PFM - WORKBOOK

R1 + R2 + R3 + ……..Rn are the returns for the different periods n = The no of periods over which returns are calculated Geometric Return The geometric return measures the compound growth overtime. The geometric mean of a collection of data is defined as the nth root of the product of all the members of the data set, where n is the number of members. G.M. = [(1 + TR1) (1 + TR2) ................. (1 + TRn)]1/n- 1 where TR is a series of total returns in decimal form. By adding 1.0 to each total return produces a return relative. Return relatives are used in calculating geometric mean returns because TRs which can be negative cannot be used. Q1. What is the arithmetic mean for the following returns? Year 1 5% Year 2 -3% Year 3 12% Sol. Arithmetic mean = (5-3+12)/3 = 4.67% Q2. What is the geometric mean for the following returns? Year 1 5% Year 2 -3% Year 3 12% Sol. Geometric mean = [(1.05)(0.97)(1.12)]1/3-1 = 0.04486 OR 4.49% Q3. The arithmetic return of 12%, 14% and 16% is _________. Sol. Arithmetic return = (12+14+16)/3 = 14% Q4. The geometric return of 10%, 18% and 24% is __________. Sol. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 101

Geometric return = [(1+0.10)(1+0.18)(1+0.24)]1/3-1 = 0.1719 or 17.19% PART - II CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 102

CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 103

Chapter 1 Regulations Governing CFPCM, Code of Ethics& Steps of Financial Planning 1. While preparing a Financial Plan for Mr. X you have made a forecast of his present revenues and expenditures i.e. constructed a model of how his finances might perform in the near future. You have prepared a __________. A. Investment Plan B. Fund Flow statement C. Cash Flow statement D. Budget 2. Prior to providing any Financial Planning services, you a Financial Planning practitioner and Mr. X, as your client shall mutually define the scope of the engagement. The letter of engagement would define the scope of engagement by discussing i) Identification of the service(s) to be provided ii) Financial Planning practitioner’s compensation arrangement(s) iii) Analysis and evaluation of client’s current situation iv) Determining the clients and the Financial Planning practitioner’s responsibilities; v) Establishing the duration of the engagement; vi) Determine the strategies to achieve financial goals (3) A) i), ii), iv) and v) B) ii), iii), iv) and vi) C) ii), iii), IV) and v) D) i), ii), v) and VI) CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 104

3. Before beginning work on Mr. X’s Financial Plan, you have drafted a “Letter of Engagement” and Sought Mr. X’s consent on the same. Mr. X asked you about relevance of such a letter. In the context of Financial Planning Profession, you explain about the “Letter of Engagement” as a _________. A. professional requirement under Code of Ethics of FPSB India B. professional requirement under Practice Guidelines of FPSB India C. legal contract as per Contract Act 1872 D. document for his personal record 4. Mr. X saw your name with CFP Marks; he wants to know different ways in which the CFP Marks in India can be written. i. CERTIFIED FINANCIAL PLANNERCM ii. CFPCM iii. CFPcm iv. C.F.P. v. CFPCM vi. Certified Financial PlannerCM A. i) & ii) B. ii), iii), vi) C. iv), v) &vi) D. ii), v) &vi) 5. Before finalizing the Financial Plan, Mr. X tells you that she wants to entrust the estate issues to a solicitor, who is a friend of Mr. X. Which of the following is your best stand? A. Estate issues being substantial in the case, you maintain that the Financial Plan cannot be an integrated one if the same is outside your purview, hence decline. B. This is permissible subject to such an arrangement finding an explicit mention in the Financial Plan for the said activity. C. This is permissible subject to the advice of the solicitor being integrated into the Financial Plan and monitored along with the Plan. D. You agree to the arrangement subject to the advice of solicitor made known to you so that you modify the Financial Plan accordingly. 6. You as a CFPCM Practitioner use the CFPCM mark as a proclamation to the public that you: 1. Can be trusted with the clients’ financial affairs with confidence. 2. Will competently fulfill the responsibilities owed to the client. 3. Are governed by a professional Code of Ethics. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 105

4. Possess exhaustive knowledge of all financial matters. A) (a), (b) B) (a), (b), (c) C) (a), (c), (d) D) All of the above 7. You as a CERTIFIED FINANCIAL PLANNERCM Professional are required to exercise objectivity in providing services to Mr. X, your client. This means you shall be _____________. A. Impartial B. Honest C. Competent D. Diligent 8. You, as a CFPCM Certificant, need to disclose regarding compensation to be received from Mr. X According to you, which would be the most appropriate option? A. Need not disclose the source of compensation B. Need to disclose compensation structure at the time of establishing relationship C. Need to disclose only when asked by Mr. X D. Need to disclose the source once the financial plan is constructed 9. You have a two year old daughter named Neha. You want to have enough money so that you can pay for her college education when she starts her college in sixteen years, which of the following best describes your concern? A. A short term financial goal B. An intermediate term financial goal C. A long term financial goal D. A personal goal 10. You want to find enough time to exercise daily to improve your health this is a question of: A. A consumable products financial goal B. A durable goods financial goal C. An intangible goal D. A long term financial goal 11. You feel very strongly that going into debt is wrong. This is an question of the influence of __ ________ on your financial planning decisions. A. Your values CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 106

B. Your stage in the adult life cycle C. Market forces D. General economic forces 12. ________________is a rise in the general price level, Your purchasing power decreases and it will cost more money to buy the same goods. A. Uncertainty B. Inflation C. Interest D. Risk 13. You receive a phone call from a person with whom you have never spoken. The caller is excited, just having heard that a new mutual fund is positioned to deliver larger gains in the coming year. The caller wishes to purchase shares of the fund through you. Keeping in mind stages of the overall personal planning process, which of the following questions that address the first two stages of the financial planning process should you ask the caller? (1) What are your goals for this investment? (2) What other investments do you have? (3) What is your date of birth? (4) Do you want your dividends reinvested? A. 1 and 2 only B. 2 and 4 only C. 1, 2, and 3 only D. 1, 2, and 4 only 14. Which one of the following statements regarding the second step of the financial planning process, Gathering client data and determining goals and expectations, Is correct? A. General goals, such as “adequate retirement income” provide appropriate guidance in developing the plan. B. Quantitative information and qualitative information are equally important. C. This step provides the greatest time-saving potential since most of the information required can be estimated and reasonable accuracy is not affected. D. Most clients will be able to completely implement their financial plans in a relatively short period of time, so prioritization is merely a formality and not particularly important CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 107

