AWMA PRACTICE EXAM QUESTIONS AND ANSWERS
Baby boomers and older GenXers as compared to millennials and younger Gen Xers-
-Are likely to be advised by a millennial adviser
-Have financial planning needs that has stayed relatively the same over many years
-Have not experienced significant bear markets
-Are generally seeking many more technological options in financial planning - Answer-
Have financial planning needs that has stayed relatively the same over many years
Dan has bonds maturing in two weeks. Since he bought the bonds interest rates have
fallen. To which one these risks are Dan's bonds most likely to be subject?
-Financial risk
-Default risk
-Reinvestment rate risk
-Interest rate risk - Answer-Reinvestment rate risk
The relationship between investment strategy and investment policy is one in which
-investment strategy is subservient to investment policy.
-investment policy is determined by investment strategy.
-investment strategy dictates the asset categories to be incorporated into the investment
policy.
-investment policy is established once the investment strategies to be used are agreed
upon.
,investment strategy is subservient to investment policy. - Answer-
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends.
what is its taxable income?
-$50,000
-$0
-$100,000
-$25,000 - Answer-$100,000
Joseph, age 60, is a taxpayer who has a considerable amount of income that is not
subject to withholding. He has not made any estimated payments during the year. At a
planning review session in mid-December, his adviser informs him that he's
approximately $25,000 underwithheld. What course of action might Joseph follow to
avoid an underpayment penalty?
-Make an estimated tax payment before the end of the year. This will make up for any
underwithholding.
-Initiate a $25,000 distribution from his IRA account, and direct that 100% of the
distribution be withheld for federal income tax before year-end. This will make up for any
underwithholding.
,-Make an estimated tax payment in December and another before the January 15
deadline for the fourth quarter. This will make up for any underwithholding.
-No exceptions to the underpayment penalty are available. - Answer-Initiate a $25,000
distribution from his IRA account, and direct that 100% of the distribution be withheld for
federal income tax before year-end. This will make up for any underwithholding
Which of these statements accurately describe characteristics of using life insurance for
the informal funding of a nonqualified deferred compensation plan?
It represents an asset that may be purchased to fund the employer's unsecured promise
to pay deferred amounts to the employee.
It offers the advantage of being able to fund a death benefit immediately.
It offers the advantage of various settlement options.
It offers the advantage of simplified administration since death proceeds are paid
directly to an employee's surviving spouse or other beneficiary.
-II and IV
-I and II
-I, II, and III
-I and III - Answer-I, II, and III
Which statement best explains the unauthorized practice of law?
-A non-attorney who discusses with a licensed attorney whether provisions in their
client's will are necessary
-A non-attorney who advises a client to have their estate plan updated
-A non-attorney who advises a client of potential "red flags" in their estate plan
-A non-attorney who advises a client to take actions that will affect their property or legal
rights - Answer-A non-attorney who advises a client to take actions that will affect their
property or legal rights
Changes that have occurred since investment firms changed from private partnerships
to publicly traded companies include all of these except
-partners no longer share in both the profits and losses of the firm.
-risk taking has increased.
-there is greater individual accountability.
-profits can be privatized (bonuses) and losses socialized (bailouts). - Answer-there is
greater individual accountability.
The most important stated life goal of wealthy individuals is
-assuring retirement lifestyle.
-maintaining good health.
-protecting wealth.
-leaving an estate to heirs. - Answer-maintaining good health.
,Wilson has a $20,000 portfolio of four different stocks. The distribution of this capital
and the betas of these stocks are shown below.
% of Portfolio Value Beta
Stock A 10% 1.1
Stock B 20% 1.15
Stock C 30% 1.3
Stock D 40% 1.25
What is the weighted-average beta of Wilson's stock portfolio? - Answer-1.23
Which of these is an advantage of equity REITs over mortgage REITs?
-Equity REITs have the right to repossess the underlying property if the mortgage REIT
fails to make its mortgage payments.
-Equity REITs participate in the capital gains of the mortgages, whereas mortgage
REITs receive only the coupon payments.
-Equity REITs retain the right to the potential appreciation of a property, but mortgage
REITs retain the right to only the property's rental income.
-Equity REITs can participate in the appreciation of the underlying properties. - Answer-
Equity REITs can participate in the appreciation of the underlying properties.
Susan, age 50, is the sole shareholder of Market Designs Inc., a small consulting firm.
All of the employees of Market Designs are considerably younger than Susan, and
turnover is relatively high. Susan is paid more than three times the salary of the next
highest paid employee and wants to install a retirement plan for the company. Excluding
Susan, the oldest employee is 32. Which type of plan would be most appropriate,
assuming she wants to maximize the contributions for her account and minimize the
cost of the other employees?
