CFP Certification Exam Practice Question Workbook: 1,000 Comprehensive Practice Questions (2018 Edition)

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Contents

General Principles

Questions

Answer Key

Insurance

Questions

Answer Key

Tax Planning

Questions

Answer Key

Investments

Questions

Answer Key

Retirement and Employee Benefits

Questions

Answer Key

Estate Planning

Questions

Answer Key

Comprehensive Exam 1

Questions

Answer Key

Comprehensive Exam 2

Questions

Answer Key

General Principles

Questions

1. Which of the following places the steps of the financial planning process in the correct order? (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

(1) Implement the financial plan.

(2) Establish the client-planner relationship.

(3) Analyze and evaluate the client’s financial status.

(4) Monitor the financial plan.

(5) Gather data and determine goals and expectations.

(6) Develop and present the financial plan.

A. 2, 3, 5, 6, 1, 4

B. 2, 5, 3, 6, 1, 4

C. 2, 5, 3, 1, 6, 4

D. 5, 2, 3, 6, 1, 4

2. Which of the following Principles states that a CFP® Board designee shall not solicit clients through false or misleading communications or advertisements? (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

A. Fairness

B. Professionalism

C. Integrity

D. Objectivity

3. Which of the following is not one of the forms of discipline that may be imposed by the CFP® Board if grounds for discipline have been established against a CFP® Board designee?

A. Require additional continuing education hours in any subject matter areas separate from, or in addition to, any form of discipline.

B. Issue a public letter of admonition.

C. Permanently revoke the right to use the CFP® mark.

D. All of the above are possible forms of discipline.

4. If an RIA has more than __________ of assets under management, the RIA must register with the SEC.

A. $90 million

B. $100 million

C. $110 million

D. $120 million

5. Renee wants to deposit an amount today that will last for 6 years.  She needs to withdraw $1,400 at the beginning of each 6-month period and expects to earn 12% compounded semiannually on her investments.  How much does Renee need to deposit today to achieve her goal?

A. $10,673.59

B. $11,737.38

C. $12,441.62

D. $13,889.23

6. According to the Principle of Confidentiality, a CFP® Board designee shall treat client information as confidential unless which of the following circumstances apply? (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

(1) The information is required in response to proper legal process.

(2) The information is needed to establish an advisory or brokerage account.

(3) The information is needed to defend against charges of wrongdoing.

(4) The information is needed in connection with a civil dispute between the CFP® Board designee and the client.

A. (1) and (2) only

B. (3) and (4) only

C. (1), (3), and (4) only

D. All of the above

7. Which of the following are included as part of the financial planning step Establish the client-planner relationship? (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

(1) Identify the services to be provided.

(2) Identify activities necessary for implementation.

(3) Coordinate the financial plan with other professionals.

(4) Determine the roles and responsibilities of the client and financial planner.

A. (2) and (3) only

B. (1) and (4) only

C. (1), (3), and (4) only

D. All of the above

8. Jenny has been investing $2,000 at the end of each year for the past 11 years.  How much has she accumulated, assuming she has earned 8% compounded annually on her investments?

A. $31,228.90

B. $33,290.97

C. $35,954.25

D. $37,840.32

9. David had five credit cards in his wallet when it was stolen on the subway.  The credit cards were fraudulently used before he could report them missing the following day.  He provides you with the following amounts that were charged against each card and asks you to determine his liability.  What is David’s total liability for these transactions?

Card 1: $50

Card 2: $800

Card 3: $475

Card 4: $30

Card 5: $450

A. $0

B. $50

C. $230

D. $1,805

10. According to the Principle of __________, a CFP® Board designee shall not commingle client funds or other property with a CFP® Board designee’s personal funds and/or other property of a CFP® Board designee’s firm. (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

A. Integrity

B. Objectivity

C. Confidentiality

D. Diligence

11. Tracy’s bond has a market price of $910.  The bond pays an 11% coupon and will mature in 6 years.  What is the bond’s yield to maturity?

A. 13.22%

B. 14.59%

C. 15.27%

D. 16.12%

12. Consumer debt payments, such as credit cards and vehicle loans, should not exceed __________ of __________ income.

A. 20%, gross

B. 20%, net

C. 28%, gross

D. 28%, net

13. Housing debt costs, including principal, interest, taxes, and insurance, should not exceed __________ of __________ income.

