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Foundations in Financial PlanningSM Professional Education Program True/False Questions ©2012, College for Financial Planning, all rights reserved. Video Play Video • Open-ended & True/False Questions • • 7 minutes Play video from Video Layout 1-2 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. Play Jeopardy music Your answer 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. 6 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. 11 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. 13 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. 15 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. 16 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. 18 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. 23 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. 24 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. 27 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. 28 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. 29 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. 33 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. 35 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.