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

• Question 1651:

  On November 15, 2006, the yield curve was upward sloping with yields of 3%, 4%, and 5.5% on 1-year, 5year, and 10-year Treasuries, respectively. The following day, the Treasury yield curve experienced an upward parallel shift equal to 112 basis points. Which of the following noncallable bonds would have experienced the least percentage change in price as a result of the yield curve shift?

  A. A 6% coupon corporate bond maturing in ten years.

  B. A 6% coupon corporate bond maturing in five years.

  C. A 0% coupon U.S. government bond maturing in ten years.

  Correct Answer: B

• Question 1652:

  A bond dealer determines that the present value of a particular Treasury note based on Treasury spot rates is greater than its market price. The dealer can generate an arbitrage profit (assuming no transactions costs) by:

  A. buying the Treasury note and selling its cash flows as Treasury STRIPS

  B. buying the equivalent Treasury STRIPS and selling them as a Treasury note.

  C. buying the undervalued note and selling short the Treasury security with the nearest maturity.

  Correct Answer: A

• Question 1653:

  Bill Foley, CFA, manages an intermediate tax-exempt bond fund. Foley makes the following two comments

  about securities in his portfolio.

  Statement 1:Revenue bonds usually pay a higher coupon rate than general obligation bonds.

  Statement 2:Double barreled bonds are municipal securities that are exempt from both federal and state

  taxes.

  Which of the following best evaluates Statement 1 and Statement 2?

  A. Only Statement 1 is correct.

  B. Only Statement 2 is correct.

  C. Both Statements are incorrect.

  Correct Answer: A

• Question 1654:

  Larry Rile is evaluating the investment merits of Bing Corp., a successful motorcycle manufacturer. Rile is forecasting a dividend in year I of $1.50 per share, a dividend in year 2 of $3.00 per share, and a dividend in year 3 of 4.50 per share. After year 3, Rile expects dividends to grow at the rate of 6% per year. Rile calculated a beta of 1.3 for Bing Corp. Rile expects the SandP 500 index to return 8%. The U.S. Treasury bill is yielding 2%. Using the multistage dividend discount model, what is Bing Corp.'s intrinsic value to the nearest dollar?

  A. $92 per share

  B. $102 per share

  C. $112 per share

  Correct Answer: B

• Question 1655:

  A bond does not pay initial coupon payments but instead accrues them over a pre-determined period and then pays a lump sum at the end of that period. The bond subsequently pays regular coupon payments until maturity. Such a bond is best described as:

  A. a step-up note

  B. a zero-coupon bond

  C. a deferred-coupon bond

  Correct Answer: C

• Question 1656:

  Sara Jones, CFA, recently purchased a U.S. government security that was issued on 6/1/2007 and will mature on 6/1/2014. Jones purchased the security in the secondary market. This security is most likely an:

  

  A. on-the-run Treasury note

  B. off-the-run Treasury bond

  C. off-the-run Treasury note

  Correct Answer: C

• Question 1657:

  Acquire Corp. has a business model based on making accretive acquisitions each year. The company has historically been successful in implementing its strategy. Earnings per share have grown each of the last five years at a 15% compounded rate. During the past year, Acquire Corp. acquired a services company with large net operating losses, representing a third leg to its business model. The other two business segments are engineering construction and mining. The purchase price was one-half the company's current market value. The most appropriate technique to value Acquire Corp. is based on its:

  A. price-to-book value ratio

  B. forward price-to-earnings ratio

  C. trailing price-to-sales ratio

  Correct Answer: B

• Question 1658:

  Lynn Smith, CFA, and a marketing associate have a disagreement over whether the stock market is truly efficient. The marketing associate believes that the stock market is totally efficient based on academic research that shows actively managed mutual funds do no better than a buy-and-hold strategy. Thus, he invests solely in index funds. Smith counters that academic research indicates that low P/E ratio stocks provide superior risk-adjusted returns. Based on this discussion, indicate which of the following statements regarding the efficient markets hypothesis (EMH) is correct.

  A. The strong form of the EMH is supported by academic research on low P/E stocks.

  B. The semistrong form of the EMH is not supported by academic research on low P/E stocks.

  C. The strong form of the EMH is not supported by academic research on mutual funds.

  Correct Answer: B

• Question 1659:

  James Larson, CFA, manages a large capitalization growth mutual fund. Larson's benchmark is the Russell 1000 Growth index. Larson's colleague, Kevin Moore, CFA, manages an index fund which mimics the Russell 1000 index. Moore believes that the capital markets are fully efficient, while Larson disagrees. Larson defends his position with the following supporting statements. Statement 1:Market participants must be adequately compensated for processing new information to ensure the markets remain efficient. Yet a perfectly efficient market provides no incentive to sufficiently reward investors for processing new information. Hence, markets cannot be fully efficient. Statement 2:Low trading costs have led to greater trading activity, which has had the unintended consequence of greater securities mispricing. Are Larson's statements correct?

  A. Yes.

  B. Only Statement 1 is correct.

  C. Only Statement 2 is correct.

  Correct Answer: B

• Question 1660:

  Willa Dowd collected the following information for a small-cap firm that she is evaluating:

  Stock price per share $20.50

  Expected sales $920 million Operating expenses (excluding interest) $405 million Depreciation amortization $44 million Return on equity (ROE) 12% Shares outstanding 31 million Common shareholders' equity $380 million

  The Price/Cash Flow (P/CF) for the small-cap firm is closest to:

  A. 7.1.

  B. 8.5.

  C. 9.1.

  Correct Answer: A