Free CFP Practice Exam

1. Question 1

   An executor wants to elect the alternate valuation date six months after death because estate assets declined in value. The decline would reduce the gross estate, but the estate owes no federal estate tax either way. May the executor make the election?

   • A.Yes; a decline in the gross estate permits the election whatever the effect on the resulting tax.
   • B.Yes; the election is granted automatically when the estate files an extension of time to file.
   • C.No; the election is limited to estates that include closely held business interests or farmland.
   • D.No; the election is available only if it reduces both the value of the gross estate and the estate tax liability.
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   Correct answer: D. No; the election is available only if it reduces both the value of the gross estate and the estate tax liability.

   Alternate valuation under IRC 2032 may be elected only if it reduces both the gross estate and the federal estate tax. If no tax is owed, the election cannot reduce it and is unavailable.

   • AA. Estate value falling alone does not suffice; tax must also be reduced.
   • BB. The extension is separate and does not authorize the alternate valuation election.
   • CC. The election is available to any estate that meets the reduction tests.
   • DD. IRC 2032(c) requires a decrease in both the gross estate and the estate tax due.

   • Source: 26 U.S.C. § 2032
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2. Question 2

   Why is understanding the client's personal and financial circumstances (Step 1) considered foundational to the remaining steps of the financial planning process?

   • A.It is used primarily to calculate the CFP professional's fee and to document the scope of the engagement for billing purposes
   • B.It is mainly a regulatory recordkeeping step, and the analysis and recommendations rely chiefly on the client's stated goals and market forecasts
   • C.It provides the factual and contextual basis needed to identify realistic goals, analyze alternatives, and develop suitable recommendations
   • D.It allows the planner to skip ongoing monitoring later in the process, since the client's circumstances are fully captured at the outset
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   Correct answer: C. It provides the factual and contextual basis needed to identify realistic goals, analyze alternatives, and develop suitable recommendations

   Accurate, complete data about the client's circumstances underpins every later step: goals must be realistic given the client's actual resources, alternatives must be analyzed against real constraints, and recommendations must be suitable for the client's true situation. It is not merely a fee calculation or a recordkeeping formality, and it in no way substitutes for the ongoing monitoring performed in Step 7.

   • AA. Data gathering in Step 1 serves far more than fee calculation and billing documentation; it underpins the entire planning process.
   • BB. Step 1 information directly feeds the analysis and recommendations that follow; they depend on the client's actual circumstances, not just stated goals and forecasts.
   • CC. Correct. Understanding the client's personal and financial circumstances supplies the factual basis needed to set realistic goals, evaluate alternatives, and develop suitable recommendations in later steps.
   • DD. Gathering information at the outset doesn't remove the separate, ongoing need for monitoring in Step 7, because circumstances change over time.

   • Source: CFP Board: Understanding the client's personal and financial circumstances
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3. Question 3

   Bond A is a 10-year zero-coupon bond. Bond B is a 10-year bond with a 6% annual coupon. Both have the same yield to maturity. Which statement about their Macaulay durations is correct?

   • A.Bond A and Bond B have the same duration because they have the same maturity
   • B.Bond B's duration is longer than Bond A's because it pays periodic coupons
   • C.Bond A's duration equals its 10-year maturity, while Bond B's duration is less than 10 years
   • D.Duration cannot be compared between a zero-coupon bond and a coupon bond
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   Correct answer: C. Bond A's duration equals its 10-year maturity, while Bond B's duration is less than 10 years

   For a zero-coupon bond, Macaulay duration equals its time to maturity exactly, because its only cash flow occurs at maturity. A coupon-paying bond returns cash flow before maturity (the coupons), which pulls its weighted-average time of cash flows earlier than its stated maturity, so its duration is always less than its maturity, and less than an equal-maturity zero-coupon bond's duration.

   • AA. Incorrect - equal maturity doesn't imply equal duration when one bond pays coupons and the other doesn't.
   • BB. Incorrect - reverses the relationship; coupon payments shorten, not lengthen, duration relative to a zero-coupon bond of equal maturity.
   • CC. Correct - zero-coupon duration equals maturity; coupon bond duration is shorter than its maturity.
   • DD. Incorrect - duration is directly comparable across bond types; that comparison is exactly what this concept tests.

   • Source: Exam outline: CFP Board Principal Knowledge Topics (2021 practice analysis)
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