15. What is the third step in the financial planning process? A. Recommending a plan B. Establishing the client planner relationship C. Analyzing information D. Gathering data 16. Which of the following financial decisions results from one’s personal planning? A. Personal financial plan B. Personal financial objective C. Personal budget D. None of the above 17. An appropriate Financial Plan is influenced by one’s________ A. Income B. Age C. Liquidity D. All of the above 18. A comprehensive financial plan includes: A. Wealth Accumulation B. Wealth Distribution C. Risk Management D. All of the above 19. Which of the following are most commonly-cited reasons that people give for why they sought out a financial planner? 1) To assist with the time and effort of managing their finances, 2) To get timely advice on markets and investment opportunities, 3) To seek advice on tax-reduction, 4) Budget planning in order to optimize their investable income A. (1), (3) and (2) B. (1), (2), (3) and (4) C. (1), (3) and (4) D. (1) and (2) CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 108

20. Which of the following is not qualitative information? A. Liquidity Preference. B. Assets and Liabilities. C. Personal Details. D. All of the above. 21. Which of the following is the basic characteristic of a client’s goal? A. It must be defined in terms of money B. It must be quantified C. It must not be vague D. All of the above 22. Which of the following data cannot be collected through a single direct Question? A. Income of a person B. Family members C. Risk tolerance D. term for the goal to be achieved CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 109

ANSWERS ANS 1 D ANS 12 B ANS 2 A ANS 13 C ANS 3 B ANS 14 B ANS 4 A ANS 15 C ANS 5 B ANS 16 A ANS 6 B ANS 17 D ANS 7 A ANS 18 D ANS 8 B ANS 19 B ANS 9 C ANS 20 B CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 110

ANS 10 C ANS 21 D ANS 11 A ANS 22 C Chapter 2 Page 111 1. Which among the following accounts deposit fetch the highest rate of interest? A. Savings deposit B. Recurring deposit C. Fixed deposit D. Current account deposit 2. Fixed deposits can have A. Nomination facility B. Nomination facility with the permission of Bank Chairman C. Nomination facility by taking special permission from bank D. Nomination facility on the day of closing 3. Which type of fund is most likely to have the lowest management fee? A. Equity income fund. B. Index fund. C. Bond fund. D. Equity growth fund. CFP Level 1 - Module 1 - Personal Financial Management - Workbook

4. What is the taxability of interest earned on saving account of bank A. Fully taxable B. Upto Rs.5000 tax free C. Upto Rs.10000 tax free D. Completely taxable 5. Taxability of interest earned on fixed deposit by Individual whose age is less than 60.. A. Upto Rs.10000 is tax free B. Upto Rs.5000 is tax free C. Complete interest is tax free D. Complete interest is taxable 6. On which of the following banks the Reserve Bank of India depends A. Co-operative Banks B. Regional Rural Banks C. Commercial Banks D. Development Banks 7. Bank deposit refers to A. The amount of money standing to the credit of a customer of a bank B. A term used by the Federal Reserve to refer to the total deposits of member banks C. The amount of money standing to the debit as a customer of a bank D. All of the above 8. The portion of total deposits of a commercial bank which it has to keep with RBI in the form of cash reserves in termed as CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 112

A. CRR Page 113 B. SLR C. Bank Rate D. Repo Rate 9. Real Time Gross Settlement (RTGS) is management by A. State Bank of India B. Reserve Bank of India C. Indian Bank Association D. Government of India 10. What is ideal CIBIL score is required to get loan at cheaper rate of interest. A. 500 B. 600 C. 1200 D. 750 11. How is your reverse mortgage amount calculated? A. based on how much the house is worth B. based on how much you've paid on the house C. based on the equity you own D. based on your monthly mortgage payments 12. What happens to your home ownership with a regular mortgage? A. you gain it over time CFP Level 1 - Module 1 - Personal Financial Management - Workbook

B. you buy it C. you lose it over time D. you sell it 13. What happens if you move from your house with a reverse mortgage? A. you have to pay back the reverse mortgage B. nothing C. you have to pay a moving penalty D. you transfer the reverse mortgage to your new house 14. MCLR was introduced by ………….to provide loans on minimal rates as well as market rate fluctuation benefit to customers. A. SEBI B. RBI C. IRDA D. PFRDA 15. Under hire purchase system, the buyer can sell, destroy, transfer, damage or pledge the goods. A. True B. False C. Partially true. D. None of the above 16. Ownership of goods under hire purchase agreement is transferred a the the time of A. Payment of down payment B. Payment of first installment CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 114

C. Full and final payment of last installment Page 115 D. None of the above 17. What is transferred to hire under hire purchase system: A. Ownership of assets B. Possession of asset C. Ownership and possession of asset D. None of the these 18. Investment in real estate is considered as: A. Liquid assets B. Invested assets C. Use assets D. None of the above 19. Cars or clothing is considered: A. Use assets B. Invested assets C. Liquid assets D. None of the above 20. What is the simple equation to determine new worth: CFP Level 1 - Module 1 - Personal Financial Management - Workbook

A. net worth = cash flow - Liabilities B. Net worth = Assets – Liabilities C. Net worth = Liabilities – assets D. Net worth = total assets + Liabilities 21. In how many years money will be doubled as per Rule 72 if rate of interes is 8% p.a. A. 8 years B. 9 years C. 7 years D. None of the above 22. A company that issues stocks and bonds to raise funds results in A. Decrease in Cash B. Increase in Cash C. Increase in Equity D. Increase in Liabilities 23. The basic financial statements include A. Statement of Cash Flows B. Statement of Retained Earnings C. Balance Sheet and Income Statement D. None of the Above CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 116

ANSWERS ANS 1 C ANS 12 A ANS 23 D ANS 2 A ANS 13 A ANS 3 B ANS 14 B ANS 4 C ANS 15 B ANS 5 D ANS 16 C ANS 6 C ANS 17 B ANS 7 A ANS 18 B ANS 8 A ANS 19 A ANS 9 B ANS 20 A CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 117

ANS 10 D ANS 21 B ANS 11 C ANS 22 B MOCK TEST - 1 1) Money has time value. It derives this value due to existence of several conditions. Which one of the following is not one of the conditions contributing to the existence of this value? A. The fees and commission sources of the firm B. Possibility of increase in tax rates over time. C. Ability to buy/ rent assets generating revenue D. Cost of foregoing present consumptions 2) You are applying for an overdraft facility with the bank. What is the rate of interest you will pay on this facility? A. The bank will apply a flat rate of interest on the amount of overdraft allowed to actually utilize. B. The bank will apply a flat rate of interest on the amount of overdraft allowed to you. C. The bank will apply rate of interest linked to the term deposit rate, on the amount of overdraft utilized. D. The bank will apply rate of interest linked to the term deposit rate, on the average amount of overdraft remaining unutilized from the OD limit. 3) The Nifty has doubled since the last time you advised your client to reduce his equity exposure. The client is annoyed. What might be the most appropriate action to take immediately?(1) A. Apologize for wrongly forecasting the market B. Change his asset allocation by increasing his equity exposure C. Help the client understand the logic of his asset allocation CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 118

