FP511 Final Quiz

Wes is considering investing in a new printing press for his printing business. The purchase price of the printing press is $225,000 and he expects to be able to sell it for $150,000 at the end of five years. During the five-year period, he expects the equipment to increase her annual cash flows by $45,000 (year 1), $32,000 (year 2), $24,000 (year 3), $16,000 (year 4), and $10,000 (year 5). If his opportunity cost is 7%, what is the net present value (NPV) of this investment?

The correct answer is -$9,118.62. The keystrokes on the HP 10bII/HP 10bII+ are as follows: 225,000 +/- CFj (year 0); 45,000 CFj (year 1); 32,000 CFj (year 2); 24,000 CFj (year 3); 16,000 CFj (year 4); 160,000 CFj (year 5; final annual cash flow of $10,000 plus the anticipated sales price of $150,000); 7 I/YR [Shift] NPV = -$9,118.6248, or -$9,118.62.

You've determined the net present value (NPV) of your client's investment to be $32,500. If your client's required rate of return is 8%, which of the following is most likely to be the investment's internal rate of return (IRR)?

The correct answer is 9%. If the net present value (NPV) of the investment is a positive number, the investment's IRR must be greater than or equal to the investor's required rate of return. Here, the investor's required rate of return is 8%, so the IRR must be greater than or equal to 8%.

You have gathered the following information from Edgar's financial statements: Net income $75,000 Gross income $110,000 Total assets $190,000 Total debt $45,000 Consumer debt $20,000 Based on this information, which of the following statements is CORRECT? I. Edgar's total debt ratio exceeds the generally recommended maximum. II. Edgar's consumer debt ratio exceeds the generally recommended maximum.

The correct answer is Both I and II. It is generally recommended that total debts do not exceed 36% of gross income. Edgar's total debt ratio is 40.9%, greater than the 36% maximum ($45,000 / $110,000 = 40.9 %). The consumer debt ratio is the ratio of consumer debt payments to net income. Edgar's consumer debt ratio is 26.67%, which exceeds the generally recommended maximum of 20% ($20,000 / $75,000 = 26.67%)

Mickey has decided he needs to increase the balance of his emergency fund. Which of the following are ways Mickey can save for this purpose? I. Cancel his audiobook subscription. II. Choose a more economical cell phone plan. III. Use an overdraft feature on his debit cards. IV. Decrease the deductible on his automobile insurance policy.

The correct answer is I and II. Using an overdraft feature on debit cards may entice Mickey to spend money he does not have available in his account. Decreasing insurance deductibles increases premiums, which is not a savings strategy.

Wendy, a CFP® professional, is meeting with her client, Chrissy, to discuss her goals. Chrissy advises Wendy that one of her goals is to take an expensive hiking trip in the Alps, something her mother and grandfather had done when they were young. She'd like to keep this tradition in her family. Wendy believes that, because of Chrissy's financial circumstances, this is not the best use of Chrissy's money. What should Wendy do to best serve her client, Chrissy? I. Wendy should understand that expensive trips like hiking in the Alps is an important family tradition to Chrissy. II. Wendy should consider the trip as one of Chrissy's goals and explain how such a goal would impact her overall financial plan. III. Wendy should share her opinion with Chrissy and persuade her to abandon this as one of her goals. IV. Because Wendy, as Chrissy's financial planner, does not feel taking the trip is a wise financial decision, she should not include it in Chrissy's financial plan as a goal.

The correct answer is I and II. Wendy should respect Chrissy's wishes and understand that such a trip is part of a family tradition. She should consider the trip as one of Chrissy's goals; however, she should also let her know how such a goal would impact Chrissy's overall financial plan. Wendy should not share her opinion with Chrissy or try to persuade her to abandon it as one of her goals.

Which of the following are characteristics of Chapter 13 bankruptcy provisions? I. A repayment plan is implemented. II. The debtor is typically required to relinquish assets. III. Debt payments may be reduced so payments are more manageable for the debtor. IV. Generally, Chapter 13 bankruptcy is more favorable for creditors than Chapter 7 bankruptcy.

The correct answer is I, III, and IV. Chapter 13 bankruptcy is generally more favorable for creditors because they receive at least some portion of what is owed. In a Chapter 13 bankruptcy, the debtor repays at least a portion of the debts over a specified time. Creditors may not receive any payments under a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, debtors are typically not required to relinquish assets.

Which of the following acts provides applicable procedures for issuing an initial public offering (IPO) of securities and addresses the paperwork involved in offering new securities to potential investors?

The correct answer is the Securities Act of 1933. In addition, this act specifies which securities are exempt from registration requirements. The 1933 Act also requires the registration of new issues of securities in the primary market.

All of the following statements regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 are correct except

Correct answer is people who have the ability to pay their debts can choose between filing under Chapter 7 and 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.

Ed recently began studying for his master's degree earlier this year on a half-time basis. He has applied for a Pell Grant and a Federal Supplemental Educational Opportunity Grant (FSEOG). Assuming Ed demonstrates financial need, for which of the following is he likely to be approved?

The answer is neither the Pell grant nor the FSEOG. Because he is a graduate student, Ed will not qualify for either grant.

Zach expects to receive $20,000 in eight years from his uncle Bradley. How much is this worth in today's dollars assuming a 6% after-tax interest rate, compounded annually?

The correct answer is $12,548. This requires a present value of a single sum calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows: 20,000 FV; 6 I/YR; 8 N; solve for PV = −12,548.2474, or $12,548.

