CFP Certification Examination

1999
RELEASED CASE SCENARIO
AND
MULTIPLE-CHOICE QUESTIONS

The Clarke case, its related multiple-choice questions, and 90 additional multiple-choice and matching
questions released in February 1999 have all been used on CFP® Certification Examinations. The correct
answer to each question is indicated with an asterisk, however, changes for current law and practice
subsequent to December 1998 are not considered as of the date of release. The questions that are no longer
correct due to law changes were left unedited. These questions were used previously on the CFP
Certification Examination when the law correctly applied.

The CFP Board of Examiners approved the Clarke case and the multiple-choice questions for publication. The
CFP Board of Examiners, a voluntary board comprised of seven members, oversees the content of the CFP
Certification Examination and is the sole governing body qualified to answer technical questions regarding the
content of the examination. Therefore, technical questions regarding the enclosed examination questions must
be addressed, in writing, to the Board of Examiners at the CFP Board’s address. The Examiners will make
every reasonable attempt to provide a response to specific issues raised about a given question prior to the next
scheduled CFP Certification Examination, though the CFP Board cannot guarantee the timeliness of the
Examiners’response.

© 1999, THE CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500. All
rights reserved.
 1.
Directions: This part consists of one case problem followed by a set of questions or incomplete statements. Four or five
suggested answers or completions follow each question or incomplete statement. Select one best answer or completion for
each question. Each question should be answered independently.

JAMES AND PAT CLARKE

Personal Data

Husband: James Clarke, age 44, college professor

Wife: Pat Clarke, age 43, college professor
Child: Kim Clarke, age 14
James’ parents: In good health, in mid to late 70s
Pat’s parents: Deceased

Financial Data

James and Pat Clarke have the following assets at fair market value (FMV):

• Single premium deferred annuity (Pat) $ 50,000

• Cash (JTWROS*) 250,000
• Stock in the XYZ Corporation** (JTWROS) 50,000
• IRAs
Pat 20,000
James 30,000
• Home (JTWROS) 100,000

Their simplified income statement is presented as follows:

• Salary (combined) $ 82,500

• Interest income 12,500
• Living expenses & taxes 90,000

They have no liabilities and no company-sponsored retirement plans.

They have no wills and they live in a non-community property state.
James’ parents can meet all current expenses from current cash flow but have very limited reserve funds and still live in
their own paid-for mobile home.

*Joint tenancy with right of survivorship

**XYZ Corporation is an S-corporation for which James worked before he started teaching.

© 1999, THE CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500. All
rights reserved.
 2.
JAMES AND PAT CLARKE

Other Pertinent Data

• The tax basis of the home is $90,000; the tax basis of the stock is $55,000.

• The Clarkes are in a 30% marginal combined state and federal tax bracket.

• They are inexperienced investors, but they are willing to take reasonable and normal investment risk if appropriate, but
they do not wish to invest aggressively.

• Both James and Pat have purchased term life insurance policies with $250,000 death benefit on each; they own their
own policies, and Kim is the contingent beneficiary on both policies.

• James is the primary beneficiary of Pat’s single premium deferred annuity; Kim is the contingent beneficiary.

• You have found their disability insurance inadequate. The Clarkes have indicated they could fit your proposed $1,600
annual premium for an adequate policy into their living expenses.

• You have reviewed their auto, homeowner’s, liability, and life insurance and found their policies adequate. James and
Pat are responsible for their medical expenses.

• Kim is a trustworthy high school honor student who earns $2,000 annually and has a $500 savings account.

• The “cash” is invested in a variety of money market funds and insured savings accounts.

• Their IRAs are invested in money market funds. James and Pat are the primary beneficiaries on each other’s IRA
account; Kim is the contingent beneficiary.

• They do not plan additional children and they have no other dependents.

• The Clarkes currently can save $5,000 per year out of current salary and can continue to do so (in inflation-adjusted
dollars) until they retire in 20 years. This savings rate assumes that all planned asset acquisition and replacements are
paid out of income before savings (except the three goals shown on the following page).

© 1999, THE CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500. All
rights reserved.
 3.
JAMES AND PAT CLARKE

Goals (in order of priority)

1. College education for Kim. They expect to spend a total of $50,000 (present value) for her entire education.

2. Retirement in 20 years which maximizes their standard of living at retirement. Their IRAs, Social Security, and
personal retirement savings form a basis for retirement.

3. Pat and James plan to take 6 months off from work (“sabbatical”) in 4 years for travel and research and to spend
$50,000 (after-tax and in current dollars).

Economic Environment

The economy has been in a period of modest economic growth for about 2 years. Inflation, as measured by the CPI, was at
a 4.9% annual rate over the last year. Ninety-day T-bill rates are currently 6%, while the yield to maturity on 20-year
government bonds is 7.5%. During the last quarter, unemployment was at 4.8% and real economic growth was about
0.75%. Most forecasts call for little change in these conditions over the short and long term.

Planner’s Assumptions

Pre-Tax Beta with

Investment Expected Return S & P 500
Biotech mutual fund 20.0% 1.75
Leveraged commercial real estate 8.5% 1.40
Small cap stock mutual fund 10.0% 1.10
S&P 500 9.0% 1.00
Taxable zero-coupon bonds 9.0% 1.00
Zero-coupon municipal bond fund 7.5% .80
Treasury bonds (30-year) 7.5% .70
Long-term municipal bond fund 5.0% .70
International stocks 11.0% .40
Treasury notes (7-year) 7.0% .25
Treasury bills 6.0% .10
Precious metals 5.0% -.25
R&D partnership 14.0% N/A
Certificate of deposit 7.0% N/A

You are doubtful anyone can “beat the market” through asset selection or timing.

© 1999, THE CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500. All
rights reserved.
 4.

