Tools and Techniques of Financial Planning 8th Edition College Course Materials, Quizzes of Nursing

Download Tools and Techniques of Financial Planning 8th Edition College Course Materials and more Quizzes Nursing in PDF only on Docsity! TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 1 True or False: 1. One definition of financial planning is cash flow planning. 2. A good financial plan is one that shows the client how to achieve all his or her goals. Answers: 1. True 2. False: the client must prioritize, and may even have to sacrifice some goals to achieve others. Multiple Choice: 1. A good financial planning report must include an analysis of all of the following EXCEPT: a. Where you are now b. Where you want to be c. Why you failed previously d. How to reach your goals Answer: C TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 2 True or False: 1. Clients are best served by a financial planning team with expertise in different fields rather than a single advisor. 2. The authors suggest that risk/reward principles must include both economic and psychological considerations. 3. The truly professional advisor will continue his/her education though various means, including joining organizations such as FPA, NAPFA, etc. 4. Clients who have a chance to participate in the financial planning process are more likely to resent paying for the services of the advisors. Answers: 1. True 2. True 3. True 4. False TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 3 True or False: 1. According to the authors, financial planning is a process, not a product or service. 2. Clients have better chances of meeting their objectives if the objectives are realistic, welldefined and measurable. 3. The authors recommend prioritizing client goals as well as attaching a time frame to each goal. Answers: 1. True 2. True Answer: 1. a : 3 b : 6 c : 5 d : 1 e.: 7 f. : 4 g : 2 TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 5 True or False: 1. A truly personalized financial plan must consider factors such as cultural background and family experiences of the client. 2. The financial planner must focus exclusively on the rational, rather than emotional aspects of the client’s goals and aspirations. 3. It is possible to assess a client’s attitudes about money based on a simple classification system, based on age, marital status, etc. 4. The financial planner must recognize that there is a strong relationship between stress and money. Answers: 1. True 2. False 3. False: such a system would be too simplistic. 4. True TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 6 True or False: 1. If you hold yourself out to the public as financial planner, you lose the exemption from registration even if you otherwise qualify. 2. A financial planner, who registered with the SEC as an investment advisor, decided to sell his practice and retire. He may assign all his clients to the buyer without obtaining the clients’ permission. 3. Investment advisor representatives must still register with the states in which they operate even if their firms are registered with the SEC. 4. The Act specifically forbids the use of testimonials in advertising by registered investment advisors. 5. An investment advisor is a fiduciary in the eyes of the SEC. 6. Part I of form ADV that is filed with the SEC is kept confidential, while part II is made available to the public at an SEC-sanctioned web site. 7. SEC-registered investment advisors must file audited financial statements with the SEC on an annual basis. True / False 8. Financial planners who advise clients who are residents of multiple states about insurance must obtain a national insurance license. 9. A financial planner who provides insurance advice for a fee may obtain a license as an insurance consultant in some states. Answers: 1. True 2. False 3. True 4. True 5. True 6. False 7. False 8. False: there is no national licensing for insurance 9. True Multiple Choice: 1. Which of the following is NOT part of the definition of an Investment Advisor as defined by the Investment Advisers Act of 1940 (the Act)? a. provides advice regarding securities b. is in the business of providing advice c. holds a CFP® or series 7 license d. receives compensation for advice 2. The Act defines compensation as a. Commission only b. Fees only c. Receipt of any economic benefit d. 12(b) 1 fees only. 3. Which of the following is NOT exempt from the definition of an investment advisor? a. Publisher of the local newspaper, the Daily Beagle b. Insurance agent who advises clients about no load mutual funds c. Those who advise clients solely about U.S. treasury obligations d. Local attorney who occasionally advises clients about setting up investment accounts for their jury awards 4. The “brochure rule” requires that the investment adviser do which of the following? a. Provide the client with an audited financial statement of the adviser’s net worth. b. Deliver a written disclosure document (such as part II of form ADV) to each client c. Provide a copy of part I of form ADV to each client d. Provide clients with copies of the adviser’s marketing brochure. 