CRPC Practice Exam 2 questions with
complete solutions
Which of the following are correct statements about the capital utilization strategy? -
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vanswer-I. It produces an annual retirement income over a finite number of years.
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II. Assuming the yield remains the same, the larger the retirement income that is paid,
v v v v v v v v v v v v v v
vthe shorter the number of years over which it will be paid.
v v v v v v v v v v v
III. When the capital utilization approach is used, the planner must be careful in making
v v v v v v v v v v v v v v
vassumptions about the life expectancy of the client. v v v v v v v
IV. The effect of taxes on retirement savings and distributions should be considered
v v v v v v v v v v v v
vwhen the before-tax approach is used to calculate the future value of retirement assets.
v v v v v v v v v v v v v
Which one of the following is not a key element of an investment policy? - answer-A) a
v v v v v v v v v v v v v v v v
vprovision for periodic review v v v
B) the acceptable risk tolerance level
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C) a target asset allocation
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D) names of specific stocks to be in the portfolio
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--D
The key elements in an investment policy are a clear statement of the client's goal,
v v v v v v v v v v v v v v
vsuitable investment vehicles and strategies, the acceptable risk tolerance level for the
v v v v v v v v v v v
vclient, asset allocation guidelines, and a provision for periodic review. One way to
v v v v v v v v v v v v
vremember the essential elements of an investment policy is the acronym "GRASP"
v v v v v v v v v v v
v(Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the investment
v v v v v v v
vcategories that may or may not be used-and Periodic Review). Specific investments
v v v v v v v v v v v
vwould be determined after the investment policy is created.
v v v v v v v v
Which one of the following is a characteristic of Treasury inflation-protected securities
v v v v v v v v v v v
(TIPS)? - answer-A) They are sold at a discount.
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B) The increase in principal is taxable each year.
v v v v v v v v
C) Their returns are tied to the producer price index.
v v v v v v v v v
D) They are issued with maturities up to 40 years.
v v v v v v v v v
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what
v v v v v v v v v v v v v v v v
vis the expected change in price for this fund? - answer-A) 6.5% decrease
v v v v v v v v v v v v
B) 9.75% increase
v v
C) 9.75% decrease
v v
D) 6.5% increase
v v
--C
,1.5% -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to
v v v v v v v v v v v v v v v
represent the inverse relationship between bond prices and interest rates. In this case,
v v v v v v v v v v v v v
an increase in rates means the bonds or bond funds will fall in price. Therefore, this fund
v v v v v v v v v v v v v v v v v
will decrease in price about 9.75%. Also, you can remember that bond prices move
v v v v v v v v v v v v v v
opposite to interest rates. An increase in interest rates means the price of bonds will go
v v v v v v v v v v v v v v v v
down.
v
The process of rebalancing is a key factor in - answer-Strategic asset allocation.
v v v v v v v v v v v v
Strategic asset allocation involves obtaining the best asset mix for a client over a long
v v v v v v v v v v v v v v
period. For example, this might be 60% stocks and 40% bonds. When these
v v v v v v v v v v v v v
percentages change due to market movements, this strategic asset allocation requires
v v v v v v v v v v v
the portfolio to be rebalanced back to the target mix, in this case 60/40 stocks/bonds.
v v v v v v v v v v v v v v v
What does Jensen's alpha tell you? - answer-the percentage a manager over- or
v v v v v v v v v v v v
underperformed based on the amount of risk taken
v v v v v v v v
The percentage of return that can be attributed to systematic risk is referred to as the -
v v v v v v v v v v v v v v v v
answer-coefficient of determination (R2).
v v v v
Which of the following are not used in technical analysis? - answer-A) graphs
v v v v v v v v v v v v
B) financial statement ratios
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C) moving averages
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D) supply and demand of stocks
v v v v v
--B
Moving averages, graphs, and statistics regarding the supply and demand of stocks are
v v v v v v v v v v v v
used by technicians.
v v v v
Financial statement ratios are part of fundamental analysis.
v v v v v v v
When performing bond calculations, which of the following general assumptions should
v v v v v v v v v v
be made unless stated otherwise? - answer-A) The coupon rate is annualized but paid
v v v v v v v v v v v v v v
semiannually for U.S. bonds.
v v v v
B) On a financial calculator, bonds are calculated in the Begin mode.
