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CFP practice questions

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Question 1Professional Conduct and Regulation

Under the CFP Board's Code of Ethics and Standards of Conduct, the fiduciary duty a CFP professional owes to a client is composed of which two duties?

  1. The duty of competence and the duty of diligence
  2. The duty of disclosure and the duty of confidentiality
  3. The duty of care and the duty of loyalty Correct answer.
  4. The duty of objectivity and the duty of fairness

Explanation

The Code defines the fiduciary duty as having two components. The duty of care requires the professional to act with the skill, care, prudence, and diligence of a fiduciary, while the duty of loyalty requires placing the client's interests above the professional's own and avoiding or disclosing conflicts. Competence, diligence, objectivity, fairness, and confidentiality are separate Principles rather than components of the fiduciary duty.

Question 2Professional Conduct and Regulation

How many hours of continuing education must a CFP professional complete during each two-year certification period?

  1. 15 hours
  2. 40 hours
  3. 25 hours
  4. 30 hours Correct answer.

Explanation

CFP Board requires certificants to complete 30 hours of continuing education every two years, a portion of which must be in ethics. The requirement must be satisfied to renew certification and retain the right to use the marks.

Question 3Professional Conduct and Regulation

Which individual is permitted to use the CFP® certification marks in advertising and on business cards?

  1. An unlicensed assistant employed by a firm that employs several CFP professionals
  2. A candidate who has passed the CFP exam but has not completed the experience requirement
  3. A person who is currently certified by CFP Board and in good standing Correct answer.
  4. An advisor whose certification lapsed two years ago after completing all coursework

Explanation

The right to use the CFP marks is a license granted by CFP Board and lasts only while certification remains active and in good standing. Passing the exam, completing coursework, or working alongside certificants does not confer any right to use the marks.

Question 4Professional Conduct and Regulation

The Practice Standards in the Code of Ethics and Standards of Conduct govern a CFP professional's conduct when the professional is:

  1. Preparing a client's individual income tax return as a paid tax preparer
  2. Teaching a personal finance class to employees of a client company
  3. Selling a single annuity at the client's request without any broader analysis
  4. Providing financial planning, whether in a single engagement or an ongoing relationship Correct answer.

Explanation

The Practice Standards set out the process that must be followed whenever a CFP professional provides financial planning, including engagements that cover only one element of a plan. Isolated product sales, tax return preparation, and general education are not financial planning engagements.

Question 5Professional Conduct and Regulation

A CFP professional may disclose confidential client information without the client's consent when:

  1. The professional believes the client may become dissatisfied with the advice
  2. A prospective employer asks the professional for references
  3. Doing so is required by law or legal process Correct answer.
  4. The information would be useful to another client of the firm

Explanation

The Principle of Confidentiality prohibits disclosure of client information without consent, but it does not require the professional to violate the law. Disclosure compelled by statute, regulation, or a valid legal process is permitted.

Question 6Professional Conduct and Regulation

Under the Standards of Conduct, the compensation disclosure a CFP professional gives a client must include:

  1. Only whether the professional accepts commissions from product sponsors
  2. Only the professional's stated hourly rate and the estimated number of hours
  3. Only the total dollar amount the client paid during the prior calendar year
  4. All material sources of compensation, including third-party payments Correct answer.

Explanation

The duty of loyalty requires that clients understand how the professional is paid, including compensation received from sources other than the client. Disclosure must be in writing and must be timely, so the client can evaluate any conflict before acting.

Question 7Professional Conduct and Regulation

Which statement accurately describes the education component of CFP certification?

  1. Passing the CFP exam plus 30 hours of pre-certification ethics coursework is required
  2. A master's degree in finance from an accredited university is required
  3. A bachelor's degree plus completion of CFP Board-approved financial planning coursework is required Correct answer.
  4. Any bachelor's degree in any subject satisfies the requirement with no additional coursework

Explanation

The education component requires a bachelor's degree and completion of CFP Board-approved coursework covering the financial planning subject areas, although equivalent transcripts or challenge examinations may satisfy parts of it. A graduate degree is not required, and passing the exam is a separate component.