A. 20%, gross

B. 20%, net

C. 28%, gross

D. 28%, net

14. Total debt payment should not exceed __________ of __________ income.

A. 28%, gross

B. 28%, net

C. 36%, gross

D. 36%, net

15. Which of the following are qualified expenses to be paid from a 529 plan?

(1) Books

(2) Tuition

(3) Supplies

(4) Room and board

A. (1) and (3) only

B. (1), (2), and (3) only

C. (2), (3), and (4) only

D. All of the above

16. Jim, John, and Jerry would each like to contribute money to their nephew’s Coverdell Education Savings Account (ESA).  Which of the following is correct regarding the maximum contribution that can be made on behalf of the nephew?

A. Jim, John, and Jerry are permitted to contribute a combined amount not to exceed $2,000 into their nephew’s ESA in the current year.

B. Jim, John, and Jerry are permitted to each contribute $2,000 into their nephew’s ESA in the current year, for a total annual contribution of $6,000.

C. Jim, John, and Jerry may each contribute up to the annual gift tax exclusion amount into their nephew’s ESA in the current year.

D. Jim, John, and Jerry may front-load contributions into their nephew’s ESA, so each may contribute up to five times the annual gift tax exclusion amount in the current year.

For questions 17-19, match the economic policy with the description that follows.  Use only one answer per blank.  Answers may be used more than once or not at all.

A. Expansionary policy

B. Contractionary policy

17. ____ Taxes increase

18. ____ Public spending increases

19. ____ Government borrowing decreases

20. Which of the following are characteristics of Pell Grants?

(1) Only full-time students are eligible

(2) Distributed on the basis of financial need and availability of federal funds

(3) Receipt of other grants and loans is contingent upon applying for or receiving Pell funds

(4) Available to undergraduate and graduate students

A. (1) and (4) only

B. (2) and (3) only

C. (1), (2), and (3) only

D. All of the above

21. Charlie purchased a rare baseball card for $600.  He kept the baseball card for 5 years before selling it.  If the internal rate of return for the 5-year period was 9%, what was the final selling price?

A. $923.17

B. $926.39

C. $930.28

D. $933.40

22. All but which of the following are correct regarding Federal Supplemental Educational Opportunity Grants (SEOGs)?

A. Funded by the federal government, but administered by individual schools

B. Available to undergraduate students only

C. Available to full-time students only

D. Distributed on the basis of financial need

23. Stafford Loans are administered by the:

A. Private Loan Administration (PLA).

B. Federal Family Education Loan Program (FFELP).

C. Parent Loans to Undergraduate Students (PLUS).

D. Federal Assistance Loan Program (FALP).

24. Which of the following are characteristics of Perkins loans?

(1) Repayment may be extended to 10 years

(2) Available to undergraduate students only

(3) Both full-time and part-time students are eligible

(4) Distributed on the basis of financial need

A. (1), (2), and (4) only

B. (1), (3), and (4) only

C. (2), (3), and (4) only

D. All of the above

25. All but which of the following are correct regarding Parent Loans to Undergraduate Students (PLUS)?

A. Both full-time and part-time students are eligible

B. Loans are not based on financial need

C. Available to parents of undergraduate students up to the cost of attendance at the institution minus additional financial support

D. All of the above are correct.

26. Which of the following are correct regarding the laws of supply and demand?

(1) The law of demand demonstrates an inverse relationship between the price consumers are willing to pay for a product and the amount they are willing to purchase.

(2) Consumers are more responsive to price when substitutes are available.

(3) The demand curve slops down and to the right, indicating that as price decreases, the quantity demanded increases.

(4) The demand curve slops down and to the left, indicating that as price decreases, the quantity demanded decreases.

A. (1) and (2) only

B. (1), (2), and (3) only

C. (2), (3), and (4) only

D. All of the above

27. When a small change in price causes a large change in the quantity purchased, the product is considered to be __________.

A. elastic

B. inelastic

C. durable

D. non-durable

28. What is the current price of a zero-coupon bond with a $1,000 face value, a YTM of 8.46%, and 5 years until maturity?

A. $620.47

B. $640.18

C. $660.80

D. $680.28

29. All but which of the following are correct regarding price inelasticity?

A. Inelastic products have many available substitutes.

B. It results when a large change in price has only a small impact on the quantity demanded.

C. An example of an inelastic product is gasoline.

D. All of the above are correct.

30. Perfect elasticity results in a __________ demand curve.  Perfect inelasticity results in a __________ demand curve.

A. vertical, horizontal

B. horizontal, vertical

C. diagonal, horizontal

D. vertical, diagonal

31. What is the current market price of a bond that pays a 10% coupon and matures in 8 years?  Comparable bonds are yielding 12.6%.