v v v v v v v v v v v
C) The coupon payment used in bond calculations is the annual amount.
v v v v v v v v v v v
D) The face value of the bond is $10,000.
v v v v v v v v
--A
The face value of the bond should be assumed to be $1,000, not $10,000. The coupon
v v v v v v v v v v v v v v v
rate is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds
v v v v v v v v v v v v v v v v v
and the coupon payment is always made at the end of the period, not the beginning. All
v v v v v v v v v v v v v v v v v
bonds, even zero coupon bonds, are compounded semiannually in the End mode. This
v v v v v v v v v v v v v
makes all bond YTM quotes standardized for easy comparison.
v v v v v v v v v
, Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity.
v v v v v v v v v v v v v v v
vComparable bonds are yielding 6%. What is the value of this bond? - answer-A) $1,010
v v v v v v v v v v v v v v
B) $902 v
C) $925 v
D) $875 v
--B
If the calculator is set for 1 P/YR, then all factors, other than FV, need to be adjusted for
v v v v v v v v v v v v v v v v v v
vsemiannual payments. The keystrokes would be: 1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N],
v v v v v v v v v v v v v
vthen solve for [PV] = -902. If the calculator is set at 2 P/YR, then [I/YR] is 6 and [N] is
v v v v v v v v v v v v v v v v v v v v
ventered as 15 [SHIFT] [N]. v v v v
Which of the following is correct regarding the additional payroll tax for high wage
v v v v v v v v v v v v v
vearners that was brought about by the Affordable Care Act? - answer-A) The tax applies
v v v v v v v v v v v v v v
vto those with an AGI in excess of $500,000.
v v v v v v v v
B) The tax is 1.9%.
v v v v
C) The tax is split between the employer and employee.
v v v v v v v v v
D) The tax was designed to provide additional funding for Medicare.
v v v v v v v v v v
--D
This tax is an additional Medicare tax. The 0.9% tax is employee paid and applies to
v v v v v v v v v v v v v v v
vhigh earners only (AGI in excess of $250,000 for joint filers and $200,000 for single
v v v v v v v v v v v v v v
vfilers, not indexed). v v
Mark, a financial adviser, has a client who has worked in two positions during his
v v v v v v v v v v v v v v
lifetime. The client's first position was a state or local government position that was not
v v v v v v v v v v v v v v v
covered by Social Security. The client is receiving a pension from that employment. His
v v v v v v v v v v v v v v
second position was covered by Social Security and he is eligible for Social Security
v v v v v v v v v v v v v v
retirement benefits. Mark should advise his client that - answer-his eligibility for Social
v v v v v v v v v v v v v
Security retirement benefits may be reduced due to the windfall elimination provision
v v v v v v v v v v v v
(WEP).
v
Worked in a position that was not covered by Social Security, and the client is receiving
v v v v v v v v v v v v v v v
a pension from that employment, - answer-If you have a client who has worked in a
v v v v v v v v v v v v v v v v
position that was not covered by Social Security, and the client is receiving a pension
v v v v v v v v v v v v v v v
from that employment, his eligibility for Social Security benefits based on his own work
v v v v v v v v v v v v v v
history covered by Social Security may be reduced due to the windfall elimination
v v v v v v v v v v v v v
provision (WEP). The government pension offset provision (GPO) impacts Social
v v v v v v v v v v
Security benefits owed to spouses, ex-spouses, or to survivor benefits. If he has one or
v v v v v v v v v v v v v v v
more survivors entitled to a benefit, the Social Security Administration recalculates the
v v v v v v v v v v v v
benefit to omit the WEP, which results in a higher survivor benefit. Reductions due to
v v v v v v v v v v v v v v v
the WEP are NOT reflected in Social Security benefit estimates. One way to
v v v v v v v v v v v v v
differentiate between the two is focusing on the "W" in WEP. The "W" can remind you of
v v v v v v v v v v v v v v v v v
"worker." Thus, the WEP reduces Social Security retirement benefits based on your own
v v v v v v v v v v v v v
work history. That leaves the GPO as the one that reduces a spousal Social Security
v v v v v v v v v v v v v v v
benefit based on what the spouse is getting from a retirement plan based on
v v v v v v v v v v v v v v
employment that did not pay into Social Security (such as public school teachers in
v v v v v v v v v v v v v v
several states).