1. Which one of the following statements most 4. What would you advise James and Pat regarding
accurately describes the risk exposure of the James’parents’estate planning documents?
Clarkes’portfolio?
A. Transfer the parents’ assets to a pooled income
A. The portfolio has excessive market risk. fund.
B. The portfolio should be unaffected by changes B. Establish a charitable remainder annuity trust.
in interest rates. C. Transfer the parents’assets to a revocable trust.
C. The portfolio contains an excessive level of * D. Set up durable power of attorney for healthcare.
business risk.
D. The portfolio contains excessive liquidity risk. 5. With regard to funds earmarked for the education
* E. The portfolio contains excessive purchasing goal, which type of investment makes the most sense
power risk. and why?
* A. a series of taxable zero-coupon bonds owned by
2. With respect to the Clarkes’ risk tolerance, which of
Kim because they can provide appropriate
the following statements is true?
funds at the correct times and are taxed at the
A. Because of their lack of investment experience, child’s rate
equity investments are inappropriate. B. a variable life insurance policy owned by Kim
* B. Because of their stated risk preferences, because it saves taxes and it contains life
investment in an R&D partnership is insurance
inappropriate. C. a certificate of deposit owned by James and Pat
C. Regardless of their specific goals, a portfolio because CDs are very safe
with a weighted average beta close to 1 is D. a small cap stock mutual fund owned by Kim
appropriate. because it provides the best return at a modest
D. Because of their stated risk preferences, a level of risk consistent with the time horizon
biotech mutual fund is appropriate. E. Treasury notes with a 7-year maturity owned by
E. Regardless of their risk tolerance, leveraged James and Pat because the 7-year maturity
commercial real estate is appropriate. Treasury notes have little interest rate risk

3. To diversify the Clarkes’ investment portfolio, 6. Which type(s) of investment(s), to be held in their
which of the following investments would be most IRA accounts, would be consistent with their
appropriate? retirement goal and why?
(1) S&P 500 Index Fund (1) a small cap mutual fund, because it provides
(2) zero-coupon municipal bond fund growth with reasonable risk
(3) international stocks (2) a municipal bond fund, because it provides tax
(4) leveraged commercial real estate advantages and relative safety
(3) an international stock fund, because it provides
* A. (1) and (3) only
an element of diversification and growth
B. (1) and (4) only
(4) precious metals, because they provide
C. (2) and (3) only
diversification and tax advantages
D. (2) and (4) only
A. (1) only
* B. (1) and (3) only
C. (2) and (4) only
D. (1), (2), and (3) only
E. (1), (3), and (4) only

© 1999, THE CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500. All
rights reserved.
 5.

9. One commonly used method of calculating the total

7. With regard to the funds earmarked for the Clarkes’
retirement fund necessary on the first day of
“sabbatical” goal, which type of investment is most
retirement is to use the present value of an annuity
appropriate?
due. The Clarkes anticipate that their annual
A. S&P 500 index fund retirement income will need to increase each year at
* B. zero-coupon municipal bond the rate of inflation. Based on the following
C. 7-year Treasury notes assumptions, calculate the total amount needed to be
D. biotech mutual fund in place when James and Pat retire. (Round to the
E. small cap stock mutual fund nearest $1,000.)
First-year annual income $90,000
8. Assume the following additional facts:
Social Security annual income, assumed to $45,000
The Clarkes have purchased a homeowner’s policy increase at the rate of inflation
(HO3-comprehensive) covering 100% of the Annual after-tax rate of return on invested assets 7%
replacement cost of their residence. This policy has a Joint life expectancy during retirement 25 years
$500 deductible. Also, they have purchased a
A. $878,000
disability income policy with a 30-day elimination
B. $887,000
period and an any-occupation definition of
* C. $896,000
disability.
D. $1,773,000
What actions should the Clarkes consider in order to E. $1,792,000
improve the quality of the insurance program
described above? 10. Assume that James has predeceased Pat by 1 year. If
Pat died yesterday, which combination of the
(1) Purchase an endorsement to the homeowner’s
following financial assets would be included in her
policy providing all risk/replacement cost (all
probate estate?
perils) coverage for personal property.
(2) Decrease the homeowner’s policy deductible to (1) James’life insurance policy
$250. (2) Pat’s SPDA
(3) Reduce the homeowner’s policy coverage to (3) XYZ stock
75%. (4) home
(4) Purchase an own-occupation disability policy. (5) Pat’s life insurance policy
* A. (1) and (4) only A. (4) only
B. (2) and (4) only B. (1) and (5) only
C. (1), (2), and (4) only * C. (3) and (4) only
D. (1), (3), and (4) only D. (1), (2), and (5) only
E. (2), (3), (4), and (5) only

11. Which of the following tax forms or schedules will

XYZ Corporation provide to James and Pat on an
annual basis?
A. Schedule E
B. Form 1099-S
C. Form 1099
D. Form W-2
* E. Schedule K-1

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 6.
Certification Examination Questions Released as of January, 1999
Directions: This part consists of problem sets. Each problem set consists of a brief fact pattern followed by two or more
questions or incomplete statements. Four or five suggested answers or completions follow each question or incomplete
statement. Select one best answer or completion for each question.

I. Bond A has a 6% annual coupon and is due in 2 years. Its value in today's market is $900.
Bond B has a 10% annual coupon and is due in 4 years. It is priced to yield 12%.
Bond C is a 9% zero-coupon bond priced to yield 11% in 8 years.

1. The yield to maturity of Bond A is closest to 2. Assuming that the duration of Bond A is 1.94 years,
which of the following statements about the effect
A. 9.90%.
of a 1% decline in interest rates is true?
B. 10.40%.
C. 10.90%. * A. Bond C, having a longer duration than Bond A,
D. 11.40%. would have a larger percent increase in price
* E. 11.90%. than Bond A.
B. The percent change in price of a bond is
independent of the duration of a bond.
C. It is not possible to determine the percent
change in price of Bond A versus Bond C
because the duration of Bond C is not given.
D. Bond A would have a greater percent change in
price than Bond C because it has a shorter
duration.
E. The percent change in the price of Bonds A and
C is equal since it is not affected by duration.

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 7.
II. A young couple (both age 30) comes to the financial planner with the desire for assistance in improving their family's
financial position. They have two healthy children, ages 3 and 6. The husband is a foreman for a manufacturer of auto
parts. His current salary is $30,000 per year. The wife is a marketing professor for a state university. Her current salary is
$40,000 per year. The couple recently purchased a riverfront home for $100,000 using their entire savings of $20,000 as a
down payment. In addition to an $80,000 mortgage, the couple's only debt is an automobile loan having a balance of
$12,000. Both husband and wife have very good family health insurance from their employers. The wife has employer-paid
life insurance equal to two times her annual salary.

3. The couple wants to start an investment program as 4. When the couple is able to begin an investment
soon as possible. To correct the weakness in their program, they want to begin making investments
financial planning before beginning the investment for their retirement and their children's education.
program, they should All of the following actions will help accomplish
their goals in a tax-efficient manner except
(1) establish an emergency fund with stock mutual
funds. A. investing in individual Roth IRAs.
(2) start a college savings fund for the children. B. investing through a 403(b) program for the
(3) purchase disability insurance for the wife and wife.
the husband. * C. investing in a growth and income mutual fund.
(4) prepare wills for the wife and the husband. D. investing in education IRAs for each child.
(5) secure credit life insurance for the auto loan.
Below is the CFP Board of Examiners’ clarification of
A. (5) only
the intent of the question.. For instructional
B. (1) and (2) only
purposes, the stem might be changed to
C. (1) and (3) only
read: “Which of the following actions will
* D. (3) and (4) only
be the least tax-efficient manner of helping
to accomplish the stated goals?”

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 8.
III. Grantor has established a trust, naming a bank as trustee. Pursuant to the terms of the trust document, Grantor is to
receive all of the income generated by the trust assets during his life. Grantor may withdraw assets from the trust or place
additional assets into it. The assets placed into the trust consist of Grantor's mutual fund portfolio, personal residence, a
rental property located in another state, and two installment notes held by Grantor. Upon Grantor's death, all of the assets
remaining in the trust are to be distributed to Grantor's two children.

5. Which of the following statements is/are correct? 6. Upon Grantor's death, the assets remaining in the
(1) Upon the transfer of the installment notes to the trust will
trust, any deferred gain will be recognized as (1) be included in Grantor's taxable estate.
taxable income. (2) be subjected to the probate process.
(2) After the transfer, the income from the mutual (3) receive a new basis except for the installment
funds will be reported on Grantor's tax notes.
return. (4) be distributed as directed by Grantor's will.
(3) Upon the transfer of the rental property to the
trust, all excess prior years' depreciation will A. (4) only
* B. (1) and (3) only
be recaptured.
C. (1), (2), and (3) only
(4) After the transfer, the $125,000 exclusion from
D. (1), (2), (3), and (4)
capital gain remains available for the
principal residence.
A. (4) only
B. (1) and (3) only
* C. (2) and (4) only
D. (1), (2), and (3) only
E. (1), (2), (3), and (4)

CFP Board of Examiner’s comment: for instructional

purposes, change the stem to read that
Grantor is single and change option (4) to
read $250,000 rather than $125,000. (Note
that (4) is no longer correct under current
tax law.)

IV. A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 closing
costs. The building originally cost $80,000 20 years ago. Total straight line depreciation of $40,000 had been taken. The
building had a mortgage of $60,000 that was assumed by the buyer.

7. What is the seller's adjusted cost basis? 8. What is the purchaser's cost basis?
A. $32,500 A. $70,000
B. $37,500 B. $92,500
* C. $40,000 * C. $100,000
D. $52,500 D. $107,500

8
©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 9.
Multiple-Choice Questions

Directions: Four or five suggested answers or completions follow each question or incomplete statement. Select one best answer
or completion for each question.

9. John Hedrick wants to pay one-half of the college 11. The following set of newly issued debt instruments
costs for his daughter, Ruth. She will be attending a was purchased for a portfolio:
private college with annual costs of $20,000 today.
Treasury bond
Ruth is 10 years old and will be starting college in 8
zero-coupon bond
years. If these costs are expected to increase
corporate bond
annually by 8%, how much will Mr. Hedrick need to
municipal bond
provide for her first year of college?
The respective maturities of these investments are
* A. $18,509
approximately equivalent.
B. $23,409
C. $27,371 Which one of the investments in the preceding set
D. $37,019 would be subject to the greatest relative amount of
E. $74,037 price volatility if interest rates were to change
quickly?
10. One of your clients wants to know the maximum
A. Treasury bond
amount that might be allocated to her 401(k) account
* B. zero-coupon bond
in 1998. She expects to earn $40,000. You explain
C. corporate bond
the possible sources of an annual addition to her
D. municipal bond
account, including allocation of forfeitures from
departing non-vested employees, and the limitation
12. Which of the following statements about S
on that addition. The largest annual addition that
corporations is true?
could be made to her 401(k) account in 1998 is
A. S corporation status is automatic if there are
A. $6,000.
fewer than 75 shareholders.
B. $8,000.
* B. S corporations are prohibited from having more
C. $9,600.
than one class of stock.
* D. $10,000.
C. S corporations are prohibited from earning
E. $30,000.
passive income.
D. S corporations may have non-resident aliens as
shareholders.

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 10.

13. The best life insurance policy for the payment of 17. Robert Smith asks for your help in preparing his
federal estate taxes for a 50-year-old couple with cash flow statement. He tells you that his salary
illiquid assets is before taxes is $250,000 and that he has no
mortgage on his home. Which of the following
A. an individual whole-life policy on each spouse
statements is true about Robert's cash flow
on a cross-ownership basis.
statement?
B. a joint first-to-die life insurance policy owned
jointly. A. The value of the home would be an income
C. a joint last-to-die life insurance policy owned by source since there is no mortgage.
the spouse with the larger estate. B. The value of the home would be an asset.
D. a joint and last-to-die life insurance policy C. The taxes on his salary would be a liability.
owned by the spouse with the smaller estate. * D. The taxes on his salary would be an expense.
* E. a joint and last-to-die life insurance policy
owned by an irrevocable trust. 18. Billy Smith, age 55, has been a member of the union
for 30 years, and as a result, has been excluded from
14. Which one of the following factors would be the his employer's retirement plan. Billy has been
strongest indication that interest rates might rise? offered a management position with his firm, which
will make him eligible to participate in the
* A. selling of dollar-denominated assets by foreign
company’s 401(k) plan.
investors
B. decreasing United States government deficits Billy's objective is to retire at age 65 with $2,000 in
C. decreasing rates of inflation monthly retirement income, exclusive of Social
D. weak credit demand by the private sector of the Security benefits. He assumes a life expectancy of
United States economy age 95. The union retirement plan will provide him
with $1,000 monthly. (There are no matching
15. What is the main responsibility of the underwriting contributions from Billy's employer to the 401(k)
department of a life insurance company? plan and, his income is adequate to have the required
* A. to guard against adverse selection level of contributions fall within the deferral limits
B. to set a limit on the amount of insurance issued of the 401(k) plan. Contributions and payments, as
appropriate, are made at the beginning of each
C. to set adequate insurance rates
D. to avoid exposures that could result in loss month.)
If the return in the company’s 401(k) plan is 10%,
16. Which of the following best describes the what monthly amount will Billy have to contribute
investment characteristics of a high-quality long- to that plan for 10 years to meet his objective?
term municipal bond?
* A. $556
* A. high inflation risk; low default risk B. $566
B. low inflation risk; high market risk C. $576
C. low inflation risk; low default risk D. $747
D. high inflation risk; high market risk E. $1,113

