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Foundations in Financial PlanningSM Professional
Education Program
True/False Questions
©2012, College for Financial Planning, all rights reserved.
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Foundations in Financial PlanningSM Professional
Education Program
Module 1
The Financial Planning
Process
©2012, College for Financial Planning, all rights reserved.
Module 1 True/False
1. Financial planning involves a process.
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1-4
Module 1 True/False
1. Special needs planning focuses on the overall
2.
3.
4.
5.
6.
needs of a client.
A financial goal needs to be quantified.
An example of a well-written financial goal is “to
accumulate $300,000 for retirement.”
The first step in the financial planning process is
gathering data.
The gather data step in the financial planning
process involves only the quantitative data of a
client.
The titling of property is an important consideration
when gathering information about a client.
5
Module 1 True/False
8. With financial planning, it often becomes necessary
to use other professionals to effectively serve a
client.
9. One important piece of information needed when
recommending an investment is the time frame for
that investment.
10.The fiduciary duty of care includes placing a
client’s interest ahead of the certificant’s own
interest.
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Foundations in Financial PlanningSM Professional
Education Program
Module 2
Financial Statements &
Cash Flow Management
©2012, College for Financial Planning, all rights reserved.
Module 2 True/False
1. A statement of financial position provides a
2.
3.
4.
5.
financial “snapshot” as of a specific date.
Personal assets are shown on financial statements
at their purchase value.
A cash flow statement shows a person’s cash
receipts and cash disbursements over a given
period of time.
Taxes are considered variable cash outflows since
they can be reduced through prudent tax
planning.
A person’s financial situation is analyzed by
computing financial ratios
8
Module 2 True/False
6. The liquid-assets-to-net-worth ratio provides an
indication of what portion of a family’s net worth
is made up of investments.
7. One factor that lenders use in evaluating a
borrower is capacity. Capacity is the net worth of
an individual.
8. The highest FICO® credit score is 850.
9. In general, interest on credit cards is one of the
most expensive forms of consumer credit.
10. The most common form of revolving credit is the
credit card.
9
Module 2 True/False
11. A mortgage is usually paid off by making periodic
12.
13.
14.
15.
principal payments.
A variable rate loan may also be a conventional
loan.
A “point” is 10% of the total loan amount.
The monthly payments for auto leases tend to be
lower than if you were purchasing the vehicle on
credit.
The Fair Debt Collection Practices Act was enacted
to prohibit abusive debt collection practices.
10
Module 2 True/False
16. Businesses may file for Chapter 13 bankruptcy.
17. A budget is a projection of cash flows.
18. A budget is not a rigid document—it should
instead be considered a planning tool.
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Foundations in Financial PlanningSM Professional
Education Program
Module 3
Time Value of Money
©2012, College for Financial Planning, all rights reserved.
Module 3 True/False
1. An assumption of a high inflation rate can restrict
2.
3.
4.
5.
the types of investments that are available for a
goal.
When setting goals, it is generally better to
assume a higher rate of return rather than a lower
rate of return.
Compounding is the process of interest earned on
interest.
The interest rate used when determining present
value is called the real cost of interest.
An ordinary annuity is a stream of payments or
receipts made at the end of each period.
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Module 3 True/False
6. The future value of an ordinary annuity will be
7.
8.
9.
greater than the future value of an annuity due if
the interest rates and the time periods of the two
annuities are the same.
To determine a periodic payment, you must know
(1) a present value or a future value, (2) an
interest rate, and (3) a time period.
If a present value is $3,000, the interest rate is
5%, and the time period is four years, then the
future value is $3,647.
If a future value is $145,000, the discount rate is
8%, and the time period is 23 years, then the
present value is $24,696.
14
Module 3 True/False
10. If a future value is $76,752, the discount rate is
7%, and the present value is $17,324, then the
number of compounding periods is 22.
11. Assume an investment in a mutual fund grew
from $7,000 to $14,000 in six years. The average
annual rate of return earned on this investment
was 11.25%.
12. The present value of a $1,000 ordinary annuity
that is paid for nine years and discounted at 6%
is $6,802.
13. The present value of a $1,000 annuity due that is
paid for nine years and discounted at 6% is
$7,210.
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Module 3 True/False
14. The future value of a $1,000 ordinary annuity that
is paid for nine years and compounded at an
annual rate of 6% is $11,491.
