CFP EXAM 2026/2027 UPDATE | VERIFIED QUESTIONS & ANSWERS
100% CORRECT | GRADED A+
Which of the following does the Federal Reserve use to control the money supply?
1. Adjusting the discount rate
2. Open market operations
3. Fiscal policy
A) 2 and 3
B) 1 only
C) 1 and 2
D) 2 only - ANSWER C) 1 and 2. The Federal Reserve can control the money supply by adjusting the
discount rate. For example, a higher discount rate discourages banks from lending money and
reduces the amount of money in circulation. The Federal Reserve also uses open market operations
to control the money supply. By buying government securities in the open market, for example, the
Fed can increase the amount of money in circulation. Fiscal policy is conducted by Congress.
Which of the following employee(s) is(are) highly compensated for qualified plan nondiscrimination
testing purposes in the current year?
1. Stephen, a 6% owner of an incorporated law firm
2. Franklin, who earned $145,000 last year and he was the top-paid employee
3. Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last year
4. Margo, a corporate vice president of marketing and 1% owner of the company, whose salary last
year was $68,000
A) 2 only
B) 1 and 2
C) 1, 2, and 4
D) 1, 3, and 4 - ANSWER B) 1 and 2. Stephen and Franklin are highly compensated for qualified plan
purposes in the current year. A highly compensated employee is one who was a greater than 5%
owner of the employer at any time during the current year or preceding year, or for the preceding
year, had compensation greater than $135,000 (2022).
,Duane, a financial planner, is meeting with Lisa, who wants information regarding how several
investment sales she has completed this year will impact her income tax return. Lisa has sold the
following properties:
-Section 1202 stock, which Lisa purchased on December 12, 2019, for $50,000 and sold on December
15, 2022, for its FMV of $65,000.
-A vacation home Lisa inherited from her uncle, who died in 2020 and who had a basis of $95,000 in
the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for $160,000 on July 1,
2022. Lisa has used the vacation home only four weeks since she inherited it; otherwise it was
vacant.
-Stock Lisa inherited from another uncle, who also died in 2020. His basis in the stock was $20,000
and the FMV in his gross estate was $15,000. Lisa sold it on November 1, 2022, for $17,000.
What should Duane tell Lisa?
1. 100% of the gain on the sale of the Section 1202 stock is - ANSWER C) 2 and 3. Statement 2 is
correct. Lisa's basis in the stock is the FMV of the stock in her uncle's gross estate, $15,000.
Statement 3 is correct. All of the gain on the sale of the vacation home is capital gain. Statement 1 is
incorrect. Section 1202 stock must be held for five years in order for Lisa to exclude the gain from her
taxable income. Statement 4 is incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on
the Section 1202 stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that
the vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the sale of a
personal residence only.
An 80-year-old widower explains to you that he is risk averse and wishes to find an investment that
will provide him with preservation of capital. Which of the following should you recommend?
A) bank-insured CDs
B) preferred stock
C) long-term U.S. government bonds
D) S&P 500 index fund - ANSWER A) bank-insured CDs. Certificates of deposit (CDs) are deposits
made with a bank or savings and loan for a specified period, commonly one month to five years. CDs
have traditionally been used to provide an income stream to retirees. CDs are FDIC insured, which is
often a reason for investors' interest in purchasing CDs.
A client consults a financial professional for help in formulating an estate plan. The client is in poor
health and expects to die within the next 3 to 4 years. He has a large estate and would like to begin
taking steps to reduce any estate tax that might be due at his death. The client is a widower with 1
adult daughter. The client owns the following property in his name alone:
,- A life insurance policy insuring his own life, with a death benefit of $5 million
- A personal residence with a market value of $6 million
- A brokerage fund with a balance of $10 million
Which of the following steps should the client implement first to meet his objectives?
A) Gift the residence to his daughter.
B) Add his daughter's name to the brokerage account as JTWROS.
C) Transfer ownership of the life insurance policy to his daughter.
D) Transfer his residence to an irrevocable living trust. - ANSWER C) Transfer ownership of the life
insurance policy to his daughter. The proceeds of the life insurance policy will be included in the
client's gross estate if the client owns the policy when he dies or if he transferred ownership of the
policy within 3 years before his death. Given the client's poor health and short life expectancy, the
most urgent step is to transfer ownership of the policy to his daughter. If the client survives for 3
years after the transfer, the $5 million in death benefits will be removed from his gross estate. The 3-
year rule would not apply to a gift of the residence to an irrevocable trust or to the daughter directly,
so making either of these transfers is less urgent. Adding his daughter's name to the brokerage
account as JTWROS would not reduce the client's gross estate because he supplied all of the
consideration for the account.
