CFP Practice Questions – Fundamentals questions with correct answers

As a rule of thumb, it is best if consumer debt does not exceed: A. 20% of net income. B. 20% of gross income. C. 3 to 6 months of expenses. D. 36% of gross monthly income. CORRECT ANSWER A. 20% of net income This is a rule of thumb, along with the others that recommend housing debt be limited to 28% of gross income, and total debt not to exceed 36% of gross income. David has won the Illinois state lottery. He must decide whether to receive annual payments of $250,000 at the beginning of each year for the next 20 years, or a lump sum payout. What lump sum amount does David need to receive to equal the $250,000 payments for the next 20 years, if he can earn an 8% return on his investments, assuming inflation is 3%? $2,454,537 $2,650,900 $2,875,900 $3,307,511 CORRECT ANSWER $2,650,900 This is a present value of an annuity due problem. So, N = 20, I = 8, PV = ?, PMT = 250,000, FV = 0. Put your calculator in BEGIN mode and solve for PV. Inflation is not necessary in this calculation, lotto winnings income streams will not increase for inflation, they are the equivalent to a fixed