FP511 EXAM TEST BANK 2024 | 700 QUESTIONS AND CORRECT ANSWERS WITH RATIONALES, Exams of Finance

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FP511 EXAM TEST BANK 2024 | 700 QUESTIONS

AND CORRECT ANSWERS WITH RATIONALES |

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Which of the following statements concerning investment advisers is CORRECT? 1 Investment advisers with assets under management of less than $ million will generally be required to register as an investment adviser with the state in which they maintain clients. 2 In general, investment advisers with $100 million of assets or more under management are required to register with the SEC. ------CORRECT ANSWER---------------both Investment advisers with assets under management of less than $ 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. 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? ------CORRECT ANSWER---------------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.

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? 1 FINRA Series 65 2 FINRA Series 66 3 FINRA Series 6 or 7 4 State variable insurance license ------CORRECT ANSWER--------------- 3 - 4 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. 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, Savings account - Joint with son $70, Certificate of deposit (CD) - John $225, Rollover traditional IRA - John $150, What amount is insured by the FDIC? ------CORRECT ANSWER--------------

• $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).

All of the following statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are correct except A) The NCUSIF is backed by the full faith and credit of the U.S. government. B) The NCUSIF insures member accounts of all federal credit unions. C) The fund is administered by the National Credit Union Administration (NCUA). D) Up to $500,000 of a member's account balances are insured by the NCUSIF. ------CORRECT ANSWER---------------D The NCUSIF insures member accounts of all federal and most state- chartered credit unions up to $250,000, not $500,000. 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? 1 Address estate and legacy matters 2 Pursue philanthropic interests 3 Preserve or increase wealth 4 Identify tax considerations ------CORRECT ANSWER---------------all *** 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? 1 Integrity ensures that information is accessible only to those authorized to have access. 2 Integrity demands honesty and candor, which must not be subordinated to personal gain an advantage.

3 Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot coexist with deceit or subordination of one's principles. ------CORRECT ANSWER--------------- 2 - 3 The duty of confidentiality and privacy ensures that information is accessible only to those authorized to have access. Choose the duties that must be fulfilled for a CFP® professional to act as a fiduciary. Duty of Loyalty Duty of Care Duty to Follow Client Instructions ------CORRECT ANSWER---------------all 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 which of the following groups do the CFP Board Fitness Standards apply? 1 CFP® candidates 2 A CFP® practitioner acting in a supervisory capacity 3 Respondents in a CFP Board investigation 4 Professionals Eligible for Reinstatement ------CORRECT ANSWER--------- ------1, 4 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.

Reinstatement by CFP Board is possible under which of the following circumstances? 1 Revocation 2 Suspension of one year or less 3 Suspension of more than one year 4 Temporary bar of more than one year ------CORRECT ANSWER------------ ---2, 3, 4 Revocation is permanent. There will be no opportunity for reinstatement. 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? ------CORRECT ANSWER---------------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. To enact monetary policy, the Federal Reserve may use which of the following tools? 1 Taxation 2 Discount rate 3 Reserve requirements 4 Open market operations ------CORRECT ANSWER---------------2,3, 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? 1 Usually, the economy is either in an expansion or contraction phase. 2 The business cycle reflects movements in economic activity and illustrates the concepts of supply and demand. ------CORRECT ANSWER-- -------------both Which of the following statements describe characteristics of deflation? 1 Prices are falling in absolute terms. 2 The rate of inflation has declined. ------CORRECT ANSWER--------------- 1 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 are characteristics of Chapter 13 bankruptcy provisions? 1 A repayment plan is implemented. 2 The debtor is typically required to relinquish assets. 3 Debt payments may be reduced so payments are more manageable for the debtor. 4 Generally, Chapter 13 bankruptcy is more favorable for creditors than Chapter 7 bankruptcy. ------CORRECT ANSWER---------------1,3, 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 are state law exemptions found in Chapter 7 of the Federal Bankruptcy Code? 1 Disability income benefits

2 An exemption for one's homestead 3 Property held as tenants by the entirety 4 Existing cash value of life insurance policies ------CORRECT ANSWER--- ------------all Other state law exemptions include the proceeds of any annuity contracts. All of the following statements regarding the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 are correct except A) the use of Chapter 7 is limited to the liquidation of credit bills or loans that are not secured. B) debtors who want to file for Chapter 7 must first undergo credit counseling. C) people who have the ability to pay their debts can choose between filing under Chapter 7 and filing under Chapter 13. D) lenders must provide consumer information about the dangers of paying only minimum required payments on credit card debt. ------CORRECT ANSWER---------------c 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. Which of the following are state law exemptions found in Chapter 7 of the Federal Bankruptcy Code? 1 Pension and retirement plan rights (ERISA plans) 2 A limited amount of personal property 3 Proceeds from annuity contracts 4 Disability income benefits ------CORRECT ANSWER---------------all