Below is the CFP Board of Examiners’ clarification of the

intent of this question. This question is intended to test
several time-value-of-money calculations, and is not
intended to imply a level retirement income or savings
approach.

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 11.

19. A client becomes age 70½ on October 1 of this year 23. Mrs. Bailey dies leaving her entire $3.2 million
and must receive a minimum distribution from his estate to her penniless husband, Mr. Bailey. Their
IRA account, which had a value at the beginning of estate goes to their children at his death. He has
the current year of $48,000. His spouse, age 63, is terminal cancer with a life expectancy of 1-2 years.
the beneficiary of the IRA account. Their combined The alternative valuation date computes Mrs.
life expectancy according to IRS tables is 24 years. Bailey’s entire estate equal to $3.0 million. Select
If the client takes a $1,000 distribution by next the postmortem technique he should utilize to reduce
April 1, what will be the tax penalty? the overall estate tax liability of both estates.
A. $0 A. elect to use date-of-death valuation
B. $100 B. elect to use the alternate valuation method
C. $150 C. disclaim $625,000 and elect to use the alternate
* D. $500 valuation method
E. $1,000 * D. disclaim $1,500,000 and elect to use the
alternate valuation method
20. Jasmine has a large paper profit in her Amalgamated E. disclaim $3,000,000 and elect to use the
Corporation shares, currently at 46. She is happy alternate valuation method
with the stock but realizes that a good thing cannot
go on forever. If she is willing to sell at 50, what 24. Which of the following is a benefit provided by
strategy could you recommend to her? Medicare?
A. Buy $50 call options. * A. hospice benefits for terminally ill persons
* B. Sell $50 call options. B. a stop-loss limit for annual medical expenses in
C. Buy $50 put options. excess of $2,500
D. Sell $50 put options. C. coverage for custodial care
D. coverage for prescription drugs that can be self-
21. “Stock prices adjust rapidly to the release of all new administered
public information.” This statement is an expression
of which one of the following ideas? 25. What is the early withdrawal penalty for a SIMPLE
plan during the 2-year period beginning on the date
A. random walk hypothesis
the employee first participated in the SIMPLE plan?
B. arbitrage pricing theory
* C. semi-strong form of the efficient market A. 10%
hypothesis B. 15%
D. technical analysis C. 20%
* D. 25%
22. Before her death, LaDonna Kiniston, age 74, gave
her three grandchildren some money for their private
school education. She paid $12,000 to the school for
Jake’s tuition and gave a like amount to Sarah and
Nicole. What would be the adjusted taxable gifts
calculated in her estate taxes?
A. $0
* B. $4,000
C. $6,000
D. $16,000
E. $36,000

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 12.

26. Assuming that the current market yield for similar 29. Judy Green, a CFP licensee, has proof that Mary
risk bonds is 8%, determine the discounted present Clark, another CFP licensee in her office, has
value of a $1,000 bond with a 7.5% coupon rate utilized clients' funds under management to cover
which pays interest semiannually and matures in gambling debts. Mary returned the funds to the
17.5 years. clients' accounts and made them whole, including
the earnings that would have accrued during the time
A. $504.68
that the funds were withdrawn. Under the Code of
B. $539.78
Ethics and Professional Responsibility and
* C. $953.34
Disciplinary Rules and Procedures, Judy is
D. $968.96
obligated to
E. $1,653.26
A. report Mary's action to the local CFP
27. Calculate the maximum 1998 contribution for an organization for proper processing.
employee earning $140,000 annually, working in a B. report Mary's action to the CFP Board of
company with the following retirement plans: Examiners because Mary has violated the
a 401(k) with no employer match and a money- Professionalism Principle.
purchase pension plan with an employer * C. report Mary's action to the CFP Board because
contribution equal to 12% of salary. Judy is bound by the CFP Code of Ethics and
A. $16,800 Professional Responsibility to do so.
B. $26,300 D. not report Mary's action to the CFP Board
because Judy would violate the
* C. $26,800
Confidentiality Principle.
D. $30,000
E. $35,000 E. not report Mary's action to the CFP Board
because Mary made full restitution and the
28. Given the following diversified mutual fund clients involved were not harmed by Mary's
performance data, which fund had the best risk- action.
adjusted performance if the risk-free rate of return
is 5.7%? 30. To immunize a bond portfolio over a specific
investment horizon, an investor would do which of
STANDARD the following?
AVERAGE DEVIATION
ANNUAL OF ANNUAL A. Match the maturity of each bond to the
FUND RETURN RETURN BETA
investment horizon.
A .0782 .0760 0.950
B. Match the duration of each bond to the
B .1287 .1575 1.250
investment horizon.
C .1034 .1874 0.857
C. Match the average weighted maturity of the
D .0750 .0810 0.300
portfolio to the investment horizon.
A. Fund B because the annual return is highest * D. Match the average weighted duration of the
bond portfolio to the investment horizon.
B. Fund A because the standard deviation is
lowest
C. Fund C because the Sharpe ratio is lowest
* D. Fund D because the Treynor ratio is highest
E. Fund A because the Treynor ratio is lowest

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 13.

