CFP exam 1

CFP exam 1 Which of the following is incorrect as a response to the following statement: An Adjustable Rate Mortgage (ARM) may be an appropriate choice if: a. A person is able to pay the mortgage off or down substanti ...

CFP exam 1 Which of the following is incorrect as a response to the following statement: An Adjustable Rate Mortgage (ARM) may be an appropriate choice if: a. A person is able to pay the mortgage off or down substantially (whether from the sale of the home or use of liquid assets) prior to the interest rate adjustment b. A person can accept and has the financial ability to absorb the interest-rate risk of the ARM. c. Interest rates are expected to increase and the risk tolerance of the individual is low. d. The spread between the ARM rate and a longer term fixed rate is sufficient to justify the increase in risk. - ANS - C T/F: A 15 year mortgage requires higher monthly payments than a 30 year mortgage and results in less interest paid over the life of the loan. - ANS - True T/F: I have to pay money to receive my credit report. - ANS - False T/F: Payment history affects my credit score. - ANS - True T/F: Ordinary marginal tax rates are higher than capital gain tax rates. - ANS - True How much will I save on an IRA contribution of $1,000 if my current year marginal tax rate is 32%? - ANS - $320 If I expect my marginal tax bracket to increase from 25% in 2017 to 32% in 2018, what is the additional marginal cost to me if I take a $1,000 IRA withdrawal in 2018? - ANS - $70 (320- 250) What is the difference between a marginal tax rate and an effective tax rate? - ANS - Marginal rate is the rate assessed on your top dollar of income. The effective tax rate reflects the total tax paid compared to total income reported on your tax return. Which tax rate (marginal or effective), would I use in evaluating the difference between income tax strategies for one person? - ANS - marginal What is my long-term capital gain tax percentage if I have $450,000 of taxable income and am a single filer? - ANS - 20% What is the total FICA tax owed for an employee with $100,000 of income and who pays it? - ANS - Total owed is $15,300 [($100,000 x .0765x 2]. The employee pays $7,650 and the employer pays the other $7,650. What is the total FICA tax owed for a self-employed business owner with $100,000 of net schedule C Income and who pays it? - ANS - ($100,000 x .9235) = $92,350 of income is subject to FICA tax. $14,129.55 is the total FICA tax owed ($92,350 x .153) and the self-‐employed business owner pays it all. What is the equation for the Balance Sheet - ANS - Assets-‐Liabilities=Net Worth What do current assets and current liabilities have in common (select correct answer)? a. Both are converted to cash (assets) or paid off (liabilities) within 1 month b. Both are converted to cash (assets) or paid off (liabilities) within 7 months c. Both are converted to cash (assets) or paid off (liabilities) within 1 year d. Both are converted to cash (assets) or paid off (liabilities) within 5 years - ANS - C How would each of the following items affect net worth (answer for each: increase /decrease/no effect)? a. Repayment of a loan using funds from a savings account b. Purchase of an automobile that is 75% financed with a 25% down payment c. The S&P 500 increases, and the client has an S&P indexed mutual fund - ANS - a. no effect b. no effect c. increase Calculate this couple's emergency fund ratio based upon the following information: Liquid assets = $3,976 Investment assets = $10,738 Annual nondiscretionary expenses=$13,913 Current liabilities=$9,247 - ANS - [$3,976 / ($13,913/12)]=3.43 Does the emergency fund ratio in #4 fall within the recommended target? - ANS - Yes, it is within 3-‐6 month range Calculate this couple's net worth based upon the following information: Checking=$2,000 House=$125,000 Savings account=$3,000 CDs=$5,000 Automobile=$13,500 Stocks=$10,000 Mortgage=$80,000 Auto loan=$5,000 Credit card bills=$1,500 - ANS - NW = $72,000 The Coopers have a net worth of $250,000 before any of the following transactions: · Paid off credit cards of $9,000 using a savings account · Transferred $5,000 from checking to their IRAs · Purchased $2,500 of furniture with credit What is the Coopers' net worth after these transactions? - ANS - $250,000, there is no change. Which of the following is not an available filing status? a. married filing jointly b. qualified dependent child c. head of household d. surviving spouse - ANS - B Which of the following is not excluded from gross income? a. dividend income b. gifts c. interest income from Municipal bonds d. Scholarships - ANS - A Which of the following is true regarding refundable tax credits? - ANS - refundable tax credits can generate a tax refund Identify the stage of planning: your client provides you with his tax returns from the previous year - ANS - Understanding the client's personal financial circumstances Identify the stage of planning: During their meeting, the couple calls the benefits office to adjust their tax withholding to better suit their financial needs - ANS - Implementing the financial planning Identify the stage of planning: During their meeting, the husband is provided with three education saving plans to choose from - ANS - Presenting the financial planning recommendations Which of the following is most likely to be considered a discretionary cash flow? a. netflix subscription b. tuition c. food d. auto loan - ANS - A Megan purchased a car for 40,000. She put down 5,000 and financed the 35,000 over 5 years. What is the impact of this transaction on her net worth? - ANS - Remains the same Which of the following statements concerning the valuation of assets on the balance sheet is correct? - ANS - Money market accounts are unlikely to lose value over time T/F Long-term liabilities represent client financial obligations that are owed to creditors beyond the next 12 months - ANS - True James deposits 10,000 in an account earning 3% interest, compounded quarterly. How much will be in the account in 7 years? - ANS - 22,879.28 Which of the following activities is most likely to be considered financial planning by the CFP board? - ANS - Analyzing a client's retirement data and making recommendations Under the candidates fitness standards, the following conduct is unacceptable and will always bar an individual from becoming certified: - ANS - Felony conviction for tax fraud All of the following are considered unacceptable conduct that will always bar an individual from becoming certified EXCEPT: - ANS - felony conviction for nonviolent crimes, including perjury, within the last five years Annie and Sam were married for 20 years when Annie met and fell madly in love with Armando. Annie is currently in the process of divorcing Sam so that she can quickly marry her new love. Which of the following is NOT proper advice for Annie? - ANS - Annie should create a letter of intent identifying all of the important information that Armando should know about her before beginning their future together Sam and Sarah owe 5,000 in taxes, are eligible for a refundable credit of 2,000, non-refundable credit of 1,000, and withheld 1,000 throughout the year. How much do they owe in taxes/will their refund be? - ANS - 1,000 (Tax Owe)