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 statements concerning the Consumer Credit Protection Act is CORRECT? 1 Credit terms must be disclosed before extending credit. 2 Consumer liability for a lost or stolen credit card is limited to $100. 3 Interest must be reported in terms of annual percentage rate (APR). 4 Credit bureau reports must include accurate, relevant, and recent information. ------CORRECT ANSWER---------------1, 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 *** 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. ---- --CORRECT ANSWER---------------$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, DOWNSHIFT, Nj 15000, CFj 4, DOWNSHIFT, Nj

[(1.09 ÷ 1.06) − 1] × 100 = 2.8302 I/YR NPV = $34,834.

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, *** 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. ------CORRECT ANSWER--------------- $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. 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. 4 N Solve for PV = 382,594.7657, or $382,594. Which of the following statements regarding the Expected Family Contribution (EFC) as it relates to student financial aid is CORRECT? 1 Parental assets include almost everything owned by the parents with notable exceptions.

2 Student income includes taxable and nontaxable income from the year preceding the award year, reduced by an income protection allowance and taxes. 3 Student assets include the value of everything the student owns or that has been saved on his behalf. 4 Parental assets and income are assigned a higher rating in the EFC calculation than student assets and income. ------CORRECT ANSWER------ ---------1,2, Parental assets and income are assigned a lower rating in the EFC calculation than student assets and income. 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? 1 Collecting personal financial information 2 Inquiring about the number of dependents 3 Inquiring about the age or dates of birth of dependents 4 Determining which stocks to purchase for the client's investment portfolio ------CORRECT ANSWER--------------- 1 - 3 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 CFP® certificants would likely be considered to be engaged in financial planning or the material elements of financial planning? 1 Lance, who reviews a life insurance sales brochure with his client, Arthur, and completes a variable life insurance application 2 Nadia, who conducts comprehensive data gathering regarding Jason's investments, life insurance, retirement plans, wills, and trusts and makes recommendations for him ------CORRECT ANSWER--------------- 2

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. According to CFP Board Code of Ethics, Connor, a CFP® professional, is responsible for which of the following? 1 Acting in the client's best interests 2 Avoiding or disclosing and managing conflicts of interest 3 Acting with honesty, integrity, competence, and diligence 4 Maintaining the confidentiality and protect the privacy of client information ------CORRECT ANSWER---------------All 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. 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. --- ---CORRECT ANSWER---------------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." 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 ------CORRECT ANSWER--------------- 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. 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? 1 Whitney has appropriately identified herself as a CFP™. 2 Advertising herself as a CFP® expert is prohibited by CFP Board. ------ CORRECT ANSWER--------------- 2 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. 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? ------CORRECT ANSWER---------------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. 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? 1 Analyzing Simon's current financial status 2 Assisting Simon in implementing the financial plan 3 Helping Simon identify financial goals and objectives ------CORRECT ANSWER---------------all 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. *** 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?

1 Assisting Nelson in identifying his goals 2 Analyzing Nelson's current financial status 3 Recommending strategies that will meet Nelson's business goals 4 Providing documentation Rochelle needs to complete the financial plan -- ----CORRECT ANSWER---------------1,2, 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. 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 ------CORRECT ANSWER---------------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. *** 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? ------CORRECT ANSWER--------

-------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. 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? ------CORRECT ANSWER----- ----------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. 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? ----

--CORRECT ANSWER---------------Understanding Macy's personal and financial circumstances *** 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? 1 Wendy should understand that expensive trips like hiking in the Alps is an important family tradition to Chrissy. 2 Wendy should consider the trip as one of Chrissy's goals and explain how such a goal would impact her overall financial plan. 3 Wendy should share her opinion with Chrissy and persuade her to abandon this as one of her goals. 4 Because Wendy, as Chrissy's financial planner, does not feel taking the trip is a wise financial decision, she sh ------CORRECT ANSWER------------- -- 1 - 2 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. 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 ------CORRECT ANSWER---------------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. Which of these statements regarding the classical economics approach to financial counseling is CORRECT? 1 This approach features the use of a SWOT analysis. 2 This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory. 3 Clients choose among alternatives based on objectively defined cost- benefit and risk-return tradeoffs. 4 This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes. ------ CORRECT ANSWER--------------- 3 - 4 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. Which of the following statements regarding open-ended and closed-ended questions is CORRECT? 1 Planners should use as many open-ended questions as possible when developing client goals and expectations. 2 Closed-ended questions facilitate effective communication between the client and planner because they require the client to answer in her own words. ------CORRECT ANSWER--------------- 1 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. 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? ------CORRECT ANSWER---------------Ask Alyssa if the camp is 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. Which of the following statements regarding interpersonal communication between financial planners and their clients are CORRECT? 1 Mirroring is accomplished by imitating the client's body language or verbal style. 2Body language can impact how clients receive and interpret messages more than any other type of communication. 3 Emotional intelligence includes the ability to recognize emotional expressions and select socially appropriate responses. ------CORRECT ANSWER---------------all Also, effective interpersonal communication involves the application of both oral and non-verbal skills, such as the effective use of body language.