D. Rebalance his asset allocation by reducing equity investments 4) Which of the following is a concurrent indicator of the phase of the business cycle? A. Wholesale price Index B. Index of Industrial production C. Labor costs and capacity utilization D. Order levels in the manufacturing sector 5) What is the main difference between the personal Financial Planning needs of the employed and the self-employed? A. Attitude to risk/Risk appetite B. Need to fund children’s education C. Need to fund retirement D. The extent of employer-provided pension benefits, if any 6) Mr. Rajan’s investment portfolio comprises Rs.2 lakh in equity, Rs.5 lakh in debt and Rs.1 lakh in his bank current account. Over one year the returns on equity and debt are 5%and 12%. At the end of the year to maintain his current asset allocation, he needs to___________. A. Do nothing. B. He needs to move Rs, 10000/- from equity and Rs. 60000/- from debt to cash. C. He needs move Rs.7500/- to equity from debt and Rs. 8750/-to cash from debt D. He needs to invest Rs. 70000/- in debt and equity. 7) A 10 year 8.0% bond (Face Value- Rs.1000, interest payable semi-annually) maturing 6years from today is available at a yield to maturity of 6.0%. It is likely to be priced at___________. A. Rs. 1100 B. Rs. 1149 C. Rs. 1168 D. Rs. 1498 8) Mrs. & Mr. Aroraare aged 55 and 58 years respectively. Both expect to work till they turn 65. Their only goal is to fund their retirement. Which of the following is likely to be an appropriate CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 119

asset allocation strategy for them? A. 10% sectoral equity, 20% diversified equity, 30% long-term debt, and 40% medium term debt B. 20% Sectoral equity, 60% diversified equity, 20% long-term debt C. 30% Sectoral equity, 30% diversified equity, 40% cash/ liquid investments. D. 80% long-term debt, 20% medium term debt 9) If the post tax rate of return on an investment is 8% and the inflation rate is 5% the real ratio return is_______________. A. 3.5% B. 3.0% C. 2.85% D. -3.0% 10) Karan wants to withdraw Rs. 1200/- at the end of each month for the next 5 years. He expects to earn 10% interest compounded monthly on his investments. What lump sum should he deposit now?(4) A. Rs. 56949 B. Rs. 58630 C. Rs. 56478 D. Rs. 59119 11) Sanjeev invests Rs.5000 in a Bank Deposit today @ 8% p.a. compounded monthly. He hopes that this investment will enable him to fund his college education (estimated to cost Rs. 9000) which commences after 4 years. What will be the value of this investment in four years? A. Rs. 6802 B. Rs. 6870 C. Rs. 6878 D. Rs. 6925 12) Sudha invests Rs.5000 in the beginning of every year for 5 years @ 5% p.a. in a bank deposit. She then withdraws the accumulated sum over a period of 3 equal annual installments. What is the value of the deposit at the end of 5 years and the quantum of withdrawal each year? (4) CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 120

A. Rs. 28505, Rs. 9954 B. Rs. 29010, Rs. 10652 C. Rs. 29568, Rs. 11054 D. Rs. 28804, Rs. 10042 13) Mr. John has purchased 100 convertible debentures of Essar Oil on 1/1/2013 at Rs.500 each.40% of the value of the debentures is convertible into one share of Rs. 50 each after seven years. Mr. John exercised his option on 1/4/2020 and received 100 shares. Compute the cost of acquisition of these shares. A. Rs. 200 B. Rs. 205 C. Rs. 195 D. Rs. 185 Answers Ans 1 B Ans 9 C Ans 2 C Ans 10 C Ans 3 C Ans 11 B Ans 4B Ans 12 A Ans 5D Ans 6 A Ans 7 A Ans 8 C CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 121

MOCK TEST - 2 1. Which of the following is true in regard to a financial planner ’s liability? A. A disclaimer removes all liability. B. A principal adviser is liable for actions of representative. C. Advice is distinguishable from a recommendation. D. An adviser may be held liable for failure to predict economic changes. 2. Which of the following tests apply to reasonable basis for recommendations? i) Know your client ii) Obey Trade Practices Acts iii) Know relevant rules and regulations IV. iv) Know your products a) I and II b) I and III c) II and IV d) and IV 3. The stage of the business cycle which is marked by increased consumer and investment spending, higher price levels and money wages, and rising employment and national income, is: A. boom B. contraction C. recession CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 122

D. recovery 4. Which of the following is not normally an influence upon short-term interest rate movements? A. movements in the current account deficit B. the trend of interest rates overseas C. fiscal policy D. the rate of long-term unemployment. 5. When the government adjusts economic policy through the central budget, it is exercising: A. Monetary policy B. Fiscal policy C. Incomes policy D. Exchange rate policy 6. Assuming all other things being equal, if the government increases the circulation of money, interest rates will: A. Increase B. decrease C. stabilise D. remain unaffected 7. Of the following investments, which is the most suited for short term parking of readily accessible cash? A. Money market mutual fund B. Govt. securities C. a piece of property D. Shares 8. What would be the main reason for a small investor using a mutual fund instead of direct investments in shares? A. lower market risk B. lower charges C. access to broad asset portfolio D. higher return 9. Which are the qualities of a good Financial Planner? A. Technical Skills B. Communication Skills CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 123

C. Convincing attitude D. All of the above 10. Which of the following are steps used in preparing a financial plan? I goal setting II identification of financial problems III preparation of alternatives/recommendations IV implementation of the agreed recommendations a) I, II, III and IV b) I, II and IV c) III and IV d) II, III and IV 11. A statement of advice is not needed in providing limited financial planning advice) A. There is no such thing known as a statement of advice B. The above statement is true C. The above statement is false D. There is no such thing as limited financial planning advice, by definition financial planning is comprehensive) 12. Which of the following is true? A. A professional financial planner provides only comprehensive financial advice to clients encompassing, estate planning, insurance risk management, income and expenditure (cash flow), retirement benefits, investment planning and taxation. B. A professional financial planner may provide limited advice, if he discloses the fact at the outset to the client. a) Both A and B are false b) A is true but B is false c) A is false but B is true d) A is true provided, the financial planner is a CFP CM certificant 13. A financial planner who receives commission from companies on sale of investment/insurance products to a client is being unprofessional. A. The above statement is true B. The above statement is false C. The above statement is false, provided the financial planner discloses the fact to the client at the beginning of the relationship. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 124