Question 8Professional Conduct and Regulation

The Code of Ethics and Standards of Conduct is founded on how many Principles?

  1. Six
  2. Ten
  3. Seven Correct answer.
  4. Five

Explanation

The Code sets out seven Principles: Integrity, Objectivity, Competence, Fairness, Confidentiality, Professionalism, and Diligence. The Principles are aspirational standards that describe the expected conduct of every CFP professional.

Question 9Professional Conduct and Regulation

A CFP professional is about to recommend a product that pays her a commission, and she knows the client assumes she is paid only by fee. What does the Code require?

  1. Disclose the conflict only if the client specifically asks about fees
  2. Keep the arrangement confidential because compensation is proprietary
  3. Make timely written disclosure of the conflict to the client Correct answer.
  4. Explain the conflict verbally at the annual review meeting

Explanation

The duty of loyalty requires disclosure of conflicts of interest that could affect the advice, and the Standards of Conduct require that disclosure to be timely and in writing. Disclosure must occur early enough that the client can weigh the conflict before acting on the recommendation.

Question 10Professional Conduct and Regulation

Which statement best describes when a CFP professional may describe her practice as "fee-only"?

  1. When she and her firm receive only client-paid compensation, with no commissions Correct answer.
  2. Whenever she personally receives no commissions, regardless of what her firm receives
  3. Whenever client fees exceed commissions during the current calendar year
  4. Whenever the client signs a waiver acknowledging that commissions may be paid

Explanation

CFP Board defines fee-only as compensation derived solely from the client, and the professional's firm must also avoid commissions and third-party compensation. A client waiver cannot convert a commission-receiving practice into a fee-only practice.

Question 11Professional Conduct and Regulation

A CFP professional who becomes the subject of a reportable event must notify CFP Board:

  1. Only at the next two-year certification renewal
  2. Only if the event results in a criminal conviction
  3. Within 30 days after the reportable event occurs Correct answer.
  4. Within 90 days after the event occurs

Explanation

Certificants must report specified events, such as certain criminal charges and civil actions involving fraud or dishonesty, to CFP Board within 30 days. The obligation is triggered by the event itself, not by its eventual outcome.

Question 12Professional Conduct and Regulation

The duty of care requires that a CFP professional:

  1. Act with the skill, care, prudence, and diligence of a fiduciary Correct answer.
  2. Guarantee that the recommendations will achieve the client's stated goals
  3. Follow the client's instructions even when they conflict with the client's goals
  4. Recommend only products that pay no commission to anyone involved

Explanation

The duty of care obliges the professional to act with the skill, care, prudence, and diligence of a fiduciary and to base recommendations on the client's objectives, needs, and circumstances. It is a standard of process and judgment, not a guarantee of results.

Question 13Professional Conduct and Regulation

A client asks a CFP professional to advise on a complex cross-border trust, an area in which the professional has no training or experience. What is the most appropriate course of action?

  1. Accept the engagement and learn the subject matter while advising the client
  2. Accept the engagement and rely on the client's attorney for every recommendation
  3. Accept the engagement but limit all advice strictly to domestic issues
  4. Decline the engagement unless competence can be gained or a qualified expert engaged Correct answer.

Explanation

The Principle of Competence requires the professional to provide services only when able to do so competently or to obtain the necessary competence, including through collaboration with a qualified expert. Learning on the client's time or abdicating judgment to another party does not satisfy this standard.

Question 14Professional Conduct and Regulation

Before or at the time of establishing a financial planning engagement, the CFP professional must:

  1. Obtain the client's signature on a product purchase agreement before any advice is given
  2. Deliver a completed written financial plan within 30 days of the first client meeting
  3. Provide written information on the scope of the engagement and the client's responsibilities Correct answer.
  4. Obtain the client's written consent to share information with every affiliated company

Explanation

Establishing and defining the relationship requires the professional to communicate in writing the scope of the engagement, the services to be provided, and the client's responsibilities. This documentation frames the remaining Practice Standards steps and prevents misunderstandings about the nature of the work.