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? ------ CORRECT ANSWER---------------250, 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. *** 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? 1 Personal tax return 2 Cash flow statement 3 Net worth statement 4 Statement of financial position ------CORRECT ANSWER--------------- 3 - 4 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. Which of the following statements regarding a financial planner's analysis of a client's cash flow statement is CORRECT? 1 The analysis of the client's cash flow statement can help the planner determine whether the client is living within his financial means.

2 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. 3 Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement ------CORRECT ANSWER---------------1, 3 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. You have gathered the following information from Edgar's financial statements: Net income $75, Gross income $110, Total assets $190, Total debt $45, Consumer debt $20, Based on this information, which of the following statements is CORRECT? 1 Edgar's total debt ratio exceeds the generally recommended maximum. 2 Edgar's consumer debt ratio exceeds the generally recommended maximum. ------CORRECT ANSWER---------------all 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%)

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? ------CORRECT ANSWER---------------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. Which of the following are considered fixed cash outflows? 1 Clothing expenses 2 Mortgage payments 3 Insurance premiums 4 Auto loan payments ------CORRECT ANSWER---------------2,3,4 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. *** 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—$115,000 Monthly mortgage payment—$1,700 Credit card debt—$3,000 (16.5% fixed) Checking account balance—$1,345 Long-term group disability insurance—60% of salary to age 65, 60-day elimination period

Life 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? ------CORRECT ANSWER--------------- 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. 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? 1 Cancel his audiobook subscription. 2 Choose a more economical cell phone plan. 3 Use an overdraft feature on his debit cards. 4 Decrease the deductible on his automobile insurance policy. ------ CORRECT ANSWER--------------- 1 - 2 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. Aaron, a financial planner, has advised Macy that she needs to increase her savings. What might you recommend as a good savings strategy? 1 Limit the number of lattes she purchases. 2 Use an overdraft feature on debit cards. 3 Increase her deductible on her car insurance policy. 4 Limit her credit card purchases to those she can pay off in full in one year. ------CORRECT ANSWER---------------1,3

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. 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? 1 By immediately closing his long-standing account when it was paid off, Quinn likely decreased his credit score. 2 Having four credit card account balances near their available credit limits will in all likelihood adversely affect Quinn's credit score. ------CORRECT ANSWER---------------both Immediately closing long-standing accounts will likely decrease Quinn's credit score. Keeping account balances near the available credit limit has a negative effect. 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? ------CORRECT ANSWER---------------New payment = $875.36, savings = $173.46 The correct answer is new payment = $875.36, savings = $173.46. END Mode 12, DOWNSHIFT, P/YR DOWNSHIFT, C ALL Old payment: 150000, PV 30, DOWNSHIFT, N = 360

7.5, I/YR

Solve for PMT = −1,048.82 or $1,048.82 END Mode 12, DOWNSHIFT, P/YR DOWNSHIFT, C ALL New payment: 150000,PV 30, DOWNSHIFT, N = 360 5.75, I/YR Solve for PMT = −875.36 or $875.36 Savings = $1,048.82 − $875.36 = $173.46 Which of the following actions would most likely help an individual improve their credit score? ------CORRECT ANSWER---------------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. Which of the following statements regarding the decision to buy or lease a home are CORRECT? 1 The itemized tax deduction for mortgage interest is a benefit of home ownership. 2 A client who will be residing in the home for a short period of time should lease the home. 3 The lower the marginal income tax bracket, the greater the advantage of owning a home. 4 Generally, more costs are associated with buying a home, especially if this arrangement is short term. ------CORRECT ANSWER---------------1,2,4 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.

*** 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? ------CORRECT ANSWER---------------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). 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? ------CORRECT ANSWER--------------- $118,205.70; annuitizing 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 (DOWNSHIFT, Beg/End) 1, DOWNSHIFT, P/YR DOWNSHIFT, C ALL 5000, +/-, PMT 5.5, I/YR 15, DOWNSHIFT, 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.