15. The future value of a $1,000 annuity due that is
paid for nine years and compounded at an annual
rate of 6% is $12,181.
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Foundations In Financial PlanningSM Professional
Education Program
Module 4
Investment Principles &
Mutual Funds
©2012, College for Financial Planning, all rights reserved.
Module 4 True/False
1. Market risk is a type of systematic risk.
2. Political events, economic and social changes, and
3.
4.
5.
the mood of the investing public affect market
risk.
Fluctuations in bond prices due to changes in the
general level of interest rates is called interest
rate risk.
An investor who continually invests in very shortterm fixed-income investments has great
exposure to reinvestment rate risk.
Currency risk is affected by changes in the
exchange rate of U.S. and foreign currencies.
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Module 4 True/False
6. Business risk refers to the risk associated with
investing in a particular industry.
7. A pure growth investor is not interested in capital
appreciation.
8. A balanced approach to investing is considered
the most conservative method of investing.
9. Strategic asset allocation does not attempt to
predict or time the market, and only a portion of
the portfolio is invested at a given time.
10. The belief that market inefficiencies can be
constantly found and employing short-term
trading to take advantage of these inefficiencies is
known as tactical asset allocation.
19
Module 4 True/False
11. A tactical asset allocation that shifts resources to
12.
13.
14.
15.
sectors that are expected to be more promising is
called sector rotation.
Diversification is all about investment risk control.
Three basic factors in technical analysis are
market averages, trading volume, and
advances/declines.
The Europe, Australasia, and Far East (EAFE)
index and the Wilshire 5000 Equity index are two
major indexes used in market analysis.
The Dow Theory is used to confirm the end of a
major market trend.
20
Module 4 True/False
16. Top-down analysis uses three basic factors: the
17.
18.
19.
20.
economy, the industry, and unemployment.
Bottom-up investing is considered a micro
approach to investing.
Buy-and-hold investors are very concerned about
market timing.
Dollar cost averaging is a technique employed
during relatively stable price periods and/or
during periods of increasing values.
An open-end investment company is a mutual
fund.
21
Module 4 True/False
21. A contingent deferred sales charge is assessed
when buying shares in a mutual fund.
22. A prospectus provides full and fair disclosure of
relevant investment information and is used by
the investor to match the stated goals of the fund
with the investor’s goals.
23. The prospectus need not explain the types of
securities the fund will invest in or the investment
techniques that will be employed.
24. Mutual funds issue annual reports that describe
how the fund has performed during the most
recent fiscal year and a comparison of its
performance to an appropriate index.
22
Module 4 True/False
25. Value oriented funds are considered less risky
26.
27.
28.
29.
30.
than growth funds.
Large cap, mid cap, and small cap refer to the
market value of companies.
Risk is generally not a factor when investing in
bond funds.
Money market funds contain only short-term
investments.
Index funds are constructed to match the
performance of a specific stock or bond index.
Mutual funds containing foreign bonds do not
have exchange-rate risk.
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Module 4 True/False
31. Closed-end funds are bought or sold at the net
asset value per share.
32. Exchange-traded funds tend to trade close to net
asset value due to arbitrage.
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Foundations In Financial PlanningSM Professional
Education Program
Module 5
Equities & Debt
Instruments
©2012, College for Financial Planning, all rights reserved.
Module 5 True/False
1. Shareholders do not have a right to receive
2.
3.
4.
5.
dividends.
All shares of stock are issued with preemptive
rights
Shareholders are not required to pay off all the
debts of the corporation.
When a company wants to reduce the number of
outstanding shares or increase the market price
per share (or both), a reverse stock split is used.
The two major risks of preferred stock are interest
rate risk and financial risk.
26
Module 5 True/False
6. A stock split does not increase the investor’s value
in the company.
7. The S&P 500 stock index consists of large
company stocks.
8. A short sale allows an investor to make money
when the price of the stock falls.
9. Corporations are major buyers of preferred stock
due to tax advantages.
10. Regular preferred stock and participating
preferred stock pay an equal amount of dividends.
11. Limited partnerships allow the passing of losses to
investors.
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Module 5 True/False
12. The discount rate is the rate of interest the Fed
13.
14.
15.
16.
17.
charges member banks when they borrow from
the Fed.
Anticipation of inflation is an important reason for
investing in collectibles.
Determining the value of collectibles is relatively
easy.
