CRPC YOU GOT THIS STUDY CARDS ACTUAL EXAM TEST PAPER FULL QUESTIONS
CORRECT RESPONSES
Question:
Salaries$70,000 Auto payments$5,000 Insurance payments$3,800 Food$8,000 Credit card
balance$10,000 Dividends$1,100 Utilities$3,500 Mortgage payments$14,000 Taxes$13,000
Clothing$9,000 Interest income$2,100 Checking account$4,000 Vacations$8,400 Donations$5,800
What is the cash flow surplus or (deficit) for Bill?
Answer:
Income = $70,000 + $1,100 + $2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000 + $3,500 +
$14,000 + $13,000 + $9,000 + $8,400 + $5,800 = $70,500, so there is a surplus of $2,700. The
checking account and credit card balances would be on the statement of financial position. LO 1-3
Question:
correct statements about income replacement percentages
Answer:
Income replacement percentages are typically much higher for those with lower preretirement
incomes. Income replacement percentages vary between low-income and high- income retirees.
Income replacement ratios should not be used as the only basis for planning. Income replacement
ratios are useful for younger clients as a guide to their long-range planning and investing. The
inverse of Option I is true. Those with a lower preretirement income typically need a much higher
income replacement percentage in retirement. LO 1-4
Question:
If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their retirement
date in 25 years (rather than an amount that grows with inflation each year), what level annual end-
of-year savings amount will they need to deposit each year, assuming their savings earn 7%
annually?
Answer:
,Set your calculator to the "End" mode and "1 P/Yr." Inputs: FV = 2000000, I/YR = 7, N = 25, PV =
0, then PMT = $31,621 1-4
Question:
Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during
retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per
month at the beginning of each month. Over the 12 remaining years of their preretirement period,
they expect to generate an average annual after-tax investment return of 8%; during their 25-year
retirement period, they want to assume a 6% annual after-tax investment return compounded
monthly. They want to start their monthly retirement withdrawals on the first day they retire. What
is the lump sum needed at the beginning of retirement to fund this income stream?
Answer:
The monthly retirement income need is not specified as "today's dollars," and no inflation rate
specified; therefore, it must be assumed that the $2,500 net monthly income need represents
retirement dollars, and the retirement period income stream is level. To calculate the lump sum
needed at the beginning of retirement, discount the stream of monthly income payments at the
investment return rate: 10BII+ PVAD calculation: Set calculator on BEG and 12 periods per year,
then input the following: 2,500 [PMT] 25 [SHIFT] [N] 6 [I/YR] 0 [FV] Solve for PV = $389,957
LO 1-4
Question:
Chris and Eve Bronson have analyzed their current living expenses and estimated their retirement
income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are
confident that they can earn a 7% after-tax return on their investments, and they expect inflation to
average 4% over the long term. Determine the lump sum amount the Bronsons will need at the
beginning of retirement to fund their retirement income needs, using the worksheet below. (1)
Adjust income deficit for inflation over the preretirement period:$ 90,000present value of retirement
income deficit25number of periods until retirement4%% inflation rateFuture value of income deficit
in first retirement year$239,925 (2) Determine retirement fund needed to meet income
deficit:$239,925payment (future value of income deficit in first retirement year)30number of
periods in retirement The lump sum needed at the beginning of the
Answer:
This PVAD calculation requires that the calculator be set for beginning-of-period payments. First,
the annual retirement income deficit is expressed in retirement-year-one dollars, resulting in a
$239,925 income deficit in the first retirement year. This income deficit grows with inflation over
the 30-year retirement period, and the retirement fund earns a 7% return. The calculator inputs are
,$239,925, [PMT]; 30, [N]; 2.8846, [I/YR]. (1.07/1.04)-1 x100 Solve for [PV], to determine the
retirement fund that will generate this income stream. If you enter 2.8846 directly into the
calculator, you will get $4,911,265. If you use the equation to compute I/YR, and then hit the I/YR
button you will get $4,911,256. Either way the answer is clear. The difference is that when you
calculate the I/YR, the calculator takes the interest rate out to nine decimal places. If you enter in the
2.8846, then the calculator only takes the interest rate to four decimal places. LO 1-4
Question:
Assume a client and investment professional have worked together for several years. Recently, the
client's personal and financial circumstances have changed. According to the course materials, what
is the next asset management step that the investment professional should take? A) gather data B)
analyze information C) make and implement recommendations D) monitor performance
Answer:
When the client's circumstances change, the asset management process goes back to the data
gathering step in the process. A LO 1-2
Question:
Which one of the following is not a key attribute of an investment policy? A) clearly defined B)
fluid C) realistic D) long-term perspective
Answer:
An investment policy provides guidelines that are standards to be followed. If they are fluid, they
are ever-changing and therefore would be difficult to implement and would provide inconsistency in
the management of the portfolio. LO 2-1 Fluid
Question:
All of these are examples of asset allocation strategies except A) alpha. B) tactical. C) core/satellite.
