Monday, October 19, 2009

Money Purchase Plan

The Series 65/66 exam may ask a question like the following:

In a "money purchase plan" contributions are
I. discretionary on the part of the employer
II. discretionary on the part of the employee
III. mandatory on the part of the employer
IV. mandatory on the part of the employee

A. I, IV
B. II, IV
C. II, III
D. I, II

EXPLANATION: someone who really knows a lot about retirement plans would probably be unable to answer this question. Since I'm just a test-prep expert, I know how the test question writers think, and I know they want me to say that the money-purchase plan involves a mandatory contribution by the employer, and the employee can also contribute (discretionary). So, I choose "C."
ANSWER: C

If you vehemently disagree with this and can explain why, send me an email walker@passthe65.com.

2 comments:

  1. Hey R Walker, can you explain why would the answer to the following question be C

    In comparing two bonds, each with a 20-year maturity, if one has a low coupon, while the other has a high coupon, you would expect the:
    I)Low coupon bond to have a lower duration
    II)High coupon bond to have a lower duration
    III)Low coupon bond to have greater pricing volatility
    IV)High coupon bond to have greater pricing volatility

    a)I and III only
    B)I and IV only
    C)II and III only
    D)II and IV only

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  2. Duration is a number measuring interest-rate risk/volatility. The higher the number, the more volatile/risky it is to hold the bond. The slower you get your money back on the bond, the riskier it is to hold it. If it pays a low coupon rate, that's bad. You paid $1,000. If you're only getting 2%, that's only $20 per year, a very small percentage of the $1,000 you put down. If you were getting 10%, on the other hand, that would be $100 per year, which is a pretty big part of the $1,000 you put down. The lower coupon has a higher duration; the higher coupon bond has a lower duration. I have a post on duration that uses the actual formula. See if that helps.

    ReplyDelete