Puts and calls are derivatives.
An investor would buy a call if he expected the
underlying stock to go down.
Bonds are similar to stocks in that the investor
receives ownership in the company when either
stocks or bonds are purchased.
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Module 5 True/False
18. A Treasury bill pays interest only at maturity.
19. Revenue municipal bonds are bonds issued for a
specific project.
20. Public purpose municipal bonds are not subject to
federal taxation, and may be free from state and
local taxation, but are subject to the alternative
minimum tax.
21. A Treasury STRIP is a zero coupon bond issued at
a discount.
22. Barbara Jackson paid $900 for an 8%, $1,000 par
value bond. This is known as a discount bond.
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Module 5 True/False
23. A bond’s current yield is its annual interest income
24.
25.
26.
27.
28.
divided by its current price.
The two major risks associated with debt
instruments are interest rate risk and purchasing
power risk.
High-yield bonds are non-investment grade
bonds.
An income debenture is the most senior of the
corporate bonds.
A convertible bond’s value strictly as a bond is
called its conversion value.
The ability to convert an investment into cash
without losing any of the principal invested is
30
Foundations In Financial PlanningSM Professional
Education Program
Module 6
Tax Planning
©2012, College for Financial Planning, all rights reserved.
Module 6 True/False
1. Individuals are subject to taxation at the federal,
2.
3.
4.
5.
6.
state, and local levels.
Individuals are not generally subject to the sales
taxes assessed by local governments on
purchases of consumer goods.
All states levy state income taxes upon their
citizens.
Whether an individual must file a federal income
tax return is determined only by gross income.
There are five filing statuses for federal income
tax return purposes.
An exemption is equivalent to a deduction from
gross income.
32
Module 6 True/False
7. An individual may claim an exemption for any
individual who lives at his or her residence.
8. Adjusted gross income is determined by
subtracting the standard deduction from total
gross income.
9. Federal taxable income is the total income a
taxpayer receives during the year.
10. Unearned income includes investment income.
11. Items subtracted from gross income as abovethe-line deductions are adjustments to income.
12. Calculation of adjusted gross income is not
important because AGI is not used to determine
the limitations of many deductions.
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Module 6 True/False
13. Itemized deductions are reported on Schedule B.
14. The lesser of the standard deduction or total
itemized deductions is subtracted from AGI as
part of the calculation to determine taxable
income.
15. A tax credit and a tax deduction have the same
effect on tax liability.
16. Tax credits result in a dollar-for-dollar reduction of
a tax liability.
17. Taxpayers generally pay their tax liabilities evenly
throughout the year.
34
Module 6 True/False
18. Form 1040ES is used to determine estimated tax
19.
20.
21.
22.
payments.
Capital assets include property held by a taxpayer
to sell to others in the course of a trade or
business.
The sale of capital assets held for more than one
year receives special treatment under the federal
tax system.
Basis is defined as the total amount that a
taxpayer has invested in an asset.
The length of time that an asset is owned is
known as its property class.
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Module 6 True/False
23. A taxpayer generally may not deduct a loss
incurred on personal-use property.
24. The amount of capital gain or loss from the sale
of a capital asset is determined by subtracting the
adjusted basis of the property from the amount
realized.
25. A taxpayer may deduct up to $4,000 of net capital
losses annually.
26. Nonrecognition provisions allow the recognition of
certain capital gains transactions to be deferred
until a future date, or eliminated.
36
Module 6 True/False
27. A cafeteria plan is a type of employee benefit
offered by many employers that receives
preferential tax treatment.
28. Under a cafeteria plan, employees do not have a
choice between a cash benefit and a qualified
benefit.
29. Many smaller employers offer an alternative form
of the cafeteria plan that is called a flexible
spending account (FSA).
37
Module 6 True/False
30. A flexible spending account is funded by money
contributed by the employer.
31. Noncash fringe benefits are specifically exempted
from income taxation.
32. The main benefit of nonqualified deferred
compensation (NQDC) plans is that they are a
type of retirement plan that needs to follow most
of the rules under the tax code and ERISA.
33. Tax records and tax returns should be kept for at
least three years.
38
Module 6 True/False
34. A taxpayer does not need to keep the
documentation that is required to support an
itemized deduction.
35. A taxpayer need not keep detailed records of
automobile mileage in order to claim it as a
business expense.