Phil secures a $350,000, 15-year mortgage with an annual interest rate of 5.5%. What will be the unpaid principal balance on Phil's mortgage at the end of 10 years?

The correct answer is $149,718.22. The unpaid principal balance on Phil's mortgage at the end of 10 years will be $104,761.78. The keystrokes on the HP 10bII/HP 10bII+ are as follows: END mode; 350,000 PV; 15 × 12 = 180 N; 5.5 ÷ 12 = 0.4583 I/YR; solve for PMT = -2,859.7921; 1 INPUT 120 [Shift] AMORT; (pressing the = key toggles you through amortization totals for months 1 through 120); = - 200,281.7762 (total principal paid through 120 months) = -142,893.2758 (total interest paid through 120 months) = 149,718.2238 (remaining principal balance through 120 months of payments)

Assume the Martins paid $2,000 of their credit card debt using a gift from Emile and Dee; financed the purchase of an $800 laptop using a new line of credit; and bought Justin a vintage trombone, valued at $500, online for $300 using their checking account debit card. Calculate the Martins' net worth after these transactions.

The correct answer is $218,753. Paying $2,000 of credit card debt reduces the Martins' liabilities by this amount. This has a positive effect of $2,000 on net worth. Although the purchase of the laptop will increase the Martins' assets by $800, the use of credit will increase liabilities by the same amount; therefore, this transaction has no effect on net worth. Using checking account funds (via a debit card) of $300 to purchase the vintage trombone valued at $500 will result in an increase in assets of $200 ($500 − $300). This results in a total net worth of $218,753 ($216,553 net worth from Statement of Financial Position + $2,000 + $200).

Oscar and Kathryn have a net worth of $250,000 before each of the following transactions: - Purchased $3,000 of appliances on credit - Transferred $2,000 from their checking account to a personal savings account - Paid off a credit card with a balance of $6,000 using a personal savings account What is the net worth of Oscar and Kathryn after these transactions?

The correct answer is $250,000. None of these transactions will change Oscar and Kathryn's net worth. The checking and savings account transactions offset each other and, although the addition of the appliances will increase the clients' assets by $3,000, the use of credit will increase their liabilities by the same amount.

Meghan is planning for her son's college education. She would like her son, who was born today, to attend a public university for four years beginning at age 18. Tuition is currently $15,000 a year and has increased at an annual rate of 6%, while inflation has only increased at 2.5% per year. Meghan can earn an investment rate of return of 9%. How much must she save at the end of each year if she wants to make the last payment at the beginning of her son's first year of college? Round to the nearest dollar.

The correct answer is $3,979. Keystrokes on the HP 10bII/HP 10bII+ are as follows: Uneven Cash Flow Method Step 1: Determine the PV of the years of tuition at age 18: 0 CFj 0 CFj 17 Shift Nj 15000 CFj 4 Shift Nj [(1.09 ÷ 1.06) − 1] × 100 = 2.8302 I/YR NPV = $34,834.5585 Step 2: Determine the annual payments needed to fund college tuition costs: 34834.5585 PV 18 N 9 I/YR PMTOA = ($3,978.5347), rounded to $3,979

Ryan and Nicole have decided to contribute equally to the cost of a $16,000 used car for Joshua when he graduates from college in two years. Ryan can earn a 5% annual after-tax rate of return. Calculate the amount Ryan must save at the beginning of each month, starting today, to reach this goal.

The correct answer is $316.32. Use BEG mode because this is an annuity due calculation. FV = 8,000 (Ryan's share of the cost) i = 0.4167 (5 ÷ 12) n = 24 (# of months) PMTAD = -316.32, or $316.32

Frank purchased an antique table today for $30,000. Experts advised her the table will increase in value at a rate of 3% annually for the next six years. Approximately how much will the table be worth at the end of the sixth year if his expected return is achieved?

The correct answer is $35,822. This is a future value of a single sum calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows: 30,000 +/− PV; 3 I/YR; 6 N; solve for FV = 35,821.5689, or $35,822.

Henry's son, Brock, turned six years old today. Henry has plans for Brock to attend a four-year private university at age 18. Currently, tuition is $46,500 per year and is expected to increase at 6.5% per year. Henry can earn an annual compound investment return of 9%. Calculate the lump sum that he needs on Brock's first day of college to be able to pay for his entire college education.

The correct answer is $382,594.77. Step 1 Determine the future cost of college for the first year: 46,500 +/- PV 6.5 I/YR 12 N Solve for FV = 99,002.9752, or $99,002.98 Step 2 Determine the account balance necessary to fund college education: BEG mode (money is needed at the beginning of college) 99,002.9752 +/- PMT 2.3474 I/YR [(1.09 ÷ 1.065) - 1] × 100 = 2.3474 4 N Solve for PV = 382,594.7657, or $382,594.77

Bobbi is a full-time employee at an insurance agency and is enrolled in night classes on a part-time basis in pursuit of her MBA. Her employer offers reimbursements for qualified expenses through the Educational Assistance Program. This year Bobbi has incurred the following educational expenses: Books: $800 Tuition: $3,000 Enrollment Fees: $200 Computer Lab Fee: $100 Clothing for school: $150 Based on these expenses, identify the amount of reimbursement for which Bobbi can receive under the Educational Assistance Program.

The correct answer is $4,100. 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. Bobbi's qualifying expenses equal $4,100 ($200 + $3,000 + $800 + $100).

Bryan wants to open a photography studio in four years. To do so, he needs to accumulate $175,000 (in today's dollars) to adequately finance this venture. He assumes he can earn an 8% compound annual after-tax rate of return on investment and inflation will average 3.5%. What will be Bryan's serial payment at the end of the third year?