31. Which of the following employee fringe benefits 34. John and Mary Meyers have a combined estate of
would be taxable to the employee? $900,000 including a $250,000 life insurance policy
on John's life. The Meyers have two children. John
A. business use of an employer-provided
prefers Mary receive the income from the policy if
automobile
he dies but wants the proceeds to go to his children
B. employee of an airline flying standby from Los
after her subsequent death. John and Mary have
Angeles to San Francisco
recently executed wills that contain unified credit
C. benefits of de minimis value
trusts. What is the best beneficiary designation for
* D. monthly dues to the local health club paid by the
John's life insurance policy?
employer
E. a 10% employee discount on department store A. his wife Mary
merchandise B. his two children
C. a charitable remainder trust
32. Many employers are now making flexible spending * D. his testamentary trust
accounts (FSAs) available to employees. Which of
the following statements concerning the nature of 35. In analyzing the financial statements of a client's
these accounts is incorrect? business, you notice that the collection period for
accounts receivable has been increasing. What does
* A. The balance in an employee's FSA can be
this increase suggest about the firm's credit policy?
carried forward or exchanged for cash if
unused for expenses incurred. A. The firm's current ratio is also increasing.
B. An FSA is technically a cafeteria plan that can B. The collection period has no relationship to a
be used by itself or as part of a broader firm's credit policy.
cafeteria plan. C. The firm is losing qualified customers.
C. A separate FSA salary reduction must be made * D. The credit policy is too lenient.
for each type of eligible benefit.
D. A salary reduction for an FSA will lower an 36. Your client's federal marginal tax rate is 36%, and
employee's income for social security tax the state marginal rate is 7%. The client does not
purposes if the employee earns less than the itemize deductions on his federal return and is
social security wage base. considering investing in a municipal bond issued in
his state of residence which yields 5%. What is the
33. A successful architect wants to purchase disability taxable equivalent yield?
income insurance. She is concerned about becoming
totally disabled, but also about a reduction in income A. 3.20%
if she is obliged to reduce her workload because of a B. 4.65%
less-than-total disability. To satisfy these concerns, C. 5.38%
which of the following should be included in her D. 7.81%
disability income coverage? * E. 8.77%
* A. residual disability benefits
B. a change-of-occupation provision
C. dismemberment benefits
D. a relation of earnings-to-insurance provision

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 14.

37. Johanna Olsen, CFP, is duly registered under the

39. A client provides a current personal balance sheet to
Investment Advisers Act of 1940. For which one of
the financial planner during the initial data gathering
the following activities would this planner be in
phase of the financial planning process. This
violation of the act?
financial statement will enable the financial planner
A. She received, with the client's knowledge, both to gain an understanding of all of the following
a fee for advice given to the client and a except the
commission from client transactions.
B. She included the cost of preparing the client's A. diversification of the client's assets.
* B. size of the client's net cash flow.
income tax returns as part of the annual fee
C. client's liquidity position.
charged the client.
D. client's use of debt.
C. She gave clients planning advice that was not
achievable, given the current economic
conditions.
* D. She distributed to clients the written disclosure
brochure 2 weeks after an investment
advising contract was duly signed.

CFP Board of Examiner’s clarification of the intent of the

above question. The question is challenging because of
option C. However, future planning (holistic and lifecycle
planning) is acceptable. It does not imply that her
projections were inappropriate.

38. Which of the following statements is correct with

regard to the use of an arbitration clause in an
investment advisory agreement?
* A. The SEC and NASD require arbitration if
voluntary negotiation fails.
B. The SEC requires that such a clause be
contained in any investment advisory
agreement.
C. The NASD requires that such a clause stipulate
that arbitration must be conducted by non-
industry organizations.
D. The clause must allow state regulation to take
precedence over federal regulation.

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 15.

40. Your client is contemplating the sale of some of her holdings in her employer's stock. The stock was acquired in four
separate purchases as follows:
Date Shares Cost Per Share Cost
June 1, 1986 200 $10 $2,000
June 1, 1988 200 $18 $3,600
June 1, 1990 200 $12 $2,400
June 1, 1992 200 $20 $4,000
Total 800 $12,000

She wants to know the least amount of gain she would be required to report if she sold 500 shares for $12,500.
Compute this gain.
A. $500
* B. $3,700
C. $4,300
D. $5,000
E. $5,700

41. Assuming neither person has used any of his/her 43. The maximum retirement benefit a participant in a
unified credit, what is the maximum amount a target-benefit plan can actually receive depends on
married couple can give to a single, third-party the
donee in 1998 without paying federal gift tax?
A. initial actuarial computation according to the
A. $625,000 plan's formula.
B. $635,000 B. amount of contributions determined in reference
C. $1,250,000 to the targeted benefit.
D. $1,260,000 C. maximum annual additional amounts.
* E. $1,270,000 * D. value of the participant's account at retirement.
E. present value of the actuarially determined
42. If a client's primary goal in making lifetime gifts to target benefit.
his children is to lower his estate taxes, he should
make gifts of property that 44. A client recently purchased a new home from a
builder for $150,000 including the lot valued at
A. are expected to depreciate significantly in the
$40,000. How much insurance would you
future.
recommend that your client purchase to cover full
* B. are expected to appreciate significantly in the
replacement of the house in the event of a loss?
future.
C. have already depreciated significantly. A. $ 88,000
D. have already appreciated significantly. * B. $110,000
C. $120,000
D. $150,000

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 16.

