FREE AFP Financial Planning Questions and Answers

Question 1

Jane works at a large financial institution. She is a member of their DC pension plan which is invested in a balanced fund (50% dividend mutual fund and 50% global government bond fund) for a total amount of $50,000. She also has her own self-directed RRSP that has $30,000 in mortgage-backed securities and $40,000 invested in CMHC bonds. Finally, her TFSA has $10,000 in cash and $45,000 invested in the S&P/TSX 60 ETF. What is Jane's current asset allocation?

Accepted Answer

6% Cash, 54% Fixed Income, 40% Equities

Answer

Explanation:
Cash Allocation (10,000/175,000) = 6%

Fixed Income Allocation - (RRSP MBS + Pension Plan - Gov't Bond + CMHC Bond) - (30,000 + 25,000 + 40,000) / 175,000 = 54%

Equities (Pension Plan - Mutual fund + TFSA - S&P TSX 60 ETF) - (25,000 + 45,000) / 175,000 = 40%

Question 2

Connie is looking for income-focused investments for her portfolio as she is nearing retirement and will require this income to live off of. Which of the following investments would you recommend for her to achieve her investment objectives?
1. Mortgage-backed securities
2. Growth stocks
3. Preferred shares
4. Absolute return hedge fund

Accepted Answer

1 and 3 only

Answer

Explanation:
Option 1 is correct. Mortgage-backed securities are considered income investments as they pay both interest and principal on a monthly basis. Option 3 is correct. Preferred shares are like debt instruments that have a fixed price and pay a fixed dividend rate, which is usually significantly higher than dividends paid by common stock.

Question 3

Richard, a financial planner, has been working with his client Glenn for the last 5 years. Glenn is the CEO of a small software company Glennatical listed on the TSX. Richard is considering to purchase a large amount of common shares of Gleenatical for his own personal investment account. What should Richard do in this situation?

Accepted Answer

Communicate to Glenn that he will discontinue their professional relationship because of the future purchase of common shares in Glennatical.

Answer

Explanation:
If Richard purchases common shares in Glennatical, he will have a conflict of interest as Glenn's financial planner. Richard can influence Glenn into strategies that will benefit Glennatical which will directly provide monetary gain (common share ownership) for Richard in the short run. The financial planner should advise that they may not be able to continue in a professional relationship if a conflict of interest materializes in the future. Providing this information early on increases the level of trust and respect between the client and the financial planner.

Question 4

Michelle, age 70, and her husband, Kip, age 74 were both retired for several years when Kip passed away from heart disease.  He was receiving a monthly CPP payment of $495.  Michelle is currently receiving a pension payment of $350 per month.  As Kip's surviving spouse, what would be the lump-sum death benefit to Michelle?

Accepted Answer

$2,500.00

Answer

Explanation:
The lump-sum payment to Michelle would be $2500. Amount payable under CPP is equal to 6 times the actual retirement pension the contributor was receiving or would have received, to a maximum of $2,500. Kip's monthly CPP payment of $495 multiplied by 6 would be greater than the CPP maximum allowed. ($2970 > $2500 MAX).

Question 5

Barry, age 67, is a widower and has two adult children, aged 36 and 33, who are both married. Twenty years ago, Barry purchased an investment property for $100,000 and today it is worth $200,000. He is considering transferring the property into joint tenancy with his two adult children. Which of the following is the biggest risk to consider before electing a transfer to joint tenancy?

1. With the property in joint tenancy when Barry dies, it will not go through his estate and he will not have to pay probate
2. Barry will not be able to split the income related to the investment property as attribution rules will apply to him
3. He will lose control of the property and his children could make changes or even sell their shares to someone else
4. Both Barry's children are married and if either of their marriages breakdown the investment property may be included in family assets.

Accepted Answer

3 and 4 only

Answer

Explanation:
Option 3 is correct. Once a joint tenancy is triggered, Barry can no longer make decisions solely on his own related to the property. Option 4 is correct. The investment property can be included in family property on marriage breakdown and he could have the asset or its value transferred to someone that is beyond his wishes (i.e. an ex-son or daughter in law).

AFP - Association for Financial Professionals Practice Test

AFP - Association for Financial Professionals Practice Test

FREE AFP Financial Planning Questions and Answers