36. A major tax planning strategy is accelerating the
payment of income tax.
39
Module 6 True/False
37. A good method for eliminating or reducing tax
liability is to fully utilize all the deductions and
credits available to a taxpayer.
38. Outright gifting is an example of the tax planning
strategy of shifting taxation to others.
39. Deferring the receipt of taxable income is a major
tax planning strategy.
40
Foundations In Financial PlanningSM Professional
Education Program
Module 7
Retirement Planning
©2012, College for Financial Planning, all rights reserved.
Module 7 True/False
1. A spousal IRA is also known as a joint IRA.
2. The trustee or custodian of an IRA may be a
3.
4.
5.
banking institution, an insurance company, a
brokerage company, or an individual.
A 71-year-old individual with earned income can
contribute to a deductible IRA.
An individual must be age 50 or older on January
1st of a given year to be eligible to make an IRA
catch-up contribution for that year.
An individual is no longer considered an active
participant merely because his or her spouse is an
active participant.
42
Module 7 True/False
6. A taxpayer should keep a copy of IRS Form 8606
7.
8.
9.
at least until such time as he or she retires.
Assets forming part of a qualified plan or IRA
assets can be converted into a Roth IRA.
An insurance company can specify a maximum
age (often age 85) when nonqualified annuity
payments must begin.
Vesting is based on an employee’s years of
participation in an employer’s qualified plan.
43
Module 7 True/False
10. A qualified plan must provide for participants to
become vested in the employer matching
contributions over a schedule that does not
exceed the limits established according to the
five-year “cliff” or seven-year graded vesting
schedules.
11. A defined benefit plan provides a separate
account for each participant.
12. Typically, defined benefit plans require employees
to make contributions to the plan.
13. The ultimate benefit provided by a defined
contribution plan is not guaranteed and cannot be
known in advance.
44
Module 7 True/False
14. Only an employer may fund a contributory
qualified plan.
15. Annual employer contributions to a profit sharing
plan are limited to a maximum of 15% of the plan
participants’ total compensation.
16. To be eligible to participate in a qualified money
purchase plan, employees must meet age
(typically 21) and service requirements (typically
one to three years of service, depending on the
vesting schedule).
17. For most employers, a profit sharing plan offers
more advantages than a money purchase pension
plan.
45
Module 7 True/False
18. An employer may not prohibit an employee from
withdrawing funds from his or her SEP account
(though the normal income tax and penalty rules
may apply).
19. 403(b) plan participants may make a special
election, sometimes called a catch-up provision,
to increase the contribution limits in a given year
beyond the normal rules.
20. Under a SIMPLE 401(k) plan, the employer has
the option of reducing the matching contribution
to less than 3% of an employee’s compensation.
46
Module 7 True/False
21. A contributory profit sharing or money purchase
pension plan is frequently referred to as a thrift
plan.
22. The answer to the economic problems associated
with retirement for most Americans is to regularly
and consistently save a percentage of their
income during their retirement years.
23. Once you have come up with a figure for the firstyear additional income needed, forecasting your
retirement income need—and the amount needed
to provide it—becomes a problem of calculating
the effects of inflation.
47
Module 7 True/False
24. Now that there are fewer adults in the workforce,
there are fewer people paying FICA taxes to
support the baby boomers who are retiring.
25. Experience shows that the closer individuals get
to retirement, the more serious they become
about planning for it.
26. One indication of an investor’s risk tolerance is his
or her ability to “hang on” to investments during
quarters or years of negative performance.
27. A “market timing” strategy is extremely hard to
execute successfully over the short term;
however, studies show that professional
investment managers have successfully executed
this strategy over the long term.
48
Module 7 True/False
28. For people born after 1959, full Social Security
benefits are available at age 66.
29. Distributions taken before age 59½ from a
“nonqualified annuity” funded with after-tax
dollars generally are not subject to a 10% early
withdrawal penalty (on the taxable amount only—
not on the return of principal).
30. A 63-year-old client covered by an employersponsored group medical plan may need to delay
retirement to age 65 (the earliest age for
Medicare coverage) rather than go two years
without medical coverage.
49
Foundations In Financial PlanningSM Professional
Education Program
Module 8
Introduction to Insurance
©2012, College for Financial Planning, all rights reserved.
Module 8 True/False
1. The process of deciding how much and what kind
2.
3.
4.
5.
6.
7.
of insurance to buy is called risk management.