45. In determining the allowable annual additions per 47. What is an appropriate standard estate planning
participant to a defined-contribution pension plan strategy for married couples to minimize taxes over
account for 1998, the employer may not include two deaths?
A. compensation exceeding $30,000 (indexed). A. Bequeath the entire estate to a trust, giving the
* B. compensation exceeding $160,000. surviving spouse a general power of
C. compensation exceeding the defined-benefit appointment.
limitation in effect for that year. B. Bequeath the applicable exclusion amount to a
D. bonuses. qualified terminable interest property trust
(QTIP) and the balance to the surviving
46. Jill Smith is an agent acting as a buyer for Tom spouse.
Jones, d/b/a JKL Auto Repair, a sole proprietorship. * C. Bequeath the applicable exclusion amount to a
Her authority is limited to purchasing supplies and bypass trust to take advantage of the unified
equipment up to $5,000 in cost. Jill signs a credit at the first death.
promissory note borrowing $5,000 from a third D. Bequeath the applicable exclusion amount to the
party. Tom Jones uses the funds for business surviving spouse and the balance to the
purposes. Which of the following statements children.
describes Tom Jones' responsibility for Jill Smith's
action? 48. A client, who is a sole proprietor, is going to give
her best customers gifts as a token of her
A. Jones is not bound by Smith's actions since she
appreciation. If the client wants to deduct the full
lacked the actual authority to sign for the
cost of the gifts, what is the maximum amount that
loan.
she may spend on each customer's gift?
B. Jones is not bound by Smith's actions since she
lacked the necessary power of attorney to * A. $25
sign for the loan. B. $50
C. Jones is not bound by Smith's actions since she C. $100
lacked the express authority to sign for the D. $250
loan.
* D. Jones is bound by Smith's actions since he 49. Which of the following dispositions of IRC Section
ratified her action by using the loan proceeds 1245 recapture property would result in the
for his business. immediate recapture of some or all of previous
E. Jones is bound by Smith's actions since she has depreciation deductions?
the authority to purchase.
A. a distribution by a partnership to its partners
B. a like-kind exchange
C. a disposition at death
* D. a sale for cash and an interest-bearing note

50. John is a contractor who has just purchased a tractor

for use in his business. John paid $25,000 plus
$1,250 in sales tax for the tractor. The local
municipality also imposes an annual personal
property tax of $500. The tractor has an expected
useful life of 5 years. What is John’s basis in the
tractor for depreciation purposes?
A. $25,000
B. $25,500
* C. $26,250
D. $26,750

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 17.

51. A cash basis taxpayer includes income from a

54. Sam, age 95, transferred $600,000 of common stock
service business when
to an irrevocable trust. Sam provides that the income
A. the services are performed. from the trust is payable to himself for life, and upon
B. the client is invoiced for the services. his death, the trust corpus will pass to his sister. The
C. the client's check is deposited in the bank. trust prohibits Sam from changing the trust
* D. the client's check is received. beneficiaries. If Sam dies 1 year from now when the
value of the trust assets is $650,000, how much of
52. Which of the following is true about property the trust will be included in Sam's gross estate?
transferred between spouses, or former spouses,
incident to a divorce? A. $0; because Sam cannot change the
beneficiaries
A. Property transfer within 18 months of the B. $25,000; because of Sam’s unified credit
divorce will have a basis equal to its fair * C. $650,000; because Sam has the right to the
market value at the date of transfer. trust’s income for life
B. Property transfer will not be treated as if it were D. $600,000; because Sam created an irrevocable
acquired by gift and will recognize gain or trust
loss to the transferor.
C. Property transfer will be treated as if it were 55. Your client's employer has recently adopted a group
acquired by gift and the basis carried over to universal life insurance plan. The advantages of
the transferee will be the lower of the fair such a plan for your client typically include all of the
market value or the transferor's basis. following except that
* D. Property transfer will be treated as if it were
A. it allows employees to borrow or withdraw cash.
acquired by gift and the transferor basis in the
B. it provides an opportunity to continue coverage
property will be carried over to the transferee.
after retirement.
Below is the CFP Board of Examiners’ clarification of the * C. the entire premium cost is borne by the
intent of the question. For instructional purposes, (D) employer.
might be changed to read “Property transfer will result in D. it provides flexibility in designing coverage to
the transferor’s basis in the property being carried over to best meet individual needs.
the transferee.”
56. Sam and Sue paid $100,000 for their home 5 years
53. Your client, who has a taxable income of $200,000, ago. Its fair market value was $150,000 when Sam
is concerned about being subject to the alternative died. What was Sue’s basis in the home after Sam’s
minimum tax (AMT). The following income and death if the home was held as community property?
deductions were included in computing taxable A. $50,000
income. Select the one item that may be added to B. $75,000
(or subtracted from) regular taxable income in C. $100,000
calculating the AMT. D. $125,000
A. a long-term capital gain of $100,000 * E. $150,000
B. a cash contribution to your client’s church of
$25,000 57. A Certified Financial Planner licensee obtains a new
C. dividend income of $100,000 client. During the fact-finding process, the CFP
D. qualified housing interest of $25,000 licensee discovers that the client's previous advisor,
* E. a state income tax deduction of $25,000 also a CFP licensee, had filed several tax forms
incorrectly with computational errors. The CFP
licensee's initial duty to the client should be which of
the following?
A. contacting the other financial planner
B. contacting the CFP Board
C. contacting the IRS
* D. informing the client of the situation

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 18.
58. Mrs. Smith is an 80-year-old widow whose liquid assets are on deposit at a small FDIC-insured bank. She has the
following on deposit:
Asset Ownership Balance

Various Certificates of Deposit Mrs. Smith $75,000

Money Market Deposit Account Mrs. Smith $50,000
IRA Rollover Mrs. Smith $200,000
Passbook Savings Joint with son $25,000
Checking Account Joint with daughter $25,000
How much is currently insured by the FDIC?
A. $100,000
B. $150,000
* C. $250,000
D. $375,000

59. Bob, age 47, has worked for XYZ Company the past 60. Which of the following statements concerning the
12 years. XYZ Company has lost a major contract choice of an entity versus a cross-purchase
and must begin downsizing immediately. Bob was partnership buy-sell agreement funded with
laid off yesterday. What should Bob do first? insurance is false?
* A. file for unemployment benefits * A. The use of existing insurance to fund the
B. rollover his company 401(k) plan agreement causes a transfer-for-value
C. convert disability coverage under COBRA problem if an entity agreement is selected,
provisions but does not cause this problem if a cross-
D. notify the bank holding the mortgage on his purchase approach is used.
house B. A cross-purchase should be selected if the
surviving partners expect to sell their interests
during their lifetimes.
C. An entity approach may solve the affordability
problem if one partner is significantly older
than the others.
D. An entity agreement becomes more desirable as
the number of partners included in the
agreement increases.

