HS 300 Exam Review Questions And Answers

For SEC registration purposes, which act sets the limit for assets under management? - ANS The Investment Advisors Act What is an appropriate investment for an emergency fund? - ANS A money market mutual fund. What is the yield to maturity of a $1,000 face amount bond that currently sells for $875, pays $60 of interest at the end of each year, and matures in 10 years? - ANS 7.85% Keystrokes: 1000FV, 875+/-PV, 60PMT, 10N; I/yr According to a consumer survey conducted by the CFP Board of Standards, the top reason why people begin financial planning is to: - ANS Build and liquidate a retirement fund. A financial service professional would devise client recommendations during which domain of financial planning? - ANS Developing recommendations How do you calculate the liquidity ratio? - ANS Liquid Assets / total current debts How do you calculate the debt service ratio? - ANS Total debt payments / gross income How do you calculate the solvency ratio? - ANS Net Worth / Total Assets How do you calculate the savings ratio? - ANS Net cash flow + Savings and investments / annual after-tax income A comprehensive financial plan organized to follow the financial planning process should start by: - ANS Specifying the responsibilities of each party for implementing the plan and carrying it through to completion. When calculating the liquidity ratio, if the top of the equation is liquid assets, what does the denominator of the equation consist of? - ANS Short term liabilities (credit card debt included) How much should an investor be willing to pay for a bond that pays $25 of interest every 6 months for the next 3 years and the $1,000 face amount at the end of 3 years if the investor requires a yield to maturity of 8%? - ANS $921.37 Keystrokes: 2P/Yr, 3xP/Yr, 25PMT, 1000FV, 8 i/yr; PV Dave has a credit card balance of $20,000, which carries an APR of 20%. He pays $400 per month towards retiring the balance. How long will it take Dave to reduce the balance to $0? - ANS 9.03 years Keystrokes: 20,000PV, 20/12= I/yr, -400PMT; N A multiline insurance agent who sells life, health, and property and liability insurance to a client is engaging in what type of financial planning? - ANS Multi-Purpose Mariah is considering attending an accredited university next year. Which is most likely to limit the amount of federal student aid she may receive? Mariah's parents estimated income next year, or her reported taxable income this year of $25,000 - ANS Mariah's reported taxable income this year of $25,000 What is the appropriate standard of conduct for a fiduciary? - ANS Acting as a prudent investor. Why do Home equity loans and HELOCs offer such low interest rates? - ANS Because the level of equity in the home decreases the lender's risk. Which of the following federal student aid programs are need based? a) Parent Loans for Undergraduate Students (PLUS Loans) b) Federal Perkins Loan - ANS Federal Perkins Loan... Plus loans are available to all family income levels. What is the point of the Pension Benefit Guaranty Corporation (PBGC)? And who created it? - ANS To protect vested benefits in defined benefit plans. Created by ERISA in 1974 What form of bankruptcy is used when Debt is restructured and the debtor enters a repayment plan? - ANS Chapter 13 bankruptcy Which of the following statements concerning disintermediation are correct? a) It reduces reserves in the banking system b) It reduces deposits held in banks - ANS Both A and B When can a certificant lend money to a client? (2) - ANS 1. If the client is a family member of the certificants immediate family. 2. If the certificant is an employee of an institution in the business of the lending money and the money lent is that of the institution, not the certificant. Are federal income tax deductions available to all taxpayers for purposes of education funding costs? - ANS No, they are phased out for high tax payers. What policy is used to manage deficit? - ANS Fiscal policy What policy is used to manage the inflation? - ANS Monetary Policy What college savings vehicle's eligibility is limited by income? - ANS Coverdell Education Savings Accounts What was the point of the Sarbanes-Oxley Act of 2002? (2) - ANS 1. Created an oversight board to monitor the auditing profession. 2. Increased corporate reporting responsibilities. Do 529 College Savings plan's owned by "non-parent" (Grandparents, aunts, uncles, etc) affect the determination of a student's potential financial aid? - ANS No sir Monetary policy tools include which of the following? a) Setting margin requirements on brokerage accounts b) Changing federal income tax rates - ANS A Only.... changing federal income tax rates is a fiscal policy tool. Which of the following statements concerning the Pension Benefit Gauranty Corporation are correct? a) Single-employer pension plans pay a basic flat-rate premium. b) Underfunded pension plans pay an additional charge per $1,000 of unfunded vested benefits. - ANS Both A and B are correct. Pays an interest rate that is linked to the inflation rate in college costs as measured by the College Board's cost index for 500 independent colleges. It is not linked to tuition cost for state schools. - ANS CollegeSure CD When does relative risk tolerance increase with wealth? - ANS When housing is either excluded from the definition of wealth or classified as a riskless asset. Residential real estate, equity in privately held sole proprietorship, and tangible assets such as collectibles are all considered what type of assets? - ANS Personal Assets (nonfinancial) If market value of lease is less than the estimated residual value, the consumer is obligated to make up the difference. More risky to the consumer as they absorb the loss. - ANS Open-end lease Lease situation where dealer absorbs the loss if the market value of the vehicle is lower than the estimated value, making it the preferred lease option for the consumer. - ANS Closed-end lease. Do insurance agents have a fiduciary duty to serve their clients? - ANS No. Makes for conflict of interest situations. According to the CFP Board, what are the top 3 areas of financial planning that advisors engage in? - ANS 1. Retirement/pension planning 2. Investment Planning 3. Comprehensive planning