The correct answer is $45,455.08. END mode FV= 175,000i= 4.3478 [(1.08 ÷ 1.035) − 1] × 100n= 4PV= 0PMTOA= (40,997.8820) × 1.035 = 42,432.8078 (change sign) 42,432.8078 × 1.035 = 43,917.9561 43,917.9561 × 1.035 = $45,455.08

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

The correct answer is $470,000. The FDIC insures separate legal categories of accounts of a legal institution. As a result, the individual accounts owned by John (CD and checking account) are aggregated and are insured up to a total of $250,000. The joint account is insured for $70,000. The individual retirement account (IRA) will be insured up to $250,000. Total amount insured is $470,000 ($250,000 + $70,000 + $150,000).

Calculate the Martins' savings from refinancing their home loan over the first year of the new loan. Assume they refinance with a 30-year loan. The result is

The correct answer is $7,716.72. Current monthly mortgage payment—$1,829.50 Mortgage payment after refinancing—$1,186.44 197888 = PV 6/12 = I/YR 30 x 12 = N Solve for PV = -1,186.4385, or $1,186.44 Monthly savings—643.06 × 12 Savings over the first year of the loan—$7,716.72 (Do not factor in closing costs because they are being paid from separate funds.)

John would like to purchase his friend's action figure collection in eight years for $12,000. His father will give him $2,000 toward the purchase of the collection at that time. John wants to save monthly for the balance of the purchase price. What is the approximate required monthly payment at the beginning of each month to accumulate the $12,000, including his father's gift, at an assumed interest rate of 5%?

The correct answer is $84.58. This requires an annuity due calculation. The amount to be funded is $10,000 ($12,000 - $2,000). The keystrokes on the HP 10bII/HP 10bII+ are as follows: BEG mode; 10,000 FV; 5 ÷ 12 = 0.4167 I/YR; 8 × 12 = 96 N; solve for PMT = −84.5801, or $84.58.

Justin and Molly have become parents today with their first-born child, Harper. They would like to start saving for Harper's college education and would like her to attend college at National University for four years starting at age 18. As Justin and Molly's financial planner, you have determined that the total amount needed to fund Harper's college education is $175,000. If the expected annual return for deposits into a 529 plan is 9%, what is the amount of the quarterly deposits that must be made into a 529 plan?

The correct answer is $993.52. The payment is calculated as follows: 175,000 FV (9 ÷ 4) 2.25 I/YR (18 x 4) 72 N Solve for PMT = -993.5239, or $993.52

Assuming the Martins' original 30-year fixed mortgage loan amount was $200,000, what is the interest rate on the loan?

The correct answer is 10.5% PV = 200,000 n = 360 (# of months) PMTOA = −1,829.50 (Mortgage payments from Statement of Cash Flows ÷ 12) i = 0.8750 × 12 (months) = 10.5%

Annie deposits $2,500 into an account earning an annual interest rate of 6.25% compounded monthly. Assuming she makes no withdrawals or additions to this account, approximately how many years will it take for Annie to have $5,000 in her account?

The correct answer is 11.12 years. This is a number of periods calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows: 2,500 +/− PV; 5,000 FV; 6.25 ÷ 12 = 0.5208 I/YR; 0 PMT; solve for N = 133.4305 ÷ 12 = 11.1192, or 11.12 years.

What would the inflation-adjusted interest rate be with a 2.5 % inflation rate and a 6% rate of return? Round to two decimal places.

The correct answer is 3.41% [(1.06 ÷ 1.025) − 1] x 100 = 3.4146, rounded to 3.41 Note: Alternate calculation would be 1.025, INPUT 1.06, SHIFT, % CHG Solve for I/YR = 3.41%

As a financial planner you must be familiar with several different economic and interest rates, and how to use them in calculations that are important to your clients. Assume the following rates: Prime rate5.5%Interest rate − Investment A8.0%Inflation rate2.5%Discount rate2.0% Considering all the interest rates above, calculate the inflation-adjusted return for investment A.

The correct answer is 5.37%. [(1.08 ÷ 1.025) − 1] x 100 = 5.3659, rounded to 5.37% This can also be calculated using the method below. 1.025, INPUT 1.08, SHIFT, % CHG Solve for I/YR = 5.37%

Charley invested $100,000 12 years ago. Today, it is valued at $250,000. What is the rate of return Charley's investment?

The correct answer is 7.93%. This requires an interest rate calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows: 100,000 +/− PV; 250,000 FV; 12 N; solve for I/YR = 7.9348, or 7.93%.

Dionne, Danielle, and Daphne are currently college students eligible for federal student aid. Dionne owes a refund on a federal student grant. Danielle has been unable to maintain satisfactory academic progress. Daphne is experiencing financial difficulties and has defaulted on her federal student loan. Which of these students are likely to lose federal student aid eligibility?

The correct answer is Dionne, Danielle, and Daphne. All three of these students are likely to lose federal student aid eligibility.

Aaron, a financial planner, has advised Macy that she needs to increase her savings. What might you recommend as a good savings strategy? I. Limit the number of lattes she purchases. II. Use an overdraft feature on debit cards. III. Increase her deductible on her car insurance policy. IV. Limit her credit card purchases to those she can pay off in full in one year.

The correct answer is I and III. Macy can use the money she saves by limiting the number of lattes she purchases to increase her savings. Using an overdraft feature on debit cards may tempt her to spend money she does not have available in her account. Increasing insurance deductibles decreases premiums, which is a good savings strategy. If credit cards are used, they should be paid off in full at the end of each month.