D. The above statement is true, provided he also charges service fees from the client. 14. A professional financial planner is one who A. takes pride in his/her work B. is committed to quality C. is dedicated to the interest of the client D. all of the above 15. A CFPCM Certificant shall act in a capacity as regards client’s funds A. Trustee B. Beneficiary C. fiduciary D. professional 16. In periods of inflation, nominal interest rates are —————— than real interest rates A. Higher B. Lower C. Equal D. None of the above) 17. ------------- is entitled to claim depreciation but not a ----------- A. hirer, lessee B. lessees, hirer C. lessor, hirer D. lessees, lessor 18. A bond with a coupon rate of 10% is available at Rs. 1,250. The face value of the bond is Rs. 1,000. The effective yield on the bond is A. 10% B. 8% C. 12% D. None of the above 19. A financial planner should A. Always suggest his own cash flow management system to the client B. Not advise on cash flow planning C. Improve upon an existing system if it is adequately effective D. None of the above CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 125

20. If the inflation rate is 3% and the tax rate is 40%, the required rate of return to maintain the value of an investment is A. 4% B. 5% C. 6% D. 7% 21. In the interest of your clients, for tax advice A. Refer them to a tax consultant B. Refer them to a CFPCM Certificant C. Seek expert advice yourself before recommending strategies D. None of the above. 22. The Indian taxation system is: A. Progressive B. Regressive C. Assertive D. None of the above 23. What is the effective interest rate for 10% compounded monthly, quarterly, semiannually? A. 10.47, 10.38, 10.25 B. 10.47, 10.40, 10.25 C. 10.42, 10.38, 10.25 D. 10.47, 10.36, 10.25 24. A client approaches you with a request that requires the intervention of an outside professional. You would: A. Refer the client to the professional B. Go ahead on your own C. Read up on the subject D. Refer him to another professional planner 25. A friend owes us Rs.50000/-, the interest is 12% compounded monthly what would you prefer A. Take 50,000/- B. Take 60,000/- after 1 year C. Take 25,000/- and 32,000/- at the end of the year D. Take 40,000/- and 15,200/- at the end of the year. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 126

26. While monitoring a financial plan you would do all of the following except A. Undertake a strategic review B. Undertake a portfolio review C. Provide information on new investment opportunities D. Get the letter of engagement signed 27. While implementing a financial plan, you would A. Devise an action to proceed B. Get a letter of engagement signed C. Define the scope of services D. Define mutual responsibilities 28. While monitoring a financial plan, you would consider all of the following except: A. Changes in the economic situation B. Changes in the portfolio of the client C. Changes in the position of the client D. Changes in the social milieu 29. All of the following is relevant information of a client except: A. Residential address of the client B. Family health history C. Number of members in a family D. The business expenses borne by the employer. 30. A well to do individual who has his needs taken care of and is well into his retirement should invest into A. 90% short term debt, 10% cash B. 90% long term debt, 10% cash C. 60% equity, 30% debt, 10% cash D. 50% equity, 40% debt, 10% cash E. 25% Equity, 60% Short term debt. 15% long term debt 31. There is a 35 year old man with a wife and 2 children aged 6 and 9 years. Their topmost priority should be: A. Retirement planning B. Income protection CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 127

C. Life insurance D. Critical illness insurance 32. there is a 22 year old male with no dependants and nominal income) His topmost priority should be A. Retirement planning B. Income protection C. Life insurance D. Critical illness 33. An investor has Rs. 9000 in mutual funds, Rs. 6000 in fixed deposits and Rs. 3000 in the savings bank. He wants to reshuffle his portfolio, keeping the ratio 3.5:2.5:1.5. What should he do? A. Take Rs. 600 from mutual funds and put it in the savings bank B. Take Rs. 1200 from mutual funds and put it in fixed deposits, take Rs. 600 from savings bank and put it in mutual funds C. Take Rs. 600 from mutual funds and put it in fixed deposits, take Rs. 1200 from fixed deposits and put it in savings bank D. Take Rs. 1200 from savings bank and put it in mutual funds 34. You invest Rs.50,000 in a commercial real estate property and expect to clear Rs. 180,000 (after selling expenses, closing costs, etc)) when you sell it in 8 years. What is your expected rate of return on this property? A. 17.63% B. 18.36% C. 17.36% D. 17.01% 35. You have three projects (A, B and C) for which you forecast the following cash inflows: Years from now 1234567 A. 1,000 1,000 1,000 1,000 1,000 — — B. — — 1,700 1,700 1,700 — — C. — — — — 2,000 2,000 2,000 CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 128

Each of the projects has been evaluated by one of your company’s trainees. They have given you the following estimates: Asset A: present value today, 3,791. Asset B: present value 3 years from now, 4,650. Asset C: present value 7 years from now, 6,620. Which asset is most valuable? A. Asset A B. Asset B C. Asset C D. All 36. The “Rule of 72” says that if you earn 8% per year, your money will double in years. A. 12 B. 6 C. 8 D. 9 E. 72 37. Smith invests in a limited partnership which requires an outlay of Rs.9,200 today. At the end of years 1 through 5, he will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Smith is in the 28% tax bracket. YEARS CASH FLOWS 0 (Rs.9, 200) CF0. 1 Rs.600 CF1 2 Rs.2,300 CF2 3 Rs.2, 200 CF3 4 Rs.6, 800 CF4 5 Rs.9,500 CF5 The after-tax IRR of this investment is a) 17.41%. b) 19.20%. c) 24.18%. d) 28.00%. e) 33.58%. 38. Which of the following statements is/are correct?. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 129