Which of the following statements regarding the skilled nursing facility benefit under Medicare Part
A is(are) CORRECT?
After 100 days of coverage in a benefit period, the patient must pay the entire cost of remaining in
the facility.
The skilled nursing facility benefit pays the entire cost of the first 30 days while the patient is in the
facility.
The skilled nursing facility benefit pays for custodial care received in a nursing home.
A) 1 only
B) 1 and 3
C) 1, 2, and 3
D) 2 and 3 - ANSWER A) 1 only. Statement 2 is incorrect; the skilled nursing facility pays the entire
cost of the patient's stay in a skilled nursing facility for only the first 20 days. Statement 3 is incorrect.
The skilled nursing facility benefit provides no coverage for custodial care.
Which of the following pension plans must be covered by Pension Benefit Guarantee Corporation
(PBG) insurance?
, 1. Cash balance pension plan.
2. Money purchase pension plan.
3. Target benefit pension plan.
4. Traditional defined benefit pension plan.
A) 1 and 4.
B) 1, 2, 3, and 4.
C) 3 only.
D) 2 and 3. - ANSWER A) 1 and 4. Only defined benefit pension plans (including cash balance pension
plans) are covered by the PBGC.
John, age 55, is divorced and retired. He has the following liquid assets on deposit at Allworld Bank,
an FDIC-insured financial institution:
Account Ownership Balance
Certificate of deposit John $225,000
Savings account Joint with son $70,000
Rollover traditional IRA John $150,000
Checking account John $80,000
What amount is insured by the FDIC?
A) $470,000
B) $325,000
C) $250,000
D) $525,000 - ANSWER A) $470,000. The FDIC insures separate legal categories of accounts. As a
result, the IRA will be insured for $150,000, but can be insured up to $250,000 as the balance
increases. The individual accounts (checking and CD owned by John are aggregated and are insured
up to $250,000 in total. The joint account is insured for $70,000.
Based on Markowitz's theory, which of the following portfolios do NOT belong on the efficient
frontier?
Portfolio Expected Return Standard Deviation
1 10% 12%
2 11% 13%
3 14% 12%
100% CORRECT | GRADED A+
Which of the following does the Federal Reserve use to control the money supply?
1. Adjusting the discount rate
2. Open market operations
3. Fiscal policy
A) 2 and 3
B) 1 only
C) 1 and 2
D) 2 only - ANSWER C) 1 and 2. The Federal Reserve can control the money supply by adjusting the
discount rate. For example, a higher discount rate discourages banks from lending money and
reduces the amount of money in circulation. The Federal Reserve also uses open market operations
to control the money supply. By buying government securities in the open market, for example, the
Fed can increase the amount of money in circulation. Fiscal policy is conducted by Congress.
Which of the following employee(s) is(are) highly compensated for qualified plan nondiscrimination
testing purposes in the current year?
1. Stephen, a 6% owner of an incorporated law firm
2. Franklin, who earned $145,000 last year and he was the top-paid employee
3. Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last year
4. Margo, a corporate vice president of marketing and 1% owner of the company, whose salary last
year was $68,000
A) 2 only
B) 1 and 2
C) 1, 2, and 4
D) 1, 3, and 4 - ANSWER B) 1 and 2. Stephen and Franklin are highly compensated for qualified plan
purposes in the current year. A highly compensated employee is one who was a greater than 5%
owner of the employer at any time during the current year or preceding year, or for the preceding
year, had compensation greater than $135,000 (2022).
,Duane, a financial planner, is meeting with Lisa, who wants information regarding how several
investment sales she has completed this year will impact her income tax return. Lisa has sold the
following properties:
-Section 1202 stock, which Lisa purchased on December 12, 2019, for $50,000 and sold on December
15, 2022, for its FMV of $65,000.
-A vacation home Lisa inherited from her uncle, who died in 2020 and who had a basis of $95,000 in
the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for $160,000 on July 1,
2022. Lisa has used the vacation home only four weeks since she inherited it; otherwise it was
vacant.
-Stock Lisa inherited from another uncle, who also died in 2020. His basis in the stock was $20,000
and the FMV in his gross estate was $15,000. Lisa sold it on November 1, 2022, for $17,000.
What should Duane tell Lisa?