D) strategic.
Answer:
Alpha is not an asset allocation strategy, but a way to measure a portfolio manager's return relative
to the amount of risk that has been taken. alpha LO 2-5
, Question:
Assume the following asset classes have the correlations to long-term government bonds shown
below: Treasury bills:.12 Gold:-.25 Large stocks:.22 Small stocks:.17 Which one of the following
best exemplifies the impact of diversification on long-term government bonds?
Answer:
The asset with the lowest correlation provides the most diversification. Therefore, gold provides
more diversification than any of the other assets. Small stocks do provide more diversification than
Treasury bills, but gold provides the most diversification, so it is the best option. LO 2-3
Question:
The two major risks associated with individual common stocks are A) default risk and business risk.
B) market risk and business risk. C) interest rate risk and exchange rate risk. D) interest rate risk and
purchasing power risk.
Answer:
The primary risks associated with common stock are business risk and market risk. Interest rate risk,
default risk, and purchasing power risk are the major risks of bonds. B LO 2-2
Question:
What is the price of a bond with a 7% coupon, a $1,000 par value, and a maturity of 20 years if the
market interest rate for similar bonds is 6%? A) $1,115.57 B) $893.23 C) $1,074.39 D) $1,000.00
Answer:
Set the calculator for 2 P/YR and use the END mode. The inputs then are as follows: END 1,000
[FV], 35 [PMT], 20 [SHIFT] [N] = 40, 6 [I/YR], and solve for PV = $1,115.57. Note: The $35
payment is the semiannual payment of the bond. This is computed by taking the 7% coupon rate the
par value of $1,000 = $70 and divide that by 2 to get the semiannual interest paid, in this case $35.
Also, the yield to maturity (YTM) is less than the coupon rate, thus the bond must be selling at a
premium. A LO 2-8
Question:
This year, your 63-year-old client had $17,025 of earned income and $30,000 of investment income.
He was also drawing Social Security benefits. Which one of the following correctly describes the
impact on his Social Security benefits? A) He loses $1 of benefits for every $2 above the "allowable
CORRECT RESPONSES
Question:
Salaries$70,000 Auto payments$5,000 Insurance payments$3,800 Food$8,000 Credit card
balance$10,000 Dividends$1,100 Utilities$3,500 Mortgage payments$14,000 Taxes$13,000
Clothing$9,000 Interest income$2,100 Checking account$4,000 Vacations$8,400 Donations$5,800
What is the cash flow surplus or (deficit) for Bill?
Answer:
Income = $70,000 + $1,100 + $2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000 + $3,500 +
$14,000 + $13,000 + $9,000 + $8,400 + $5,800 = $70,500, so there is a surplus of $2,700. The
checking account and credit card balances would be on the statement of financial position. LO 1-3
Question:
correct statements about income replacement percentages
Answer:
Income replacement percentages are typically much higher for those with lower preretirement
incomes. Income replacement percentages vary between low-income and high- income retirees.
Income replacement ratios should not be used as the only basis for planning. Income replacement
ratios are useful for younger clients as a guide to their long-range planning and investing. The
inverse of Option I is true. Those with a lower preretirement income typically need a much higher
income replacement percentage in retirement. LO 1-4
Question:
If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by their retirement
date in 25 years (rather than an amount that grows with inflation each year), what level annual end-
of-year savings amount will they need to deposit each year, assuming their savings earn 7%
annually?
Answer:
,Set your calculator to the "End" mode and "1 P/Yr." Inputs: FV = 2000000, I/YR = 7, N = 25, PV =
0, then PMT = $31,621 1-4
Question:
Bill and Lisa Hahn have determined that they will need a monthly income of $6,000 during
retirement. They expect to receive Social Security retirement benefits amounting to $3,500 per
month at the beginning of each month. Over the 12 remaining years of their preretirement period,
they expect to generate an average annual after-tax investment return of 8%; during their 25-year
retirement period, they want to assume a 6% annual after-tax investment return compounded
monthly. They want to start their monthly retirement withdrawals on the first day they retire. What
is the lump sum needed at the beginning of retirement to fund this income stream?
