WMS Financial Analysis & Planning 3 ā Questions and Answers
Question 1: A client holds a bond with a 6% coupon when market rates rise to 8%. The bond's price will most likely:
- Increase because coupon payments become more attractive
- Decrease because its fixed payments are worth less relative to new issues (Correct answer)
- Stay constant because the coupon rate is locked in
- Increase because duration shortens as rates rise
Correct answer: Decrease because its fixed payments are worth less relative to new issues
Bond prices move inversely to interest rates; when rates rise above the coupon, the bond trades at a discount to par.
Question 2: Which of the following best defines a client's 'human capital' in the context of comprehensive financial planning?
- The total value of a client's investment portfolio at current market prices
- The present value of the client's future expected labor income (Correct answer)
- The client's current net worth minus outstanding liabilities
- The client's credit score expressed in monetary terms
Correct answer: The present value of the client's future expected labor income
Human capital is the present value of all future earned income from employment, which declines as the client ages toward retirement.
Question 3: An investor with a 30-year time horizon and high risk tolerance should typically tilt their portfolio toward:
- Short-term Treasury bills to minimize volatility
- Long-duration investment-grade bonds for stability
- Higher equity allocations to capture the equity risk premium over time (Correct answer)
- Gold and commodities exclusively to hedge against inflation
Correct answer: Higher equity allocations to capture the equity risk premium over time
Long time horizons and high risk tolerance support heavier equity allocations, as equities have historically outperformed fixed income over multi-decade periods.
Question 4: What is the primary purpose of a personal financial statement (net worth statement)?
- To report taxable income to the IRS for the current year
- To provide a snapshot of total assets minus total liabilities at a point in time (Correct answer)
- To project future cash flows over the next five years
- To document investment returns achieved during the prior quarter
Correct answer: To provide a snapshot of total assets minus total liabilities at a point in time
A net worth statement (personal balance sheet) captures what a client owns versus what they owe at a specific date.
Question 5: A client wants to save $500,000 in 15 years. If their account earns 6% annually, approximately how much must they save each month?
- $1,288
- $1,720
- $2,074 (Correct answer)
- $3,333
Correct answer: $2,074
Using future value of an annuity formula at 0.5% monthly rate for 180 periods, the required monthly payment to reach $500,000 is approximately $2,074.
Question 6: Which planning document coordinates all elements of a client's financial lifeāinvestments, insurance, taxes, estate, and retirementāinto a single cohesive strategy?
- Investment Policy Statement (IPS)
- Comprehensive financial plan (Correct answer)
- Beneficiary designation form
- Qualified Domestic Relations Order (QDRO)
Correct answer: Comprehensive financial plan
A comprehensive financial plan integrates all financial planning domains into a unified strategy tailored to the client's goals and circumstances.
Question 7: The 'rule of 72' is used to estimate:
- The maximum allowable 401(k) contribution for the year
- The number of years required to double an investment at a given return rate (Correct answer)
- The percentage of income to allocate to retirement savings
- The tax bracket threshold for net investment income tax
Correct answer: The number of years required to double an investment at a given return rate
Dividing 72 by the annual return rate gives the approximate number of years needed to double an investment through compound growth.
WMS Financial Analysis & Planning 3
A client holds a bond with a 6% coupon when market rates rise to 8%.
The bond's price will most likely: