4368 Finance Professional Financial Planning Final Exam Spring 2005
1. Discuss the major benefits administered by the Social Security Administration. 2. Briefly discuss who is eligible for Social Security benefits. 3. You receive your Social Security Statement which estimates your benefits as follows: At age 62 Full retirement (66 & 2 months) Age 70 $1,435 a month $1,994 a month $2,630 a month
a. Assume you are currently 62 and your life expectancy is 85. Ignoring inflation and any possible change in the amounts above, if your opportunity cost is 4% which option should you select? b. What impact would a longer life expectancy have on your decision? c. What impact would a higher discount rate have on your decision? 4. Ms. Williams has a portfolio with a beta of 1.5 that earned 12 percent during the current year. The market (S&P 500) earned 10 percent over the same period. The risk-free rate of return was 5 percent. Use the Treynor index to determine if Ms. Williams portfolio outperformed the market on a risk-adjusted basis. 5. Consider the following two mutual funds: Fund A B Load Operating Expenses 12b-1 Fee 5% front 0.75% 25 basis points 5% declining 0.40% 100 basis points redemption fee* * 5% redemption within first year; 4% in second year; 3% in third year; 2% in fourth year; 1% within fifth year; none after 5 years Assuming both funds are in the same risk class and both funds earn 10% per year before expenses, which is fund best the best choice if: a. The fund is held for 1 year b. The fund is held for 5 years c. The fund is held for 15 years 6. Discuss the financial planner's role with respect to their client's investment portfolio. Be thorough.
7. With respect to employer sponsored benefit plans, a. Compare and contrast a defined benefit plan and a defined contribution plan, including advantages, disadvantages and risks. b. What is the difference between a contributory and noncontributory plan? c. What is a Keogh plan? 8. George, age 52, wants to retire at age 62. He currently makes $150,000 per year. He has an objective to replace 80% of his pre-retirement income. He wants the retirement income to be inflation adjusted. George has an investment portfolio valued at $600,000, which is expected to earn 8% average annual returns. George expects inflation to average 2.75 pe...