CFP Exam Questions and Correct Answers Updated
Question 1
Which of the following is a valid comparison between the capital asset pricing model (CAPM)
and the arbitrage pricing theory (APT)?
A
APT is a multi-factor model while CAPM is a single factor model.
B
CAPM captures more market complexity than the APT model.
C
CAPM is based on the idea that perfect substitutes must sell at the same time.
D
APT model is easier to use because the factors/betas have economic sources.
Correct Answer
A. Correct. This is the correct differentiation.
B. Incorrect. The single-index model is less complex.
C. Incorrect. This option describes the arbitrage pricing theory.
D. Incorrect. Factor-analytic, factor interpretation is more difficult
Question 2
Which of the following would avoid an additional 10% federal excise tax on IRA distributions
before age 59½?
A
File a notice with the tax return showing that the withdrawal is a partial return of the after-tax
deposits.
B
Delay withdrawals until age 55.
C
Make withdrawals to purchase disability insurance.
D
Take substantially equal periodic payments based on life expectancy.
Correct Answer
A. Incorrect. Filing a notice with the tax return is not sufficient to avoid the 10% excise
tax.
,B. Incorrect. Age 55 is not a viable exception for IRA owners; it only applies to employer
plans such as 401(k).
C. Incorrect. There is no one-time exception for IRA owners under IRC §72(t).
D. Correct. Of the four options, only substantially equal periodic payments over
life expectancy offers a viable alternative. The other three options are not allowed
by the IRC §72(t)
Question 3
A CFP® professional has been asked to develop a financial plan for one of her clients. Upon
delivery, the client notices that the CFP® professional has assumed a 6% rate of return, while
the client insists on assuming 10%. Which of the following is the CFP®
professional's BEST course of action?
A
Rerun the scenario reflecting the 10% rate of return as insisted by the client
B
Compromise with the client and run the scenario at an 8% rate of return
C
Continue to show the scenario with a 6% return as originally prepared
D
Ask the client to explain their insistence on a 10% rate of return
Correct Answer
D. Correct. The CFP ® professional must first understand what is driving the
client's concern. The client may require more return, which would ordinarily
necessitate portfolio trades to riskier investments. Alternatively, the client may
feel that their existing portfolio can produce greater return. The client's rationale
should be explored before proceeding
Question 4
From February 2010 to the present, she has been registered with FINRA through Firm X as a
General Securities Representative.
,The calls were intended to obtain current information in preparation for client meetings, obtain
documents that would facilitate a mortgage refinance, and to update a contract holder's
address of record.
Ms. Gordon's conduct violated FINRA Rule 2010 which requires associated persons to observe
high standards of commercial honor and just and equitable principles of trade. In March 2017,
Ms. Gordon entered into a Letter of Acceptance, Waiver and Consent with FINRA, and
consented to the imposition of a suspension from associating with any FINRA member firm in
any and all capacities for 30 business days and a $5,000 fine.
In what way does the FINRA action against Ms. Gordon affect her certification as a CFP®
professional?
Correct Answer
A. Correct. A CFP ® professional has a duty to notify CFP Board when he or she
has been named as a subject of, or whose conduct is mentioned adversely in, a
Regulatory Investigation or Regulatory Action alleging failure to comply with the
laws, rules, or regulations governing Professional Services (sub section 'b'); and
had conduct mentioned adversely in a Finding in a Regulatory Action involving
failure to comply with the laws, rules, or regulations governing Professional
Services (except a Regulatory Action involving a Minor Rule Violation in a
Regulatory Action brought by a self-regulatory organization) (subsection 'c'.)
Question 5
Andrea, age 65, has an estate of $14,000,000 with $3,500,000 in a traditional IRA. She is
married to her second husband, age 60. She has three children from a prior marriage whose
ages range from 31 years to 42 years. She would like to take care of her surviving spouse after
her death and preserve as much assets as possible for her children. What recommendation is
the most tax efficient from the standpoint of both federal estate and income tax purposes?