5. The anti-fraud provisions of the Act applies to: a. All investment advisors, even those who are exempt from registration b. Only those who must register with the SEC or the states Multiple Choice: 1. The following are the disciplinary actions that the CFP Board may take against a financial advisor who is in violation of the Code of Ethics EXCEPT: a. Private censure b .Lawsuit against the advisor in Federal Court c. Public letter of admonition d. Suspension 2. Which of the following uses of the CFP® marks are PROHIBITED by the CFP Board? a. Jane Smith is a CFP® graduate b. Jane Smith is a CFP® c. Jane Smith has a CFP® d. All of the above 3. Which of the following are PROHIBITED uses of the CFP® marks? a. www. CFP Advisors.com b. CFP Advisors, Inc. c. All Star CFPs, Inc. d. All of the above 4. Under the CFP Board’s Code of Conduct and Professional Responsibility, a financial planner who has reason to suspect illegal conduct in his or her organization must: a. Disclose the information to his or her supervisor b. Alert regulatory authorities if the organization does not take suitable action to remedy the situation c. Not use the process to harass another planner d. All of the above 5. An important requirement that is common to the SEC rules for investment advisors and the CFP Board’s Code of Ethics is: a. Full Disclosure of all material information to clients b. A ban on accepting commissions c. A ban on “soft dollars” d. Rules for custody of assets under management 6. Under the Code of Ethics and Professional Responsibility, a CFP® practitioner may not generally disclosed confidential information obtained from a client. A CFP® practitioner may, however, disclose such information in the following situations EXCEPT: a. The client sues the practitioner b. The client files a complaint against the practitioner with the NASD or the CFP Board c. The client consents to the disclosure d. The client’s bank requests information in connection with a mortgage application 7. According to the Code of Ethics and Professional Responsibility, a CFP® practitioner who gives a brochure to clients disclosing information about his or her firm must include all of the following EXCEPT: a. The identity of insurance companies that the firm represents and any commission arrangements with those companies b. A statement of whether the firm’s compensation will include commissions or fees only c. Resumes of the firm’s employees who will provide financial planning services to the client d. The identity of the bank or other institution where the firm maintains a checking account 8. The Principle of Objectivity in the Code of Ethics and Professional Responsibility of the CFP Board of Standards requires that a CFP® practitioner a. Must disclose in writing any conflicts of interest that might compromise the adviser’s objectivity or independence prior to establishing a relationship with the client. b. Has the burden of proving, by clear and strong evidence that any business transactions with or for the client are arms-length transactions c. Shall act with prudent professional judgment and in the best interest of the client d. All of the above Answers: 1. b 2. d 3. d 4. d 5. a 6. d 7. d 8. d TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 8 True or False: 1. The practice standards are guidelines unrelated to the CFP Board Code of Ethics. 2. The practice standard 100-1 (defining the scope of the client engagement) states that the client and the financial planner must mutually define the scope of the engagement before any financial planning service is rendered. 3. Practice standard 400-1 (identifying and evaluating financial planning alternatives) is intended to ensure that different financial planners will, nevertheless, come to similar conclusions, and thus provide similar advice. 4. According to practice standard 200-1 (determining the client’s personal and financial goals, needs and priorities), it is not the responsibility of the financial planner to help clients recognize the implications of unrealistic goals and objectives. 5. According to practice standard 200-2 (obtaining quantitative information and documents), the financial planner who is unable to obtain sufficient and relevant quantitative information and documents to provide suitable recommendations for the client must formulate the advice using the limited information available. 2. Mark and Jane spent $10,000 each for the tuition expenses of their 3 children in college. They can claim a Lifetime Learning Credit for $30,000 of combined educational expenses. 3. Tuition, room and board and other expenses may be included in the calculation of Hope Scholarship and Lifetime Learning credits. 4. Withdrawals from IRAs prior to age 59½ are not subject to a 10% penalty if the amount of the withdrawal does not exceed the “qualified higher education expenses” of the taxpayer. 5. Contributions to Coverdell Educational Savings Accounts are tax deductible, subject to income limitations. 6. The maximum Hope Scholarship Credit is equal to 20% of qualified tuition and expenses that do not exceed $10,000. 7. Jodie’s grandparents contributed $150,000 to a 529 plan for her benefit in 2007. If they choose the split gift option, they may exclude $120,000 from gift tax purposes this year, and only $30,000 will be taxable. 8. Joseph is a freshman at Home State University in 2007. His parents paid $10,000 this year for his tuition. If their AGI for 2007 is $75,000, they may claim a tuition and fees deduction for $4,000, which will disqualify them from claiming a Hope tax credit for part of the remaining expenses. 9. One benefit of subsidized student loans is that interest does not accrue while the student is in college. 