-SARSEP
-Cross-tested ESOP
-Target benefit plan
-Age-weighted profit sharing plan - Answer-Age-weighted profit sharing plan
For the current tax year, Bob, an individual taxpayer filing a joint return, has $6,000 of
investment interest expense and $11,000 of net investment income (interest income
and dividends). How much investment interest expense, if any, may Bob deduct in the
current tax year?
-$5,000
-$6,000
-$0
-$11,000 - Answer-$5,000
Investment interest expense is deductible up to the amount of net investment income.
The fact pattern tells us that the net investment income is $11,000, thus it is the
, maximum deduction. The actual deduction is limited to the amount of investment
interest, which we know is $6,000. The fact that the dividends are included in the net
investment income indicates that the taxpayer elected to include them in investment
income and is forgoing the preferential capital gain rates associated with qualified
dividends.
Which statement below does not correctly describe a concept related to nonqualified
deferred compensation?
-The availability of deferred compensation plan funds to the employee, without
substantial restriction, generally result in constructive receipt.
-An example of substantial risk of forfeiture provisions would be the employee's loss of
rights to the plan benefits at death or disability.
-The employee's receipt of anything that can be assigned a cash value results in
economic benefit and taxation.
-Substantial risk of forfeiture exists when the employee's receipt of deferred
compensation benefits is contingent upon performance of substantial services in the
future. - Answer-An example of substantial risk of forfeiture provisions would be the
employee's loss of rights to the plan benefits at death or disability.
Bill has an estate worth $20 million and is unmarried with two children and four
grandchildren. He would like to transfer $16 million to a trust for the benefit of his
children and grandchildren. The trust will be irrevocable, and the trustee may distribute
income to the children for their lives with the remainder to be distributed to the
grandchildren. Which statement correctly analyzes the transfer tax implications of this
arrangement?
-Bill will owe generation-skipping transfer tax at the time the trust is funded because this
is a direct skip.
-Bill will owe generation-skipping transfer tax for this transfer, but not gift tax.
-The trust is not subject to the generation-skipping transfer tax because Bill's children
have an interest in the assets.
-The trust is an indirect skip and generation-skipping transfer tax will be due upon a
taxable termination. - Answer-The trust is an indirect skip and generation-skipping
transfer tax will be due upon a taxable termination.
Regulation Best Interest does all of the following except
-requires establishing, maintaining, and enforcing policies reasonably designed to
address conflicts of interest.
-requires the creation and distribution to clients of Form CRS that is limited to two
pages, must be in plain English, and must disclose the firm's standard of conduct.
-creates new private rights and protections for retail clients, including the right of
rescission.
Baby boomers and older GenXers as compared to millennials and younger Gen Xers-
-Are likely to be advised by a millennial adviser
-Have financial planning needs that has stayed relatively the same over many years
-Have not experienced significant bear markets
-Are generally seeking many more technological options in financial planning - Answer-
Have financial planning needs that has stayed relatively the same over many years
Dan has bonds maturing in two weeks. Since he bought the bonds interest rates have
fallen. To which one these risks are Dan's bonds most likely to be subject?
-Financial risk
-Default risk
-Reinvestment rate risk
-Interest rate risk - Answer-Reinvestment rate risk
The relationship between investment strategy and investment policy is one in which
-investment strategy is subservient to investment policy.
-investment policy is determined by investment strategy.
-investment strategy dictates the asset categories to be incorporated into the investment
policy.
-investment policy is established once the investment strategies to be used are agreed
upon.
,investment strategy is subservient to investment policy. - Answer-
If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends.
what is its taxable income?
-$50,000
-$0
-$100,000
-$25,000 - Answer-$100,000
Joseph, age 60, is a taxpayer who has a considerable amount of income that is not
subject to withholding. He has not made any estimated payments during the year. At a
planning review session in mid-December, his adviser informs him that he's
approximately $25,000 underwithheld. What course of action might Joseph follow to
avoid an underpayment penalty?
-Make an estimated tax payment before the end of the year. This will make up for any
underwithholding.
-Initiate a $25,000 distribution from his IRA account, and direct that 100% of the
distribution be withheld for federal income tax before year-end. This will make up for any
underwithholding.
,-Make an estimated tax payment in December and another before the January 15
deadline for the fourth quarter. This will make up for any underwithholding.
-No exceptions to the underpayment penalty are available. - Answer-Initiate a $25,000
distribution from his IRA account, and direct that 100% of the distribution be withheld for
federal income tax before year-end. This will make up for any underwithholding
Which of these statements accurately describe characteristics of using life insurance for
the informal funding of a nonqualified deferred compensation plan?
It represents an asset that may be purchased to fund the employer's unsecured promise
to pay deferred amounts to the employee.
It offers the advantage of being able to fund a death benefit immediately.
It offers the advantage of various settlement options.
It offers the advantage of simplified administration since death proceeds are paid
directly to an employee's surviving spouse or other beneficiary.
-II and IV
-I and II
-I, II, and III
-I and III - Answer-I, II, and III
Which statement best explains the unauthorized practice of law?