Question 15Professional Conduct and Regulation

Which list correctly identifies sanctions CFP Board may impose on a CFP professional?

  1. Private censure, public letter of admonition, suspension, and revocation Correct answer.
  2. Probation, community service, mandatory retraining, and a public apology
  3. Arbitration, mediation, restitution, and a compliance audit
  4. Warning letter, monetary fine, license suspension, and imprisonment

Explanation

CFP Board's available sanctions are private censure, public letter of admonition, suspension, and revocation of the right to use the marks. Revocation may be ordered with or without a right to apply for reinstatement later.

Question 16Professional Conduct and Regulation

If a CFP professional is not engaged to monitor the client's progress after implementation, the professional must:

  1. Clearly disclose to the client the limits of the engagement Correct answer.
  2. Still review the plan annually at no charge to the client
  3. Refer the client to another planner for ongoing monitoring
  4. Terminate the relationship immediately after implementation

Explanation

Monitoring is a Practice Standards step that applies only when it is part of the engagement. If the professional is not responsible for monitoring, that limitation must be disclosed clearly so the client understands what ongoing services are and are not being provided.

Question 17Professional Conduct and Regulation

A CFP professional receives an ongoing referral fee from an attorney to whom she sends clients. What is required?

  1. Donate the fee to charity so that no conflict remains
  2. Decline the fee because referral fees are prohibited outright
  3. Disclose the arrangement only if the client asks about it
  4. Disclose the arrangement to the client in writing Correct answer.

Explanation

Third-party compensation creates a conflict of interest that must be disclosed in writing so the client can evaluate the recommendation. The Code does not categorically ban referral arrangements; it requires transparency about them.

Question 18Professional Conduct and Regulation

A CFP professional provides a single, one-time investment recommendation for a fee rather than a comprehensive financial plan. The professional is:

  1. Subject only to the continuing education requirement, not to the Standards of Conduct
  2. Not subject to CFP Board standards, because no written financial plan was delivered
  3. Subject to the fiduciary duty, because the recommendation is financial advice Correct answer.
  4. Subject to the Practice Standards, but not to the fiduciary duty

Explanation

The fiduciary duty attaches whenever a CFP professional provides financial advice to a client, which includes a recommendation to take or refrain from a course of action. The Practice Standards apply only when the professional is providing financial planning, but the fiduciary duty is broader.

Question 19Professional Conduct and Regulation

A CFP professional tells a client she is "fee-only," but her broker-dealer pays her trailing 12b-1 fees on the funds she recommended. Which statement is correct?

  1. She has misstated her compensation and must correct it and disclose the payments in writing Correct answer.
  2. Nothing is wrong, as long as the client's net return is competitive with peers
  3. Nothing is wrong, provided the fees stay below a quarter of one percent per year
  4. Nothing is wrong, because 12b-1 fees are paid by the fund company rather than the client

Explanation

Trailing 12b-1 payments are third-party compensation and are economically borne by the client through fund expenses, so a practice receiving them cannot be described as fee-only. The misstatement must be corrected and the compensation disclosed in writing so the client can assess the conflict.

Question 20Professional Conduct and Regulation

After delivering a financial plan, a CFP professional discovers she used an incorrect life expectancy assumption that materially overstates the client's sustainable retirement income. She should:

  1. Promptly inform the client and deliver a corrected recommendation Correct answer.
  2. Wait until the next scheduled review so as not to alarm the client
  3. Quietly revise the file copy of the plan without notifying the client
  4. Withdraw from the engagement and refund the planning fee

Explanation

The Principles of Integrity and Professionalism, together with the duty of care, require the professional to correct material errors and communicate openly with the client. Waiting or silently editing records deprives the client of information needed to make decisions.