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 19.

Directions: This part consists of combination items. Each item contains a question or incomplete statement followed by a list of
numbered responses. Select one best answer for each item that includes the correct combination of responses from the numbered
list.

64. Alisha Sheridan, a CFP licensee and fee-only

61. A tenancy by the entirety may be terminated in
financial planner, has assisted Roger Regate, a self-
which of the following ways?
employed physician, in tax and investment planning
(1) death, whereby the survivor takes the entire during the year. Identify the schedule(s) on which
estate Alisha’s fee may be deductible by Roger on his
(2) mutual agreement federal income tax return.
(3) divorce, which converts the estate into a
(1) Schedule A--itemized deductions
tenancy in common or a joint tenancy
(2) Schedule C--profit or loss from business
(4) severance, whereby one spouse transfers his or
(3) Schedule D--capital gains and losses
her interest to a third party without the
consent of the other spouse A. (1) only
B. (2) only
A. (4) only
C. (3) only
B. (1) and (3) only
* D. (1) and (2) only
C. (2) and (4) only
E. (1), (2), and (3)
* D. (1), (2), and (3) only
E. (1), (2), (3), and (4) 65. Which of the following statements is/are
characteristics of tax-sheltered annuities (TSAs)?
62. Which of the following investment vehicles are
most appropriate for an emergency fund for a (1) Salary reduction contributions are not reported
family with $12,000 a year discretionary income? as W-2 income and are not subject to Social
Security tax.
(1) balanced mutual fund
(2) Maximum salary deferral limit is $10,000 for a
(2) line of credit
newly hired employee.
(3) money market mutual funds
(3) Employer contributions are deductible.
(4) laddered CDs set to mature every 6 months
(4) Loans and “catch-up” contributions may be
A. (1) and (2) only permitted.
B. (2) and (4) only
A. (4) only
* C. (3) and (4) only
B. (1) and (3) only
D. (1), (2), and (3) only
* C. (2) and (4) only
D. (1), (2), and (3) only
63. Mortgage-backed securities may contain which of
E. (1), (2), (3) and (4)
the following risks?
(1) purchasing power risk
(2) interest rate risk
(3) prepayment risk
A. (2) only
B. (1) and (2) only
C. (1) and (3) only
* D. (1), (2), and (3)

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 20.

66. A premature distribution from a qualified 68. Your client has the following beliefs about the
retirement plan is allowed at age 52 without a 10% allocation of forfeitures of contributions to
additional tax when a participant employees who leave the company. Which of the
following statements is/are correct?
(1) becomes obligated for payment of plan benefits
to an alternate payee under a qualified (1) Departing plan participants are entitled to their
domestic relations order (QDRO). entire account balances regardless of the
(2) separates from service and takes an accepted vesting schedule in effect.
form of systematic payment. (2) Forfeitures could be allocated to plan
(3) remains with current employer but elects to participants in exactly the same manner as
take systematic payments over the life of the the employer's contributions.
participant and spouse. (3) Unless specific steps were taken to the
contrary, the allocation of forfeitures in this
A. (1) only
company's plan over time would tend to
B. (3) only
discriminate in favor of the relatively few
* C. (1) and (2) only
longer-hired and more highly-paid
D. (1), (2), and (3)
employees.
(4) The company could use forfeitures to offset
67. A financial planner's client has an IRA with a
balance of $140,000 as of January 1. On April 15 amounts it would otherwise contribute to
of the same year, the client withdraws the entire employees' accounts.
amount from the IRA and places it in a non-IRA A. (2) only
CD for 60 days, earning 9% interest. On the 60th B. (1) and (2) only
day, the client promptly and timely reinvests the C. (1) and (4) only
principal of the CD in an IRA containing an D. (3) and (4) only
aggressive growth fund. On September 15 of the * E. (2), (3), and (4) only
same year, the client becomes dissatisfied with the
return and the variability of the investment. The 69. You receive a phone call from an individual you
client wants a less risky investment and wants have not spoken with previously. The caller is
assurance that any IRA distribution will not be excited, just having heard that a new mutual fund is
taxed at the time of the change. Which of the positioned to deliver large gains in the coming year.
following is/are acceptable alternatives for the The caller wishes to purchase shares of the fund
client? through you. Keeping in mind stages of the overall
personal financial planning process, which of the
(1) Withdraw the funds and reinvest them within
following questions that address the first two stages
60 days in an IRA that invests exclusively in
of the financial planning process should you ask the
Treasury instruments.
caller?
(2) Direct the trustee of the IRA to transfer the
funds to another IRA that invests exclusively (1) What are your goals for this investment?
in Treasury instruments. (2) What other investments do you have?
(3) Withdraw the funds and reinvest within 60 (3) What is your date of birth?
days in an IRA that is an index mutual fund (4) Do you want your dividends reinvested?
holding common stocks with portfolio risk
A. (1) and (3) only
equal to the S&P 500.
B. (2) and (4) only
A. (1) only * C. (1), (2), and (3) only
* B. (2) only D. (1), (2), and (4) only
C. (2) and (3) only
D. (1), (2), and (3) Below is the CFP Board of Examiners’ clarification of
the question: (1), (2), and (3) all relate to the
second step of the financial planning
process, namely, “Gathering client data and
determining goals and expectations”. The
first step is “Establishing the client-planner
relationship”.
©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 21.

