CRPC PRACTICE EXAM 2 QUESTIONS
AND ANSWERS (GRADED A+)
Which of the following are correct statements about the capital utilization strategy? -
ANSWER-I. It produces an annual retirement income over a finite number of years.
II. Assuming the yield remains the same, the larger the retirement income that is paid,
the shorter the number of years over which it will be paid.
III. When the capital utilization approach is used, the planner must be careful in making
assumptions about the life expectancy of the client.
IV. The effect of taxes on retirement savings and distributions should be considered
when the before-tax approach is used to calculate the future value of retirement assets.
Which one of the following is not a key element of an investment policy? - ANSWER-A)
a provision for periodic review
B) the acceptable risk tolerance level
C) a target asset allocation
D) names of specific stocks to be in the portfolio
--D
The key elements in an investment policy are a clear statement of the client's goal,
suitable investment vehicles and strategies, the acceptable risk tolerance level for the
client, asset allocation guidelines, and a provision for periodic review. One way to
remember the essential elements of an investment policy is the acronym "GRASP"
(Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the investment
categories that may or may not be used-and Periodic Review). Specific investments
would be determined after the investment policy is created.
Which one of the following is a characteristic of Treasury inflation-protected securities
(TIPS)? - ANSWER-A) They are sold at a discount.
B) The increase in principal is taxable each year.
C) Their returns are tied to the producer price index.
D) They are issued with maturities up to 40 years.
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what
is the expected change in price for this fund? - ANSWER-A) 6.5% decrease
B) 9.75% increase
C) 9.75% decrease
D) 6.5% increase
--C
1.5% -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to
represent the inverse relationship between bond prices and interest rates. In this case,
an increase in rates means the bonds or bond funds will fall in price. Therefore, this
fund will decrease in price about 9.75%. Also, you can remember that bond prices move
opposite to interest rates. An increase in interest rates means the price of bonds will go
down.
,The process of rebalancing is a key factor in - ANSWER-Strategic asset allocation.
Strategic asset allocation involves obtaining the best asset mix for a client over a long
period. For example, this might be 60% stocks and 40% bonds. When these
percentages change due to market movements, this strategic asset allocation requires
the portfolio to be rebalanced back to the target mix, in this case 60/40 stocks/bonds.
What does Jensen's alpha tell you? - ANSWER-the percentage a manager over- or
underperformed based on the amount of risk taken
The percentage of return that can be attributed to systematic risk is referred to as the -
ANSWER-coefficient of determination (R2).
Which of the following are not used in technical analysis? - ANSWER-A) graphs
B) financial statement ratios
C) moving averages
D) supply and demand of stocks
--B
Moving averages, graphs, and statistics regarding the supply and demand of stocks are
used by technicians.
Financial statement ratios are part of fundamental analysis.
When performing bond calculations, which of the following general assumptions should
be made unless stated otherwise? - ANSWER-A) The coupon rate is annualized but
paid semiannually for U.S. bonds.
B) On a financial calculator, bonds are calculated in the Begin mode.
C) The coupon payment used in bond calculations is the annual amount.
D) The face value of the bond is $10,000.
--A
The face value of the bond should be assumed to be $1,000, not $10,000. The coupon
rate is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds
and the coupon payment is always made at the end of the period, not the beginning. All
bonds, even zero coupon bonds, are compounded semiannually in the End mode. This
makes all bond YTM quotes standardized for easy comparison.
Henry, a fully insured worker for Social Security purposes, will retire next month at the
age of 62. Henry is concerned that he may lose some of his Social Security benefits
because of the earnings limitation test.
Which of the following sources of Henry's income are counted for purposes of the
earnings limitation test?
, I. IRA withdrawals
II. self-employment earnings
III. pension annuity payments
IV. inheritance payments
V. dividend income - ANSWER--- II only
"Excess" earned income by Social Security beneficiaries who are under Social
Security's full retirement age results in a partial or full loss of benefits, depending on the
age of the person, the amount of Social Security benefit, and the amount of earned
income. "Earned income" generally includes wages, salary, and self-employment
earnings; investment income is not included in this definition. The following non-work
sources of income do not count as wages for the earnings test: IRA withdrawals,
pension annuity payments, inheritance payments, and dividend income.
Assume that a worker's Social Security full retirement age is 66. What percentage of the
worker's full retirement age benefits will be paid to her at age 62? - ANSWER--- 75%
A worker can begin receiving Social Security retirement benefits at age 62, but at a 25%
reduction from the full amount that would be received at full retirement age 66. The
percentage of this worker's full retirement age benefits that will be paid to her at age 62
is 75% [(5/9 of 1% per month for each of the first 36 months prior to full retirement age =
20%) + (5/12 of 1% 12 months = 5%); 20% + 5% = 25%].
What is the maximum percentage of Social Security benefits that may be taxed? -
ANSWER-85%
The maximum percentage of Social Security benefits that may be taxed is 85%, which
occurs when an individual's provisional income exceeds the upper limit of the tax
threshold ($34,000 for single filers and $44,000 for married filers).
Which of the following are correct statements about the effect that income and asset
ownership have on Social Security benefit payments?
I. The value of assets owned by a worker does not affect the amount of Social Security
benefits that he or she will receive.
II. The reduction is $1 of benefits for each $1 of income earned above the allowable limit
for an individual who begins receiving Social Security benefits prior to the year he or
she attains full retirement age.
III. Investment income received by a worker does not affect the amount of Social
Security benefits that he or she will receive.
V. The reduction is $1 of benefits for each $2 of income earned above the allowable
limit for individuals who begin receiving Social Security benefits in the year they attain
their Social Security full retirement age, but prior to the month in which they actually
attain that age. - ANSWER--- I and III
Unearned income, such as income from investment assets, has no effect on the amount
of Social Security benefits that will be paid to a worker. Similarly, the value of assets
owned by the worker does not affect eligibility for Social Security benefits.
AND ANSWERS (GRADED A+)
Which of the following are correct statements about the capital utilization strategy? -
ANSWER-I. It produces an annual retirement income over a finite number of years.
II. Assuming the yield remains the same, the larger the retirement income that is paid,
the shorter the number of years over which it will be paid.
III. When the capital utilization approach is used, the planner must be careful in making
assumptions about the life expectancy of the client.
IV. The effect of taxes on retirement savings and distributions should be considered
when the before-tax approach is used to calculate the future value of retirement assets.
Which one of the following is not a key element of an investment policy? - ANSWER-A)
a provision for periodic review
B) the acceptable risk tolerance level
C) a target asset allocation
D) names of specific stocks to be in the portfolio
--D
The key elements in an investment policy are a clear statement of the client's goal,
suitable investment vehicles and strategies, the acceptable risk tolerance level for the
client, asset allocation guidelines, and a provision for periodic review. One way to
remember the essential elements of an investment policy is the acronym "GRASP"
(Goals, Risk, Asset Allocation, Strategies/Suitable Investment-meaning the investment
categories that may or may not be used-and Periodic Review). Specific investments
would be determined after the investment policy is created.
Which one of the following is a characteristic of Treasury inflation-protected securities
(TIPS)? - ANSWER-A) They are sold at a discount.
B) The increase in principal is taxable each year.
C) Their returns are tied to the producer price index.
D) They are issued with maturities up to 40 years.
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what
is the expected change in price for this fund? - ANSWER-A) 6.5% decrease
B) 9.75% increase
C) 9.75% decrease
D) 6.5% increase
--C
1.5% -6.5 = -9.75%. Recall that duration needs to have a negative sign in order to
represent the inverse relationship between bond prices and interest rates. In this case,
an increase in rates means the bonds or bond funds will fall in price. Therefore, this
fund will decrease in price about 9.75%. Also, you can remember that bond prices move
opposite to interest rates. An increase in interest rates means the price of bonds will go
down.
,The process of rebalancing is a key factor in - ANSWER-Strategic asset allocation.
Strategic asset allocation involves obtaining the best asset mix for a client over a long
period. For example, this might be 60% stocks and 40% bonds. When these
percentages change due to market movements, this strategic asset allocation requires
the portfolio to be rebalanced back to the target mix, in this case 60/40 stocks/bonds.
What does Jensen's alpha tell you? - ANSWER-the percentage a manager over- or
underperformed based on the amount of risk taken
The percentage of return that can be attributed to systematic risk is referred to as the -
ANSWER-coefficient of determination (R2).
Which of the following are not used in technical analysis? - ANSWER-A) graphs
B) financial statement ratios
C) moving averages
D) supply and demand of stocks
--B
Moving averages, graphs, and statistics regarding the supply and demand of stocks are
used by technicians.
Financial statement ratios are part of fundamental analysis.
When performing bond calculations, which of the following general assumptions should
be made unless stated otherwise? - ANSWER-A) The coupon rate is annualized but
paid semiannually for U.S. bonds.
B) On a financial calculator, bonds are calculated in the Begin mode.
C) The coupon payment used in bond calculations is the annual amount.
D) The face value of the bond is $10,000.
--A
The face value of the bond should be assumed to be $1,000, not $10,000. The coupon
rate is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds
and the coupon payment is always made at the end of the period, not the beginning. All
bonds, even zero coupon bonds, are compounded semiannually in the End mode. This
makes all bond YTM quotes standardized for easy comparison.
Henry, a fully insured worker for Social Security purposes, will retire next month at the
age of 62. Henry is concerned that he may lose some of his Social Security benefits
because of the earnings limitation test.
Which of the following sources of Henry's income are counted for purposes of the
earnings limitation test?
, I. IRA withdrawals
II. self-employment earnings
III. pension annuity payments
IV. inheritance payments
V. dividend income - ANSWER--- II only
"Excess" earned income by Social Security beneficiaries who are under Social
Security's full retirement age results in a partial or full loss of benefits, depending on the
age of the person, the amount of Social Security benefit, and the amount of earned
income. "Earned income" generally includes wages, salary, and self-employment
earnings; investment income is not included in this definition. The following non-work
sources of income do not count as wages for the earnings test: IRA withdrawals,
pension annuity payments, inheritance payments, and dividend income.
Assume that a worker's Social Security full retirement age is 66. What percentage of the
worker's full retirement age benefits will be paid to her at age 62? - ANSWER--- 75%
A worker can begin receiving Social Security retirement benefits at age 62, but at a 25%
reduction from the full amount that would be received at full retirement age 66. The
percentage of this worker's full retirement age benefits that will be paid to her at age 62
is 75% [(5/9 of 1% per month for each of the first 36 months prior to full retirement age =
20%) + (5/12 of 1% 12 months = 5%); 20% + 5% = 25%].
What is the maximum percentage of Social Security benefits that may be taxed? -
ANSWER-85%
The maximum percentage of Social Security benefits that may be taxed is 85%, which
occurs when an individual's provisional income exceeds the upper limit of the tax
threshold ($34,000 for single filers and $44,000 for married filers).
Which of the following are correct statements about the effect that income and asset
ownership have on Social Security benefit payments?
I. The value of assets owned by a worker does not affect the amount of Social Security
benefits that he or she will receive.
II. The reduction is $1 of benefits for each $1 of income earned above the allowable limit
for an individual who begins receiving Social Security benefits prior to the year he or
she attains full retirement age.
III. Investment income received by a worker does not affect the amount of Social
Security benefits that he or she will receive.
V. The reduction is $1 of benefits for each $2 of income earned above the allowable
limit for individuals who begin receiving Social Security benefits in the year they attain
their Social Security full retirement age, but prior to the month in which they actually
attain that age. - ANSWER--- I and III
Unearned income, such as income from investment assets, has no effect on the amount
of Social Security benefits that will be paid to a worker. Similarly, the value of assets
owned by the worker does not affect eligibility for Social Security benefits.
