Old Finance Test

Education Planning - Savings Techniques: Questions with Rationales

1. Charles is planning to make a single-sum investment to fund his son’s college education that will begin 10 years from now. As his financial planner, you suggest the purchase of a zero-coupon bond returning 8% per year, with a maturity date to match the college entry date. Charles figures he will need $100,000 to properly fund his son’s 4-year college education. What should be the purchase price of the bond?

A. $12,500

B. $46,319

C. $46,651

D. $92,000

This is a time value of money problem in which you must solve for the present value of a single sum. The correct answer is $46,319, with keystrokes on the HP 10BII as follows: 100000 FV; 8 I/YR; 10 N; solve for PV = 46319.35.

2. All of the following are relevant considerations in establishing a college education savings program EXCEPT

A. the use of a defined benefit plan for college expenses

B. in whose name assets should be titled

C. the provisions of federal gift tax laws

D. the rate of inflation for college costs

Distributions from retirement IRAs may be made without the imposition of a tax penalty if used in payment of college education expenses. However, this provision does not apply for corporate retirement plans. The other considerations are all important when funding a college education.

3. Which of the following statements describing a provision of a Coverdell Education Savings Account (ESA) as used in the education funding process during 2010 is CORRECT?

A. The beneficiary may accept annual contributions of $2,000 each from multiple contributors.

B. Any balance remaining in the account must be distributed when the child graduates from college.

C. Qualified withdrawals for higher education expenses are taxed at the student’s income tax rate rather than the parents’ rate.

D. The annual contribution limit for a single beneficiary...