Which of the following statements concerning the Consumer Credit Protection Act is CORRECT? I. Credit terms must be disclosed before extending credit. II. Consumer liability for a lost or stolen credit card is limited to $100. III. Interest must be reported in terms of annual percentage rate (APR). IV. Credit bureau reports must include accurate, relevant, and recent information.

The correct answer is I and III. Statement II is incorrect because a cardholder is liable for only $50 in unauthorized charges if he reports the card as lost or stolen. Statement IV is incorrect as it is a requirement of the Consumer Credit Reporting Act, not the Consumer Credit Protection Act. The Consumer Credit Protection Act also requires that applicants who are denied credit must be offered the reason

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. The analysis of the client's cash flow statement helps determine the client's net worth, or total cash surplus, by tracking cash inflows and outflows over a period of time. III. Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement.

The correct answer is I and III. Statement II is incorrect. 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. Net worth is determined in a statement of financial position.

To which of the following groups do the CFP Board Fitness Standards apply? I. CFP® candidates II. A CFP® practitioner acting in a supervisory capacity III. Respondents in a CFP Board investigation IV. Professionals Eligible for Reinstatement

The correct answer is I and IV. The Fitness Standards apply to CFP® candidates and Professionals Eligible for Reinstatement (PER). PER includes both individuals who are not currently certified but have been certified by CFP Board in the past and individuals are eligible to reinstate their certification without being required to pass the current CFP® Certification Examination.

Which of the following statements describe characteristics of deflation? I. Prices are falling in absolute terms. II. The rate of inflation has declined.

The correct answer is I only. Disinflation, not deflation, is characterized by a decline in the rate of inflation. Deflation is characterized by prices that are falling in absolute terms.

Which of the following statements regarding open-ended and closed-ended questions is CORRECT? I. Planners should use as many open-ended questions as possible when developing client goals and expectations. II. Closed-ended questions facilitate effective communication between the client and planner because they require the client to answer in her own words.

The correct answer is I only. Planners should use as many open-ended questions as possible when developing client goals and expectations. These types of questions require clients to answer in their own words. Open-ended questions facilitate effective communication between clients and planners. Statement II is incorrect. Closed-ended elicit "yes" or "no" answers, and this can restrict communication.

Which of the following education funding plans provides tax advantages regardless of the contributor's adjusted gross income (AGI)? I. Section 529 plan II. Series EE or Series I savings bonds III. Coverdell Education Savings Account (CESA)

The correct answer is I only. This plan offers significant tax advantages regardless of the contributor's adjusted gross income (AGI). The tax advantages of CESAs and education savings bonds are phased out at higher levels of AGI.

According to CFP Board Code of Ethics, Connor, a CFP® professional, is responsible for which of the following? I. Acting in the client's best interests II. Avoiding or disclosing and managing conflicts of interest III. Acting with honesty, integrity, competence, and diligence IV. Maintaining the confidentiality and protect the privacy of client information

The correct answer is I, II, III, and IV. A CFP® professional must 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 and protect the privacy of client information. Act in a manner that reflects positively on the financial planning profession and CFP® certification.

Which of the following individuals are required to register as an investment adviser under the Investment Advisers Act of 1940? I. Bethany provides advice regarding securities. II. Chase receives compensation for providing advice. III. Andrew is in the business of providing advice about securities. IV. Catherine is a CFP® practitioner who issues reports regarding securities.

The correct answer is I, II, III, and IV. All of the individuals must register as investment advisers.

Mandy, your financial planning client, would like you to advise her of tax-efficient estate planning strategies that preserve her family's wealth and incorporate charitable donations. What are the relevant elements in Mandy's financial planning engagement? I. Address estate and legacy matters II. Pursue philanthropic interests III. Preserve or increase wealth IV. Identify tax considerations

The correct answer is I, II, III, and IV. All of these are relevant elements in Mandy's financial planning arrangement.

Which of the following are state law exemptions found in Chapter 7 of the Federal Bankruptcy Code? I. Pension and retirement plan rights (ERISA plans) II. A limited amount of personal property III. Proceeds from annuity contracts IV. Disability income benefits

The correct answer is I, II, III, and IV. Other state law exemptions include an exemption for one's homestead and the existing cash value of any life insurance policies.

Which of the following are state law exemptions found in Chapter 7 of the Federal Bankruptcy Code? I. Disability income benefits II. An exemption for one's homestead III. Property held as tenants by the entirety IV. Existing cash value of life insurance policies

The correct answer is I, II, III, and IV. Other state law exemptions include the proceeds of any annuity contracts.

Which of the following statements regarding interpersonal communication between financial planners and their clients are CORRECT? I. Mirroring is accomplished by imitating the client's body language or verbal style. II. Body language can impact how clients receive and interpret messages more than any other type of communication. III. Emotional intelligence includes the ability to recognize emotional expressions and select socially appropriate responses.

The correct answer is I, II, and III. Also, effective interpersonal communication involves the application of both oral and non-verbal skills, such as the effective use of body language.

Which of the following activities would be appropriate if you were establishing and defining the client-planner relationship or gathering information necessary to fulfill the engagement? I. Collecting personal financial information II. Inquiring about the number of dependents III. Inquiring about the age or dates of birth of dependents IV. Determining which stocks to purchase for the client's investment portfolio

The correct answer is I, II, and III. Establishing and defining the client-planner relationship does not include determining which stocks or investments to purchase. This occurs in the fourth phase of the financial planning process, developing the recommendations.