v v
complete solutions
Which of the following are correct statements about the capital utilization strategy? -
v v v v v v v v v v v v
vanswer-I. It produces an annual retirement income over a finite number of years.
v v v v v v v v v v v v
II. Assuming the yield remains the same, the larger the retirement income that is paid,
v v v v v v v v v v v v v v
vthe shorter the number of years over which it will be paid.
v v v v v v v v v v v
III. When the capital utilization approach is used, the planner must be careful in making
v v v v v v v v v v v v v v
vassumptions about the life expectancy of the client. v v v v v v v
IV. The effect of taxes on retirement savings and distributions should be considered
v v v v v v v v v v v v
vwhen the before-tax approach is used to calculate the future value of retirement assets.
v v v v v v v v v v v v v
Which one of the following is not a key element of an investment policy? - answer-A) a
v v v v v v v v v v v v v v v v
vprovision for periodic review v v v
B) the acceptable risk tolerance level
v v v v v
C) a target asset allocation
v v v v
D) names of specific stocks to be in the portfolio
v v v v v v v v v
--D
The key elements in an investment policy are a clear statement of the client's goal,
v v v v v v v v v v v v v v
vsuitable investment vehicles and strategies, the acceptable risk tolerance level for the
v v v v v v v v v v v
vclient, asset allocation guidelines, and a provision for periodic review. One way to
v v v v v v v v v v v v
vremember the essential elements of an investment policy is the acronym "GRASP"
v v v v v v v v v v v
v(Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the investment
v v v v v v v
vcategories that may or may not be used-and Periodic Review). Specific investments
v v v v v v v v v v v
vwould be determined after the investment policy is created.
v v v v v v v v
Which one of the following is a characteristic of Treasury inflation-protected securities
v v v v v v v v v v v
(TIPS)? - answer-A) They are sold at a discount.
v v v v v v v v v
B) The increase in principal is taxable each year.
v v v v v v v v
C) Their returns are tied to the producer price index.
v v v v v v v v v
D) They are issued with maturities up to 40 years.
v v v v v v v v v
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what
v v v v v v v v v v v v v v v v
vis the expected change in price for this fund? - answer-A) 6.5% decrease
v v v v v v v v v v v v
B) 9.75% increase
v v
C) 9.75% decrease
v v
D) 6.5% increase
v v
--C
,1.5% -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to
v v v v v v v v v v v v v v v
represent the inverse relationship between bond prices and interest rates. In this case,
v v v v v v v v v v v v v
an increase in rates means the bonds or bond funds will fall in price. Therefore, this fund
v v v v v v v v v v v v v v v v v
will decrease in price about 9.75%. Also, you can remember that bond prices move
v v v v v v v v v v v v v v
opposite to interest rates. An increase in interest rates means the price of bonds will go
v v v v v v v v v v v v v v v v
down.
v
The process of rebalancing is a key factor in - answer-Strategic asset allocation.
v v v v v v v v v v v v
Strategic asset allocation involves obtaining the best asset mix for a client over a long
v v v v v v v v v v v v v v
period. For example, this might be 60% stocks and 40% bonds. When these
v v v v v v v v v v v v v
percentages change due to market movements, this strategic asset allocation requires
v v v v v v v v v v v
the portfolio to be rebalanced back to the target mix, in this case 60/40 stocks/bonds.
v v v v v v v v v v v v v v v
What does Jensen's alpha tell you? - answer-the percentage a manager over- or
v v v v v v v v v v v v
underperformed based on the amount of risk taken
v v v v v v v v
The percentage of return that can be attributed to systematic risk is referred to as the -
v v v v v v v v v v v v v v v v
answer-coefficient of determination (R2).
v v v v
Which of the following are not used in technical analysis? - answer-A) graphs
v v v v v v v v v v v v
B) financial statement ratios
v v v
C) moving averages
v v
D) supply and demand of stocks
v v v v v
--B
Moving averages, graphs, and statistics regarding the supply and demand of stocks are
v v v v v v v v v v v v
used by technicians.
v v v v
Financial statement ratios are part of fundamental analysis.
v v v v v v v
When performing bond calculations, which of the following general assumptions should
v v v v v v v v v v
be made unless stated otherwise? - answer-A) The coupon rate is annualized but paid
v v v v v v v v v v v v v v
semiannually for U.S. bonds.
v v v v
B) On a financial calculator, bonds are calculated in the Begin mode.
