CFP Certified Financial Planner 5 — Questions and Answers
Question 1: A client receives stock options from her employer. NSOs (Non-Qualified Stock Options) differ from ISOs (Incentive Stock Options) in that NSOs:
- Create ordinary income at exercise equal to the spread between exercise price and FMV (Correct answer)
- Qualify for favorable long-term capital gains treatment at exercise
- Have no AMT implications
- Are limited to $100,000 per year in grant value
Correct answer: Create ordinary income at exercise equal to the spread between exercise price and FMV
When NSOs are exercised, the spread (FMV minus exercise price) is taxed as ordinary income and subject to payroll taxes, unlike ISOs which may qualify for capital gains treatment.
Question 2: Which portfolio rebalancing approach triggers a trade only when an asset class drifts beyond a predetermined percentage from its target allocation?
- Percentage-of-portfolio (threshold) rebalancing (Correct answer)
- Calendar rebalancing
- Tactical asset allocation
- Constant-proportion portfolio insurance (CPPI)
Correct answer: Percentage-of-portfolio (threshold) rebalancing
Threshold rebalancing triggers trades when an asset class deviates by a set percentage (e.g., ±5%) from its target, balancing transaction costs against allocation drift.
Question 3: A couple files jointly and has $350,000 of realized capital gains from selling their primary home. They lived there for 4 of the last 5 years. How much is excluded from income?
- $500,000 (Correct answer)
- $250,000
- $350,000
- $0 — gains on home sales are fully taxable
Correct answer: $500,000
Married couples filing jointly may exclude up to $500,000 of gain on the sale of a primary residence if ownership and use tests are met (2 of last 5 years).
Question 4: Under ERISA, which fiduciary standard applies to plan sponsors managing a 401(k) plan?
- Prudent expert standard — act as a prudent person familiar with such matters would (Correct answer)
- Suitability standard only
- Best execution standard used in securities trading
- Reasonable care standard from common law
Correct answer: Prudent expert standard — act as a prudent person familiar with such matters would
ERISA's prudent expert standard requires plan fiduciaries to act with the care and skill of a prudent person knowledgeable in retirement plan management.
Question 5: A client is in the 32% marginal tax bracket. A municipal bond yields 4.2%. What is the taxable equivalent yield?
- 6.18% (Correct answer)
- 5.60%
- 4.85%
- 2.86%
Correct answer: 6.18%
Taxable equivalent yield = tax-exempt yield ÷ (1 − tax rate) = 4.2% ÷ (1 − 0.32) = 4.2% ÷ 0.68 = 6.18%.
Question 6: Which business continuation agreement requires each business owner to purchase life insurance on the other owners to fund a buyout at death?
- Cross-purchase buy-sell agreement (Correct answer)
- Entity purchase (stock redemption) agreement
- Wait-and-see buy-sell agreement
- One-way buy-sell agreement
Correct answer: Cross-purchase buy-sell agreement
In a cross-purchase agreement, each co-owner personally buys life insurance on the other owners, using the death proceeds to purchase the deceased's business interest.
Question 7: A CFP professional discovers their client's ex-spouse has been fraudulently transferring marital assets before a divorce settlement. What is the CFP's primary obligation?
- Advise the client of the situation and recommend they seek legal counsel (Correct answer)
- Report the fraud directly to law enforcement without client consent
- Ignore the situation to preserve client confidentiality
- Contact the ex-spouse's attorney directly to resolve the issue
Correct answer: Advise the client of the situation and recommend they seek legal counsel
The CFP should inform the client and recommend legal counsel, since the CFP's duty runs to the client and asset fraud in a divorce is a legal matter requiring an attorney.
CFP Certified Financial Planner 5
A client receives stock options from her employer.
NSOs (Non-Qualified Stock Options) differ from ISOs (Incentive Stock Options) in that NSOs: