CRPC PRACTICE EXAM 1 QUESTIONS
AND ANSWERS 100% CORRECT
Mary Goodwin's financial situation is as follows:
Cash/cash equivalents$15,000S
hort-term debts$8,000
Long-term debts$133,000
Tax expense$7,000
Auto note payments$4,000
Invested assets$60,000
Use assets$188,000
What is her net worth? - ANSWER-$122,000
Assets = $263,000; liabilities = $141,000, so net worth is $122,000. Taxes and auto
note payments appear on the cash flow statement.
When the client's circumstances change, the asset management process goes back to
the data gathering step in the process. - ANSWER-A) realistic
B) clearly defined
C) long-term perspective
D) fluid
--D
An investment policy provides guidelines that are standards to be followed. If they are
fluid, they are ever-changing and therefore would be difficult to implement and would
provide inconsistency in the management of the portfolio.
An investment policy provides guidelines that are standards to be followed. If they are
fluid, they are ever-changing and therefore would be difficult to implement and would
provide inconsistency in the management of the portfolio. - ANSWER-A) tactical.
B) alpha.
C) core/satellite.
D) strategic.
--B
Alpha is not an asset allocation strategy, but a way to measure a portfolio manager's
return relative to the amount of risk that has been taken.
Assume the following asset classes have the correlations to long-term government
bonds shown below:
Treasury bills:.12 Gold:-.25 Large stocks:.22 Small stocks:.17
Which one of the following correctly states the impact of diversification on long-term
government bonds? - ANSWER-A) Gold provides more diversification than large stocks.
,B) Small stocks provide more diversification than Treasury bills.
C) Treasury bills provide more diversification than gold.
D) Large stocks provide more diversification than small stocks.
--A
The asset with the lowest correlation provides the most diversification. Therefore, gold
provides more diversification than any of the other assets.
What is the price of a bond with a 7% coupon, a $1,000 par value, and a maturity of 20
years if the market interest rate for similar bonds is 6%? - ANSWER-A) $1,074.39
B) $893.23
C) $1,000.00
D) $1,115.57
--D
Set the calculator for 2 P/YR and use the END mode. The inputs then are as follows:
1,000 [FV], 35 [PMT], 20 [SHIFT] [N] = 40, 6 [I/YR], and solve for PV = $1,115.57. Note:
The $35 payment is the semiannual payment of the bond. This is computed by taking
the 7% coupon rate the par value of $1,000 = $70 and divide that by 2 to get the
semiannual interest paid, in this case $35. Also, the yield to maturity (YTM) is less than
the coupon rate, thus the bond must be selling at a premium.
This year, your 63-year-old client had $17,025 of earned income and $30,000 of
investment income. He was also drawing Social Security benefits. Which one of the
following correctly describes the impact on his Social Security benefits? - ANSWER---
There is no reduction to his benefits.
For the year ending December 31, XXXX, Bill Greer has the following financial
information:
Salaries$70,000Auto payments$5,000Insurance$3,800Food$8,000Credit card
balance$10,000Dividends$1,100Utilities$3,500Mortgage
payments$14,000Taxes$13,000Clothing$9,000Interest income$2,100Checking
account$4,000Vacations$8,400Donations$5,800
What is the cash flow surplus or (deficit) for Bill? - ANSWER-$2,700
Income = $70,000 + $1,100 + $2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000
+ $3,500 + $14,000 + $13,000 + $9,000 + $8,400 + $5,800 = $70,500, so there is a
surplus of $2,700. The checking account and credit card balances would be on the
statement of financial position.
Which of the following are correct statements about income replacement percentages? -
ANSWER-II, III, and IV
The inverse of Option I is true. Those with a lower preretirement income typically need a
much higher income replacement percentage in retirement.
, If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by
their retirement date in 25 years (rather than an amount that grows with inflation each
year), what level annual end-of-year savings amount will they need to deposit each
year, assuming their savings earn 7% annually? - ANSWER-$31,621
Set calculator "End" and "1 P/Yr" Inputs: FV = 2000000, i = 7, N = 25, PV = 0, then Pmt
= $31,621
Bill and Lisa Hahn have determined that they will need a monthly income of $6,000
during retirement. They expect to receive Social Security retirement benefits amounting
to $3,500 per month at the beginning of each month. Over the 12 remaining years of
their preretirement period, they expect to generate an average annual after-tax
investment return of 8%; during their 25-year retirement period, they want to assume a
6% annual after-tax investment return compounded monthly.
What is the lump sum needed at the beginning of retirement to fund this income
stream? - ANSWER-$389,957
The monthly retirement income need is not specified as "today's dollars," and no
inflation rate specified; therefore, it must be assumed that the $2,500 net monthly
income need represents retirement dollars, and the retirement period income stream is
level. To calculate the lump sum needed at the beginning of retirement, discount the
stream of monthly income payments at the investment return rate:
10BII+ PVAD calculation:
Set calculator on BEG and 12 periods per year, then input the following:
2,500 [PMT]
25 [SHIFT] [N]
6 [I/YR]
0 [FV]
Solve for PV = $389,957
Chris and Eve Bronson have analyzed their current living expenses and estimated their
retirement income need, net of expected Social Security benefits, to be $90,000 in
today's dollars. They are confident that they can earn a 7% after-tax return on their
investments, and they expect inflation to average 4% over the long term.
Determine the lump sum amount the Bronsons will need at the beginning of retirement
to fund their retirement income needs, using the worksheet below.
(1) Adjust income deficit for inflation over the preretirement period:$ 90,000present
value of retirement income deficit25number of periods until retirement4%% inflation
rateFuture value of income deficit in first retirement year$239,925(2) Determine
retirement fund needed to meet income deficit:$239,925payment (future value of
income deficit in first retirement year)30number of periods in retirement
The lump sum needed at the beginning of the Br - ANSWER-$4,911,256
AND ANSWERS 100% CORRECT
Mary Goodwin's financial situation is as follows:
Cash/cash equivalents$15,000S
hort-term debts$8,000
Long-term debts$133,000
Tax expense$7,000
Auto note payments$4,000
Invested assets$60,000
Use assets$188,000
What is her net worth? - ANSWER-$122,000
Assets = $263,000; liabilities = $141,000, so net worth is $122,000. Taxes and auto
note payments appear on the cash flow statement.
When the client's circumstances change, the asset management process goes back to
the data gathering step in the process. - ANSWER-A) realistic
B) clearly defined
C) long-term perspective
D) fluid
--D
An investment policy provides guidelines that are standards to be followed. If they are
fluid, they are ever-changing and therefore would be difficult to implement and would
provide inconsistency in the management of the portfolio.
An investment policy provides guidelines that are standards to be followed. If they are
fluid, they are ever-changing and therefore would be difficult to implement and would
provide inconsistency in the management of the portfolio. - ANSWER-A) tactical.
B) alpha.
C) core/satellite.
D) strategic.
--B
Alpha is not an asset allocation strategy, but a way to measure a portfolio manager's
return relative to the amount of risk that has been taken.
Assume the following asset classes have the correlations to long-term government
bonds shown below:
Treasury bills:.12 Gold:-.25 Large stocks:.22 Small stocks:.17
Which one of the following correctly states the impact of diversification on long-term
government bonds? - ANSWER-A) Gold provides more diversification than large stocks.
,B) Small stocks provide more diversification than Treasury bills.
C) Treasury bills provide more diversification than gold.
D) Large stocks provide more diversification than small stocks.
--A
The asset with the lowest correlation provides the most diversification. Therefore, gold
provides more diversification than any of the other assets.
