2. Financial Planning Skills - Tutorial 2 Chapter 3...

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Tutorial 2 Chapter 3 - Financial Planning Skills True/false and Discuss Q1. With the current availability of computer packages, it is now not necessary for financial planners to explain to clients the basis on which their advice is determined. Q2. The risk-adjusted rate of return provided on an investment illustrates the operation of the opportunity costs concept. Q3. An investment returning $800 after 5 years at a discount rate of 9% p.a. is likely to produce a greater present value than the present value of an investment with the same maturity value after 6 years at 6% p.a. Q4. It is possible for an investment to be classified as an annuity where payments commence either at the start or end of a given period. Q5. For a given investment, the nominal interest rate increases with the number of compounding periods per annum. Q6. For a given maturity value and nominal interest rate, an investor will be required to make a relatively greater initial investment where there are a relatively greater number of compounding periods per annum. Q7. When selecting between alternative investments, a particular investment would generally be preferred if it provided the investor with a relatively higher effective interest rate even if the nominal interest rate was the same for each investment. Q8. The effective interest rate will always be greater than the calculated nominal interest rate on a given investment. Q9. The variance is equal to the square root of the standard deviation. Q10. The preferred manner in establishing a client’s risk profile for a financial adviser is via the completion of an appropriately designed client fact finder or questionnaire. Multiple-choice questions Q1. A rational response in relation to an investment involving time preference for money issues is to prefer to receive a given sum of money earlier rather than later because of which of the following factors: 1
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1. there is a greater chance that the entity promising you the money may not fulfill the promise the longer the waiting period 2. the earlier the money is received the earlier the ability to reinvest and earn a rate of return on such funds 3. the earlier the money is received the earlier the ability to use the funds for current consumption 4. all of the above Q2. The time preference for money concept is directly related to the preference of: i. receiving a specified sum of money today rather than at some future time when such choice is available B. receiving a specified sum of money at some future time rather than today when such choice is available C. paying a specified sum of money at some future time rather than today when such choice is available D. both A and C
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