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

• Question 1721:

  An analyst is considering a bond for purchase. The bond has a coupon that resets semiannually and is

  determined by the following formula:

  coupon = 12% - (3.0 * 6-month Treasury bill rate)

  Identify what type of bond this is, and calculate the coupon rate this bond would reset to if the 6-month

  Treasury bill rate is 4.5%.

  A. This bond is an inverse floater, and the coupon would reset to 1.50%.

  B. This bond is an inverse floater, and the coupon would reset to 0.00%.

  C. This bond is a step up note, and the coupon would reset to 4.50%.

  Correct Answer: B

• Question 1722:

  Which of the following statements best describes the relationship between a valuation factor and its effect on the present value of a bond, holding all else constant?

  A. Using a lower discount rate will generate a lower present value.

  B. A bond with a lower coupon rate will have a higher present value.

  C. Using a higher discount rate will generate a lower present value.

  Correct Answer: C

• Question 1723:

  Two newly hired fixed income analysts are debating the merits of federal agency backed mortgage securities, specifically mortgage passthroughs and collateralized mortgage obligations (CMOs). Analyst A and Analyst B make the following statements: Analyst A:Investors in mortgage pass-through securities backed by one mortgage pool have equal exposure to prepayment risk, whereas investors in the CMOs of one pool have different exposures to prepayment risk. Analyst B:Investors in CMOs have greater protection against default risk than investors in mortgage pass-through securities due to additional credit enhancement-Identify whether the statements of each analyst are correct or incorrect.

  A. Only Analyst A is correct.

  B. Only Analyst B is correct.

  C. Neither analyst is correct.

  Correct Answer: A

• Question 1724:

  Increasing which factor in the dividend discount model, without changing the other two, would be least likely to increase a stock's price-to-earnings (P/E) ratio?

  A. The expected dividend payout ratio.

  B. The required rate of return on the stock.

  C. The expected constant growth rate of dividends.

  Correct Answer: B

• Question 1725:

  A drawback of using the price-to-book value ratio as a valuation tool is that book value:

  A. does not reflect human capital.

  B. is not appropriate for valuing firms with large, highly liquid assets.

  C. is only effective in valuing companies that are not expected to continue as a going concern.

  Correct Answer: A

• Question 1726:

  Antun Blasevic manages a fixed-income mutual fund which holds a variety of high-yield corporate bonds. His largest position is in Garjun Technologies, which currently trades to yield 8.75%, while the equivalent maturity U.S. Treasury yields only 5.25%. Which of the following is the most accurate description of the yield spread between Garjun Technologies and U.S. Treasuries?

  A. The yield ratio is 1.67.

  B. The absolute yield spread is 67%.

  C. The relative yield spread is 350 basis points.

  Correct Answer: A

• Question 1727:

  Kelly Clark, CFA, is a fixed income analyst for Convex Capital. She is evaluating a 15-year bond with a 6.0% coupon. At the current interest rate of 5.5%, the bond is priced at $1,050.62. Clark calculates that a 25 basis point drop in interest rates increases the bond's price to $1,077.20, while a 25 basis point increase in interest rates reduces the bond's price to $1,024.90. Based on the information provided, calculate the bond's effective duration.

  A. 4.98

  B. 5.06

  C. 9.96

  Correct Answer: C

• Question 1728:

  Assume that there is a widely accepted belief in the U.S. that 1-year interest rates will remain stable at

  their current level of 3.25%. A yield curve derived from spot rates on U.S. Treasury securities shows the

  following data:

  Maturity Spot Rate

  1 year 3.25%

  2 years 4.00%

  5 years 6.80%

  10 years 7.20%

  The yield curve based on this data is least consistent with which theory of the term structure of interest

  rates?

  A. Pure expectations.

  B. Liquidity preference.

  C. Market segmentation.

  Correct Answer: A

• Question 1729:

  A 6% U.S. Treasury security maturing 9/30/10 is quoted at a price of 97.625 on July 1. The bond pays interest semiannually on March 31 and September 30. On July 1, the clean price of this bond would be closest to:

  A. $976.25

  B. $991.17

  C. $946.41

  Correct Answer: A

• Question 1730:

  An analyst uses a temporary supernormal growth model to value a common stock. The company paid a $2 dividend last year. The analyst expects dividends to grow at 15% each year for the next three years and then to resume a normal rate of 7% per year indefinitely. The analyst estimates that investors require a 12% return on the stock. The value of this common stock is closest to:

  A. $48.

  B. $53.

  C. $71.

  Correct Answer: B