CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 1461:

  A mutual fund has a load of 4 percent and a net asset value (NAV) of $20 per share. What must an investor pay to purchase 250 shares?

  A. $5,200.

  B. $4,800.

  C. $5,013.

  D. $5,208.

  Correct Answer: D

  

• Question 1462:

  Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond- yield-plusrisk-premium method to find k(s) (component cost of retained earnings). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Rollins' cost of preferred stock?

  A. 12.6%

  B. 13.2%

  C. 11.0%

  D. 12.0%

  E. 10.0%

  Correct Answer: A

  K(ps) (cost of preferred stock) = $12/$100 (0.95) = 12.6%.

• Question 1463:

  A trader has a long position in a wheat contract.

  What is the price at which the trader will receive a maintenance margin call?

  A. $1.90.

  B. $2.05.

  C. $2.25.

  D. $1.75.

  Correct Answer: D

  The trader would have to lose $1,250 or 5,000-3,750 before they get a margin call. 5,000(2.00-P) = 1,250. P = $1.75.

• Question 1464:

  Which of the following statements is TRUE about the profits and losses from buying a put:

  A. potential losses are limited to the initial premium the buyer pays when he buys the put.

  B. potential profits are theoretically unlimited.

  C. potential losses are theoretically unlimited.

  D. none of these choices are correct.

  Correct Answer: A

• Question 1465:

  XYZ company has entered into a "plain-vanilla" interest rate swap on $1,000,000 notional principal. XYZ company pays a fixed rate of 8 percent on payments that occur at 90-day intervals. Six payments remain with the next one due in exactly 90 days. On the other side of the swap, XYZ company receives payments based on the LIBOR rate. Describe the transaction between XYZ company and the dealer at the end of the sixth period if the appropriate LIBOR rate is 5 percent.

  A. XYZ company receives $12,500.

  B. Dealer pays XYZ company $7,500.

  C. Dealer receives $20,000.

  D. XYZ company pays dealer $7,500.

  Correct Answer: D

  XYZ company owes the dealer ($1,000,000)(.08)(90/360) = $20,000. The dealer owes XYZ company ($1,000,000)(.05)(90/360) = $12,500. Net: XYZ company pays the dealer $7,500.

• Question 1466:

  What is the bond's yield to call (YTC)?

  A. 10.05%.

  B. 9.26%.

  C. 10.34%.

  D. 10.55%.

  Correct Answer: A

  N = 8, PMT = 120, PV = -1150, FV = 1100, CPT I/Y.

• Question 1467:

  What is the bond's yield to maturity (YTM)?

  A. 9.26%.

  B. 10.34%.

  C. 10.05%.

  D. 10.55%.

  Correct Answer: B

  N = 28, PMT = 120, PV = -1150, FV = 1000, CPT I/Y.

• Question 1468:

  What rate should be used to estimate the potential return on this bond?

  A. the YTM.

  B. 12.00%.

  C. 10.34%.

  D. the YTC.

  Correct Answer: D

• Question 1469:

  An investor buys a 25-year, 10 percent annual pay bond for $900 planning to sell the bond in 5 years when he estimates yields will be 9 percent. What is the estimate of the future price of this bond?

  A. $964.

  B. $1,000.

  C. $1,122.

  D. $1,091.

  Correct Answer: D

  This is a Present Value problem 5 years in the future. Input into your calculator:

  N = 20, PMT = 100, FV = 1000, I/Y = 9CPT PV = 1,091.28The $900 purchase price is a distracter for this

  problem.

• Question 1470:

  Duration of a bond normally increases with an increase in:

  A. time to maturity.

  B. coupon rate.

  C. yield to maturity.

  D. par value.

  Correct Answer: A

  Duration is directly related to maturity and inversely related to the coupon rate and yield to maturity (YTM). Duration is approximately equal to the point in years where the investor receives half of the present value of the bond's cash flows. Therefore, the later the cash flows are received, the greater the duration. The longer the time to maturity, the greater the duration (and vice versa). A longer-term bond pays its cash flows later than a shorter-term bond, increasing the duration. The lower the coupon rate, the greater the duration (and vice versa). A lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration. The lower the YTM, the higher the duration. This is because the bond's price (or present value) is inversely related to interest rates. When market yields fall, the value (or cash flow) of a bond increases without increasing the time to maturity.

  Consider the purchase of an existing bond selling for $1,150. This bond has 28 years to maturity, pays a 12 percent annual coupon, and is callable in 8 years for $1,100.