10. Chad obtained a student loan of $8,000 to pay for his college expenses. He paid $5,000 for tuition and the rest for his room and board. On the federal income tax return, he may deduct the interest only on the funds he used to pay his tuition and fees, but not the room and board and other expenses. 11. The parents’ retirement assets and home equity are not included in the federal methodology for calculating Expected Family Contribution when the student needs financial aid for college. 12. The Lifetime Learning Credit provides a bigger tax benefit than the Hope Scholarship Credit if the tuition expenses exceed $7,500. 13. The Hope Scholarship Credit can be claimed by the parents of a dependent student even if the funds were contributed by someone else. 14. Michelle, a sophomore at the local university at the beginning of 2007, paid $3,000 towards her tuition from her own savings. Her parents will not claim her as a dependent on their 2007 tax return, but paid $5000 towards her tuition for the year. Michelle may claim a Hope Scholarship credit for herself, but her parents may not. 15. The tuition and fees deduction can be claimed by the parents of a college student only if they paid the expenses themselves, AND the student is their dependent. 16. Student loan interest is deductible up to a maximum amount of $3,000. 17. Interest on EE and Series I savings bonds purchased by the student qualifies for exclusion from federal income tax (subject to AGI limits) if used to pay qualified educational expenses. Answers: 1. True 2. False: the $10,000 limit for Lifetime Learning credit applies per taxpayer, not per student. 3. False: room and board may not be included in the calculation of either credit. 4. True 5. False: there is no tax deduction for the contributions. 6. False 7. True 8. True 9. True 10.False: unlike the Hope Scholarship and Lifetime Learning Credits, expenses for room and board can be included in the calculation of the student loan interest deduction. 11.True 12.True 13.True: if the funds are contributed directly to the college, they are deemed to have been gifted to the student, and in turn paid by the student to the college. 14.True 15.True 16.False 17.False: the student must be older than age 24 when he or she purchases the bonds in order to qualify for the benefit (or the parents may claim the benefit if they purchased the bonds when they were older than 24 years) Multiple Choice: 1. Tuition at the Home State University is currently $10,000 per year, increasing on the average of 6% per year. What is the lump sum needed at the beginning of the freshman year of college to fund an 8-year old child’s college education for 4 years starting at age 18, if the investment return is expected to be 4%? a. $65,778 b. $67,706 c. $73,727 d. $69,502 2. What is the (constant) annual payment needed to fund the above lump sum, if the parents start investing now, and continue until the beginning of the freshman year, and the annual investment return is 8%? a. $5,905 b. $4,712 c. $5,277 d. $6,565 3. The Hope Scholarship Credit is characterized by all of the following EXCEPT: a. It can be claimed only for the first two years of a post-secondary education b. There is no requirement that the student pursue a degree c. The maximum annual credit amount is $1,650 per student d. The credit is phased out between income ranges of $40,000 to $50,000 as indexed (single) and between $80,000 to $100,000 as indexed (joint) 4. The following statements about “529 plans” for funding college educational expenses are true EXCEPT: a. Withdrawals from 529 plans for qualified educational expenses are tax-free b. Parents can retain some control over the funds, including ability to change beneficiaries c. Contributions are not eligible for federal income tax deduction d. Donor can exercise day to day control over investment management 3. Ron and Linda have been living together for several years, but are not legally married. Ron’s assets were valued at over $5 million last year. If Ron passes away this year, he will be able to use the unlimited marital deduction to avoid paying estate taxes by leaving his entire estate to Linda. 4. In the example above, if Ron dies without a will, their home state’s intestacy laws may prevent Linda from inheriting Ron’s probate property. 5. Social Security benefits for a non-traditional couple (same sex or co-habitating) can be based on either partner’s earnings. Answers: 1. True 2. True 3. False 4. True 5. False TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 13 True or False: 1. Dr. Kreig, an orthopedic surgeon, has a disability insurance policy. Dr. Kreig is no longer able to practice as an orthopedic surgeon as a result of an accident. If the policy has an “own occupation” definition of disability, he will receive disability payments. 2. Following his accident from the above case, Dr. Kreig is able to more than replace his previous earnings by working as a professor of orthopedics, and a consultant in malpractice suits. If the definition of disability in his policy was “modified own occupation”, Dr. Kreig will be denied disability benefits. 3. If Dr. Kreig is able to work as an admitting clerk or as a cafeteria worker, he will be denied Social Security disability benefits. 4. Disability benefits usually equal 100% of pre-disability earnings. 