CRPC PRACTICE EXAM 1-WITH 100 ACCURATE

CRPC PRACTICE EXAM 1-WITH 100% ACCURATE

SOLUTIONS-

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?

$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.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?

$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?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?

$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?

$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 Bronsons' retirement period is

$4,911,256

This PVAD calculation requires that the calculator be set for beginning-of-period payments. First, the annual retirement income deficit is expressed in retirement-year-one dollars, resulting in a $239,925 income deficit in the first retirement year. This income deficit grows with inflation over the 30-year retirement period, and the retirement fund earns a 7% return. The calculator inputs are $239,925,

[PMT]; 30, [N]; 2.8846, [I/YR]. Solve for [PV], to determine the retirement fund that will generate this income stream. If you enter 2.8846 directly into the calculator, you will get $4,911,265. If you use the equation to compute I/YR, and then hit the I/YR button you will get $4,911,256. Either way the answer is clear. The difference is that when you calculate the I/YR, the calculator takes the interest rate out to nine decimal places. If you enter in the 2.8846, then the calculator only takes the interest rate to four decimal places.Assume a client and investment professional have worked together for several years. Recently, the client's personal and financial circumstances have changed. According to the course materials, what is the next asset management step that the investment professional should take?

• analyze information
• gather data
• make and implement recommendations
• monitor performance

--B When the client's circumstances change, the asset management process goes back to the data gathering step in the process.When the client's circumstances change, the asset management process goes back to the data gathering step in the process.

• realistic
• clearly defined
• long-term perspective
• 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.

• tactical.
• alpha.
• core/satellite.
• 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?

• Gold provides more diversification than large stocks.
• Small stocks provide more diversification than Treasury bills.
• Treasury bills provide more diversification than gold.
• 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%?

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?-- There is no reduction to his benefits.The client's earnings (earned income) are below the allowable limit for the current year ($18,240 for 2020). Remember that according to the work penalty rule, only earned income is counted toward the "allowable limit." Which one of the following is a correct statement about the amount of Social Security retirement benefits available when a fully insured worker's retirement benefit begins at full retirement age

(FRA)?

• If the spouse of the worker has attained FRA and is entitled to benefits on their earning record,

the benefit is the lesser of 100% of the spouse's own PIA or 50% of the worker's PIA.