Which of the following statements regarding the Expected Family Contribution (EFC) as it relates to student financial aid is CORRECT? I. Parental assets include almost everything owned by the parents with notable exceptions. II. Student income includes taxable and nontaxable income from the year preceding the award year, reduced by an income protection allowance and taxes. III. Student assets include the value of everything the student owns or that has been saved on his behalf. IV. Parental assets and income are assigned a higher rating in the EFC calculation than student assets and income.

The correct answer is I, II, and III. Parental assets and income are assigned a lower rating in the EFC calculation than student assets and income.

Candice has referred Rochelle, a CFP® professional, to her brother, Nelson. In their initial meeting, Rochelle explains how she can help Nelson develop a comprehensive financial plan. Which of the following would be Rochelle's roles in a client-planner relationship with Nelson? I. Assisting Nelson in identifying his goals II. Analyzing Nelson's current financial status III. Recommending strategies that will meet Nelson's business goals IV. Providing documentation Rochelle needs to complete the financial plan

The correct answer is I, II, and III. Rochelle is responsible for helping Nelson with identifying his goals and making recommendations based on those goals. She is also responsible for analyzing Nelson's current financial status. Nelson has the duty to provide documentation Rochelle needs to complete the financial plan.

Blanca, a CFP® professional, has recently entered into a financial planning engagement with Simon. As his financial planner, which of the following are Blanca's roles? I. Analyzing Simon's current financial status II. Assisting Simon in implementing the financial plan III. Helping Simon identify financial goals and objectives

The correct answer is I, II, and III. The financial planner is responsible for analyzing clients' financial status, assisting clients in implementing their financial plans, and making recommendations based on the client's goals and objectives.

Which of the following expenses qualify for an employer's Educational Assistance Program? I. Enrollment fees II. On-campus housing III. Full-time, graduate school tuition IV. Part-time, undergraduate tuition

The correct answer is I, III, and IV. With the Educational Assistance Program, an employer can reimburse an employee's undergraduate and graduate tuition, enrollment fees, books, supplies, and equipment, and these benefits are excluded from the employee's income up to $5,250 per year. Meals, transportation, and lodging are not qualified.

When providing financial planning services to a client, a certificant needs to provide these services with integrity. Which of the following are characteristics of the duty of Integrity? I. Integrity ensures that information is accessible only to those authorized to have access. II. Integrity demands honesty and candor, which must not be subordinated to personal gain an advantage. III. Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot coexist with deceit or subordination of one's principles.

The correct answer is II and III. The duty of confidentiality and privacy ensures that information is accessible only to those authorized to have access.

Which of the following CFP® certificants would likely be considered to be engaged in financial planning or the material elements of financial planning? I. Lance, who reviews a life insurance sales brochure with his client, Arthur, and completes a variable life insurance application II. Nadia, who conducts comprehensive data gathering regarding Jason's investments, life insurance, retirement plans, wills, and trusts and makes recommendations for him

The correct answer is II only. Because Nadia's services involve several of the financial planning subject areas and she is involved in the elements of financial planning, she is likely providing financial planning. Lance's service to Arthur is limited, and the engagement would likely not be considered financial planning.

Whitney is designing her new email template which will reflect her recent certification as a CFP® professional. Under her name, she has identified herself as a CFP™. In a tagline at the bottom of the template, she advertises herself as a "CFP® expert." According to CFP Board's guidelines regarding how the CFP®" marks may be used, which of the following is CORRECT? I. Whitney has appropriately identified herself as a CFP™. II. Advertising herself as a CFP® expert is prohibited by CFP Board.

The correct answer is II only. Statement I is incorrect. Although, Whitney can identify herself as a CFP®, it must be done behind her name, not under it. If Whitney wants to identify herself under her name, she should do so as a ™. Statement II is correct. "CFP®" 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. Here, it can be used alone.

Which of the following are considered fixed cash outflows? I. Clothing expenses II. Mortgage payments III. Insurance premiums IV. Auto loan payments

The correct answer is II, III, and IV. Clothing expenses are a variable outflow because they typically do not occur on a regular basis and the amount tends to vary. The other choices represent fixed outflows because they tend to occur regularly and the amount is more predictable.

Reinstatement by CFP Board is possible under which of the following circumstances? I. Revocation II. Suspension of one year or less III. Suspension of more than one year IV. Temporary bar of more than one year

The correct answer is II, III, and IV. Revocation is permanent. There will be no opportunity for reinstatement.

Charlie wants to sell financial products as a career. In addition to the Series 63 registration required by his state, what other license must he have to sell both variable life insurance and mutual funds? I. FINRA Series 65 II. FINRA Series 66 III. FINRA Series 6 or 7 IV. State variable insurance license

The correct answer is III and IV. A planner who wishes to sell variable contracts, such as variable life insurance or variable annuities, must hold a FINRA Series 6 or Series 7 (and, in most states, a Series 63 registration) as well as that particular state's variable insurance license. A Series 65 license entitles the holder to provide investment advice to clients within the holder's primary state of residence. The Series 63 and Series 65 license requirements are combined in the Series 66 registration. Any individual who holds a Series 66 license may provide investment advice and sell securities to any client in any state.

Which of the following financial statements provides a snapshot of the client's net worth at any given point in time, usually at the end of a calendar year? I. Personal tax return II. Cash flow statement III. Net worth statement IV. Statement of financial position

The correct answer is III and IV. A statement of financial position, also known as a personal balance sheet or net worth statement, provides a snapshot of the client's net worth at any given point in time, most often at the end of a calendar year.

