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

• Question 1601:

  Which of the following statements about debt retirement features is TRUE?

  A. A bond issue must be retired in its entirety when exercising a call feature.

  B. A make-whole premium provision and call price are identical terms.

  C. A bond can be retired early even if it is nonrefundable.

  Correct Answer: C

• Question 1602:

  Allison Coleman, CFA, owns a bond portfolio that includes Bond X, a callable bond with ten years to maturity that is callable at any time beginning one year from today. Coleman's portfolio also includes Bond Y, a noncallable security with ten years to maturity that carries the same credit rating as Bond X. Coleman expects interest rates to drift steadily lower over the next few years. Based on this assumption, Coleman should expect that:

  A. Bond Y will experience a larger decrease in value than Bond X.

  B. Bond X will benefit from positive convexity as rates decline.

  C. the option embedded in Bond X will increase in value.

  Correct Answer: C

• Question 1603:

  Jefferson Blake invests only in bonds and other fixed-income securities. Blake believes there is a good opportunity to purchase an undervalued 4% annual pay corporate bond with three years left until maturity and a par value of $1,000. Blake observes that 1-year, 2-year, and 3-year Treasury strip rates are currently 4.0%, 4.5%, and 4.75%, respectively. What is the maximum price Blake should be willing to pay for the bond?

  A. $1,069.58.

  B. $979.93.

  C. $958.36.

  Correct Answer: B

• Question 1604:

  Mark Waiters' risk aversion is relatively high compared to other individual investors. Waiters is interested in generating some income on his equity portfolio. Walters decides to establish a covered call position on CGF stock and simultaneously establish a protective put position on HSD stock. After establishing the covered call and protective put positions, which of the following would least likely describe Walters' portfolio, relative to the positions before adding the options?

  A. The HSD position will have a higher break even price and less downside risk.

  B. The CGF position will have a lower break even price and more upside potential.

  C. The HSD position will have lower upside potential and less downside risk.

  Correct Answer: B

• Question 1605:

  In futures markets, the role of the clearing house is to:

  A. prevent arbitrage and enforce federal regulations.

  B. act as guarantor to both sides of a futures trade.

  C. reduce transaction costs by making contract prices public.

  Correct Answer: B

• Question 1606:

  Morgan Dexter has been asked by his supervisor to present the features of interest rate swaps to a group of newly hired risk managers. In his presentation, Dexter notes that in a plain-vanilla interest rate swap, there is one floating rate-payer and one fixed-rate payer. Dexter points out that the netting arrangements typical to plain vanilla swaps reduce the credit risk for both counter parties Dexter also states that some interest rate swaps may have two floating rate payers. Are Dexter *s statements regarding swaps correct or incorrect?

  A. Only Dexter's statement about reduced credit risk from netting is correct.

  B. Only Dexter's statement about two floating rate payers is correct.

  C. Both statements are correct.

  Correct Answer: C

• Question 1607:

  Debbie Chon, CFA, is evaluating a put option on Lincoln Industrial. Lincoln's current stock price is $64 per share and the company will pay a $0.56 dividend. The 90-day U.S. Treasury bill is yielding 5.3%. Lincoln's 3-month European call option with a strike price of $70 has a premium of $3.50. Based on the put-call parity, calculate the value of the associated Lincoln put option.

  A. $8.05

  B. $8.60

  C. $9.15

  Correct Answer: C

• Question 1608:

  Peter Black is an options trader for High Smith Investments. Black trades options on the U.S. and U.K. stock exchanges. Over the past three weeks, Black has been following the price movements of options on two companies: U.S.-based Pacific Chemicals Inc. (PCI), and U.K.-based Merchant Clothing Co. (MCC). Black has observed that over the past few days, the price of put options on PCI stock have suddenly increased, and the price of call options on MCC stock have suddenly increased. Which of the following provides the most accurate explanation of Black's observations? Interest rates in:

  A. the U.S. have risen and the volatility of MCC stock has risen.

  B. the U.K. have fallen and the volatility of PCI stock has risen.

  C. the U.S. have fallen and the volatility of MCC stock has risen.

  Correct Answer: C

• Question 1609:

  An investor holds a long position in a futures contract on the SandP 500 Index. The futures contract has a term of three months, requires 10% margin, and has a futures price of 1,574. The investor posted $37,500 into the margin account at contract initiation. After the contract initiation, the futures price on the index experienced infrequent but dramatic drops. Two days ago, the investor received a margin call and was required to post an additional $17,500 to the margin account. Which of the following is most likely the maintenance margin on the contract?

  A. $17,500.

  B. $18,750.

  C. $22,500.

  Correct Answer: C

• Question 1610:

  James Volley, CFA, is evaluating a number of municipal bonds. One of the revenue bonds on his list is marked as "prercfunded." When Volley asks his assistant about the bonds, the assistant tells him that the collateral behind the bonds is a portfolio of U.S. government securities, and that, therefore, these bonds have "less credit risk than insured municipal bonds." Which of the following statements regarding these bonds is most accurate"?

  A. The bonds do indeed have less credit risk than insured municipal bonds.

  B. Only general obligation bonds can be prerefunded, not revenue bonds.

  C. Prerefunded bonds are secured by a cash escrow account, not by US government securities.

  Correct Answer: A