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

• Question 1571:

  David Bateman is contemplating the purchase of a shopping center. The average annual after tax cash flow for the next ten years is expected to be $30,000. The property cost $750,000. Bateman will put down 25 percent and borrow the rest. In ten years, the property will be sold netting $350,000 after taxes. What is the approximate yield on the shopping center?

  A. 21.35.

  B. 17.2%.

  C. 12.3%.

  D. 14.8%.

  Correct Answer: B

  Explanation:[30000 + (350,000-187,500)/10] / [(187500 + 350000) /2]

• Question 1572:

  Which of the following statements about investment companies is false?

  A. The 12b-1 plan allows funds to deduct up to 1.25% of average assets per year to cover marketing expenses.

  B. Closed end investment companies trade at the net asset value of the shares.

  C. The fund's net asset value is the prevailing market value of all the fund's assets divided by the number of fund shares outstanding.

  D. The typical management fees charged to compensate the Management Company for the expense of running the fund are between ?and 1% of the fund's net asset value.

  Correct Answer: B

  Explanation:Closed end funds sell for whatever people will pay for them. CE funds typically sell at premiums or discounts from their NAV.

• Question 1573:

  A bond has a modified duration of 6 and a convexity of 62.5. What happens to the bond's price if interest rates rise 25 basis points?

  A. it goes up 1.46%

  B. it goes down 1.46%

  C. it goes up 4%

  D. it goes down 15%

  Correct Answer: B

  Explanation:P/P = (-)(MD)(i) + (C)P/P = (-)(6)(+.0025) + (62.5)=- .015 + .00039 = - .01461

• Question 1574:

  Which theory about the term structure of interest rates is correct?

  A. The expectations hypothesis indicates that investors have varying opinions about future interest rates.

  B. The liquidity premium hypothesis assumes investors will give up yield to lock in longer-term interest rates.

  C. That the segmented markets hypothesis contends that borrowers and lenders prefer particular segments of the yield curve.

  D. The expectations hypothesis contends that the long-term rate is equal to the expected short-term rate.

  Correct Answer: C

• Question 1575:

  If a bond sells at a discount:

  A. its YTM will exceed its horizon yield.

  B. its current yield is greater than its YTM.

  C. its coupon rate is greater than its current yield.

  D. its coupon rate is less than the market rate of interest.

  Correct Answer: D

  When a bond sells at a discount, the market rate goes above the coupon rate and the bond's price falls below par. The current yield is the coupon rate / price, so as price falls below 1000 the current yield rises above the coupon rate. The YTM considers the current yield plus the capital gain associated with the discount.

• Question 1576:

  You have a 3-year investment horizon. You can buy a 10% semi annual coupon, 10 year bond for $1,000. You estimate you can reinvest the coupons at 12% and sell the bond in 3 years time for $1,050. Based on this information, what is your horizon return?

  A. 9.5%

  B. 10.0%

  C. 11.5%

  D. 13.5%

  Correct Answer: C

  Explanation:1.Find the FV of the coupons and interest on interest: n = 3(2)=6; i = 12/2 = 6; PMT = 50; compute FV =348.77

  2.

  Determine the value of the bond at the end of 3 years: given = 1,050.00 1,398.77

  3.

  Equate FV (1398.77) with PV (1000) over 3 years (n=6); compute i = 5.75(2) = 11.5%

• Question 1577:

  Consider a bond that pays an annual coupon of 5 percent and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6 percent. How much does the bond price change over the next twelve-month interval if the term structure of interest rates does not change?

  A. 0.84.

  B. -0.84.

  C. -0.56.

  D. 0.00.

  Correct Answer: A

  Explanation:The bond price change is computed as follows: Bond Price Change = New Price ?Old Price = (5/1.06 + 105/1.062) - 5/1.06 + 5/1.062 + 105/1.063 = 0.84.

• Question 1578:

  When the relative strength ratio, the stock's price divided by the index's prices, is increasing this means the stock is:

  A. doing worse than the index.

  B. doing the same as the index.

  C. doing better than the index.

  D. tracking the index.

  Correct Answer: C

• Question 1579:

  Weak form efficiency states that excess risk adjusted returns cannot be obtained by using: A. insider information

  B. technical analysis

  C. fundamental analysis

  D. portfolio theory

  Correct Answer: B

  Weak form - you can't make excess returns using technical analysis. Semi-Strong form - you can't make excess returns using fundamental analysis, which is the use of public information. Strong Form - you can't make excess returns using non-public information.

• Question 1580:

  Using time series analysis you project that the Widget Index's sales per share will be $1,000. You also

  project that:

  Assuming a P/E ratio of 10X, project the Widget Index's value at year-end?

  A. $250

  B. $325

  C. $432

  D. $490

  Correct Answer: D

  = [($Sales)(EBDIT profit margin) - ($D) - ($I)](1 - T)= [($1,000)(.15) - ($50) - ($30)](1 - .30) = $49Price at end = EPS(P/E) = (49)(10) = 490