CFP Practice Exam

Passing the CFP Exam is the most challenging step in obtaining your Certified Financial Planner designation. Topics on the test include general principles, insurance planning, employee benefits planning, investment planning, income tax planning, retirement planning, and estate planning. Try these free CFP practice questions to help you with your test prep. Good luck with your certification!


CFP Exam Questions

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Question 1
XYZ stock has a Beta of -2. If the market were to go up by 2%, what change in price would you expect from XYZ?

A
Increase of 2%.
B
Increase of 8%.
C
Decrease of 2%.
D
Decrease of 4%.
Question 1 Explanation: 
A stock with a beta of 2 will change (on average) by twice the magnitude of the overall market. Since the beta is negative, this change will be in the opposite direction of the market.
Question 2
These are negotiable certificates issued by U.S. banks and traded on U.S. exchanges. The certificates represent a specific number of shares of a foreign stock.

A
European Mutual Funds.
B
International Fixed Annuities.
C
Foreign Deposit Trusts.
D
American Depositary Receipts.
Question 2 Explanation: 
American Depositary Receipts are better known as ADRs. They are designed to make it easier for Americans to invest in foreign companies. They are priced in U.S. dollars, pay dividends in U.S. dollars, and can be traded like any other shares on the U.S. stock exchanges.
Question 3
Subtracting the risk-free rate of return from the expected return of a stock will give you the:

A
Risk Premium.
B
Beta.
C
Reward-to-Risk Ratio.
D
Capital Gains.
Question 3 Explanation: 
In the Capital Asset Pricing Model, the individual risk premium equals the market premium times beta.
Question 4
Which of the following is NOT a qualifying event that allows for continuing health care coverage under COBRA?

A
The employer goes out of business.
B
The covered employee dies.
C
The employee loses eligibility for coverage due to involuntary termination.
D
A divorce terminates the eligibility for coverage of a spouse.
Question 4 Explanation: 
COBRA does not apply when an employer terminates the health plan altogether or if the employer goes out of business.
Question 5
Jim's mother purchased 3,000 shares of ABC stock 15 years ago for $22,000. When his mother died, Jim inherited the stock. The day she died the stock was worth $35,000. Two years later, Jim sold the stock for $30,000. What are the tax consequences for Jim?

A
He will have a gain of $30,000.
B
He will have a loss of $5,000.
C
He will have a gain of $8,000.
D
He will not need to show anything about this stock sale on his tax filings.
Question 5 Explanation: 
The stock's basis is stepped up to the date-of-death value.
Question 6
If Wanda rents out her vacation home, the rental income is not taxable unless the home is rented out for more than ___ days in a year.

A
Zero
B
7
C
14
D
21
Question 6 Explanation: 
As long as the home is not rented out for more than 14 days, then the income is not taxable. And no deductions will be allowed for expenses or depreciation.
Question 7
Money purchase plans have which of the following characteristics?

A
They are a type of defined-benefit plan.
B
The employer can vary their contributions based on profitability.
C
The employer contributions are not tax deductible.
D
The employer is required to make a contribution to the plan each year.
Question 7 Explanation: 
Money Purchase Plans require the employer to contribute a fixed percentage of compensation to each eligible employee on an annual basis. They are a type of defined contribution plan, and the contributions are tax deductible to the employer.
Question 8
This is a retirement savings plan available for employees of educational institutions, ministers, and certain non-profit organizations.

A
457 Plan.
B
403b Plan.
C
401k Plan.
D
529 Plan.
Question 8 Explanation: 
The 403b plan was established by the federal government in 1958 in order to encourage employees in these particular tax-exempt organizations to save for retirement. These plans are similar to 401k plans.
Question 9
What are the consequences of a wash sale?

A
Prosecution by the IRS.
B
Basis adjustment and holding period adjustment.
C
Sale is cancelled retroactively.
D
Increased margin requirements.
Question 9 Explanation: 
With a wash sale you cannot claim a loss. This disallowed loss is added to the basis of the new stock you purchased. And the holding period for the new stock is adjusted to include the holding period of the stock that was sold.
Question 10
Under social security, what is the full retirement age for someone born between 1943 and 1954?

A
62
B
64
C
66
D
67
Question 10 Explanation: 
Full retirement age varies from 65 to 67 based upon the year you are born.
Question 11
Your client makes a $25,000 investment that is earning 9% per year. Using the rule of 72, how many years will it take for the investment to be worth $100,000?

A
14
B
16
C
20
D
32
Question 11 Explanation: 
With the rule of 72, the number 72 is divided by the interest per year to get the approximate number of years required for doubling. In this case 72/9=8, so it will double to $50,000 in 8 years and double again to $100,000 in 16 years.
Question 12
What is the name for a dividend that meets the necessary criteria to be taxed at the long-term capital gains tax rate, rather than at the higher tax rate used for ordinary income?

A
Qualified dividend.
B
Liquidating dividend.
C
Ordinary dividend.
D
Stock dividend.
Question 12 Explanation: 
There several criteria for a dividend to be qualified, including a distribution date between 1/1/03 and 12/31/12.
Question 13
Which of the following would be NOT be included in the probate estate?

A
A farm owned as community property.
B
A car owned by the decedent.
C
Salary due to the deceased.
D
A Keogh Plan with a named beneficiary.
Question 13 Explanation: 
Retirement plans that are payable to a designated beneficiary do not go to probate.
Question 14
Which of these is a bearish strategy?

A
Buying call options.
B
Buying put options.
C
Selling put options.
D
Buying straddles.
Question 14 Explanation: 
Buying calls and selling puts are bullish strategies. Buying puts is a bearish strategy. Buying a straddle is a neutral strategy.
Question 15
Which of these is NOT one of the requirements that must be met in order to qualify as an S corporation?

A
Must be a domestic corporation.
B
Shareholders must be individuals, estates, certain exempt organizations, or certain trusts.
C
Must have more than 100 shareholders.
D
Must have one class of stock.
Question 15 Explanation: 
S corporations cannot have more than 100 shareholders.
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CFP Exam:

The CFP exam is 10 hours long, and all questions are multiple choice format. It is divided into 3 sessions, and each session has a series of CFP exam questions along with a lengthy case study. The first session is always on a Friday, and is 4 hours long. Then there are two session on Saturday that are each 3 hours long.

The CFP test is administered by the Certified Financial Planner Board of Standards. Due to the number of questions and the broad range of topics, your CFP exam prep will require many hours of studying. Practice questions are great for test prep, so be sure to work through as many CFP sample questions as possible.