CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1691:

  How much would you pay for a 15 year bond with a semiannual coupon rate of 6%, and a par value of $15,000 if you want a 14% percent annual return on your investment? What would be the value of the coupons and principal to you?

  A. The value of the bond would be $15,024. The present value of the coupons would be $10,833, and that of the principal would be $4,191.
  B. The value of the bond would be $13,860. The present value of the coupons would be $11,457, and that of the principal would be $2,403.
  C. The value of the bond would be $17,239. The present value of the coupons would be $14,828, and that of the principal would be $2,411.
  D. Not enough information.
  E. The value of the bond would be $13,140. The present value of the coupons would be $11,169, and that of the principal would be $1,971.
  E. The value of the bond would be $13,140. The present value of the coupons would be $11,169, and that of the principal would be $1,971.

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  Explanation

  The semiannual coupon payment would be 0.06 x 15000 = $900. Using Appendix C of "Investment Analysis and Portfolio Management," by Reilly and Brown, one sees that the present value of annuity of $1 for 30 periods at a required rate of 7% (half of 14%) would be 12. 410. The present value of the coupon payments is therefore 900 x 12. 410 = $11,169. Using the same appendix, one sees that the present value of $1 after 30 periods at a required rate or 7% is 0.1314. The present value of the principal payment is therefore 15000 x 0.1314 = $1,971. The total value of the bond to you would be 11169 + 1971 = $13,140.

• Question 1692:

  Which of the following best describes an income statement?

  A. It reports revenues and expenses for a specific accounting period.
  B. It reports the amount and composition of assets and liabilities for a specific accounting period.
  C. None of these answers.
  D. It reports investment activities for a specified accounting period.
  E. It reports cash receipts and cash disbursements for a specific accounting period.
  A. It reports revenues and expenses for a specific accounting period.

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  Explanation

  An income statement measures a company's financial performance between balance sheet dates and, hence, reflects a period of time. It lists revenues, expenses, gains, and losses of a company over a time period.

• Question 1693:

  The Keynesian model indicates that when individuals plan to save more (and spend less), the result may be a(n)

  A. increase in investment because investment always equals saving.
  B. decline in the equilibrium level of income.
  C. increase in the marginal propensity to consume.
  D. increase in equilibrium income by some multiple of the increase in saving.
  B. decline in the equilibrium level of income.

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  Explanation

  An increase in savings implies a decrease in disposable income and thus a decline in consumption. As a result aggregate demand will fall and output will follow. Output is equivalent to income and thus the equilibrium level of income also declines.

• Question 1694:

  A firm's quick ratio equals 1.31 and its cash ratio equals 1.19. If the firm has receivables of 693, its current liabilities equal ________.

  A. 8,129
  B. 4,693
  C. 5,775
  D. 7,926
  C. 5,775

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  Explanation

  The definitions of the two ratios are:

  Quick ratio = (cash + marketable securities +receivables)/current liabilities

  Cash ratio = (cash + marketable securities)/current liabilities

  Thus, (Quick ratio - Cash ratio) = receivables/current liabilities.

  Therefore, 1.31 - 1.19 = 0.12 = 693/current liabilities. Solving, we get current liabilities = 693/0.12 = 5,775.

• Question 1695:

  If alpha = .05 for a two-tailed test, how large is the acceptance area?

  A. .975
  B. None of these answers
  C. .950
  D. .025
  E. .050
  C. .950

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  Explanation

  The acceptance region is the area in between the two critical values. In this case it is 1 - 0.05 = 0.95.

• Question 1696:

  When a firm records a lease as a capital lease:

  A. Its working capital increases.
  B. Its current ratio decreases.
  C. Its debt-to-asset ratio increases.
  D. Its financial leverage ratio decreases.
  B. Its current ratio decreases.

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  Explanation

  A capital lease is recorded as an asset as well as a liability. The next principal payment to be made on the lease is recorded as current liability (since it occurs within an operating cycle), thus decreasing the current ratio and working capital. The remaining portion is recorded as a long-term liability. Since total assets increase, the financial leverage ratio (assets/equity) increases.

• Question 1697:

  A stock has an expected dividend growth rate of 3. 5%. The firm has just paid a dividend of $1.5 per share. With a required rate of return of 8%, the stock is trading at $36. 40. The stock is ________.

  A. overpriced
  B. underpriced
  C. fairly priced
  D. insufficient information
  A. overpriced

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  Explanation

  In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). In this case, g = 3. 5%, D1 = Do*(1+g) = 1.5 * 1.035 = $1.5525. The price that will give k = 8% equals P = 1.5525/(8% - 3. 5%) = $34. 5. Since the stock is trading at a price higher than this, it is overpriced (by $1.90).

• Question 1698:

  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.
  A. 0.128.

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  Explanation

  

• Question 1699:

  The semiannually compounded rate is 6% quoted on an annualized basis. The equivalent quarterly compounded rate is:

  A. 6. 12%
  B. 5. 91%
  C. 5. 96%
  D. 5. 76%
  C. 5. 96%

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  Explanation

  To solve such problems, think about investing a dollar for 1 year. The final amount should be the same under both the quotations. Under quarterly compounded rate, r, $1 grows to (1+r/4)^4 in 1 year. Under semiannual compounding, it grows to (1+0.06/2)^2 = 1.0609. Since these two should be equal, we get (1+r/4)^4 = 1.0609, giving r = 5. 96%. Note that the quarterly compounded rate must be smaller than the semiannually compounded rate, ruling out 6. 12 automatically.

• Question 1700:

  Three banks have quoted interest rates as follows:

  Bank A: 10% per year, compounded quarterly.

  Bank B: 11% per year, compounded annually.

  Bank C: 10.5% per year, compounded semi-annually.

  Which bank should you choose to invest with for a period of one year and what's the effective annual rate?

  A. Bank B, 11%
  B. Bank A, 10.38%
  C. Bank C, 12. 01%
  D. Bank A, 11.19%
  A. Bank B, 11%

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  Explanation

  The annual yield for Bank A is (1+10%/4)^4 - 1 = 10.38%, that for Bank B is 11% and that for Bank C is (1+10.5%/2)^2 - 1 = 10.78%. Therefore, you should invest with Bank B.