A. $489.04

B. $710.18

C. $871.29

D. $999.99

32. Money in a Coverdell Education Savings Account (ESA) must be used by the time the beneficiary is __________ years of age.

A. 18

B. 21

C. 24

D. 30

33. According to the Second Law of Demand, when the price of a product increases, consumers will reduce their consumption more in the __________ than in the __________.  Thus, the demand for products is more __________ in the long run than in the short run.

A. short run, long run, elastic

B. short run, long run, inelastic

C. long run, short run, elastic

D. long run, short run, inelastic

34. Jane purchased a rare stamp collection for $30,000.  She expects it will increase in value at a rate of 12% compounded annually for the next 4 years.  How much will her stamp collection be worth at the end of the fourth year if her expectations are correct?

A. $37,212.44

B. $41,310.98

C. $47,205.58

D. $55,210.12

35. Which of the following will cause a shift in the demand curve?

(1) Change in consumer income

(2) Change in the price of complement and substitute goods

(3) Change in consumer expectations

(4) Change in consumer tastes and preferences

A. (1) only

B. (2) and (4) only

C. (2), (3), and (4) only

D. All of the above

36. A change in quantity supplied is identified by which of the following?

A. Shifting the demand curve

B. Shifting the supply curve

C. Movement along the supply curve

D. Movement along the demand curve

For questions 37-43, match the economic indicator with the description that follows.  Use only one answer per blank.  Answers may be used more than once or not at all.

A. Leading economic indicator

B. Lagging economic indicator

37. ____ Change in consumer sentiment

38. ____ Average prime rate charged by banks

39. ____ Change in the Consumer Price Index (CPI)

40. ____ Orders for durable goods

41. ____ Average duration of unemployment

42. ____ Change in money supply

43. ____ Housing starts

44. According to the Principle of __________, a CFP® Board designee shall disclose conflicts of interest and sources of compensation. (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

A. Fairness

B. Objectivity

C. Confidentiality

D. Professionalism

45. What is the maximum contribution a donor can make in a single year to a 529 plan if the gift tax annual exclusion is $15,000?  Assume the donor has not made previous contributions to a 529 plan.

A. $15,000

B. $30,000

C. $75,000

D. $105,000

46 Carrie wants to accumulate $95,000 in 7.5 years to purchase a rental property.  She expects to earn an annual rate of 9.5% compounded quarterly.  How much does Carrie need to invest today to achieve her goal?

A. $46,979.26

B. $48,292.38

C. $49,840.25

D. $50,283.49

47. Which of the following may cause a shift in the supply curve?

(1) Change in resource prices

(2) Change in technology

(3) Natural disaster

(4) Political disruption

A. (1) and (2) only

B. (2) and (3) only

C. (2), (3), and (4) only

D. All of the above

48. Devin sued his former employer and won a judgment that provides him $2,000 at the end of each 6-month period for the next 5 years.  If the account that holds Devin’s settlement earns an average annual rate of 7% compounded semiannually, how much was the employer initially required to pay Devin?

A. $15,328.29

B. $16,633.21

C. $17,215.37

D. $18,108.38

49. Which of the following places the Principles of the Code of Ethics in the correct order? (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

(1) The Principle of Fairness

(2) The Principle of Competence

(3) The Principle of Integrity

(4) The Principle of Professionalism

(5) The Principle of Objectivity

(6) The Principle of Diligence

(7) The Principle of Confidentiality

A. 3, 2, 5, 4, 7, 6, 1

B. 2, 5, 7, 4, 1, 3, 6

C. 3, 5, 2, 1, 7, 4, 6

D. 5, 2, 4, 7, 6, 3, 1

50. Sarah expects to receive $150,000 from an irrevocable trust in 7 years.  What is the current value of the trust if it is earning an annual rate of 10% compounded quarterly?

A. $75,131.67

B. $76,274.38

C. $83,485.10

D. $84,273.10

51. To establish a Coverdell Education Savings Account (ESA), the beneficiary must be under age __________ unless the individual is designated as a special needs beneficiary.

A. 14

B. 18

C. 21

D. 30

52. Michelle has been investing $2,000 at the end of each 6-month period to accumulate funds for her daughter’s college tuition.  If the funds are earning an annual rate of 6% compounded semiannually, how much will the account be worth when Michelle’s daughter begins college in 7 years?