Ryan is considering purchasing a variable universal life policy. Identify the licenses you must maintain to sell him the policy. I. Series 24 II. Series 65 III. Series 6 or 7 IV. A variable state insurance license

The correct answer is III and IV. Generally, you must maintain a Series 6 or a Series 7 license and a variable state insurance license to sell variable universal life insurance. A Series 24 license is maintained by any person actively engaged in managing a member's securities or investment banking business, including supervising, soliciting, and conducting business, or in training persons associated with the member. A Series 65 license allows the holder to provide investment advice to clients within the holder's state of residence.

Which of the following statements regarding the classical economics approach to financial counseling is CORRECT? I. This approach features the use of a SWOT analysis. II. This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory. III. Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs. IV. This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes.

The correct answer is III and IV. Statement I is incorrect; the strategic management approach features the use of a SWOT analysis. Statement II is incorrect; the financial counseling approach that is based on the use of psychoanalytic theory such as Freudian or Gestalt theory is the psychoanalytic approach.

The Martins ask you whether their consumer debt ratio is at an acceptable level without considering the projected income earned by Sherri. What should you advise them? (Exclude any Section 401[k] plan loan payments.)

The correct answer is a ratio of 8.53%, which is excellent. Monthly debt payments Debt payments* = $80 + $253.33 = $333.33 Monthly net income ($71,050 - [$22,855 + $1,320]) / 12 = $3,906.25 Consumer debt ratio = $333.33 / $3,906.25 = 8.53% NOTE: Monthly credit card payments, boat loan payments, and all sources of income from Statement of Cash Flows without considering the projected income earned by Sherri. A generally accepted rule in personal financial planning is that the consumer debt ratio should not exceed 20%. Thus, a consumer debt ratio of 8.53% is considered excellent.

Amanda, a CFP® professional, is enjoying an afternoon at her son's school playground when she is approached by Tracy, a fellow parent and teacher at a local elementary school. Their conversation covers specifics about Tracy's personal and financial situation, with emphasis on a recommended investment strategy for her 403(b) account. Amanda is aware that she is providing Financial Advice to Tracy. Identify the correct application of rules from the Code and Standards based on Amanda and Tracy's interaction.

The correct answer is although only Financial Advice has been determined, Amanda must uphold her Fiduciary Duty and must follow the Code of Ethics. As a CFP® professional, Amanda is obligated to uphold the Code of Ethics. In addition, since Financial Advice is occurring, Amanda must act as a Fiduciary, in the best interest of Tracy. The introduction of the Code and Standards specifically states "The Code of Ethics applies at all times, and sets forth principles that guide the behavior of CFP® professionals, with elaboration provided in the Standards."

Paul and Carmen recently moved to the Gulf Coast. Paul is in the Secret Service and would like to live on the beach until he gets his next work assignment in three years. Paul and Carmen want to purchase a home; however, they expect to move for Paul's next assignment. Which of the following mortgages is best for Paul and Carmen if they want to keep their monthly mortgage payments to a minimum?

The correct answer is an adjustable rate mortgage with an interest rate cap. Given Paul and Carmen's relatively short time in their new home, an adjustable rate mortgage (ARM) is their best option. A reverse mortgage is a special type of home loan where the payment stream is reversed (that is, the lender pays the homeowner a stream of income secured by the considerable amount of equity in the home).

In 2012, the average cost of a new home in Oakville was $150,000. In 2014 the average cost rose to $210,000. Due to an economic downturn in 2017, the average cost of a new home fell to $185,000, and the reaction to the decreased cost was positive, even though the new average cost was higher than the 2012 average cost of a new home. This behavior is known as

The correct answer is anchoring. When the average cost of a new home rose in 2014 to $210,000, home buyers reset their psychological anchors to that cost. As the price declined in 2017 to $185,000, the reaction was positive because it was considered in light of the higher 2014 price.

Bernie is meeting with his clients, Mike and Alyssa, to define their goals. Mike tells Bernie that one of his goals is purchasing a hunting camp in two years and Alyssa shakes her head. What is the best action for Bernie to take next?

The correct answer is ask Alyssa if the camp if a mutually agreed-upon goal. Alyssa's body language (shaking her head) may express that she does not agree with this goal. Therefore, Bernie should clarify whether or not she is on board with Mike's idea. If Alyssa is agreeable, Bernie should then get more details regarding the purchase of the camp. Bernie should not move on to other goals before Mike and Alyssa are in agreement regarding this particular one. Lastly, this is not the time to make recommendations without comprehensive information.

Derrick wants to establish an education fund that may be used to pay for his son's primary and secondary education expenses. Which of the following will meet Derrick's needs? I. Section 529 plan II. Coverdell Education Savings Account(CESA)

The correct answer is both I and II. Coverdell Education Savings Accounts (CESAs) and Section 529 plans may be used to pay for primary and secondary education expenses.

Over the years, Quinn has made timely payments on four of his credit card accounts, all which have balances near the available credit limits. He did pay off a fifth credit card account, which he had for 20 years, and immediately closed it. Which of the following statements regarding Quinn's credit score is CORRECT? I. By immediately closing his long-standing account when it was paid off, Quinn likely decreased his credit score. II. Having four credit card account balances near their available credit limits will in all likelihood adversely affect Quinn's credit score.

The correct answer is both I and II. Immediately closing long-standing accounts will likely decrease Quinn's credit score. Keeping account balances near the available credit limit has a negative effect.