1. 100% of the gain on the sale of the Section 1202 stock is - ANSWER C) 2 and 3. Statement 2 is
correct. Lisa's basis in the stock is the FMV of the stock in her uncle's gross estate, $15,000.
Statement 3 is correct. All of the gain on the sale of the vacation home is capital gain. Statement 1 is
incorrect. Section 1202 stock must be held for five years in order for Lisa to exclude the gain from her
taxable income. Statement 4 is incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on
the Section 1202 stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that
the vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the sale of a
personal residence only.
An 80-year-old widower explains to you that he is risk averse and wishes to find an investment that
will provide him with preservation of capital. Which of the following should you recommend?
A) bank-insured CDs
B) preferred stock
C) long-term U.S. government bonds
D) S&P 500 index fund - ANSWER A) bank-insured CDs. Certificates of deposit (CDs) are deposits
made with a bank or savings and loan for a specified period, commonly one month to five years. CDs
have traditionally been used to provide an income stream to retirees. CDs are FDIC insured, which is
often a reason for investors' interest in purchasing CDs.
A client consults a financial professional for help in formulating an estate plan. The client is in poor
health and expects to die within the next 3 to 4 years. He has a large estate and would like to begin
taking steps to reduce any estate tax that might be due at his death. The client is a widower with 1
adult daughter. The client owns the following property in his name alone:
,- A life insurance policy insuring his own life, with a death benefit of $5 million
- A personal residence with a market value of $6 million
- A brokerage fund with a balance of $10 million
Which of the following steps should the client implement first to meet his objectives?
A) Gift the residence to his daughter.
B) Add his daughter's name to the brokerage account as JTWROS.
C) Transfer ownership of the life insurance policy to his daughter.
D) Transfer his residence to an irrevocable living trust. - ANSWER C) Transfer ownership of the life
insurance policy to his daughter. The proceeds of the life insurance policy will be included in the
client's gross estate if the client owns the policy when he dies or if he transferred ownership of the
policy within 3 years before his death. Given the client's poor health and short life expectancy, the
most urgent step is to transfer ownership of the policy to his daughter. If the client survives for 3
years after the transfer, the $5 million in death benefits will be removed from his gross estate. The 3-
year rule would not apply to a gift of the residence to an irrevocable trust or to the daughter directly,
so making either of these transfers is less urgent. Adding his daughter's name to the brokerage
account as JTWROS would not reduce the client's gross estate because he supplied all of the
consideration for the account.
Which of the following statements regarding the skilled nursing facility benefit under Medicare Part
A is(are) CORRECT?
After 100 days of coverage in a benefit period, the patient must pay the entire cost of remaining in
the facility.
The skilled nursing facility benefit pays the entire cost of the first 30 days while the patient is in the
facility.
The skilled nursing facility benefit pays for custodial care received in a nursing home.
A) 1 only
B) 1 and 3
C) 1, 2, and 3
D) 2 and 3 - ANSWER A) 1 only. Statement 2 is incorrect; the skilled nursing facility pays the entire
cost of the patient's stay in a skilled nursing facility for only the first 20 days. Statement 3 is incorrect.
The skilled nursing facility benefit provides no coverage for custodial care.
Which of the following pension plans must be covered by Pension Benefit Guarantee Corporation
(PBG) insurance?
, 1. Cash balance pension plan.
2. Money purchase pension plan.
3. Target benefit pension plan.
4. Traditional defined benefit pension plan.
A) 1 and 4.
B) 1, 2, 3, and 4.
C) 3 only.
D) 2 and 3. - ANSWER A) 1 and 4. Only defined benefit pension plans (including cash balance pension
plans) are covered by the PBGC.
John, age 55, is divorced and retired. He has the following liquid assets on deposit at Allworld Bank,
an FDIC-insured financial institution:
Account Ownership Balance
Certificate of deposit John $225,000
Savings account Joint with son $70,000
Rollover traditional IRA John $150,000
Checking account John $80,000
What amount is insured by the FDIC?
A) $470,000
B) $325,000
C) $250,000
D) $525,000 - ANSWER A) $470,000. The FDIC insures separate legal categories of accounts. As a
result, the IRA will be insured for $150,000, but can be insured up to $250,000 as the balance
increases. The individual accounts (checking and CD owned by John are aggregated and are insured
up to $250,000 in total. The joint account is insured for $70,000.
Based on Markowitz's theory, which of the following portfolios do NOT belong on the efficient
frontier?
Portfolio Expected Return Standard Deviation
1 10% 12%
2 11% 13%
3 14% 12%