Question 21Professional Conduct and Regulation

A client asks her CFP professional, who is not an attorney, to draft her will and revocable trust. The professional should:

  1. Refuse to discuss any estate planning topic with the client
  2. Decline to draft the documents and coordinate with the client's attorney Correct answer.
  3. Draft the documents but tell the client to have a lawyer review them later
  4. Draft the documents from standard templates and have the client sign them

Explanation

Drafting legal instruments is outside the professional's competence and generally constitutes the unauthorized practice of law. The appropriate response is to explain the limitation and work with a qualified attorney while continuing to advise on the financial aspects of the estate plan.

Question 22Professional Conduct and Regulation

During an engagement, a CFP professional learns that a client appears to be using the advisory relationship to launder money. The professional should:

  1. Continue the engagement but stop documenting any of the client's transactions
  2. Keep the information confidential because the duty of confidentiality applies to all client information
  3. Not assist the client and make any report required by law, since confidentiality yields to legal duties Correct answer.
  4. Resign from the engagement quietly and return all original records to the client

Explanation

Confidentiality does not authorize participation in or concealment of unlawful activity, and the professional must comply with applicable law, including anti-money-laundering reporting obligations. Continuing the relationship in any way that facilitates the conduct would also breach the Principles of Integrity and Professionalism.

Question 23Professional Conduct and Regulation

A CFP professional's firm owns an insurance agency that pays her a bonus whenever she places an annuity. When she recommends an annuity, she must:

  1. Recommend the annuity only if it pays the highest available bonus to the firm
  2. Obtain the client's verbal consent to the bonus at the point of sale
  3. Make written disclosure of the conflict and act in the client's best interest Correct answer.
  4. Avoid recommending any annuity products while the bonus arrangement is in place

Explanation

An ownership or bonus arrangement tied to product sales is a conflict of interest that must be disclosed in writing early enough for the client to evaluate it. The recommendation itself must still be consistent with the client's objectives, needs, and circumstances.

Question 24Professional Conduct and Regulation

Under the Code of Ethics and Standards of Conduct, "financial advice" is best described as:

  1. Any written document that is delivered to the client and labeled a financial plan
  2. Only recommendations for which the professional is paid a separate, disclosed fee
  3. Only recommendations concerning securities, as that term is defined under federal law
  4. A communication a reasonable person would view as a recommendation to act or not act Correct answer.

Explanation

The Code defines financial advice by reference to content, context, and presentation, asking whether a reasonable person would view the communication as a recommendation to take or refrain from a course of action. The label on a document, the form of compensation, and the type of product do not control.

Question 25Professional Conduct and Regulation

A CFP professional wants to feature a client's situation in a marketing case study. She may do so only if:

  1. The client gives informed consent, or the data is fully anonymized Correct answer.
  2. The client's name is replaced with initials while the dollar amounts stay the same
  3. The data is at least five years old and the account has been closed
  4. The professional's compliance department reviews and approves the draft

Explanation

The Principle of Confidentiality prohibits using client information for the professional's benefit without consent. Anonymizing the data so the client cannot reasonably be identified is an acceptable alternative to obtaining consent.

Question 26Professional Conduct and Regulation

A CFP professional is served with a valid subpoena requiring her to produce a client's account statements in a pending divorce action. The client has not consented to the disclosure. Under the Standards of Conduct, the professional should:

  1. Decline to produce anything until the court appoints a mediator to resolve the confidentiality dispute.
  2. Produce the records only after notifying CFP Board and receiving its written authorization to release them.
  3. Produce the documents called for by the subpoena, because disclosure compelled by proper legal process is a permitted exception to confidentiality. Correct answer.
  4. Decline to produce the records, because client confidentiality can never be overridden without the client's written consent.

Explanation

Confidentiality under the Code of Ethics and Standards of Conduct is not absolute: a CFP professional may disclose confidential client information without consent when responding to proper legal process, when necessary to defend against an allegation of wrongdoing, or as otherwise required by law. The disclosure should be limited to the information actually called for. CFP Board authorization is not a precondition to compliance with a valid subpoena.