v v v v v v v v v v v
C) The coupon payment used in bond calculations is the annual amount.
v v v v v v v v v v v
D) The face value of the bond is $10,000.
v v v v v v v v
--A
The face value of the bond should be assumed to be $1,000, not $10,000. The coupon
v v v v v v v v v v v v v v v
rate is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds
v v v v v v v v v v v v v v v v v
and the coupon payment is always made at the end of the period, not the beginning. All
v v v v v v v v v v v v v v v v v
bonds, even zero coupon bonds, are compounded semiannually in the End mode. This
v v v v v v v v v v v v v
makes all bond YTM quotes standardized for easy comparison.
v v v v v v v v v
, Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity.
v v v v v v v v v v v v v v v
vComparable bonds are yielding 6%. What is the value of this bond? - answer-A) $1,010
v v v v v v v v v v v v v v
B) $902 v
C) $925 v
D) $875 v
--B
If the calculator is set for 1 P/YR, then all factors, other than FV, need to be adjusted for
v v v v v v v v v v v v v v v v v v
vsemiannual payments. The keystrokes would be: 1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N],
v v v v v v v v v v v v v
vthen solve for [PV] = -902. If the calculator is set at 2 P/YR, then [I/YR] is 6 and [N] is
v v v v v v v v v v v v v v v v v v v v
ventered as 15 [SHIFT] [N]. v v v v
Which of the following is correct regarding the additional payroll tax for high wage
v v v v v v v v v v v v v
vearners that was brought about by the Affordable Care Act? - answer-A) The tax applies
v v v v v v v v v v v v v v
vto those with an AGI in excess of $500,000.
v v v v v v v v
B) The tax is 1.9%.
v v v v
C) The tax is split between the employer and employee.
v v v v v v v v v
D) The tax was designed to provide additional funding for Medicare.
v v v v v v v v v v
--D
This tax is an additional Medicare tax. The 0.9% tax is employee paid and applies to
v v v v v v v v v v v v v v v
vhigh earners only (AGI in excess of $250,000 for joint filers and $200,000 for single
v v v v v v v v v v v v v v
vfilers, not indexed). v v
Mark, a financial adviser, has a client who has worked in two positions during his
v v v v v v v v v v v v v v
lifetime. The client's first position was a state or local government position that was not
v v v v v v v v v v v v v v v
covered by Social Security. The client is receiving a pension from that employment. His
v v v v v v v v v v v v v v
second position was covered by Social Security and he is eligible for Social Security
v v v v v v v v v v v v v v
retirement benefits. Mark should advise his client that - answer-his eligibility for Social
v v v v v v v v v v v v v
Security retirement benefits may be reduced due to the windfall elimination provision
v v v v v v v v v v v v
(WEP).
v
Worked in a position that was not covered by Social Security, and the client is receiving
v v v v v v v v v v v v v v v
a pension from that employment, - answer-If you have a client who has worked in a
v v v v v v v v v v v v v v v v
position that was not covered by Social Security, and the client is receiving a pension
v v v v v v v v v v v v v v v
from that employment, his eligibility for Social Security benefits based on his own work
v v v v v v v v v v v v v v
history covered by Social Security may be reduced due to the windfall elimination
v v v v v v v v v v v v v
provision (WEP). The government pension offset provision (GPO) impacts Social
v v v v v v v v v v
Security benefits owed to spouses, ex-spouses, or to survivor benefits. If he has one or
v v v v v v v v v v v v v v v
more survivors entitled to a benefit, the Social Security Administration recalculates the
v v v v v v v v v v v v
benefit to omit the WEP, which results in a higher survivor benefit. Reductions due to
v v v v v v v v v v v v v v v
the WEP are NOT reflected in Social Security benefit estimates. One way to
v v v v v v v v v v v v v
differentiate between the two is focusing on the "W" in WEP. The "W" can remind you of
v v v v v v v v v v v v v v v v v
"worker." Thus, the WEP reduces Social Security retirement benefits based on your own
v v v v v v v v v v v v v
work history. That leaves the GPO as the one that reduces a spousal Social Security
v v v v v v v v v v v v v v v
benefit based on what the spouse is getting from a retirement plan based on
v v v v v v v v v v v v v v
employment that did not pay into Social Security (such as public school teachers in
v v v v v v v v v v v v v v
several states).
v v