5. In order to qualify for disability benefits under the social security program, the individual must be unable to perform any type of work for at least 12 months or must be terminally ill. 6. A special needs trust is the best way to provide some funds for a special needs child without jeopardizing the child’s eligibility for government program such as Supplemental Social Security Income. 7. Terminally ill patients may find that accelerated benefits from their life insurance policies or viatical settlements may be needed as potential source of cash to meet their living expenses. Answers: 1. True 2. True 3. True 4. False: the limit is usually 2/3 of pre-disability earnings 5. True 6. True 7. True Multiple Choice: 1. The most important documents that a terminally ill person should have are the following EXCEPT: a. Healthcare power of attorney b. Living will c. Power of attorney/Durable power of attorney d. Charitable remainder trust Answers: 1. d TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 14 True or False: 1. A properly executed codicil will serve as a replacement for a prior will. 2. A living will indicates a person’s desire regarding actions to be taken in case of a terminal accident or illness. 3. Hand-written (holographic) wills are not valid in many states. 4. A financial planner who is not a practicing attorney must be careful to avoid the inadvertent practice of law while providing estate planning advice. 5. Belinda, a single mom with 2 kids, 5 years and 7 years old, is interested in drawing up a will. If her will does not contain a provision naming a guardian for her children in case of her death, a court proceeding will be needed to accomplish the same. 6. Trusts set up under the terms of a will may be an effective way to avoid probate. 7. A married couple may jointly give $24,000 to an unlimited number of recipients every year without triggering any gift-tax—but only if the recipients are their blood relatives. 8. Mikhail’s mother set up a trust, giving him the power to choose the ultimate beneficiaries of the trust. The power is considered a “general” power of appointment, and the value of the trust will be included in Mikhail’s estate upon his death. 9. Barbara owns a life insurance policy on her own life with a face value of $250,000. If she dies today, the $250,000 will not be included in her estate, since life insurance proceeds are generally income tax free. 10. Ashok and Asha, who have been married for 10 years, have drawn up wills leaving their entire estates to each other, using the unlimited marital deduction to avoid paying any estate tax at the death of the first spouse. The pitfall of this strategy is that they may be squandering the unified credit of the first spouse to die. 11. The generation skipping transfer (GST) tax rate is a flat rate equal to the prevailing maximum federal estate tax rate. 1. A major obstacle to the budgeting process is the psychological aversion to the record keeping required. 2. A major benefit of the budgeting process is that it can increase the client’s income. 3. Clients with irregular incomes should prepare two budgets—a worst case and a best case budget in addition to the most probable budget. Answers: 1. True 2. False 3. True TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 16 True or False: 1. AICPA recommends reporting assets and liabilities on personal financial statements on an accrual basis rather than cash basis. 2. Capitalization of income is a commonly used way to estimate the fair market value of a business. Answers: 1. True 2. True TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 17 True or False: 1. Ramon’s gross annual income is $45,000. He is considering purchasing a home where his monthly mortgage amount will be $1,200. Property taxes on the home will be $2,400 and homeowner’s insurance will be $300. The bank’s policy is to issue loans only if the frontend ratio does not exceed 0.32. Does Ramon qualify for a loan from this bank? 2. The back-end ratio is the ratio of the monthly housing expense plus property taxes and insurance to the borrower’s gross monthly income. 3. The Fair Debt Collection law forbids debt collectors from contacting debtors by telephone. 4. Jenny and Jim purchased a home 10 years ago with a 30-year mortgage. The market value of the home is now $400,000 and the outstanding balance on the mortgage is $200,000. In 2007, they obtained a home equity loan for $125,000 to finance their new business. The entire interest on the home equity loan is deductible on their federal income tax return. 5. Consumers can dispute information on their credit report that they believe to be inaccurate, and have it removed with proper documentation. 6. The first step that consumers who suspect being victims of identity theft must take is to file a complaint with the state attorney general’s office to protect their credit record. 7. Chapter 7 bankruptcy filing requires total liquidation of all non-exempt assets of the debtor. 8. The Equal Credit Opportunity Act makes it illegal for lenders to enquire about the marital status of the borrowers. 9. Consumers with FICO scores above 700 will qualify for lower interest rates on their loans than those with scores below 700. Answers: 1. No: the front end ratio for Ramon = 0.38 2. False 3. False 4. False: The interest deductibility is limited to loans up to $100,000 when the funds are not used to build or improve the home. 5. True 6. False: consumers must first report the suspected identity theft to one of the credit reporting agencies. 7. True 8. False: the act only makes it illegal to discriminate on the basis of marital status, among others. 