Question 27General Principles of Financial Planning

Under the CFP Board's Practice Standards, which activity is performed first when establishing a financial planning relationship?

  1. Presenting the recommendations to the client for a decision
  2. Analyzing the client's current course of action and possible alternatives
  3. Identifying and selecting the goals that the client wishes to pursue
  4. Understanding the client's personal and financial circumstances Correct answer.

Explanation

The Practice Standards begin with understanding the client's personal and financial circumstances, which establishes the qualitative and quantitative data used in every later step. Identifying and selecting goals is a distinct, later step that depends on that understanding.

Question 28General Principles of Financial Planning

Which CFP Board Code of Ethics principle requires a CFP professional to provide services with honesty and candor?

  1. Fairness
  2. Diligence
  3. Integrity Correct answer.
  4. Objectivity

Explanation

Integrity requires honesty and candor in all professional dealings and prohibits subordinating a client's interests to the professional's own. The other principles address impartiality, equitable treatment, and thoroughness respectively.

Question 29General Principles of Financial Planning

A client's net worth is determined by:

  1. subtracting annual living expenses from annual gross income
  2. adding the client's annual income to the value of the investment portfolio
  3. adding total assets and total liabilities and then dividing by two
  4. subtracting total liabilities from total assets Correct answer.

Explanation

Net worth is a balance-sheet measure equal to the fair market value of all assets minus the outstanding balances of all liabilities as of a point in time. It is a snapshot of wealth rather than a flow of income or spending.

Question 30General Principles of Financial Planning

An investment earning a fixed 6% compounded annually will approximately double in value in how many years?

  1. 15 years
  2. 12 years Correct answer.
  3. 18 years
  4. 24 years

Explanation

The Rule of 72 estimates doubling time by dividing 72 by the annual compound rate: 72 divided by 6 equals 12 years. The rule is an approximation that becomes less accurate at high rates.

Question 31General Principles of Financial Planning

A financial planner generally recommends that a client's emergency reserve fund hold:

  1. one month of gross income plus the client's insurance deductible
  2. three to six months of living expenses Correct answer.
  3. at least two years of the client's gross household income
  4. an amount equal to the client's total outstanding consumer debt

Explanation

The standard recommendation is a reserve equal to three to six months of living expenses, with a longer target for clients with volatile income or a single earner. The reserve is measured against expenses, because those are the obligations it must cover.

Question 32General Principles of Financial Planning

In the United States, monetary policy is conducted primarily by:

  1. the Federal Reserve Correct answer.
  2. the U.S. Department of the Treasury
  3. the Securities and Exchange Commission
  4. the Congressional Budget Office

Explanation

The Federal Reserve sets monetary policy using tools such as open market operations, the discount rate, and reserve requirements. Fiscal policy, by contrast, is conducted through taxation and spending by Congress and the administration.

Question 33General Principles of Financial Planning

Which type of interest results in interest being earned on previously credited interest?

  1. Simple interest
  2. Discount interest
  3. Compound interest Correct answer.
  4. Nominal annual interest

Explanation

Compound interest is added to principal so that later interest is calculated on a larger base, producing interest on interest. Simple interest is computed only on the original principal and produces less growth over multiple periods.

Question 34General Principles of Financial Planning

What is the maximum annual contribution that may be made to a Coverdell education savings account for a single beneficiary?

  1. $1,500
  2. $500
  3. $2,000 Correct answer.
  4. $1,000

Explanation

Coverdell ESA contributions are capped at $2,000 per beneficiary per year and are phased out at higher levels of the contributor's modified adjusted gross income. Any person may contribute, but total contributions across all contributors cannot exceed the cap.

Question 35General Principles of Financial Planning

A client has gross income of $80,000, pays $16,000 in taxes, and spends $48,000 on living expenses. Based on gross income, the client's savings rate is:

  1. 25%
  2. 20% Correct answer.
  3. 33%
  4. 16%

Explanation

Savings equals gross income minus taxes minus expenditures: $80,000 minus $16,000 minus $48,000 equals $16,000. Dividing that $16,000 by the $80,000 gross income produces a 20% savings rate.