Max and Marlene have three children, Annie, Stephanie, and Joshua, attending college full-time. Which of the following statements regarding education tax credits is CORRECT? I. An American Opportunity Tax Credit may be claimed by Max and Marlene for each child. II. Max and Marlene may claim a Lifetime Learning Credit for the entire family.

The correct answer is both I and II. In addition, a Lifetime Learning Credit may be claimed for one child and an American Opportunity Tax Credit may be claimed for the other two.

Which of the following statements concerning investment advisers is CORRECT? I. Investment advisers with assets under management of less than $100 million will generally be required to register as an investment adviser with the state in which they maintain clients. II. In general, investment advisers with $100 million of assets or more under management are required to register with the SEC.

The correct answer is both I and II. Investment advisers with assets under management of less than $100 million will generally be required to register as an investment adviser with the state in which they maintain clients. The general rule is that investment advisers with $100 million of assets or more under management must register with the SEC.

Peter, age 35, has requested your expertise in developing a college funding plan for his five-year-old daughter, Brooke. He has presented you with the following information. Current annual salary—$115,000Monthly mortgage payment—$1,700Credit card debt—$3,000 (16.5% fixed)Checking account balance—$1,345Long-term group disability insurance—60% of salary to age 65, 60-day elimination periodLife insurance—1x salary (group), $400,000 20-year term (individual) After completing a budget with Peter, you have determined that he has $350 per month in surplus cash flow. He tells you he would like to use this amount to fund a college plan for Brooke. Based on the information provided, what should Peter do first?

The correct answer is establish an emergency fund. At this point, Peter should use his surplus cash flow to establish an emergency fund. He does not have access to immediate cash, and, in the event of disability, he does not have enough set aside to cover his elimination period. Paying off his credit card debt, purchasing additional life insurance, and establishing a college plan for Brooke should be considered after establishing the emergency fund.

From your meetings with Ryan, you realize he has a tendency to follow the actions of a larger group of people when making financial decisions, whether those actions are rational or not. Choose the behavioral finance theory that explains Ryan's behavior.

The correct answer is herding. Ryan's behavior is known as herding. 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.

Maxine, age 57, would like to retire in 10 years. Currently, her debt is decreasing as her cash flow and net worth are steadily increasing. Based on Maxine's current financial life cycle phase, which of the following goals is she likely to have?

The correct answer is long-term goals, such as investing for retirement. Maxine is in the conservation/protection phase of the financial life cycle. As such, her goals are likely longer-term goals, such as investing to provide for future retirement income. In the accumulation phase of the financial life cycle, clients have only limited discretionary income and, as a result, they are likely to focus on short-term, cost-of-living goals. Finally, in the distribution/gifting phase, estate planning and capital preservation are usually most important.

Melissa has $8,000 in a savings account, which she has earmarked for an Australian vacation later this year. The roof of her house was damaged recently and it requires considerable repairs. Melissa does not want to spend the money in her savings account to make the repairs because she believes that money is for her upcoming vacation. Instead, she withdraws $4,000 from her traditional IRA to make the repairs. She has to pay income tax of $1,120 plus a penalty of $400 on the IRA withdrawal. This is an example of which of the following behaviors?

The correct answer is mental accounting. Melissa's irrational financial decision resulted from mentally putting her money into separate "accounts" based on the function of those accounts. Self-control bias occurs when an individual lacks self-discipline and favors immediate gratification over long-term goals. Herding occurs when a person follows the actions of a larger group, whether rational or not. Confirmation bias means people tend to pay attention to information that supports their preconceived opinions while disregarding accurate, unsupportive information.

Craig is refinancing his current 7.5% 30-year fixed-rate mortgage for $150,000 into a new 5.75% 30-year mortgage for $150,000. How much is his new monthly payment and how much per month will he save on this payment?

The correct answer is new payment = $875.36, savings = $173.46. END Mode Old payment: PV = 150,000 n = 360 (30 × 12) i = .625 (7.5 ÷ 12) PMT = −1,048.82 New payment: PV = 150,000 n = 360 (30 × 12) i = .4792 (5.75 ÷ 12) PMT = −875.36 Savings = $1,048.82 − $875.36 = $173.46

Analyze the following scenario. Ryan's neighbor, Dan, asked you to prepare his tax return and financial statements for the previous year. You do this for Dan and meet with him when the documents are completed. During your meeting, you present an investment plan for Dan based on the information he provided for the tax return preparation. Dan thanks you for completing the tax return and financial statements and pays you a fee for your work. Dan, however, tells you he is not interested in an investment plan at this time but may contact you in the future if circumstances change. Assuming you are competent to prepare the tax return and financial statements, did you provide financial planning for Dan based on the facts presented?

The correct answer is no, because Dan did not ask you to prepare, nor did he expect you to create, an investment plan. Dan expected no more from you than the preparation of his tax return and financial statements; he did not request any of the financial planning subject areas be addressed. The fact that Dan paid you a fee for your services, and that Dan is Ryan's neighbor, does not make the assistance you provided to Dan financial planning. In some cases, a client's request for a singular service may rise to the level of financial planning. Depending on the depth and breadth of a service and the intent of the client, as well as the comprehensiveness of information gathered, a service might be considered financial planning.

Blake and Sarah have a monthly mortgage payments of $850 (principal, interest, taxes, and insurance [PITI]) on a mortgage balance of $95,000 on their home. They have an auto loan balance of $5,000, with monthly payments of $250. Additionally, they have a credit card balance of $2,000, on which they pay $225 each month. Blake and Sarah's net income for the past year was $35,000. Their gross income was $48,000. Are Blake and Sarah using excessive amounts of debt?