1) The IRR is the discount rate which equates the present value of an investment’s expected costs to the present value of the expected cash inflows. 2) The IRR is 24.18% and the present value of the investment’s expected cash flows is Rs. 9,200. 3) The IRR is 24.18%. For Smith to actually realize this rate of return, the investment’s cash flows will have to be reinvested at the IRR. 4) If the cost of capital for this investment is 9%, the investment should be rejected because its net present value will be negative) a) (2) and (4) only b) (2) and (3) only c) (1) only d) (1), (2) and (3) only e) (1) and (4) only 39. Arrange the following financial planning functions into the logical order in which these functions are performed by a professional financial planner. 1) Interview clients, identify preliminary goals 2) Monitor financial plans 3) Prepare financial plan 4) Implement financial strategies, plans, and products. (5) collect, analyze, and evaluate client data a) (1), (3), (5), (4), (2) b) (5), (1), (3), (2), (4) c) (1), (5), (4), (3), (2) d) (1), (5), (3), (4), (2) e) (1), (4), (5), (3), (2) 40. If R is the real return, r is the portfolio return and I is the rate of inflation, then the formula for calculation of R is: A. R=r-I B. R= 1-(r +I)/(r-I) C. R=1+(r+I)/r-I) D. R = [(1+r)/ (1+I)]-1 41. If you have deposited Rs. 4,000 with a company for a specific interest and if the company wishes to prepay the deposits at the contract rate of interest after a period of 3.5 years and offers you Rs. 4985, what is the effective rate of interest if it is accounted half yearly? A. 6.4% B. 3.19% CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 130

C. 6.5% 42. You are likely to receive Rs. 85,000 and Rs. 91,000 at the end of 19 and 21 years, and if the discount rate is 6%, what is the present value? A. 54862 B. 54678 C. 54863 D. 51234 43. You wish to save for your daughter’s education, the present cost of which is around Rs. 2,40,000 and is expected to grow every year at the rate of 7%. If your daughter is 10 years old and is likely to be in the college in another 8 years’ time, what is the amount of investment to be made if it is likely to earn 11% return? A. 178936 B. 179836 C. 173896 D. 178930 CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 131

Suggested Answers and Solutions 1. b) as the rest of the options can be eliminated: Disclaimers only limit liability; for liability Purposes, recommendation may be considered part of advice; Nobody, including an 2. D) advisor can predict economic changes with certainty. 3. D) since you have to match products to client needs. Refer indicators for each stage of economic cycle from Topic 6 of Module 1 (after a 4. D) trough (downturn or depression) in all economic indicators, this period marks a recovery (upturn or upswing) in all economic indicators). 5. B) since other factors may influence short unemployment is unlikely to affect short term 6. B) Interest rate movements while the rate of long term interest rates. 7. A) by definition of fiscal policy 8. c) as interest rates are determined by the demand and supply of money. 9. D) All the others would give reasonable returns only in the long term 10. A) Since access to broad asset portfolio would automatically reduce risk in the portfolio All the Skills are required 11. c) All the above are steps in the financial planning process as defined by the CFP Board of Standards 12. c) In the case of limited financial planning advice, a statement of advice is doubly 13. c) important as Limited advice entails special mention to avoid legal liability 14. D) A professional financial planner may also provide limited advice Commission is a legitimate form of remuneration for financial planners as described in the text of Module 1 CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 132

15. c) As given in the text (trustworthy). 16. A) As Nominal interest rate = Real interest rate + Inflation rate. 17. A) Hirer is one who hires and lessor is one who leases. Under tax law, ownership changes hands in hiring but not in leasing 18. B) The effective yield is coupon/mkt. Price=Rs. 100/1250=8% 19. c) As the objective is to add value to the client and not impose an unnecessary system of Cash flow planning on him/her 20. B) = Inflation rate/(1-tax rate) = 3/(1-0.4)= 5% 21. c) In fact for more complicated cases, you may even refer them to a tax consultant 22. A) Progressive refers to increasing tax rates with increasing income and regressive refers to decreasing tax rates for increasing income) 23. A) Use the effective interest rate function on your calculator or the formula: ie ff = ((1+i/n)n) – 1where ie ff – effective interest rate i – nominal interest rate n – the 24. A) number of compounding periods 25. D) since you would always act in the interest of the client Find out the present value of all the options and whichever is highest is the best option. 26. D) n=12, i=1% For a)=50,000 b)=53246.95 c)=53398.38 d)= 53489.23 27. A) you would do d) much earlier. 28. D) this is the primary area of work while implementing the plan. 29. D) this is the least relevant 30. E) Bus. Expenses borne by employer are his own concern 31. c) some exposure to equity is requited His life insurance needs (in the unfortunate event that he passes away) for his 32. b) dependants are greatest. Since he has nominal income, in the case of any unfortunate event, his first priority will 33. a) be Protection of income) Try one transaction in each case and see if it meets the ratio. If the first transaction fits, 34. c) the second transaction to be tried) = 180000/50000= 3.6 for 8 years, therefore annualised rate of return = 3.6^(1/8) = 35. a) 1.1736 – 1 = 0.1736, therefore return = 17.36% You need to calculate the discount rate, since PV of asset A and cash flows 36. d) corresponding are given, you can calculate the discount rate to be 10%, at 10%, the 37. c) other to PVs are lower As 72/8=9 38. d) Cash flows are always after tax unless mentioned otherwise) Use the IRR function for the following cash flows -9200, 600, 2300, 2200, 6800, 9500. (1) is true by definition, (2) is true because IRR has already been calculated and IRR is CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 133

39. d) the Discount rate at which NPV is 0 (3) is true because reinvestment at IRR is an 40. d) assumption of IRR. 41. c) By definition 42. a) By definition 43. a) Calculate the Rate of interest for PV=Rs. -4,000, FV=Rs. 4,985 for 7 periods The sum of 28,093.61 and 26768.14 Cost of daughter ’s education is FV of 240000 at 7% for 8 years, investment required is the present value of the cost of education at 11% for 8 periods Mock Test I 1. The first step of the financial planning process is . (1Mark) a. Evaluating the various Alternatives b. Data gathering and goal setting c. Establishing the Client Planner relationship d. Plan Review 2. How many years will it take for a sum of Rs. 10000 to double if the rate of return is 9% p.a.? (2 Mark) a. 9.5 b. 8.5 c. 10 d. 9 e. 8 3. If the post tax rate of return on an investment is 8% and the inflation rate is 5% the real rate of return is (2 Marks) a. 3.5% b. 3.0% c. 2.86% d. -3.0% e. 2.74% CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 134