A
Leave her IRA to her children and create a qualified terminable interest property (QTIP) trust for
her spouse funded with the remaining asset
B
Leave her IRA to her spouse and create a marital QTIP and bypass trust for her remaining assets
C
Leave her IRA to a bypass trust that benefits her children and leave the remaining assets to a
QTIP trust
D
, Withdraw the assets from her IRA and execute a Will with an optimal marital QTIP/applicable
exclusion formula
Correct Answer
A. Incorrect. By having her children inherit the IRA they will be subject to RMDs thereby
incurring income tax.
B. Correct. The best income tax efficiency occurs if the surviving spouse is the beneficiary
of the IRA (husband not yet 73, so not yet subject to RMDs). Andrea desires to take care of
her spouse and the IRA could give him a lifetime retirement benefit. She can take care of
her children, maximize her applicable exclusion, and preserve the principal of the
remaining assets with a QTIP and credit shelter trust arrangement.
C. Incorrect. If the IRA goes to a bypass trust it would not qualify for the estate tax marital
deduction. Therefore, it would be subject to income tax (as withdrawn) and estate tax.
D. Incorrect. Withdrawing the assets from the IRA would immediately subject them to ordinary
income tax rates
Question 6
A client who was severely injured in an accident says that the insurance company involved with
the claim has offered a monthly structured settlement. The payments will compensate for the
loss of income because the person was paralyzed. If accepted, which of the following is an
advantage of this strategy?
A
Any remainder of interest or term certain passes estate and income tax-free to the heirs.
B
The monthly income would not be subject to creditors of the client.
C
The payments may be structured by the client in a way that allows a lump sum at a date in the
future.
D
All ongoing life payments would be income tax-free.
Correct Answer
A. Incorrect. Any remainder of interest in an award of damages is included in gross
estate.
B. Incorrect. The law allows creditors to attach the monthly income from a structured
settlement as the recipient has unfettered access and the funds.
C. Incorrect. The periodic payment schedule cannot be changed.
Question 1
Which of the following is a valid comparison between the capital asset pricing model (CAPM)
and the arbitrage pricing theory (APT)?
A
APT is a multi-factor model while CAPM is a single factor model.
B
CAPM captures more market complexity than the APT model.
C
CAPM is based on the idea that perfect substitutes must sell at the same time.
D
APT model is easier to use because the factors/betas have economic sources.
Correct Answer
A. Correct. This is the correct differentiation.
B. Incorrect. The single-index model is less complex.
C. Incorrect. This option describes the arbitrage pricing theory.
D. Incorrect. Factor-analytic, factor interpretation is more difficult
Question 2
Which of the following would avoid an additional 10% federal excise tax on IRA distributions
before age 59½?
A
File a notice with the tax return showing that the withdrawal is a partial return of the after-tax
deposits.
B
Delay withdrawals until age 55.
C
Make withdrawals to purchase disability insurance.
D
Take substantially equal periodic payments based on life expectancy.
Correct Answer
A. Incorrect. Filing a notice with the tax return is not sufficient to avoid the 10% excise
tax.
,B. Incorrect. Age 55 is not a viable exception for IRA owners; it only applies to employer
plans such as 401(k).
C. Incorrect. There is no one-time exception for IRA owners under IRC §72(t).
D. Correct. Of the four options, only substantially equal periodic payments over
life expectancy offers a viable alternative. The other three options are not allowed
by the IRC §72(t)
Question 3
A CFP® professional has been asked to develop a financial plan for one of her clients. Upon
delivery, the client notices that the CFP® professional has assumed a 6% rate of return, while
the client insists on assuming 10%. Which of the following is the CFP®
professional's BEST course of action?