-A non-attorney who discusses with a licensed attorney whether provisions in their
client's will are necessary
-A non-attorney who advises a client to have their estate plan updated
-A non-attorney who advises a client of potential "red flags" in their estate plan
-A non-attorney who advises a client to take actions that will affect their property or legal
rights - Answer-A non-attorney who advises a client to take actions that will affect their
property or legal rights
Changes that have occurred since investment firms changed from private partnerships
to publicly traded companies include all of these except
-partners no longer share in both the profits and losses of the firm.
-risk taking has increased.
-there is greater individual accountability.
-profits can be privatized (bonuses) and losses socialized (bailouts). - Answer-there is
greater individual accountability.
The most important stated life goal of wealthy individuals is
-assuring retirement lifestyle.
-maintaining good health.
-protecting wealth.
-leaving an estate to heirs. - Answer-maintaining good health.
,Wilson has a $20,000 portfolio of four different stocks. The distribution of this capital
and the betas of these stocks are shown below.
% of Portfolio Value Beta
Stock A 10% 1.1
Stock B 20% 1.15
Stock C 30% 1.3
Stock D 40% 1.25
What is the weighted-average beta of Wilson's stock portfolio? - Answer-1.23
Which of these is an advantage of equity REITs over mortgage REITs?
-Equity REITs have the right to repossess the underlying property if the mortgage REIT
fails to make its mortgage payments.
-Equity REITs participate in the capital gains of the mortgages, whereas mortgage
REITs receive only the coupon payments.
-Equity REITs retain the right to the potential appreciation of a property, but mortgage
REITs retain the right to only the property's rental income.
-Equity REITs can participate in the appreciation of the underlying properties. - Answer-
Equity REITs can participate in the appreciation of the underlying properties.
Susan, age 50, is the sole shareholder of Market Designs Inc., a small consulting firm.
All of the employees of Market Designs are considerably younger than Susan, and
turnover is relatively high. Susan is paid more than three times the salary of the next
highest paid employee and wants to install a retirement plan for the company. Excluding
Susan, the oldest employee is 32. Which type of plan would be most appropriate,
assuming she wants to maximize the contributions for her account and minimize the
cost of the other employees?
-SARSEP
-Cross-tested ESOP
-Target benefit plan
-Age-weighted profit sharing plan - Answer-Age-weighted profit sharing plan
For the current tax year, Bob, an individual taxpayer filing a joint return, has $6,000 of
investment interest expense and $11,000 of net investment income (interest income
and dividends). How much investment interest expense, if any, may Bob deduct in the
current tax year?
-$5,000
-$6,000
-$0
-$11,000 - Answer-$5,000
Investment interest expense is deductible up to the amount of net investment income.
The fact pattern tells us that the net investment income is $11,000, thus it is the
, maximum deduction. The actual deduction is limited to the amount of investment
interest, which we know is $6,000. The fact that the dividends are included in the net
investment income indicates that the taxpayer elected to include them in investment
income and is forgoing the preferential capital gain rates associated with qualified
dividends.
Which statement below does not correctly describe a concept related to nonqualified
deferred compensation?
-The availability of deferred compensation plan funds to the employee, without
substantial restriction, generally result in constructive receipt.
-An example of substantial risk of forfeiture provisions would be the employee's loss of
rights to the plan benefits at death or disability.
-The employee's receipt of anything that can be assigned a cash value results in
economic benefit and taxation.
-Substantial risk of forfeiture exists when the employee's receipt of deferred
compensation benefits is contingent upon performance of substantial services in the
future. - Answer-An example of substantial risk of forfeiture provisions would be the
employee's loss of rights to the plan benefits at death or disability.
Bill has an estate worth $20 million and is unmarried with two children and four
grandchildren. He would like to transfer $16 million to a trust for the benefit of his
children and grandchildren. The trust will be irrevocable, and the trustee may distribute
income to the children for their lives with the remainder to be distributed to the
grandchildren. Which statement correctly analyzes the transfer tax implications of this
arrangement?
-Bill will owe generation-skipping transfer tax at the time the trust is funded because this
is a direct skip.
-Bill will owe generation-skipping transfer tax for this transfer, but not gift tax.
-The trust is not subject to the generation-skipping transfer tax because Bill's children
have an interest in the assets.
-The trust is an indirect skip and generation-skipping transfer tax will be due upon a
taxable termination. - Answer-The trust is an indirect skip and generation-skipping
transfer tax will be due upon a taxable termination.
Regulation Best Interest does all of the following except
-requires establishing, maintaining, and enforcing policies reasonably designed to
address conflicts of interest.
-requires the creation and distribution to clients of Form CRS that is limited to two
pages, must be in plain English, and must disclose the firm's standard of conduct.
-creates new private rights and protections for retail clients, including the right of
rescission.