The correct answer is no, because monthly house payments (PITI) are less than 28% of gross income and total monthly debt payments are only 33% of gross income. Blake and Sarah are not using excessive amounts of debt. Both ratios should be calculated using gross income.

Recently, Fallon, an avid shopper, has heard from her friends that an investment in Shoes-2-You stock was a wise idea because the shoes sold are very stylish. Even though Fallon's financial planner has advised her that investing in this stock is a poor decision, she invests in it anyway. Her brother, Stanley, congratulates her on her investment because he feels it is a wise investment. Stanley considers himself to be an expert in investments. Unfortunately, he considers his expertise to be much greater than it actually is. In the past, Stanley has taken credit for any investment decisions that have positive returns but blames the economy when an investment does poorly. Considering Fallon's and Stanley's behavior, which of the following statements is CORRECT?

The correct answer is that Fallon's behavior is an example of confirmation bias; Stanley's behavior is representative of overconfidence. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Overconfidence tends to make Stanley believe his level of ability is much higher than what it is. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Mental accounting is putting money into separate "accounts" based on the function of these accounts.

Bill and Sophia have recently retired and want to travel to Europe and then volunteer for local mission work. They would also like to meet with Humphrey, their financial planner, to discuss charitable contributions they would like to make to these local missions. Humphrey should determine Bill and Sophia's life cycle phase to be

The correct answer is the distribution phase. The distribution/gifting phase begins subtly when a couple realizes that they can afford to spend on things they never believed possible. The asset accumulation and conservation/protection phases make this phase possible. For many people, there is a period when they are being influenced by all three phases simultaneously, though not necessarily to the same degree.

In his financial planning practice, Frank allows his clients' goals and values to drive his relationships with them. He sees himself as a consultant. Frank's approach to financial counseling is known as

The correct answer is 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. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. 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.

Wholesome Bakery supplies restaurants with bread and biscuits. The price of bread increases, resulting in a higher profit margin. As a result, the bakery chooses to reduce the supply of biscuits and to increase the supply of bread to take advantage of increased profits. Based on this information, which of the following statements is CORRECT?

The correct answer is the supply curve for biscuits would shift to the left. The supply curve for biscuits would shift to the left. Other non-price related factors that may shift supply include technological advances, suppliers leaving the industry, and changes in the cost of the resources used to produce a good.

Which of the following actions would most likely help an individual improve their credit score?

The correct answer is to make the minimum payment on time each month. Although making a minimum payment on a credit card will mean an individual will pay significant interest over the years, it shows creditworthiness and, over time, would increase a credit score.

All of the following statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are correct except

The correct answer is up to $500,000 of a member's account balances are insured by the NCUSIF. The NCUSIF insures member accounts of all federal and most state-chartered credit unions up to $250,000, not $500,000.

Johanna is considering purchasing a greenhouse for use in her business that will cost $25,000. She anticipates selling this machine at the end of five years for $7,500. The machine is projected to produce the following cash flows: End of year 1: $500 End of year 2: $750 End of year 3: $1,000 End of year 4: $2,100 End of year 5: $4,300 Calculate the net present value (NPV) of purchasing the machine if Johanna's opportunity cost is 10%.

The correct answer is −$14,413.11. Keystrokes on the HP 10bII/HP 10bII+ are as follows: 25,000 +/− CFj 500 CFj 750 CFj 1,000 CFj 2,100 CFj 11,800 CFj 10 I/YR Shift, NPV = -14,413.1052, or −$14,413.11

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

Correct answer is I, II, and IV. Individuals in higher marginal income tax brackets benefit more from owning a home than those in lower tax brackets. More costs are associated with purchasing a home, regardless of the length of the lease.

Choose the duties that must be fulfilled for a CFP® professional to act as a fiduciary. I. Duty of Loyalty II. Duty of Care III. Duty to Follow Client Instructions

The answer is I, II, and III. At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled: 1) duty of loyalty, 2) duty of care, and 3) duty to follow client information.

To enact monetary policy, the Federal Reserve may use which of the following tools? I. Taxation II. Discount rate III. Reserve requirements IV. Open market operations

The answer is II, III, and IV. Statement I is incorrect. Taxation is a tool used in fiscal policy decisions, which are made by Congress and the president (the Administration). All of the other tools are used by the Fed to enact monetary policy.

Which of the following statements regarding the business cycle is CORRECT? I. Usually, the economy is either in an expansion or contraction phase. II. The business cycle reflects movements in economic activity and illustrates the concepts of supply and demand.

The answer is both I and II. These statements regarding the business cycle are correct.

Mark is meeting with a new client, Macy. It is important that Mark understand Macy's psychological ability to deal with uncertain outcomes includes risk tolerance, risk capacity, and risk perception. During what step in the financial planning process should Mark measure Macy's abilities?

The answer is understanding Macy's personal and financial circumstance. All of the other answer choices are steps that are too late in the process for this measurement.

At the beginning of each year for the past 15 years, Betty, who is Angela and Avery's aunt, has put $5,000 into an account earning 5.5% annually for their benefit. How much is the account worth today and which process must take place to calculate the value?

The correct answer is $118,205.70; annuitizing. This is a future value of an annuity due calculation. The keystrokes on the HP 10bII/HP 10bII+ are as follows: BEG mode; 5,000 +/− PMT; 5.5 I/YR; 15 N; solve for FV = 118,205.6999, or $118,205.70. This is done using annuitizing. Compounding is the process of interest being earned on increasing sums over time.