Question 36General Principles of Financial Planning

All else being equal, the present value of an annuity due is:

  1. identical to the present value of an ordinary annuity with the same payments
  2. greater than the present value of an ordinary annuity with the same payments Correct answer.
  3. smaller than the present value of an ordinary annuity that has the same payments
  4. equal to the future value of the same payments divided by the number of payments

Explanation

An annuity due pays at the beginning of each period, so each payment is discounted for one fewer period than in an ordinary annuity. That makes the present value of the annuity due larger than the present value of an otherwise identical ordinary annuity.

Question 37General Principles of Financial Planning

A client invests $10,000 today at 5% compounded annually. What will the investment be worth at the end of 10 years?

  1. $15,000
  2. $16,289 Correct answer.
  3. $17,100
  4. $15,513

Explanation

Future value equals present value multiplied by (1 + r) raised to the number of periods: $10,000 times 1.05 to the tenth power, or $10,000 times 1.6289, which is approximately $16,289.

Question 38General Principles of Financial Planning

A portfolio earns a nominal return of 9% while inflation runs at 3%. Using the approximation method, the real return is approximately:

  1. 12%
  2. 9%
  3. 3%
  4. 6% Correct answer.

Explanation

The approximate real return equals the nominal return minus the inflation rate: 9% minus 3% equals 6%. The exact figure, calculated as (1.09 divided by 1.03) minus 1, is about 5.8%.

Question 39General Principles of Financial Planning

Under the CFP Board's Practice Standards, the monitoring and updating step requires the CFP professional to:

  1. transfer full responsibility for the plan to the client once implementation is complete
  2. restate the engagement letter and collect a new retainer before any review occurs
  3. review whether the client's goals are being met and whether circumstances have changed Correct answer.
  4. guarantee that the plan's projected outcomes will be achieved as stated

Explanation

Monitoring and updating requires the planner and client to agree on who reviews progress, then to assess whether goals are being achieved and whether the client's circumstances or the environment have changed. The scope of the original engagement governs how often that review occurs.

Question 40General Principles of Financial Planning

A CFP professional will receive a commission if a client purchases a recommended insurance product. Under the Code and Standards, the planner must:

  1. decline the engagement because commissions create an impermissible conflict of interest
  2. disclose the conflict of interest to the client in writing Correct answer.
  3. refer the client to another planner who charges only fees
  4. donate the commission to a charity selected by the client

Explanation

Compensation arrangements that create conflicts of interest must be disclosed in writing so the client can make an informed decision, and the planner must manage the conflict in the client's best interest. Disclosure, not avoidance, is the governing requirement.

Question 41General Principles of Financial Planning

Under the CFP Board's Code and Standards, a CFP professional owes a fiduciary duty to a client:

  1. only after the client has paid a fee for the advice that was delivered
  2. only when the planner has discretion over the client's investment accounts
  3. whenever the CFP professional is providing financial advice Correct answer.
  4. only when the engagement is a comprehensive financial plan with a written contract

Explanation

The fiduciary duty applies whenever a CFP professional provides financial advice, which includes financial planning and material elements of it. It does not depend on whether the advice is comprehensive, whether discretion is held, or when fees are paid.

Question 42General Principles of Financial Planning

Using the common 28% front-end guideline, the maximum monthly housing payment for a client with gross monthly income of $6,000 is:

  1. $2,100
  2. $1,200
  3. $1,440
  4. $1,680 Correct answer.

Explanation

The front-end ratio compares housing costs, including principal, interest, taxes, and insurance, to gross monthly income. Multiplying $6,000 by 0.28 gives a maximum housing payment of $1,680.

Question 43General Principles of Financial Planning

Which of the following is a tool of fiscal policy rather than monetary policy?