A
Rerun the scenario reflecting the 10% rate of return as insisted by the client
B
Compromise with the client and run the scenario at an 8% rate of return
C
Continue to show the scenario with a 6% return as originally prepared
D
Ask the client to explain their insistence on a 10% rate of return
Correct Answer
D. Correct. The CFP ® professional must first understand what is driving the
client's concern. The client may require more return, which would ordinarily
necessitate portfolio trades to riskier investments. Alternatively, the client may
feel that their existing portfolio can produce greater return. The client's rationale
should be explored before proceeding
Question 4
From February 2010 to the present, she has been registered with FINRA through Firm X as a
General Securities Representative.
,The calls were intended to obtain current information in preparation for client meetings, obtain
documents that would facilitate a mortgage refinance, and to update a contract holder's
address of record.
Ms. Gordon's conduct violated FINRA Rule 2010 which requires associated persons to observe
high standards of commercial honor and just and equitable principles of trade. In March 2017,
Ms. Gordon entered into a Letter of Acceptance, Waiver and Consent with FINRA, and
consented to the imposition of a suspension from associating with any FINRA member firm in
any and all capacities for 30 business days and a $5,000 fine.
In what way does the FINRA action against Ms. Gordon affect her certification as a CFP®
professional?
Correct Answer
A. Correct. A CFP ® professional has a duty to notify CFP Board when he or she
has been named as a subject of, or whose conduct is mentioned adversely in, a
Regulatory Investigation or Regulatory Action alleging failure to comply with the
laws, rules, or regulations governing Professional Services (sub section 'b'); and
had conduct mentioned adversely in a Finding in a Regulatory Action involving
failure to comply with the laws, rules, or regulations governing Professional
Services (except a Regulatory Action involving a Minor Rule Violation in a
Regulatory Action brought by a self-regulatory organization) (subsection 'c'.)
Question 5
Andrea, age 65, has an estate of $14,000,000 with $3,500,000 in a traditional IRA. She is
married to her second husband, age 60. She has three children from a prior marriage whose
ages range from 31 years to 42 years. She would like to take care of her surviving spouse after
her death and preserve as much assets as possible for her children. What recommendation is
the most tax efficient from the standpoint of both federal estate and income tax purposes?
A
Leave her IRA to her children and create a qualified terminable interest property (QTIP) trust for
her spouse funded with the remaining asset
B
Leave her IRA to her spouse and create a marital QTIP and bypass trust for her remaining assets
C
Leave her IRA to a bypass trust that benefits her children and leave the remaining assets to a
QTIP trust
D
, Withdraw the assets from her IRA and execute a Will with an optimal marital QTIP/applicable
exclusion formula
Correct Answer
A. Incorrect. By having her children inherit the IRA they will be subject to RMDs thereby
incurring income tax.
B. Correct. The best income tax efficiency occurs if the surviving spouse is the beneficiary
of the IRA (husband not yet 73, so not yet subject to RMDs). Andrea desires to take care of
her spouse and the IRA could give him a lifetime retirement benefit. She can take care of
her children, maximize her applicable exclusion, and preserve the principal of the
remaining assets with a QTIP and credit shelter trust arrangement.
C. Incorrect. If the IRA goes to a bypass trust it would not qualify for the estate tax marital
deduction. Therefore, it would be subject to income tax (as withdrawn) and estate tax.
D. Incorrect. Withdrawing the assets from the IRA would immediately subject them to ordinary
income tax rates
Question 6
A client who was severely injured in an accident says that the insurance company involved with
the claim has offered a monthly structured settlement. The payments will compensate for the
loss of income because the person was paralyzed. If accepted, which of the following is an
advantage of this strategy?
A
Any remainder of interest or term certain passes estate and income tax-free to the heirs.
B
The monthly income would not be subject to creditors of the client.
C
The payments may be structured by the client in a way that allows a lump sum at a date in the
future.
D
All ongoing life payments would be income tax-free.
Correct Answer
A. Incorrect. Any remainder of interest in an award of damages is included in gross
estate.
B. Incorrect. The law allows creditors to attach the monthly income from a structured
settlement as the recipient has unfettered access and the funds.
C. Incorrect. The periodic payment schedule cannot be changed.