9. True Multiple Choice: 1. According to the authors, the three C’s of credit include the following EXCEPT: a. Character b. Competence c. Collateral d. Capacity 2. Consumers may obtain copies of their credit history from one of the following major reporting agencies EXCEPT: a. Experian b. Equifax c. Equitable d. TransUnion 3. You can improve your Fair Isaac Credit Score (FICO) by all of the following EXCEPT: a. Paying bills on time b. Keeping balances on credit cards low c. Not opening credit accounts indiscriminately d. Paying bills before they are posted to your account 4. Ron’s bankruptcy filing under Chapter 7 was approved by the bankruptcy court. Which of the following obligations will he be allowed to discharge? 13. Zach and Jenny, a newly married couple, are considering purchasing their first home. Zach is employed as a sales manager. Jenny recently received her teaching certification, and expects to get a teaching job in the fall. They noticed that local builders are offering temporary buy-down programs for new homes. Would you recommend these programs to Zach and Jenny as appropriate for their situation? Yes / No 14. Professionals such as doctors or lawyers may qualify for “No Income Verification” Loans which require verification of employment, but not actual income. 15. In a capital lease, the present value of the lease payments is at least 90% of the fair market value of the asset at the start of the lease. 16. Points on the original mortgage (acquisition debt) for a home purchase are deductible in the year of purchase, but points on the refinancing must be amortized. Answers: 1. True 2. False: Regulation T deals with the rules for margin loans 3. True 4. True 5. True 6. True 7. True 8. False 9. True 10.True 11.Yes 12.Yes: monthly payments are likely to be lower for the “interest only” mortgage 13.Yes 14.True 15.True 16.True Multiple Choice: 1. Which of the following is NOT an example of financial leverage? a. Obtaining a mortgage to purchase a house b. Buying 100 shares of a stock using cash c. Using a “no interest till 2005” offer to buy a TV d. Buying 100 shares of a stock on margin 2. Which of the following is the CORRECT definition of a jumbo loan? a. A loan to build houses that are larger than average b. A loan whose amount exceeds the guidelines of agencies like Fannie Mae c. A loan whose term is longer than 30 years d. A loan with additional points charged to cover closing costs 3. In the opinion of the authors, the best way to assess whether refinancing a loan is advantageous is to: a. Compare the total payments for the two loans over the same period b. Compare the present value of the payments at the two discount rates c. Compare the points being charged on the two loans d. Compare the closing costs of the two loans 4. If a family’s annual gross income is $120,000 and the front-end ratio limit of the lender is 0.33, the maximum monthly housing expenses for the family under the lender’s guidelines will be: a. $3960 b. $3300 c. $6600 d. $1200 Answers: 1. b 2. b 3. b 4. b TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 19 True or False: 1. Fed Funds rate is the interest rate on newly issued Treasury bonds. 2. Monetarists advocate liberal monetary policies to stimulate the economy and ensure maximum growth. 3. The study of the individual consumer’s economic decisions is called macroeconomics. 4. Economists suggest that the marginal utility of a product to an individual consumer declines as the number of units consumed increases. Answers: 1. False 2. False 3. False 4. True Multiple Choice: 1. The official source of the index of leading, lagging, and coincident indicators is: a. The U.S. Dept. of Labor b. The U.S. Dept. of Commerce c. The Conference Board d. The U.S. Chamber of Commerce 2. A rise in the index of Leading Economic Indicators can be a predictor of all EXCEPT: a. Rising interest rates b. More favorable mortgage rates in the immediate future 7. b 8. b 9. a 10.b TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 20 Multiple Choice: 1. Rahul and Miranda want to make a lump-sum investment for their newborn’s college education, and their goal is to accumulate $80,000 in 18 years. What is the amount they must invest today to reach their goal if the annual rate of return is 8%? a. $20,020 b. $22,789 c. $14,782 d. $23,291 2. Troy wants to accumulate $40,000 in 10 years to purchase a vacation home. What is the annual investment rate of return that Troy must obtain if he deposits $250 at the end of every month for 10 years? a. 6.75% b. 5.56% c. 9.25 % d. 7.75 % 3. Samantha just won a settlement with an insurance company, which entitles her to receive payments of $20,000 at the beginning of each year for the next 20 years. Her financial advisor recommended to her that she consider accepting a lump-sum payment now, using a discount rate of 7%. What is the amount that she should accept in this scenario? a. $205,234 b. $211,880 c. $226,712 d. $182,765 4. Omar wants to make a gift of $10,000 in today’s dollars to his parents at the end of each of the next 10 years. If the annual rate of return is 8% and inflation is 3%, what is the value of the funds he must have in hand today to meet this need for the 10-year period? a. $81,541 b. $77,766 c. $76,251 d. $82,713 An investment that Kevin is considering offers the following cash flows. 5. What is the internal rate of return (IRR) that this investment offers if all cash flows occur at the end of each period? a. 10.10% b. 10.87% c. 9.24% d. 9.74%. 