Series6 Latest Exam Braindumps
Question 5: Your nephew has asked you to help him formulate a financial plan for his family. Scott is 27years old and
has been employed as an associate with a law firm for two years. Sarah, his wife, is 26 years old and
works in the human resources department of a large corporation. The couple is childless now, but
they
plan to begin a family in a few years. Together, they have accumulated $10,000 in a savings account
and
recently inherited $40,000 cash. They expect to be able to start saving at least $5,000 annually since
their
incomes more than meet their current needs. They each have employer-provided health insurance
and
retirement plans. Both have excellent upward mobility potential in their careers. They currently pay
taxes
at the marginal rate of 15%. Scott tells you that although they regularly read some of the more
popular
financial investment magazines, neither feels particularly knowledgeable about the world of
investments.
Based on this information, which of the following statements is true?
A. A greater than average percentage of their money should be invested in money market mutual
funds to
meet their needs for liquidity.
B. A greater than average percentage of their money should be invested in municipal bonds to
minimize
their currently high tax bill.
C. Although some money should be allocated to bond funds for diversification purposes, bond funds
should be underweighted in favor of stock funds.
D. Purchasing power risk is not an issue in their situation.
Correct Answer: C
Explanation: Given that Scott and Sarah already have a nice nest egg started at their relatively young
ages and are expecting to be able to contribute more to it, with no obvious need for current income,
some
of their money should be allocated to bond funds for diversification purposes, but bond funds should
be
underweighted in favor of stock funds. Purchasing power risk is an issue for them, and bond funds do
not
provide the inflation hedge that stock funds do. At the current time, municipal bond funds should not
be
selected since they pay taxes at a low marginal tax rate. This allocation may need to be changed
down
the road a bit as their tax rate (and other circumstances) change. Only a minimal amount of money
should
be allocated to a money market fund since the couple has no need for current income, and money
market
funds offer low returns.