Answer:
The monthly retirement income need is not specified as "today's dollars," and no inflation rate
specified; therefore, it must be assumed that the $2,500 net monthly income need represents
retirement dollars, and the retirement period income stream is level. To calculate the lump sum
needed at the beginning of retirement, discount the stream of monthly income payments at the
investment return rate: 10BII+ PVAD calculation: Set calculator on BEG and 12 periods per year,
then input the following: 2,500 [PMT] 25 [SHIFT] [N] 6 [I/YR] 0 [FV] Solve for PV = $389,957
LO 1-4
Question:
Chris and Eve Bronson have analyzed their current living expenses and estimated their retirement
income need, net of expected Social Security benefits, to be $90,000 in today's dollars. They are
confident that they can earn a 7% after-tax return on their investments, and they expect inflation to
average 4% over the long term. Determine the lump sum amount the Bronsons will need at the
beginning of retirement to fund their retirement income needs, using the worksheet below. (1)
Adjust income deficit for inflation over the preretirement period:$ 90,000present value of retirement
income deficit25number of periods until retirement4%% inflation rateFuture value of income deficit
in first retirement year$239,925 (2) Determine retirement fund needed to meet income
deficit:$239,925payment (future value of income deficit in first retirement year)30number of
periods in retirement The lump sum needed at the beginning of the
Answer:
This PVAD calculation requires that the calculator be set for beginning-of-period payments. First,
the annual retirement income deficit is expressed in retirement-year-one dollars, resulting in a
$239,925 income deficit in the first retirement year. This income deficit grows with inflation over
the 30-year retirement period, and the retirement fund earns a 7% return. The calculator inputs are
,$239,925, [PMT]; 30, [N]; 2.8846, [I/YR]. (1.07/1.04)-1 x100 Solve for [PV], to determine the
retirement fund that will generate this income stream. If you enter 2.8846 directly into the
calculator, you will get $4,911,265. If you use the equation to compute I/YR, and then hit the I/YR
button you will get $4,911,256. Either way the answer is clear. The difference is that when you
calculate the I/YR, the calculator takes the interest rate out to nine decimal places. If you enter in the
2.8846, then the calculator only takes the interest rate to four decimal places. LO 1-4
Question:
Assume a client and investment professional have worked together for several years. Recently, the
client's personal and financial circumstances have changed. According to the course materials, what
is the next asset management step that the investment professional should take? A) gather data B)
analyze information C) make and implement recommendations D) monitor performance
Answer:
When the client's circumstances change, the asset management process goes back to the data
gathering step in the process. A LO 1-2
Question:
Which one of the following is not a key attribute of an investment policy? A) clearly defined B)
fluid C) realistic D) long-term perspective
Answer:
An investment policy provides guidelines that are standards to be followed. If they are fluid, they
are ever-changing and therefore would be difficult to implement and would provide inconsistency in
the management of the portfolio. LO 2-1 Fluid
Question:
All of these are examples of asset allocation strategies except A) alpha. B) tactical. C) core/satellite.
D) strategic.
Answer:
Alpha is not an asset allocation strategy, but a way to measure a portfolio manager's return relative
to the amount of risk that has been taken. alpha LO 2-5
, Question:
Assume the following asset classes have the correlations to long-term government bonds shown
below: Treasury bills:.12 Gold:-.25 Large stocks:.22 Small stocks:.17 Which one of the following
best exemplifies the impact of diversification on long-term government bonds?
Answer:
The asset with the lowest correlation provides the most diversification. Therefore, gold provides
more diversification than any of the other assets. Small stocks do provide more diversification than
Treasury bills, but gold provides the most diversification, so it is the best option. LO 2-3
Question:
The two major risks associated with individual common stocks are A) default risk and business risk.
B) market risk and business risk. C) interest rate risk and exchange rate risk. D) interest rate risk and
purchasing power risk.
Answer:
The primary risks associated with common stock are business risk and market risk. Interest rate risk,
default risk, and purchasing power risk are the major risks of bonds. B LO 2-2
Question:
What is the price of a bond with a 7% coupon, a $1,000 par value, and a maturity of 20 years if the
market interest rate for similar bonds is 6%? A) $1,115.57 B) $893.23 C) $1,074.39 D) $1,000.00
Answer:
Set the calculator for 2 P/YR and use the END mode. The inputs then are as follows: END 1,000
[FV], 35 [PMT], 20 [SHIFT] [N] = 40, 6 [I/YR], and solve for PV = $1,115.57. Note: The $35
payment is the semiannual payment of the bond. This is computed by taking the 7% coupon rate the
par value of $1,000 = $70 and divide that by 2 to get the semiannual interest paid, in this case $35.
Also, the yield to maturity (YTM) is less than the coupon rate, thus the bond must be selling at a
premium. A LO 2-8
Question:
This year, your 63-year-old client had $17,025 of earned income and $30,000 of investment income.
He was also drawing Social Security benefits. Which one of the following correctly describes the
impact on his Social Security benefits? A) He loses $1 of benefits for every $2 above the "allowable