6. What is a reasonable purchase price for an investment that offers the following cash inflows at the end of each period? Assume an interest rate of 7%. a. $18,792 Year 1 Initial investment of $10,000 Year 2 Inflow of $2,000 Year 3 Inflow of $1,500 Year 4 Additional investment of $5,000 Year 5 Inflow of $1,200 Year 6 Inflow of $2,200 Year 7 Inflow of 1,500 Year 8 Inflow of $1,000 Year 9 Inflow of $1,200 Year 10 Sale proceeds of $17,000 Year 1 $2,000 2 $2,200 3 $1,700 4 $2,000 5 $1,500 6 $2,000 7 $1,400 8 $14,000 5. b 6. d 7. d 8. b 9. a 10.b 11.a 12.d TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 21 True or False: 1. Every $1 that a bank takes in as a deposit leads to many dollars of deposits throughout the banking system. This is called the multiplier effect. 2. Credit unions are regulated by Office of Thrift Supervision. 3. The Troy National Bank operates 25 branches in Detroit, Michigan. The name of the bank indicates that the bank operates on a nationwide basis. 4. Shares of closed end mutual fund shares trade at a discount or premium to the net asset value of the fund. 5. Investors are not assured of locking in an interest rate nor a maturity rate when they purchase mortgage backed securities such as GNMA. 6. Exchange traded funds (ETFs) are priced and traded at the close of the New York stock exchange. Answers: 1. True 2. False 3. False 4. True 5. True 6. False Multiple Choice: 1. National banks are regulated by: a. FDIC b. Comptroller of the Currency c. Federal Reserve d. Federal Office of Thrift Supervision 2. The independence of the Federal Reserve is assured through the following EXCEPT: a. Longer tenure for the Board of Governors than senators or the President b. No dependence on Congress for its budget c. Staggered terms for the Fed Board of Governors d. Fed Chairman chosen by regional Fed directors Answers: 1. B 2. D TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 22 True or False: 1. Shareholders of corporations that do not follow the formalities of shareholder meetings, etc. may lose their liability protection through a process known as the “piercing the corporate veil”. True / False 2. Family limited partnerships may be an excellent tool for transferring the value of a business to family members without transferring control. True / False 3. Limited partnerships do not offer adequate creditor protection, as creditors can attach partnership interests, and force distribution of income or liquidation of the partnership. True / False 4. One advantage of C-corporations is that shareholders can avoid double taxation. True / False 5. A limited liability partnership (LLP) is available only to certain professionals, such as doctors, lawyers and accountants. True / False 6. A Limited liability companies (LLC) may choose to be taxed as a corporation or as a partnership. True / False 7. Individuals in a high tax bracket should consider transferring assets into a trust to save income taxes as the marginal tax rate for trust income is significantly lower than that for individuals. True / False 8. Trusts may not generally hold shares of S-corporations. True / False Answers: Multiple Choice: 1. The following entities protect the business owner from personal liability in actions by creditors of the business EXCEPT: 1. Tru e 2. Tru e 3. Fal se 4. Fal se 5. Tru e 6. Tru e 7. Fal se 8. Tru e 1983, which was valued at $300,000 immediately prior to Jim’s death in 2007. If Mary sells the home for $300,000, what is the taxable gain that she must declare for income tax purposes? a. $150,000 based on the value of Mary’s half of the home b. $100,000 based on the step-up in basis of Jim’s half of the home c. None, since the entire home receives a step-up in basis on Jim’s death d. $200,000 based on the appreciation on the value of the home 3. Which of the following statements about property owned in a community property state is TRUE? a. The will of the decedent (the deceased person) will dictate how his or her half of the property will transfer at death b. The decedent’s half of the property will automatically transfer at death to the surviving spouse without going through probate c. The marital deduction is available for estate tax purposes, regardless of who receives the decedent’s half of the property d. None of the above 4. Which of the following statements about sole ownership of property is INCORRECT? a. If the owner shifts income from the property to another person, the owner can reduce his own income taxes b. Upon the owner’s death, the property will transfer by terms of the will c. If spouse is not bequeathed a share of the property according to the terms of the owner’s will, spouse may elect against the will d. Owner needs no one’s permission to dispose of property 5. The following statements about joint tenancy with rights of survivorship (JTWROS) are true EXCEPT: a. Husband and wife, father and son, or even unrelated persons can own property in JTWROS form b. When co-owners are not a married couple, the entire value of property will be included in the estate of the first owner to die, unless the survivor can prove contribution to basis c. For married couples, the decedent’s half of the property receives a step up in basis d. At the death of the first owner, the entire property receives a step up in basis 6. All of the following statements about tenancy in common are true EXCEPT: a. Multiple