General Principles of Financial Planning practice questions

Answer: D) 20% equity based on the original value, on request

• AIncorrect. It can be removed earlier.
• BIncorrect. More equity is required.
• CIncorrect. Less equity is required.
• DCorrect. It ends automatically at 22% equity.

Answer: B) Federally tax-free

• AIncorrect. Qualified withdrawals are tax-free.
• BCorrect. Including earnings.
• CIncorrect. Only nonqualified earnings are penalized.
• DIncorrect. Qualified withdrawals are tax-free.

Answer: A) Contraction

• ACorrect. Then a trough and expansion.
• BIncorrect. A contraction follows the peak.
• CIncorrect. A contraction follows the peak.
• DIncorrect. The trough ends the contraction.

Answer: D) Account owner

• AIncorrect. The owner keeps control.
• BIncorrect. The owner keeps control.
• CIncorrect. The owner keeps control.
• DCorrect. Not the beneficiary.

Answer: C) Placing a security freeze on the credit files at Equifax, Experian, and TransUnion

A security freeze at each nationwide credit reporting company stops prospective creditors from accessing the credit file, so new accounts generally can't be opened. Fraud alerts, monitoring, and report reviews only add verification steps or detect fraud after it happens.

• AIncorrect. A fraud alert requires creditors to take steps to verify the client's identity before extending credit. The CFPB notes that it doesn't prevent a lender from opening credit in the client's name.
• BIncorrect. Monitoring watches for unusual activity and alerts the client after it appears. It doesn't stop a creditor from opening a new account.
• CCorrect. A security freeze stops prospective creditors from accessing the credit file. Because creditors generally won't extend credit without seeing the file, this prevents new accounts from being opened until the freeze is lifted. Freezes are free by law.
• DIncorrect. Reviewing reports helps catch fraudulent accounts after they're opened. It doesn't stop them from being opened.

Answer: A) $2,000

• ACorrect. NPV is the present value of inflows minus the cost.
• BIncorrect. The cost is subtracted.
• CIncorrect. That's a profitability index.
• DIncorrect. The inflows exceed the cost.

Answer: B) Assets minus liabilities

• AIncorrect. Subtract liabilities.
• BCorrect. A snapshot at one point in time.
• CIncorrect. That's cash flow.
• DIncorrect. It's assets minus liabilities.

Answer: A) Future value increases, because interest is credited more often and begins earning interest sooner

With a positive stated rate, more frequent compounding raises the effective annual yield because interest earns interest sooner. Future value therefore goes up.

• ACorrect. More frequent compounding raises the effective annual yield (APY) above the stated rate, so the ending balance is higher.
• BIncorrect. The stated rate leaves out compounding within the year. The effective yield, and so the future value, depends on how often interest is compounded.
• CIncorrect. The periodic rate is smaller, but it is applied twelve times a year to a growing balance, so the result is more than one annual credit.
• DIncorrect. A single lump sum also grows faster with more frequent compounding, because interest earns interest. No extra deposits are needed.

Answer: C) $2,500 a year, subject to income limits

• AIncorrect. Limits apply.
• BIncorrect. That isn't the rule.
• CCorrect. It's an above-the-line deduction.
• DIncorrect. It's deductible within limits.

Answer: A) Purchasing power risk, because his level payments buy less as prices rise

Income from a fixed pension and a fixed annuity without cost-of-living adjustments stays level in dollars. The main risk is therefore inflation, which erodes its purchasing power over time.

• ACorrect. Payments without cost-of-living adjustments stay the same in dollars, so inflation steadily reduces what they can buy over a retirement that may last decades.
• BIncorrect. His income comes from contractual lifetime payments, not from maturing bonds or coupons he has to reinvest, so reinvestment risk is not his main exposure.
• CIncorrect. A fixed pension and an annuitized fixed annuity pay set amounts that do not change with stock market performance.
• DIncorrect. He holds no marketable bonds whose prices would fall when rates rise. His payments are fixed by contract.