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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1701:

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

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  Explanation

• Question 1702:

  Which of the following statements is correct regarding Standard II (A) - Use of Professional Designation?

  A. Joe Martin passed Level I and Level II of the CFA exams and is scheduled for the next Level III exam. He may write "Joe Martin, CFA II."
  B. Joe Martin passed Level I and Level II of the CFA exams and is scheduled for the next Level III exam. He may write "Joe Martin, CFA III."
  C. Joe Martin passed Level I and Level II of the CFA exams, but is not scheduled for the next Level III exam. He may state, "I am a CFA candidate."
  D. None of these statements are correct.
  D. None of these statements are correct.

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  Explanation

  "Joe Martin, CFA II" and "Joe Martin, CFA III" are misrepresentations and a violation of Standard II (A). There is no designation for someone who has passed Level I, Level II, or Level III. He may not state he is a candidate unless he is registered for the next exam.

• Question 1703:

  Jack Hare, CFA, is a fixed income analyst. Hare is evaluating a 15-year zero-coupon bond, which is priced at $30.83. Determine the issue's approximate yield to maturity.

  A. 6%.
  B. 7%.
  C. 8%.
  C. 8%.

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  Explanation

• Question 1704:

  Given that the risk-free rate is 7%, what is the value of a zero-coupon bond in which $10,000 will be paid in 15 years?

  A. $4,759
  B. $4,522
  C. $5,628
  D. Not enough information
  E. $3,624
  D. Not enough information

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  Explanation

  In order to take the present value of the coupon and principal payments, one must know the required rate of return on the bond. The required rate of return is equal to the risk-free rate plus the risk premium. The risk premium is not given, so there is not enough information to answer the question.

• Question 1705:

  An decrease in the required rate of return will have what effect on the earnings multipliers of common stocks? Further, what effect could be expected from a decrease in the dividend payout ratio?

  A. An decrease in the earnings multiplier; a decrease in the earnings multiplier
  B. An decrease in the earnings multiplier; a increase in the earnings multiplier
  C. No change in the earnings multiplier, a decrease in the earnings multiplier
  D. An increase in the earnings multiplier; an increase in the earnings multiplier
  E. An increase in the earnings multiplier; a decrease in the earnings multiplier
  E. An increase in the earnings multiplier; a decrease in the earnings multiplier

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  Explanation

  A simple method of determining the appropriate earnings multiplier for a common stock can be found by manipulating the Infinite Period Dividend Discount Model such that it resembles the following:

  P/E = [(d1/e1) / (k - g)]

  Where: P/E = the earnings multiplier expressed as the Price-to-Earnings Ratio, d1/e1 = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated annual growth rate.

  As you can see, a decrease in the required rate of return, holding everything else equal, will lead to an increase in the earnings multiplier. Opposite this effect, a decrease in the dividend payout ratio will lead to a decrease in earnings multiplier.

• Question 1706:

  Within the Keynesian model, when planned aggregate demand equals total output,

  A. the employment rate will equal the labor force participation rate.
  B. government expenditures will equal revenues.
  C. the output level will tend to persist into the future.
  D. income in the future will tend to rise.
  C. the output level will tend to persist into the future.

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  Explanation

  Because Keynesian equilibrium is dependent on equality between planned aggregate expenditures and output, it need not take place at full employment. An economy in Keynesian equilibrium has no tendency for output to change even if output is well below full employment capacity.

• Question 1707:

  The primary purpose of the statement of cash flows is to:

  A. measure the change in the company's assets
  B. state the company's financial position at period-end
  C. provide information about a company's cash receipts and cash payments during the accounting period
  D. analyze net income during the accounting period
  C. provide information about a company's cash receipts and cash payments during the accounting period

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  Explanation

  Other financial statements are used to analyze revenues, expenses, assets, liabilities, and stockholders' equity. The statement of cash flows summarizes transactions affecting cash; it is the balance sheet that states the company's financial position at a point in time.

• Question 1708:

  Which of the following is/are FALSE?

  I. Depreciation does not affect cash flows since it is a non-cash expense.

  II. Depreciation does not affect the cash flow statement since it is an allocation of past investing expense.

  III.

  Under US GAAP, companies can use different methods of depreciation for financial reporting and tax purposes.

  A. III only
  B. I and II
  C. II and III
  D. I, II and III
  B. I and II

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  Explanation

  Depreciation does affect cash flows since it reduces the amount of income tax paid. Further, US firms have the latitude of choosing an accelerated method of depreciation for tax purposes and a different method (like straight-line method) for financial reporting. This flexibility has an important effect on the reported balance sheet, which has to recognize an explicit liability in the form of deferred taxes payable.

• Question 1709:

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

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  Explanation

• Question 1710:

  Which of the following statements about the cash flow statement is/are true?

  I. The cash flow statement provides information on the liquidity of the firm.

  II. The income statement is more susceptible to management manipulation than the cash flow statement.

  III. The cash flow statement serves as a check on the inherent assumptions of the income statement.

  IV.

  The cash flow statement is based on actual events while the income statement is based on the allocation of the effects of these events over time.

  A. I and III
  B. I, II, III and IV
  C. I, II and III
  D. II and IV
  B. I, II, III and IV

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  Explanation

  The cash flow statement cannot be manipulated as easily as the income statement since it is based on actual cash flows while income statement has to follow the accrual principle, which allocates non-cash expenses and revenues to the current and future periods, leaving open the avenue for earnings manipulation. For this reason, the cash flow statement acts as a check on the income statement.