What is the price of a bond with a 7% coupon, a $1,000 par value, and a maturity of 20
years if the market interest rate for similar bonds is 6%? - ANSWER-A) $1,074.39
B) $893.23
C) $1,000.00
D) $1,115.57
--D
Set the calculator for 2 P/YR and use the END mode. The inputs then are as follows:
1,000 [FV], 35 [PMT], 20 [SHIFT] [N] = 40, 6 [I/YR], and solve for PV = $1,115.57. Note:
The $35 payment is the semiannual payment of the bond. This is computed by taking
the 7% coupon rate the par value of $1,000 = $70 and divide that by 2 to get the
semiannual interest paid, in this case $35. Also, the yield to maturity (YTM) is less than
the coupon rate, thus the bond must be selling at a premium.
This year, your 63-year-old client had $17,025 of earned income and $30,000 of
investment income. He was also drawing Social Security benefits. Which one of the
following correctly describes the impact on his Social Security benefits? - ANSWER---
There is no reduction to his benefits.
For the year ending December 31, XXXX, Bill Greer has the following financial
information:
Salaries$70,000Auto payments$5,000Insurance$3,800Food$8,000Credit card
balance$10,000Dividends$1,100Utilities$3,500Mortgage
payments$14,000Taxes$13,000Clothing$9,000Interest income$2,100Checking
account$4,000Vacations$8,400Donations$5,800
What is the cash flow surplus or (deficit) for Bill? - ANSWER-$2,700
Income = $70,000 + $1,100 + $2,100 = $73,200. Expenses = $5,000 + $3,800 + $8,000
+ $3,500 + $14,000 + $13,000 + $9,000 + $8,400 + $5,800 = $70,500, so there is a
surplus of $2,700. The checking account and credit card balances would be on the
statement of financial position.
Which of the following are correct statements about income replacement percentages? -
ANSWER-II, III, and IV
The inverse of Option I is true. Those with a lower preretirement income typically need a
much higher income replacement percentage in retirement.
, If Tom and Jenny want to save a fixed amount annually to accumulate $2 million by
their retirement date in 25 years (rather than an amount that grows with inflation each
year), what level annual end-of-year savings amount will they need to deposit each
year, assuming their savings earn 7% annually? - ANSWER-$31,621
Set calculator "End" and "1 P/Yr" Inputs: FV = 2000000, i = 7, N = 25, PV = 0, then Pmt
= $31,621
Bill and Lisa Hahn have determined that they will need a monthly income of $6,000
during retirement. They expect to receive Social Security retirement benefits amounting
to $3,500 per month at the beginning of each month. Over the 12 remaining years of
their preretirement period, they expect to generate an average annual after-tax
investment return of 8%; during their 25-year retirement period, they want to assume a
6% annual after-tax investment return compounded monthly.
What is the lump sum needed at the beginning of retirement to fund this income
stream? - ANSWER-$389,957
The monthly retirement income need is not specified as "today's dollars," and no
inflation rate specified; therefore, it must be assumed that the $2,500 net monthly
income need represents retirement dollars, and the retirement period income stream is
level. To calculate the lump sum needed at the beginning of retirement, discount the
stream of monthly income payments at the investment return rate:
10BII+ PVAD calculation:
Set calculator on BEG and 12 periods per year, then input the following:
2,500 [PMT]
25 [SHIFT] [N]
6 [I/YR]
0 [FV]
Solve for PV = $389,957
Chris and Eve Bronson have analyzed their current living expenses and estimated their
retirement income need, net of expected Social Security benefits, to be $90,000 in
today's dollars. They are confident that they can earn a 7% after-tax return on their
investments, and they expect inflation to average 4% over the long term.
Determine the lump sum amount the Bronsons will need at the beginning of retirement
to fund their retirement income needs, using the worksheet below.
(1) Adjust income deficit for inflation over the preretirement period:$ 90,000present
value of retirement income deficit25number of periods until retirement4%% inflation
rateFuture value of income deficit in first retirement year$239,925(2) Determine
retirement fund needed to meet income deficit:$239,925payment (future value of
income deficit in first retirement year)30number of periods in retirement
The lump sum needed at the beginning of the Br - ANSWER-$4,911,256
