The Certified Financial Planner (CFP) certification examination has been created to evaluate the skills candidates have with using their knowledge in financial planning with everyday circumstances. It is taken in pursuit of certification. When candidates are successful on the test, it demonstrates that they have enough expertise to work in this field. Candidates must meet specific academic, work and ethics guidelines before being certified. The academic work must be complete before taking the test.
- Concise information or a situation is given, and then the candidate must answer the question based on the data provided. These are valued at two points per item.
- Lengthier information or a longer scenario is provided, and then the candidate completes 10-20 pertinent items.These are valued at three points per item. For each item, candidates will need to put their knowledge, understanding, scrutiny and ability to put things together, and assessment skills into action. Candidates will be required to demonstrate an ability to think critically and solve problems.
The content of the test is broken down as follows:
- General principles of financial planning – 11%
- Insurance planning and risk management – 14%
- Employee benefits planning – 8%
- Investment planning – 19%
- Income tax planning – 14%
- Retirement planning – 19%
- Estate planning – 15%
Candidates will need to bring at least one (or more, if needed) battery-operated, hand-held financial function calculator to the exam. This tool needs to have an internal rate of return (IRR) function so that unequal periodic cash flows can be calculated. The calculator cannot have alphabetic keyboards or any ability to print out information. All information has to be cleared out of the calculator’s memory before the testing session starts. Candidates cannot use any programming on the calculator while the exam is in process.
Since the score depends on the number of items answered correctly, it is better to try to answer every question rather than leaving one blank. The outcome will be either pass or fail based on a scaled score, which is found with a modified Angoff technique.
CFP Test Practice Questions
1. Thomas is purchasing his first home for $200,000 and plans to make a 15% down payment. The lender qualifies for a 30-year fixed rate loan on the remaining amount at 4.99%. Thomas wants to escrow the amount needed for property tax and insurance, which he believes will be around $5,000 annually. What amount of Thomas’ monthly payments will be made to principal and interest of the loan?
2. Scott purchases 125 shares of QAZ stock in February at $80 per share. QAZ pays a quarterly dividend of $1.19 per share, which he receives for three quarters until he sells his shares at $89 each Scott’s holding period return is…
3. American Incorporated wants to be viewed as a stable and mature company within its industry and is concerned about having a low Price to Earnings (P/E) ratio. Which of the following would increase the company’s P/E?
A. If the company sold more shares of common stock
B. If the company repurchased outstanding stock
C. A lower market price per share
D. A 2:1 stock split
4. Andrea is debating between purchasing a taxable bond yielding 6% or a municipal bond yielding 4.2%. She is in the 28% federal tax bracket and 6% state tax bracket. The municipal bond is exempt from federal and state taxes. What is the municipal bond’s taxable equivalent yield based on this information?
5. A Detroit Motors Dec call has a strike price of $45. Detroit Motors is currently trading at $50 per share and there are 1,200,000 shares outstanding. The premium on the call is $5.50. The fundamental value of the call is…
CFP Test Review Recession and Economic Stagnation
1. C: $911.56. The home costs $200,000 and Thomas plans to make a 15% down payment of $30,000. Thus, the PV of the original loan is $170,000. N = 360, I = .41583, and FV = 0. Therefore, his monthly payments of principal and interest are $911.56. While he may escrow additional funds to provide for property tax and insurance, these funds are not attributable to the payment of principal and interest on the loan.
2. A: 15.71%. Holding Period Return is calculated as: Current income + capital gain (or loss) / beginning investment value. Scott purchased 125 shares at $80 per share, giving him an initial investment value of $10,000. He receives 3 quarterly dividends of $1.19 per share, or $446.25. He then sells the shares for a gain of $1,125. Thus, Scott’s holding period return is $446.25 + $1,125 / $10,000 = 15.71%. HPR is an appropriate return measure for periods of one year or less.
3. B: If the company repurchased outstanding stock. The price to earnings (P/E) ratio is market value per share / earnings per share (EPS). Repurchasing outstanding shares takes them out of market circulation, thus affecting an increase in the company’s EPS. A higher EPS will result in a higher P/E ratio. If the company sold more shares of common stock, this would have the opposite effect and dilute the company’s EPS. A lower market price would result in a lower number in the numerator and would decrease the P/E. A company’s EPS should be adjusted for stock splits as to not affect the company’s P/E.
4. A: 8.84%. The taxable equivalent yield for a municipal bond which is exempt from state and federal tax is: Municipal bond yield / [(1 – (federal + state tax rate (1- federal tax rate))]. For Andrea’s municipal bond, the taxable equivalent yield is = 4.2% / [1- (34) (.72)] = 8.84%. Based on this information, the taxable bond would have to yield 8.84% return to match the after-tax return of the municipal tax-free bond.
5. B: $500. The fundamental value of a call is: (market price of the underlying stock – the strike price of the call) * 100. For Detroit Motors, the fundamental value of the call is ($50 – $45) * 100 = $500. Neither the premium price nor the number of shares outstanding affects the fundamental value of a call or put.