4. Seema and Arun are co-applicants of a mortgaged house. They are on the verge of a divorce. The Housing Finance Company will . (2 Mark) a. not interfere as long as the EMIs are being paid on time b. repossess the house after divorce c. insist on the house being transferred to one of them d. mediate reconciliation between the couple. e. Increase the interest rate in order to compensate for the increased risk 5. Refinancing is . (2 Marks) a. Borrowing at lower cost in order to pay off higher cost debt b. Repaying debt by selling off assets c. Lending at a higher rate of interest\\ d. Securitizing your receivables e. None of the above 6. For a nominal interest rate of 6% payable monthly, quarterly, and semi-annually, the effective rates Respectively would be . (2 Marks) a. 6.04, 6.02, 6.01 b. 6.16, 6.13, 6.09 c. 6.10, 6.07, 6.03 d. 6.11, 6.08, 6.06 7. Sanjeev invests Rs. 5000 in a Bank Deposit today @ 8% p.a compounded monthly.. He hopes that this investment will enable him to fund his college education (estimated to cost Rs. 9000) which commences after 4 years. What will be the value of this investment in four years? (4 Marks) a. 6802 b. 6870 c. 6878 d. 6925 8. Sudha invests Rs. 5000 per year (at the beginning of each year) for 5 years @ 5% p.a. in a bank deposit. She then withdraws the accumulated sum over a period of 3 equal annual installments. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 135

What is the value of the deposit at the end of 5 years and the quantum of withdrawal each year? (4 Marks) a. 28505, 9954 b. 29010, 10653 c. 29568, 10653 d. 29010, 10042 9. Amar wants to purchase a Car 5 years from now. His investments are currently worth Rs. 50,000/- and he intends to contribute Rs. 10,000/- at the beginning of every six months period to fund his purchase. Assuming that the annual investment rate of return is 8% compounded semiannually, what will be the value of the investment in five years’ time? (4 Marks) a. 1,98,876 b. 1,95,555 c. 1,97,240 10. Neeta wants to accumulate Rs. 1, 50,000 in three years time for a one month trip to the USA. Assuming she can get an 8% annual return on her investments, compounded quarterly, how much must she invest today in order to achieve her goal? (4 Marks) a. 117591 b. 119487 c. 118274 11. John has estimated that the following will be his outgoings over the next few years: (4 Marks) End of Year Cash Outflow 1st Rs.10000 2nd Rs.15000 3rd Rs.12000 4th Rs.13500 5th Rs.11000 If John wants to cater to these cash outflows, how much should he have today, assuming an annual rate of return of 5%? (4 Marks) CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 136

a. 54126 b. 53220 c. 52483 d. 50483 12. Mohan invested Rs. 420000 for 7 years @ 7% where it was compounded annually for the first 5 years and quarterly for the last 2 years. What did he receive on maturity? (4 Marks) a. 676774 b. 776774 c. 931095 d. 609870 SOLUTIONS 1. c. Establishing the Client Planner relationship 2. e. 8 Working Note: Use Rule of 72 i.e. r = 72/n Therefore, n = 8 years 3. c. 2.86% Working Note: Inflation adjusted return: (1+r/1+i).1; Therefore, (1+0.08/1+0.05).1 =2.86% 4. a. Not interfere as long as the EMIs are being paid on time 5. a. Borrowing at lower cost in order to pay off higher cost debt 6. b. 6.16, 6.13, 6.09 Working Note: Use .Future Value. Function to get the rates. For monthly compounding: If PV=Re.1 i=6%/12 n = 1*12 Therefore FV = 1.0616 and therefore rate = 6.16%. Similar calculations for quarterly and semiannual com- pounding. 7. c. 6878 Working Note: Use Future Value Function where PV = Rs.5000; r = 8%/12; n = 48; Therefore, FV=Rs. 6878/- 8. b. 29010, 10653 Working Note: Use Future Value function to get the value of deposit at the end of 5 years.PMT = Rs.5000 i= 5% n = 5 years Future Value = Rs.29010. Then Use PMT Function to find the annual withdrawal where PV = Rs.29010 r = 5% n = 3 therefore PMT = Rs. 10656. 9. a. 1,98,876 CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 137

10. c. Working Note: PV = Rs.50,000 Rate of Return = 8%/2 = 4%; No. of compounding periods 11. b. = 10; Type of Annuity: Immediate; Annuity 12. a. Amount = Rs.10,000;Therefore the Future Value at the end of five years = Rs.1,98,875 118274 Working Note: PV = To be found Rate of Return = 8%/4 = 2%; No. of compounding periods = 12; Future Value at the end of three years = Rs.1, 50,000/-; Therefore the amount to be invested today is Rs. 118273.98 53220 Working Note: We have to find out the Net Present Value of these cash outflows. Using the NPV Formula; The Amount he should have today amounts to Rs. 53220.57 676774 Working Note: Use FV Function; Stage I: PV = Rs. . 420000; r = 7%; n = 5 years; Therefore FV= Rs. 589072; Stage II: PV = Rs. . 589072; I = (7/100)/4; n = 8 quarters; Therefore FV = Rs. 676774 Mock Test II Instructions to candidates A. There are four alternatives for each question B. Tick the answer which you feel is closest to the correct answer c) Each Question carries one mark 1. Mr. X plans to invest Rs. 10,000 today for a period of 4 years. If interest rate is 10% p.a., how much income per year should he receive to recover his investment? a) Rs. 3,155 b) Rs. 2,500 c) Rs. 2,750 d) None of the above 2. An investor expects a perpetual sum of Rs. 50,000 annually from his investment. What is the present value of this perpetuity if interest rate is 10% p.a? a) Rs. 15 lakh b) Rs. 5 lakh c) Rs. 10 lakh d) None of the above 3. The compound value of Rs. 1,000 after two years interest rate being 12% p.a. compounded continuously is a) Rs. 1271 b) Rs. 1254 c) Rs. 1262 d) None of the above CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 138

4. Ten years from now, Mr. X will start receiving a pension of Rs. 3,000 a year. The payment will continue for 16 years. If interest rate is 10%, what is the worth of the premium now? a) Rs. 10,854 b) Rs. 9,954 c) Rs. 8,744 d) None of the above 5. If the NPV of buy alternative is positive and NPV of incremental lease effect is negative, then the asset should be a) leased b) bought c) neither leased nor bought d) (incomplete information) 6. While considering the lease vs. buy decision, the incremental lease cashflow should be discounted at a discount rate which is a) higher than buy alternative b) lower than buy alternative c) same as with buy alternative d) could be any of the above 7. For the rural sector, the refinancing arm is primarily a) RBI b) Regional rural banks c) Commercial banks d) Nabard 8. In hire-purchase, ownership of assets passes on to hirer a) on commencement of the hire-purchase agreement b) on completion of installments c) on cash down payment d) none of the above 9. Entire hire-purchase installment is tax deductible as an expense a) The above statement is true b) The above statement is false c) Only the interest expense is tax deductible d) b) and c) 10. An emergency fund could be kept in the form of a) gold and silver b) Saving bank account All of the above c) Fixed deposits d) 11. Liquidity is needed b) to ensure smooth running of day to day life a) to avail discounts d) all of the above c) to ensure peace of life 12. The yield to maturity of a bond may also be called its CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 139

a) interest rate b) NPV c) IRR d) None of the above 13. Deflation is a) a boon b) good for developing economies c) a phenomenon which has a number of negative aspects d) good for developed economies 14. If a planner does not receive sufficient and relevant information from a client he/she should: a) terminate the relationship b) give restricted (limited) advice c) go ahead but give a disclaimer disclaiming all responsibility d) either a or b 15. 1)Investment experience, 2) Investment time horizon 3)concern for liquidity/flexibility are all examples of qualitative information about a client. a) True b) False c) Only 1) and 3) are examples d) None of them are examples 16. It is best to start a data gathering client interview with a) qualitative details b) client’s finances Quantitative information c) planner’s fees details d) 17. A financial planner should a) confine himself strictly to the client’s brief b) point out all flaws in a client’s financial position that he may notice c) not agree to providing limited or restricted advice d) always provide comprehensive financial planning advice 18. The client questionnaire records quantitative data and record/s qualitative data. a) the planner’s mind b) the same client questionnaire c) file notes d) a separate questionnaire 19. As part of their job, financial planners have to predict future economic indicators which impact clients. a) The above statement is true b) The statement is false c) It is true in cases of economic turmoil CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 140

d) The statement is true for CFPCM Certificants 20. If the long term interest rate sought is 9%, the real rate of interest is 6%, and then inflation is likely a) 2.83% b) 3% c) 4% d) 6% 21. Once a client is ready for implementation of the plan, there is need to prepare a) a letter of engagement b) an Authority to proceed c) an Action plan d) authorization letters 22. A strategic review of a client’ s situation is required in case of a) Macro level changes b) Micro level changes c) Neither d) Both 23. The most appropriate criterion for deciding on the frequency of portfolio reviews of a client is: a) Client profile b) Funds under management c) Fees received from client d) Planner’s discretion 24. A letter of engagement is: a) a legal document b) a requirement of the FPSB rules of professional conduct c) essential for client-planner relationships d) like a memorandum of understanding Mock Examination Answer Sheet 1. A 2. B 3. C 4. B 5. B 6. C 7. D 8. B CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 141

9. B 10. D 11. B 12. C 13. C 14. D 15. C 16 D 17. D 18. B 19. B 20. A 21. A 22. D 23. B 24. D Section-II 1. Your father, to give you a start in life, has promised to give you a gift of Rs. 100,000 when you are 25 years old. You are now 16 years old. a) If your father were to start investing one year from now, how much would he have to put away each year at 8%? b) If your father were to invest a lumpsum one year from now, how much would that be at 8% compounded annually? c) If in the first option, payments are made at the beginning of the year, what would the annual payment be? Answer a. Rs. 8007.97 b. Rs. 50,025 c. Rs. 7414.79 2. One Mr. Babulal Marandi is borrowing Rs. 50,000 to buy a house under a government subsidy scheme. If he pays equal installments for 25 years and 4% interest on the outstanding balance, a) What is the amount of installment? b) What is the amount of installment, if they are to be paid quarterly? Answer a) Rs. 3,200.60 b) Rs. 793.28 CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 142

3. A firm purchases machinery for Rs. 800,000 by making a down payment of Rs. 150,000 and the remainder in equal annual installments of Rs. 150,000 for 6 years. How much is the rate of interest that the firm is paying? Answer Approx. 10% 4. A man who is 75 years old expects to live another 10 years. He has savings of Rs. 80,000 and would not like to think beyond 10 years. Therefore, he wants to exhaust his savings by then. He places the savings in a bank account earning 10% p.a. and plans to start withdrawals one year from now, so that he has zero balance at the end of 10 years. What will be his annual withdrawal? Answer Rs. 13,019.63 5. A housing loan company is offering a flat for Rs. 200,000 with Rs. 40,000 downpayment. The conditions are a 12-year mortgage requiring end of year payments of Rs. 28,593. The loan processing fee of Rs. 5,000 is deducted from the loan amount. What is the interest amount on the loan amount being charged to you? Answer 15% 6. An investment promises to pay Rs. 2,000 at the end of each of the next three years and Rs. 1000 at the end of each of the next 4 years. What is the maximum amount that you will pay for this investment if your required return is 13% p.a. with the amounts being payableat the beginning of the year b) at the end of the year as stated Answer a. Rs. 7665.65 b. Rs. 6783.76 7. You are planning to retire and your employer gives you an option of Rs. 25,000 lifetime annuity or Rs. 200,000 lumpsum payment. You estimate that you will live for another 20 years. If the discount rate is 12% p.a., which option should you choose? Answer The lumpsum payment is favourable. 8. You are given three options to choose from: a) Rs. 80,000 paid now would yield Rs. 14,000 p.a. for the next ten years CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 143

b) Rs. 20,000 paid now would yield Rs. 14,000 p.a. for the next 20 years c) Rs. 20,000 paid now would yield Rs. 14,000 p.a. for the next 15 years. You can earn 8% p.a. from money invested elsewhere in the market. Which option would you choose? Answer Option b) 9. Mr. Ravi Mohan has borrowed Rs. 50,000 for a car loan from his employer. The loan is repayable at an interest rate of 10% p.a. in five years with equal end of the year repayments. What is the annual repayment? Answer Rs. 13189.87 10. If you deposit Rs. 10,000 in an account paying 8% p.a. compounded quarterly and you withdraw Rs. 100 per month. a) How long will the money last? b) How much money will you receive? Answer a. 164.45 b. Rs. 16445 11. You approach a dealer to buy a household appliance for Rs. 10,000 on instalment basis. The dealer says he will charge 13% for four years i.e. Rs. 5,200. The annual payment works out to Rs. 10,000 + Rs. 5,200 = Rs. 15,200/4 = Rs. 3,800. What is the rate of return that the dealer is earning? Answer 19.14% 12. A bank officer informs you that Rs. 2,013 is payable as an annual instalment on a eight year loan of Rs. 10,000. The bank advertises its interest rate as 12%. Is the advertisement correct? Answer Yes 13. An equipment A has a cost of Rs. 75,000 and net cash flow of Rs. 20,000 per year for six years. A substitute equipment B would cost Rs. 50,000 and generate net cash flow of Rs. 14,000 per year for six years. The required rate of return of both equipments is 11%. Calculate the IRR and NPVfor each equipment. Which equipment should be accepted and why? Answer CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 144

