CRPC Practice Exam 2 with Complete Solutions

Which of the following are correct statements about the capital utilization strategy? - ANSWER-I. It produces an annual retirement income over a finite number of years. II. Assuming the yield remains the same, the larger the retirement income that is paid, the shorter the number of years over which it will be paid. III. When the capital utilization approach is used, the planner must be careful in making assumptions about the life expectancy of the client. IV. The effect of taxes on retirement savings and distributions should be considered when the before-tax approach is used to calculate the future value of retirement assets. Which one of the following is not a key element of an investment policy? - ANSWER-A) a provision for periodic review B) the acceptable risk tolerance level C) a target asset allocation D) names of specific stocks to be in the portfolio --D The key elements in an investment policy are a clear statement of the client's goal, suitable investment vehicles and strategies, the acceptable risk tolerance level for the client, asset allocation guidelines, and a provision for periodic review. One way to remember the essential elements of an investment policy is the acronym "GRASP" (Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the investment categories that may or may not be used-and Periodic Review). Specific investments would be determined after the investment policy is created. Which one of the following is a characteristic of Treasury inflation-protected securities (TIPS)? - ANSWER-A) They are sold at a discount. B) The increase in principal is taxable each year. C) Their returns are tied to the producer price index. D) They are issued with maturities up to 40 years. Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is the expected change in price for this fund? - ANSWER-A) 6.5% decrease B) 9.75% increase C) 9.75% decrease D) 6.5% increase --C 1.5% -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to represent the inverse relationship between bond prices and interest rates. In this case, an increase in rates means the bonds or bond funds will fall in price. Therefore, this fund will decrease in price about 9.75%. Also, you can remember that bond prices move opposite to interest rates. An increase in interest rates means the price of bonds will go down. The process of rebalancing is a key factor in - ANSWER-Strategic asset allocation