CRPC Damage Control Test 1 & 2
with Complete Solutions
Which one of the following is a characteristic of Treasury inflation-protected securities
(TIPS)?
The increase in principal is taxable each year.
Their returns are tied to the producer price index.
They are sold at a discount.
They are issued with maturities up to 40 years. - Answer-The increase in principal is
taxable each year.
Any annual increase in principal is subject to federal taxation (unless in a tax-deferred
account). Returns are tied to the consumer price index. TIPS are sold at par value and
have maturities up to 30 years.
(LO 2-2)
Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what
is the expected change in price for this fund?
6.5% increase
9.75% increase
6.5% decrease
9.75% decrease - Answer-9.75% decrease
1.5% × 6.5 = 9.75%. Recall that duration needs to have a negative sign in order to
represent the inverse relationship between bond prices and interest rates. In this case,
an increase in rates means the bonds or bond funds will fall in price. Therefore, this
fund will decrease in price about 9.75%. Also, you can remember that bond prices move
opposite to interest rates. An increase in interest rates means the price of bonds will go
down.
What does Jensen's alpha tell you?
the percentage of return that can be attributed to systematic risk
the percentage a manager over or underperformed based on the amount of risk taken
the percentage by which a manager beat the market
the percentage of return that can be attributed to unsystematic risk - Answer-the
percentage a manager over or underperformed based on the amount of risk taken
,Alpha is the percentage a manager over- or underperformed based on the amount of
risk taken. The percentage of return that can be attributed to systematic risk is referred
to as the coefficient of determination (R2).
(LO 2-5)
Which of the following are not used in technical analysis?
moving averages
graphs
supply and demand of stocks
financial statement ratios - Answer-financial statement ratios
Moving averages, graphs and statistics regarding the supply and demand of stocks are
used by technicians. Financial statement ratios are part of fundamental analysis.
(LO 2-3)
Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity.
Comparable bonds are yielding 6%. What is the value of this bond? - Answer-$902
If the calculator is set for 1 P/YR, then all factors, other than FV, need to be adjusted for
semiannual payments. The keystrokes would be: 1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N],
then solve for [PV] = 902. If the calculator is set at 2 P/YR, then [I/YR] is 6 and [N] is
entered as 15 [SHIFT] [N].
(LO 2-8)
This year, your 63-year-old client had $17,025 of earned income and $30,000 of
investment income. He was also drawing Social Security benefits. Which one of the
following correctly describes the impact on his Social Security benefits?
He loses $1 of benefits for every $1 above the "allowable limit."
He loses $1 of benefits for every $2 above the "allowable limit."
He loses $1 of benefits for every $3 above the "allowable limit."
There is no reduction to his benefits. - Answer-There is no reduction to his benefits.
The client's earnings (earned income) are below the allowable limit for the current year
($17,640 for 2019). Remember that according to the work penalty rule, only earned
income is counted toward the "allowable limit."
(LO 3-3)
Which one of the following is correct regarding tax-exempt interest and the taxation of
Social Security benefits?
, None of the tax-exempt interest is included in the computation of the taxation of Social
Security benefits.
50% of the tax-exempt interest is included in the computation of the taxation of Social
Security benefits.
85% of the tax-exempt interest is included in the computation of the taxation of Social
Security benefits.
All of the tax-exempt interest is included in the computation of the taxation of Social
Security benefits. - Answer-All of the tax-exempt interest is included in the computation
of the taxation of Social Security benefits.
All tax-exempt interest income is included in computing the portion of Social Security
benefits that are subject to taxation. Tax-free Roth distributions are not counted when
determining provisional income. A maximum of 85% of the Social Security benefits are
subject to taxation.
(LO 3-3)
Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per month.
Because he has filed at age 62, his payment will be reduced by 25% to $1,125. His wife
Linda, age 67, would like to begin spousal benefits. Her monthly income would be -
Answer-$750.00.
Because Linda has attained FRA, she would be eligible for 50% of Sam's full PIA, or
$750.00.
(LO 3-4)
Over a period of 10 years, Mark Edmunds contributed a total of $20,000 to a
nondeductible IRA. The current value of Mark's IRA is $40,000, and Mark, who is now
age 45, has decided to use all of his IRA assets for the down payment on a second
home. Assuming Mark's marginal tax bracket is 35%, how much does he owe in taxes?
- Answer-$9,000
Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% ×
$20,000 tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to
income tax or the early withdrawal penalty.
Harry, a single professor who is age 36, started his Roth IRA three years ago,
contributing $5,000. He has since made a contribution of $5,500 each year and
converted a traditional IRA of $17,000 to the Roth IRA last year. His total contributions
are $16,000 plus the $17,000 conversion, and the account is now worth $36,497. Harry
would like to make a complete withdrawal so that he can buy a new car. He wants to
know what his options are and what the tax consequences would be. Which one of the
following statements would be the correct information for Harry? - Answer-If a
withdrawal of converted IRA funds is made from the Roth account subsequent to the
