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

• Question 1491:

  If you are going to invest in a closed-end mutual fund and were told that the net asset value of the fund is $11.20, and the share price was $11.80. What is the discount you would receive or the premium that you would pay?

  A. -0.0508.

  B. 0.0508.

  C. 0.0536.

  D. -0.0536.

  Correct Answer: C

  (SP-NAV)/NAV= (11.80-11.20)/11.20=0.05357

• Question 1492:

  An individual investor approaches you and asks, "If I were to purchase a fund with a load of 6 percent, and I used $6,200 to purchase the fund, what dollar amount would the shares purchased be?"

  A. $6,200.

  B. $5,828.

  C. $6,572.

  D. $372.

  Correct Answer: B

  6,200 x .94 = 5,828

• Question 1493:

  The buyer of a call option has the:

  A. obligation to sell the underlying asset in the future under certain conditions.

  B. right to sell the underlying asset in the future under certain conditions.

  C. obligation to buy the underlying asset in the future under certain conditions.

  D. right to buy the underlying asset in the future under certain conditions.

  Correct Answer: D

• Question 1494:

  A real estate analysis estimates the market value of an income-producing property at $2,560,000. The annual gross potential rental income is $596,000, the annual property operating expanses and taxes are $178,800, and the annual vacancy and collection losses are $89,400. What capitalization rate was used by the analysis to assess the property at $2,560,000.

  A. 0.128.

  B. 0.1275.

  C. 0.129.

  D. 0.127.

  Correct Answer: A

  

• Question 1495:

  If a bond has a modified duration of 7 and convexity of 100 and interest rates fall 1 percent, what will happen to the price of the bond?

  A. Fall 7.5%.

  B. Rise 6.5%.

  C. Rise 7.5%.

  D. Fall 6.5%.

  Correct Answer: C

  V = -(7) (.01) + 1/2 (100) (.01)2.

• Question 1496:

  Calculating the price change in a bond caused by a 1 percent decline in interest rates using only the modified duration equation will always result in an answer that is:

  A. too high.

  B. just right.

  C. too low.

  D. insignificant.

  Correct Answer: C

• Question 1497:

  Which of the following statements regarding daily cash settlement before contract maturity is TRUE?

  A. A futures contract requires daily cash settlement, and a forward contract does not require daily cash settlement.

  B. Neither a futures contract nor a forward contract requires cash settlement before contract maturity.

  C. A forward contract requires cash settlement and a futures contract does not require cash settlement.

  D. Both a futures contract and a forward contract require cash settlement before contract maturity.

  Correct Answer: A

• Question 1498:

  Which of the following statements about the positions of the clearinghouse is CORRECT? The clearinghouse:

  A. takes no position.

  B. only takes short position to buyers.

  C. only takes long positions to sellers.

  D. takes short positions to buyers and long positions to sellers.

  Correct Answer: D

• Question 1499:

  An investor buys a 15-year, 10 percent annual pay coupon bond for $1,000. He plans to hold the bond for

  5 years while reinvesting the coupons at 12 percent. At the end of the 5-year period he feels he can sell

  the bond to yield 9 percent.

  What is the expected realized (horizon) yield?

  A. 10.0%.

  B. 11.8%.

  C. 11.2%.

  D. 12.2%.

  Correct Answer: C

  The key to this problem is to find all future cash flows. N = 5, I/Y = 12, PMT = 100, PV = 0CPT FV = 635.28 = VALUE OF COUPONSN = 10, I/Y = 9, PMT = 100, FV= 1000CPT PV = 1,064.18 = VALUE OF BOND 5 YEARS OUT Realized Return = Question-LI-SS14-LOS1A-a-answer-1

  

  

• Question 1500:

  All other things being equal, which one of the following bonds has the greatest duration?

  A. 15-year, 8% coupon bond.

  B. 5-year, 8% coupon bond.

  C. 15-year, 12% coupon bond.

  D. 5-year, 12% coupon bond.

  Correct Answer: A

  If bonds are identical except for maturity and coupon, the one with the longest maturity and lowest coupon will have the greatest duration. The rationale for this is similar to that for price volatility. 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 relationship of maturity to duration is direct - the longer the time to maturity, the greater the duration. A longer-term bond pays its cash flows later than a shorter-term bond, increasing the duration. Here, one of the 15-year bonds will have the greatest duration. The relationship of coupon to duration is indirect - the lower the coupon rate, the greater the duration. A lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration. Here, the 15-year bond with the lowest coupon (8.00%) will have the greatest duration.