owners, including unrelated parties can share ownership of property b. One owner’s fractional interest can be transferred without the permission of the other owners c. Transfer at death occurs without the probate process d. The property receives step up in basis at death for the owner’s fractional interest 7. The following statements about joint tenancy w/ rights of survivorship (JTWROS) and tenancy in the entirety (TIE) are true EXCEPT: a. TIE is permitted in some states, and only between husband and wife b. One spouse can’t dispose of TIE property without the consent of the other c. TIE property is a probate asset, but JTWROS property is not d. Valuation of TIE property may be different from JTWROS property 8. The following statements about joint tenancy with rights of survivorship (JTWROS) are true EXCEPT: a. Ownership interests are deemed to be equal; so is income b. Conversion from sole ownership to JTWROS may trigger gift tax c. Marital deduction for estate tax is not allowed when one spouse’s interest passes exclusively to the other d. JTWROS property does not avoid inclusion in decedent’s estate Answers: 1. a 2. c 3. a 4. a 5. d 6. c 7. c 8. c TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 24 True or False: 1. The typical remedy for a breach of contract is the specific performance by the breaching party. 2. An agency relationship is indistinguishable from an employer-employee relationship. 3. A negotiable instrument is valid only if it is in writing. Answers: 1. False: monetary damage is the typical remedy. 2. False 3. True Multiple Choice: 1. The following are the essential elements of a contract EXCEPT: a. Offer and acceptance b. Consideration c. Legal object/purpose d. Right of rescission 2. When a contract is drafted by one party (such as an insurance company) and signed by the other party (such as a client), matters of ambiguity in the contract will be judged in favor of: . c 4. Don owned a $1 million life insurance policy on his own life. In 2006, he transferred ownership of the policy to his only son, who was the beneficiary of the policy. If Don dies in 2008, the proceeds of the life insurance policy will not be included in Don’s estate. 5. Homeowners must purchase separate policies in addition to the homeowner policy to cover additional perils such as flood and earthquake. Answers: 1. True 2. True 3. True 4. False: the policy proceeds will be included in Don’s estate as he died within 3 years of the policy being transferred. 5. True Multiple Choice: 1. Which of the following is NOT a valid defense against negligence? a. Assumption of risk b. Contributory negligence Last clear chance d. Negligence per se Answers: 1. D TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 27 True or False: . d 1. In the scenario above, if Tony had sold all his Yahoo stock for $20/share, he could report a loss of $18,000 for income tax purposes. 2. “At risk” rules are designed to limit income tax deductions for losses that investors may claim to the amounts that they are personally at risk of losing. 3. Installment sales allow investors to spread out the recognition of capital gains over a period of many years. 4. The applicable federal rate (AFR) is the interest rate that must be charged by sellers in installment sales. 5. Nicole earned a salary of $50,000 in 2004. She had losses of $12,000 in stock trades during the year. She will be able to deduct all of the losses from her income on her 2004 tax return. 6. Qualified dividends will be taxed at a rate no higher than 15% till 2008. 7. After 2008, qualified dividends will be taxed at capital gains rates. 8. Larry is a partner in a business along with his brother, Moe who manages all the affairs of the business. Larry’s share of the income from the business would be considered passive. 9. A corporation may deduct the interest it pays on its bonds as well as the dividend it pays on its stock. 10. Maya purchased a vacation home in 2004 for $400,000 with a $350,000 mortgage. She also owns a residence valued at $500,000, and has a $400,000 outstanding balance on the mortgage. Maya may deduct the entire interest on the two mortgages. 11. Miriam used a home equity loan to purchase $100,000 of municipal bonds in 2004. If she does not owe AMT, she may fully deduct the interest on the loan as an investment expense. 12. If you receive your paycheck on December 31, 2004, but do not deposit it until January 2, 2005, the income is taxable in the year 2005. . e 13. The concept that is used to ensure that contributions to nonqualified deferred compensation plans are not taxed to the employees is called constructive receipt. 14. State and local income taxes are not deductible from the taxpayer’s income for the computation of the Alternative Minimum Tax (AMT). Answers: 1. False: the reportable loss is only $500, based on the price at the time of the gift. 2. True 3. True 4. False: AFRs are imputed rates; other interest rates may be used, but subject to limitations. 5. False: only $3000 of losses may be deducted against earned income. 6. True 7. False: after 2008, dividends will no longer be “qualified”, and will be taxed at ordinary income rates. 8. True 9. False: the dividend paid on corporate stock is not deductible to the corporation 10. True: Interest on loans up to $1 million for the purchase of the two homes is deductible. 11.False: since the interest income is tax free, the interest expense is not deductible. 