  1. changing reserve requirements for member banks
  2. changing the level of government spending Correct answer.
  3. changing the discount rate charged to banks
  4. buying Treasury bonds in the open market

Explanation

Fiscal policy operates through government taxation and spending decisions made by the legislative and executive branches. The discount rate, open market operations, and reserve requirements are monetary tools used by the Federal Reserve.

Question 44General Principles of Financial Planning

Which statement about qualified tuition programs, commonly called 529 savings plans, is correct?

  1. Contributions are deductible for federal income tax purposes
  2. Account balances must be spent by the beneficiary's thirtieth birthday
  3. Earnings grow tax-deferred and qualified withdrawals are tax-free Correct answer.
  4. Investment options may be changed only once per calendar year

Explanation

529 plan contributions are made with after-tax dollars, grow tax-deferred, and escape federal income tax when withdrawn for qualified education expenses. States may offer their own deductions, but there is no federal deduction for contributions.

Question 45General Principles of Financial Planning

A client needs $50,000 in eight years and can earn 6% compounded annually. Approximately how much must be invested today?

  1. $35,000
  2. $33,500
  3. $31,371 Correct answer.
  4. $25,000

Explanation

Present value equals the future amount divided by (1 + r) raised to the number of periods: $50,000 divided by 1.06 to the eighth power, or $50,000 divided by 1.5938, which is approximately $31,371.

Question 46General Principles of Financial Planning

Which of the following is qualitative rather than quantitative client information?

  1. the balance on the client's home mortgage
  2. the client's average monthly living expenses
  3. the client's salary and annual bonus
  4. the client's tolerance for investment risk Correct answer.

Explanation

Qualitative data are subjective and include goals, attitudes, risk tolerance, and health status. Quantitative data are objective numbers such as income, account balances, and expenses.

Question 47General Principles of Financial Planning

Two mutually exclusive projects have conflicting net present value and internal rate of return rankings. A financial planner should recommend the project with:

  1. the larger total undiscounted cash inflows during the holding period
  2. the higher net present value at the client's required return Correct answer.
  3. the shorter payback period regardless of the discount rate used
  4. the higher internal rate of return over the project's life

Explanation

When rankings conflict for mutually exclusive projects, net present value is the preferred criterion because it measures the dollar increase in the client's wealth at the required rate of return. Internal rate of return implicitly assumes reinvestment at the IRR itself and can misrank projects of different scale or timing.

Question 48General Principles of Financial Planning

A taxable investment earns a 7% nominal return, is taxed annually at a 25% marginal rate, and inflation is 3%. The real after-tax return is approximately:

  1. 2.3%
  2. 4.0%
  3. 5.3%
  4. 2.2% Correct answer.

Explanation

The after-tax nominal return is 7% multiplied by (1 minus 0.25), or 5.25%. Deflating that figure by 3% inflation gives (1.0525 divided by 1.03) minus 1, which is approximately 2.2%.

Question 49General Principles of Financial Planning

A client wants to accumulate $1,000,000 in 25 years by making equal deposits at the end of each year. Assuming an 8% annual return, the required annual deposit is closest to:

  1. $13,679 Correct answer.
  2. $15,000
  3. $10,000
  4. $12,500

Explanation

The future value annuity factor is ((1.08 to the 25th power minus 1) divided by 0.08), which equals about 73.106. Dividing the $1,000,000 goal by that factor produces a required annual deposit of approximately $13,679.

Question 50General Principles of Financial Planning

A court subpoenas a CFP professional's records concerning a client's accounts. Under the Code of Ethics, the planner should:

  1. notify the CFP Board and wait for its approval before disclosing
  2. refuse to release the records until the client signs a written consent form
  3. provide the information in response to the proper legal process Correct answer.
  4. release only those records the client authorizes in writing beforehand

Explanation

Confidentiality may be breached without client consent when disclosure is required by law, such as in response to a valid subpoena, or when necessary to defend against a charge of wrongdoing. Client consent, not CFP Board approval, is the alternative route to disclosure.