Equipment A NPV - Rs. 9,611 IRR - 15.34% Equipment B NPV - Rs. 9,228 IRR - 17.19% Mock Test III Instructions to candidates A. There are four alternatives for each question B. Tick the answer which you feel is closest to the correct answer C Each Question carries the marks indicated 1. The compound value of Rs.1000/- interest rate being 12% p.a. if compounded annually, semi annually and 2monthly for 2 years is 2 a) Rs. 1254, 1262, 1270 b) Rs. 1262 1267, 1270 c) Rs. 1254, 1262, 1268 d) Rs. 1240, 1262, 1270 2. Laxman willstart receiving a pension of Rs.3000/- per year exactly 10 years from now. The payment will continue for 16 years if the interest rate is 10%, the present worth of the pension is 4 a) Rs. 23,472/- b) Rs. 9954/- c) Rs. 48,000/- d) Rs. 33,426/- CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 145

3. A Bank has offered to you an annuity of Rs.1800/- for 10 years. If you invest Rs.12,000/- today the effective rate of return in this case is 4 a) 6.67% b) 8% c) 8.15% d) 8.67% 4. Professionalism implies 1 a) Pride in work c) Dedication to the interest of client b) Commitment to quality e) All of the above d) sincere desire to help 5. A client approaches you for some advice on a technical matter, a CFP Planner is not professionally competent in that area then you will 1 a) go ahead on your own b) refer the client to seek the counsel of qualified professionals. c) Read up on the subject d) Refer him to another CFP 6. Which of the following is not true in relation to preparing oral or written recommendations to clients? 1 a) The client should be placed in a position to comprehend the recommendations. b) The client should be in a position to comprehend the basis for recommendations. c) The nature of investment risk should be explained to the client in terms he is likely to understand. d) Same standards of confidentiality should be maintained to employers as are made to clients. 7. Integrity implies: 1 a) Members shall provide financial planning receives in a fair & irrevocable manner. b) Members shall use high standards of honesty in conducting their financial planning business c) Members shall disclose to their client any limitation on their ability to provide objective financial planning services . d) All of the above 8. Which of the following is not an essential component of a written financial plan: 1 a) Statement of current situation b) Financial Plan summary c) Service, fee and commission etc. d) Projections e) All of the above are essential components. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 146

9. A Financial Plan should be reviewed in the light of 1 a) Micro & Macro level changes. 1 b) Micro but not Macro level changes c) Macro but not Micro level changes d) Generally the financial plans do not require review. 10. The financial planning process involves the following steps: 1. Establishing the relationship 2. Identification of financial problems 3. Review and revision of the plan 4. Data gathering and goal settings. 5. Preparation of written alternatives and recommendations. 6. Implementation of agreed recommendations. Which of the following expression represents the correct order: a) 1, 2, 3, 4, 5, 6 b) 1,4,2,5,6,3 c) 1,2,4,5,6,3 d) 1,4,2,6,5,3 11. When the income of your client drops, health becomes the primary concern and significant savings can provide for financially dependent spouse in the event of his death, his insurance will be 1 a) Accident Cover. b) Critical Illness Protection c) Income Protections d) Property protection a. 1, 2, 3, 4 b. 1,2,4 c. 1, 2, 3 d. 2, 4 12. Jag Mohan wants to pay one-half of the college costs for his daughter, Rina. She will be attending a private college with annual costs of Rs. 20,000 today. Rina is 10 years old and will be starting college in 8 years. If these costs are expected to increase annually by 8%, how much will Mr. Jag Mohan need to provide for her first year of college? 1 a) Rs.18,509 b) Rs.23,409 c) Rs.27,371 d).Rs. 37,019 e) Rs.74,037 13. A client provides a current personal balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following except the 1 a) diversification of the client’s assets. b) size of the client’s net cash flow. c) client’s liquidity position. d). client’s use of debt. CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 147

14. A client recently purchased a new home from a builder for Rs. 150,000 including the plot valued at Rs. 40,000. How much insurance would you recommend that your client purchase to cover full replacement of the house in the event of a loss? 1 a) Rs. 88,000 b) Rs. 110,000 c) Rs. 120,000 d) Rs.150,000 15. The Maheshwaris recently found out that they can reduce their mortgage interest rate from 12% to 8%. The value of homes in their neighborhood has been increasing at the rate of 7.5% annually. If the Maheshwaris were to refinance their house with Rs. 2,000 in closing costs in addition to the mortgage balance (Rs. 120,056) over a period of time to coincide with their chosen retirement age in 22 years, what would the monthly payment be for principal and interest (closing costs are going to be added to the mortgage)? 2 a) Rs. 853.43 b) Rs. 895.60 c) Rs. 945.34 d) Rs. 967.86 e) Rs. 983.99 Answers 1. a 9. a Page 148 2. b 10. b 3. c 11. d 4. e 12. b 5. b 13. a 6. d 14. d 7.b 15. b CFP Level 1 - Module 1 - Personal Financial Management - Workbook

8. e 16. e Mock Test IV TIME VALUE OF MONEY/ YTM 1. An investment of Rs.231 will increase in value to Rs.268 in 3 years. The annual compound growth rate is closest to: a) 3% b) 4% c) 5% d) 6% 2. An investment promises to pay Rs.100 one year from today, Rs.200 two years from today and Rs.300 three years from today. If the required rate of return is 14% compounded annually, the value of this investment today is closest to: a) Rs.404 b) Rs.446 c) Rs.462 d) Rs.516 CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 149

3. An investment has the following stream of annual year-end cash flows: Year-end Cash Flows 1 23 4 -Rs.100 Rs.450 -Rs.200 -Rs.100 If the discount rate is 12%, the present value of this stream of cash flow is: a) -Rs.53.37 b) -Rs.44.65 c) -Rs.33.92 d) -Rs.13.06 Use the following data in answering questions 5 and 6 The annual rate of return for a common stock has been: 2002 2003 2004 2005 14% Return 14% 19% -10% 4. What is the arithmetic mean of the rate of return for the common stock over the four years? a) 8.62% b) 9.25% c) 14.00% d) 14.25% 5. What is the geometric mean of the rate of return for the common stock over the four years? a) 8.62% b) 9.25% c) 14.21% d) It cannot be calculated because of the negative return in 2004. 6. An investor will receive a 5 year annuity of Rs.2500 per year at the best of the year. He will not receive the first payment until three years from today. If the annual interest rate is 8%, the present value of this annuity is closest to: a) Rs.8105 b) Rs.8224 c) Rs.8558 CFP Level 1 - Module 1 - Personal Financial Management - Workbook Page 150