12.False 13.True 14.True Multiple Choice: 1. Keith purchased a home with $20,000 down payment and a $180,000 mortgage. What is his basis in the home? a. $20,000 b. $180,000 c. $200,000 d. $160,000 . h c. $3000/month is taxable to Ricky; $7000/month to Ricardo d. Income shifting is allowed only if specified in the client leases. 11. Curly manages all the affairs of a rental real estate business that he owns. In 2004, his share of the losses amounted to $40,000. Curly and his wife expect to have an AGI about $80,000. How much of the losses are deductible on their 2004 income tax return? a. $40,000 b. $3,000 c. $25,000 d. None Answers: 1. C 2. B 3. C 4. A 5. B 6. A 7. D. Any sale at a price between $200/share and $25/share will not trigger any gain or loss 8. D. The basis increase is proportional to the ratio of the net appreciation of the land to the value of the gift. 9. D. Wash sale rules will apply in this situation. 10.B 11.C. Special rule for rental real estate applies. TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 28 True or False: . i 1. Studies have shown that the average actively managed mutual fund has under- performed its matching benchmark like the S & P 500 index or the Russell 2000 index. 2. A major benefit of passive investing is its low cost. 3. Market timing has been demonstrated to beat the performance of the various market indices. 4. “Efficient market hypothesis” states that shrewd stock pickers can beat everyone else due to their access to information or other competitive advantages. 5. Rebalancing a portfolio annually forces investors to sell high and buy low. 6. Prudent investors should match their investment portfolio to the life cycle stage they are currently in. Answers: 1. True 2. True 3. False 4. False 5. True 6. True TOOLS & TECHNIQUES OF FINANCIAL PLANNING 8th Edition College Course Materials Chapter 29 True or False: 1. Defined benefit plan benefits are usually based on the employee’s earnings close to retirement. 2. Defined contribution plans shift all inflation risk, and responsibility for investment performance to the employee. . j 3. Future retirees can expect more generous benefits from Social Security due to population growth. 4. The Consumer Price Index (CPI) is a good inflation indicator for retirees. 5. The age at which retirees can receive full Social Security retirement benefits is being raised to age 67 for those born in 1960 or later. 6. Terry has a pension plan at his place of employment, which also contains his after tax contributions to the plan. He will start receiving the pension in the form of a joint and survivor annuity. The recovery of Terry’s cost basis will be deemed to occur over a number of payments based on the combined ages of Terry and his wife. 7. The penalty for withdrawing less than the minimum required distribution from a qualified plan is 10% of the required distribution for the year. 8. Retirement plans that are governed by the Employee Retirement Income Security Act (ERISA) include 401(k) plans and IRAs. 9. Older employees may receive lower pension payouts from cash balance plans compared to traditional pension plans. 10. Contributions to Roth IRAs, but not the earnings can be withdrawn at any time without a penalty. 11. An owner of an IRA who turns 70 ½ in July, 2005 must start taking the required minimum distributions by December 31, 2005. Answers: 1. True 2. True 3. False 4. False 5. True 6. True 7. False: the penalty is 50% of the shortfall in the required distribution 8. False: IRAs are not covered by ERISA. 9. True 10.True 11. False: the distribution must be made by April 1, 2006 . m interest of the trust will go to the local hospital in 20 years. Under IRS rules, the hospital must receive at least $20,000 when the trust terminates. 5. A charitable lead trust directs the income from the trust to a charity for a specified number of years, then the remainder interest to a non-charitable beneficiary. 6. Teresa is the life income beneficiary of a pooled income fund. The executor of her will may designate the charity that will receive the remainder interest upon Teresa’s death. 7. A donor advised fund offer a simpler and less expensive alternative to a private foundation. Answers: 1. True 2. False 3. False: the payouts are a specified percentage of the value of the trust, valued annually, 4. False: the charity must receive at least 10% of the initial value, i.e., $10,000 5. True 6. False: the pooled income fund is created by the charity. Thus the charity becomes the remainder beneficiary once the donor makes the initial donation. 7. True Multiple Choice: 1. Lena’s AGI for 2006 was $60,000. She donated to the Red Cross a $75,000 bank CD when it matured during the year. The maximum amount that she can deduct on her 2006 federal income tax return is: a. $30,000 b. $60,000 c. $75,000 d. $22,500 2. Mariah purchased a painting in 1990 for $10,000. In December 2006, it was valued at $30,000 and she donated it to the local art museum. What is the . n maximum charitable deduction that Mariah may claim in 2006 if her AGI was $80,000? a. $10,000 b. $30,000 c. $24,000 d. $16,000 3. In the scenario above, if the painting had been purchased in January, 2006, what is the maximum charitable deduction that Mariah may claim in 2006? a. $10,000 b. $30,000 c. $24,000 d. $16,000 Answers: 1. A 2. C. The deduction for capital gain property is limited to 30% of AGI; the remaining deduction can be carried over to the following year. 3. A