70. Which of the following are exemptions under the 72. Terry Underwood purchased a 15-year-old compact
definition of “investment adviser”? car with 100,000 miles for his teenage son who
recently received his license. Which of the
(1) banks that are not investment companies
following auto insurance coverages should be
(2) accountants or lawyers whose investment
included in the policy for this auto?
advice is “solely incidental” to the practice
of their profession (1) Part A - liability coverage
(3) persons whose advice relates only to securities (2) Part B - medical payments coverage
issued or guaranteed by the U.S. government (3) Part C - uninsured motorist coverage
(4) publishers of financial publications that have (4) Part D - damage to insured’s auto
regular and general circulation
* A. (1), (2), and (3) only
A. (1) and (3) only B. (1), (2), and (4) only
B. (2) and (4) only C. (1), (3), and (4) only
C. (1), (2), and (4) only D. (2), (3), and (4) only
* D. (1), (2), (3), and (4)
73. In selecting insurance coverage for a client, the
71. A local businessperson approaches a CFP licensee prudent planner should consult which of the
for assistance with an investment-related tax following independent sources for determining
problem. The client's previous tax preparer had company strength?
suggested the purchase of a variety of tax-
(1) A.M. Best Reports
advantaged investments to reduce the client's
(2) Standard and Poor’s
current and future tax burden. Time passed, the
(3) Moody's Investors Services
client's income dropped, and the tax laws changed.
(4) Dun and Bradstreet
The client does not feel the tax preparer
misrepresented the situation on the initial sale, but A. (1) and (3) only
would still like to know what recourse is available B. (1) and (4) only
with respect to the tax preparer. The CFP licensee * C. (1), (2), and (3) only
should D. (2), (3), and (4) only
(1) explain to the client that this issue is beyond the
74. Which of the following credentials permit an
scope of the CFP licensee’s professional
individual to appear before the IRS on behalf of a
expertise.
client?
(2) advise the client that no recourse is available.
(3) advise the client to contact an attorney. (1) enrolled agent
(4) contact the tax preparer. (2) Certified Public Accountant
(3) attorney
A. (4) only
(4) Certified Financial Planner licensee
* B. (1) and (3) only
C. (2) and (4) only A. (2) and (3) only
D. (1), (2), and (3) only B. (2) and (4) only
* C. (1), (2), and (3) only
D. (1), (3), and (4) only

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 22.

75. The duration of a bond is a function of its 77. A client asks you to explain the statement, “Life
insurance proceeds are tax-free.” You answer that
(1) current price.
the general rule(s), subject to some exceptions,
(2) time to maturity.
is/are that death benefits received from a life
(3) yield to maturity.
insurance policy due to the death of the insured are
(4) coupon rate.
income-tax-free to the beneficiary, but
A. (1) and (3) only
(1) are subject to estate taxes in the estate of the
B. (2) and (3) only
insured if the insured owned the policy.
C. (2) and (4) only
(2) may be subject to income taxes if the policy
D. (1), (2), and (3) only
was sold to a third party.
* E. (1), (2), (3), and (4)
(3) not if the contract was modified at purchase.
76. Five years ago, Tom Mohy bought 10,000 shares of A. (1) only
stock at $10 per share in a pharmaceutical B. (2) only
company. Today, the stock is worth $200,000 and * C. (1) and (2) only
is paying a dividend of $8,000 per year. Tom feels D. (2) and (3) only
that the stock will continue to appreciate at a rate of E. (1), (2), and (3)
12% per year, including the dividend. Tom wants to
establish a college education fund for his two
daughters, ages 15 and 9. Which of the following
statements is/are true?
(1) If Tom gives 2,500 shares of stock to his
15-year-old daughter, all dividends from the
2,500 shares will be taxed in her income tax
bracket.
(2) If Tom gives 2,500 shares of stock to his
9-year-old daughter, all dividends from the
2,500 shares will be taxed at her marginal
rate.
(3) Two years from now, if Tom’s older daughter
sells her 2,500 shares of stock at $30 per
share, Tom will need to report the gain as a
long-term capital gain on his personal
income tax return.
(4) All dividend income earned by his 9-year-old
daughter which exceeds $1,400 in 1998 will
be taxed at Tom’s marginal tax rate.
A. (2) only
B. (1) and (2) only
C. (1) and (3) only
* D. (1) and (4) only
E. (3) and (4) only

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 23.
Directions: This part consists of matching sets. Each matching set consists of a list of response options followed by a set of
items. Follow the instructions that accompany each set to match the most appropriate response option to each item in the set. A
response option may be used once, more than once, or not at all, unless otherwise specified.

I. You are faced with the following alternative fixed income investments.
A. a U.S. Treasury bond with an 11.625% coupon, due in 2004 with a price of $142.50 and a yield to maturity of 6.3%
B. a U.S. Treasury strip bond (zero coupon) due in 2004 with a price of $46.75 and a yield to maturity of 6.25%
C. a corporate B-rated bond with a 9.75% coupon, due in 2004 with a price of $104.75 and a yield to maturity of
8.79%

A 78. Which of these bonds has the greatest reinvestment rate risk?

B 79. Which of these bonds has the greatest interest rate risk?

B 80. Which of these bonds has the longest duration?

II. Match the charitable trust listed below with the corresponding descriptions in each of the items that follow.
A. charitable remainder annuity trust (CRAT)
B. charitable remainder unitrust (CRUT)
C. both A. and B.
D. neither A. nor B.

C 81. income tax advantage, life income

B 82. estate tax advantage, income from the trust is variable

A 83. income tax advantage, income from the trust is a sum certain

D 84. estate tax advantage, immediate income to charity

III. Investment A costs $10,000,000 and offers a single cash inflow of $13,000,000 after 1 year. Investment B costs
$1,000,000 and will be worth $2,000,000 at the end of the year. The appropriate discount rate or required rate of return
is 10% compounded annually. Match the investment(s) listed below with the corresponding financial information in the
items that follow.
A. Investment A
B. Investment B
C. Both A and B
D. Neither A nor B

D 85. The net present value (NPV) is $818,182 and the internal rate of return is 30%.

B 86. The NPV is $818,182 and the internal rate of return is 100%.

A 87. The NPV is $1,818,182 and the internal rate of return is 30%.

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500
 24.
IV. Match the investment characteristics listed below with the appropriate type of investment company in the items that
follow.
A. passive management of the portfolios
B. shares of the fund are normally traded in major secondary markets
C. both A. and B.
D. neither A. nor B.

B 88. closed-end investment companies

D 89. open-end investment company

A 90. unit investment trust

THI CONCLUDES THE 1999 RELEASED CASE AND QUESTIONS.

©1999, The CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC (CFP Board) 1700 Broadway, Suite 2100, Denver, CO 80290, 303 830-7500