Sample Questions
Question 1
Easy
Human capital in the context of wealth management is best defined as:
Solution
C is correct.
Human capital is the economic concept representing the present value of all expected future earnings from an individual's labor over their remaining working years. For younger workers, human capital is typically their largest asset, often exceeding their financial capital (investment portfolio). As an individual ages and accumulates financial assets while approaching retirement, human capital declines and financial capital grows.
Human capital is the economic concept representing the present value of all expected future earnings from an individual's labor over their remaining working years. For younger workers, human capital is typically their largest asset, often exceeding their financial capital (investment portfolio). As an individual ages and accumulates financial assets while approaching retirement, human capital declines and financial capital grows.
Question 2
Medium
Using Exhibit 2, the relative value of gifting assets to Mirela today rather than bequeathing them in 12 years is closest to:
Solution
C is correct. The gift falls within the unused lifetime allowance, so no gift tax is paid, and the gifted assets then compound at Mirela's after-tax rate. The bequest compounds at the parents' after-tax rate and is reduced by the 40% transfer tax at death. With , the relative value of the tax-free gift is
Gifting today leaves Mirela with about 79% more after-tax wealth in 12 years than the equivalent bequest. Most of the advantage comes from escaping the 40% death tax; the higher after-tax compounding in her hands adds the remainder.
Gifting today leaves Mirela with about 79% more after-tax wealth in 12 years than the equivalent bequest. Most of the advantage comes from escaping the 40% death tax; the higher after-tax compounding in her hands adds the remainder.
Question 3
Hard
Using Exhibit 2, the money's worth ratio of the annuity quoted to Ngozi is closest to:
Solution
A is correct. The money's worth ratio divides the expected present value of the annuity's payments by the premium paid, with each payment weighted by the probability that the annuitant survives to receive it and then discounted:
The ratio below 1.00 reflects the insurer's loading for expenses, capital, and profit, so Ngozi receives about $0.95 of expected present value for each $1.00 of premium.
The ratio below 1.00 reflects the insurer's loading for expenses, capital, and profit, so Ngozi receives about $0.95 of expected present value for each $1.00 of premium.
