreases, then the equilibrium price will rise b) If demand decreases and supply increases, then the equilibrium price will fall

Jill is a sophomore at the local community college. During the calendar year, she incurred tuition and fees of $8,000. Given that she paid for $5,000 of that bill from a 529 savings plan, how much can be claimed as an AOTC tax credit? (Assume there is no phase out) a. $0 b. $2,000 c. $2,250 d. $2,500

c 2250

Your clients have two children attending college to obtain their undergraduate degree. The first child incurred tuition and fees of $5,500. The second child who has a partial scholarship incurred tuition and fees of $2,000. What is the maximum AOTC credit that can be claimed by the parents? a. $0 b. $2,500 c. $4,500 d. $5,000 e. $7,500

c: 2500 R: 2500 of the first and then 2000 of the second