Most claims for disability injuries end in recovery
or death within one year.
Insurance is a method of risk sharing.
An example of pure risk is gambling.
Any monies returned to a policyholder of a mutual
insurance company are taxed as ordinary income.
Death is the one certainty that is insurable.
Coverage provided under a scheduled personal
property endorsement usually requires the
payment of a deductible.
51
Module 8 True/False
8. Homeowners insurance coverage can be
expanded through the use of either riders or
endorsements.
9. Comparison shopping is very important when
considering the purchase of insurance.
10. Owning an automobile essentially ensures that
you have the potential for legal liability.
11. The umbrella liability policy was designed to
provide liability coverage with high upper limits.
52
Foundations In Financial PlanningSM Professional
Education Program
Module 9
Life and Health Insurance
©2012, College for Financial Planning, all rights reserved.
Module 9 True/False
1. One of the major advantages to group life
2.
3.
4.
5.
insurance is that evidence of insurability usually is
not required.
Characteristics of permanent life insurance may
include cash buildup, tax deferral, and dividends.
Upon the death of the insured, the designated
beneficiary becomes the owner of the life
insurance policy.
Life insurance is a way to avoid the risk of death.
The Consolidated Omnibus Budget Reconciliation
Act of 1986 (COBRA) changed provisions on
group-to-group plan portability.
54
Module 9 True/False
6. Major medical insurance provides protection from
7.
8.
financial devastation brought on by the inability to
pay enormous medical bills.
One of the most significant factors in determining
the amount of medical insurance coverage
appropriate for you is the amount of coverage
your employer’s group insurance provides.
A guaranteed renewable disability insurance policy
ensures that the policyholder will be able to
continue the policy at the current premiums as
long as premiums are paid on time and according
to the manner stipulated in the policy.
55
Module 9 True/False
9. Workers’ compensation laws provide income
compensation to injured employees only after the
incident has been investigated to determine the
responsible party.
10. The most liberal definition of disability is the “at
any occupation” definition.
11. Generally, the maximum amount of disability
income coverage an insurance company will write
is determined by an applicant’s age.
12. Medigap policies increase benefits paid by
Medicare.
56
Module 9 True/False
13. In a typical HIPAA-qualified long-term care policy,
an insured must be unable to perform two or
more ADLs to qualify for benefits.
14. Long-term care premiums are based strictly on an
individual’s age.
15. Annuities can be immediate or deferred; fixed or
variable.
16. information to compare the financial strength of
various insurance companies.
57
Foundations In Financial PlanningSM Professional
Education Program
Module 10
Estate Planning
©2012, College for Financial Planning, all rights reserved.
Module 10 True/False
1. There are two categories of personal property
2. A testator is the holder of legal title to trust
3.
4.
5.
property.
A trust must be irrevocable to function as a will
substitute.
When property is transferred from an estate, a
recipient typically receives a stepped-up basis in
the property.
When property passes at death by application of
the intestate succession statutes, the property is
subject to the probate process.
59
Module 10 True/False
6. A surviving spouse of a decedent in a common
7.
8.
9.
law state usually has a right to elect to take a
statutory share of the decedent’s estate rather
than what is left to him or her under the
decedent’s will.
It is a common occurrence for an intestate’s
property to escheat to the state.
Intestate property can be placed in a
testamentary trust.
Property owned in joint tenancy and property
owned in tenancy in common both pass by right
of survivorship.
60
Module 10 True/False
10. It is possible for the same person to be the
11.
12.
13.
14.
grantor, the trustee, and the beneficiary of a trust.
Custodial accounts can be used to handle the
financial affairs of an incompetent adult.
The donee of a gift does not receive a stepped-up
basis in the gifted property for income tax
purposes.
All property transferred by a decedent within
three years of death must be included in the
decedent’s gross estate.
The federal gift tax and estate tax have
historically shared a common tax rate table in
years where there is both a federal gift and estate 61
Module 10 True/False
15. In a power of attorney, the person who receives
authority to act for another is known as the
principal.
16. A contingent trust usually receives substantial
assets immediately upon creation.
17. Living wills are revocable.
18. Durable medical powers of attorney for health
care (DPOAHC) are controlled by state law.
62
Foundations in Financial PlanningSM Professional
Education Program
True/False Questions
End of slides
©2012, College for Financial Planning, all rights reserved.