AAFM AAFM Financial Planning Principles 3 — Questions and Answers
Question 1: A client can save $500 monthly and needs $60,000 for a down payment in five years. Which concept most directly helps determine if the goal is achievable?
- Future value of an annuity (Correct answer)
- Present value of a lump sum
- Net present value of a project
- Internal rate of return
Correct answer: Future value of an annuity
Regular monthly contributions growing over time are evaluated using future value of an annuity.
Question 2: Which factor causes money received today to be worth more than the same amount received in the future?
- Its potential to earn a return over time (Correct answer)
- Inflation always being zero
- Fixed exchange rates
- Government guarantees
Correct answer: Its potential to earn a return over time
The time value of money reflects that present funds can be invested to grow.
Question 3: A client's investments earn 8% but inflation is 3%. What is the approximate real rate of return?
- About 5% (Correct answer)
- About 11%
- About 8%
- About 3%
Correct answer: About 5%
The real return roughly equals the nominal return minus inflation, about 5%.
Question 4: Which emergency fund guideline is most commonly recommended in financial planning?
- Three to six months of living expenses (Correct answer)
- One week of income
- Twelve months of gross salary
- Ten percent of net worth
Correct answer: Three to six months of living expenses
A reserve of three to six months of expenses covers most income disruptions.
Question 5: Under the Rule of 72, how long does it take money to double at a 6% annual return?
- About 12 years (Correct answer)
- About 6 years
- About 24 years
- About 8 years
Correct answer: About 12 years
Dividing 72 by the interest rate of 6 gives approximately 12 years to double.
Question 6: A high debt-to-income ratio primarily signals which concern for a client's financial health?
- Reduced capacity to take on new obligations (Correct answer)
- Strong liquidity
- High net worth
- Excellent credit utilization
Correct answer: Reduced capacity to take on new obligations
A high debt-to-income ratio shows that a large share of income services debt, limiting flexibility.
Question 7: Which statement best describes the purpose of dollar-cost averaging?
- Investing fixed amounts regularly to reduce timing risk (Correct answer)
- Buying only when markets peak
- Concentrating all funds in one security
- Selling during every downturn
Correct answer: Investing fixed amounts regularly to reduce timing risk
Investing a set amount on a schedule smooths purchase prices and reduces timing risk.
AAFM AAFM Financial Planning Principles 3
A client can save $500 monthly and needs $60,000 for a down payment in five years.
Which concept most directly helps determine if the goal is achievable?