A. $28,384.06

B. $29,235.58

C. $34,172.65

D. $35,197.83

53. Jacob would like to receive the equivalent of $40,000 in today’s dollars at the beginning of each year for the next 8 years.  He assumes inflation will average 3%, and that he can earn an 8% compound annual rate of return on his investments.  How much does Jacob need to invest today in order to meet his goal?

A. $260,056.99

B. $272,681.46

C. $274.369.28

D. $290,182.38

54. According to the Principle of __________, a CFP® Board designee who has knowledge that another CFP® Board designee has committed a violation of the Code of Ethics which raises substantial questions as to the designee’s honesty, trustworthiness or fitness as a CFP® Board designee in other respects, shall promptly inform the CFP® Board. (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

A. Integrity

B. Competence

C. Professionalism

D. Diligence

55. Lauren invests $4,000 into her SEP IRA.  Each year, for the next 10 years, she is able to invest an additional $2,000.  What is the value of Lauren’s account at the end of 10 years if her investments earn 8% annually?

A. $20,337.42

B. $22,655.27

C. $37,608.82

D. $39,926.67

56. Mary wants to start her own business in 5 years.  She needs to accumulate $200,000 in today’s dollars to fund the start-up costs.  She assumes inflation will average 4%, and that she can earn an 8% compound annual rate of return on her investments.  What serial payment should Mary invest at the end of the first year to achieve her goal?

A. $31,284.18

B. $34,190.28

C. $37,039.13

D. $38,520.69

57. What is the IRR of a zero-coupon bond with a $1,000 face value, a current market price of $810, and 4 years until maturity?

A. 2.67%

B. 5.34%

C. 5.41%

D. 10.80%

58. If an RIA has up to __________ of assets under management, the RIA must register with the individual state(s) where the RIA maintains clients.

A. $80 million

B. $90 million

C. $100 million

D. $110 million

59. According to the Principle of __________, a CFP® Board designee shall make and/or implement only recommendations which are suitable for the client. (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

A. Competence

B. Diligence

C. Objectivity

D. Fairness

60. An individual who meets which of the following criteria must register as an investment advisor?

(1) The individual provides advice or analyses concerning securities.

(2) The individual is in the business of providing investment advice.

(3) The individual is a CPA or attorney whose investment advice is only incidental to his or her other activities.

(4) The individual provides investment advice for compensation.

A. (3) only

B. (1), (2), and (3) only

C. (1), (2), and (4) only

D. (2), (3), and (4) only

61. An advisor can satisfy the brochure rule by providing the client which of the following?

A. Form ADV, Part I

B. Form ADV, Part II

C. Client Service Agreement

D. Addendum of Trust

62. If an RIA has between __________ and __________ of assets under management, the RIA may register with either the applicable state(s) where the RIA maintains clients, or the SEC at the RIA’s discretion.

A. $10 million, $100 million

B. $25 million, $100 million

C. $50 million, $150 million

D. $100 million, $200 million

63. According to the Principle of __________, a CFP® Board designee shall enter into a financial planning engagement only when the relationship is warranted based on the individual’s needs and objectives. (This question is subject to change after October 1, 2019, when the CFP® Board adopts its new Code of Ethics and Standards of Conduct.)

A. Integrity

B. Fairness

C. Competence

D. Diligence

64. Murray deposited $325 into his money market account at the end of each month for the past 3 years.  His account is now worth $12,875.  If interest was compounded monthly, what was the average annual compound rate of return Murray earned over the 3-year period?

A. 6.5%

B. 6.9%

C. 7.3%

D. 7.8%

For questions 65-74, match the consumer protection act with the description that follows.  Use only one answer per blank.  Answers may be used more than once or not at all.

A. Fair Credit Reporting Act

B. Truth in Lending Act

65. ____ The consumer must be told if information in his credit report has been used against him.

66. ____ The lender must inform the borrower of the annual interest rate being charged on a loan.

67. ____ The consumer has a right to know what is in his credit report.

68. ____ The consumer has a right to ask for his credit score.

69. ____ The cost of any credit life insurance must be disclosed to the borrower.

70. ____ The consumer has the right to dispute incomplete or inaccurate information in his credit report.

71. ____ Prepayment penalties must be disclosed to the borrower.

72. ____ Credit reporting agencies must correct or delete inaccurate, incomplete, or unverifiable information.

73. ____ A right of rescission clause must be included in a loan contract allowing the borrower three business days to nullify the contract.

74. ____ If a credit card is lost or stolen, the consumer is liable for a maximum loss of $50 per credit card.

75. Paula wants to save $40,000 for a down