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

• Question 1801:

  Ned Jameson. CFA, is considering the purchase of a newly issued asset-backed security (ABS) for his fixed income portfolio. According to the broker/dealer offering the bond, the OAS for the issue is 75 basis points (bps). Based on the OAS value, which of the following assumptions can Jameson make about this particular ABS?

  A. The OAS represents the investor's compensation for credit risk, liquidity risk, and option risk.

  B. The bond is trading at a yield that is more than 75 bps higher than a Treasury security with a comparable maturity.

  C. The implied cost of an option embedded in the security is always equal to the difference between the OAS and the Treasury spread.

  Correct Answer: B

• Question 1802:

  With regard to a theoretical Treasury yield curve constructed with the bootstrapping method:

  A. every point on the curve is constructed by utilizing current on-the-run Treasury yields of various maturities.

  B. the yield for most maturities used to construct the Treasury yield curve are observed yields rather than interpolated yields.

  C. any yield on the Treasury yield curve that is not one of the on-the-run maturities is only an approximation for that maturity.

  Correct Answer: C

• Question 1803:

  An analyst is using the following information to value AGF Company's common shares. AGF paid a dividend of $1.90 per share last year. Dividends are expected to grow at 6% forever. The risk-free rate is 5%, the market risk premium is 7%, and the beta of the common shares is 1.3. The value of the AGF Company's common shares is closest to:

  A. $23.46

  B. $24.86

  C. $33.57

  Correct Answer: B

• Question 1804:

  In valuing the stock of Evergreen Enterprises, an analyst compiles the following information about the firm: The value of the firm's stock today is closest to:

  A. $31.80

  B. $38.55

  C. $53.00

  Correct Answer: A

• Question 1805:

  Radio Corp. owns a leading radio network with 200 million weekly listeners. To combat a declining radio audience, the company has implemented a strategy of targeting the Hispanic audience. After careful analysis, Radio Corp. makes the decision to acquire a Hispanic radio station, rather than convert existing radio stations. The acquisition strategy benefits from rules that allow clustering of ownership of local radio stations. The basis of the strategic initiative and the basis of the acquisition strategy, respectively, are:

  A. market timing and geography

  B. lifestyles and technology

  C. demographics and regulation

  Correct Answer: C

• Question 1806:

  An investor purchased 100 shares of a stock two years ago for $50 per share after deciding the stock would be a good value investment. Since the initial purchase, the stock price has fallen to $35 per share after several of the company's major customers canceled contracts. The investor has decided to purchase another 50 shares at the lower price. Which of the following behavioral biases best characterizes the investor's actions?

  A. Escalation bias.

  B. Momentum bias.

  C. Overconfidence bias.

  Correct Answer: A

• Question 1807:

  Ian Lance, CFA, is discussing short selling with a client and states, "The short seller must pay any dividend of the issuer to the lender of the stock. In addition, the short seller must provide some collateral to the brokerage house." Is Lance correct about the short seller's obligations?

  A. Yes.

  B. Lance is correct about paying the dividend, and incorrect about providing collateral.

  C. Lance is incorrect about paying the dividend, and correct about providing collateral.

  Correct Answer: A

• Question 1808:

  If the beginning inventory is overstated and the ending inventory is understated, which of the following is/ are true:

  I. COGS is understated

  II. COGS is overstated

  III. Income is overstated

  IV.

  Income is understated

  A.

  I and III

  B.

  IV only

  C.

  II only

  D.

  II and IV

  Correct Answer: D

  COGS = Beginning inventory - Ending inventory + Purchases Hence, if BI is overstated and EI understated, COGS is overstated, implying income is understated. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.

• Question 1809:

  Which of the following is NOT a change in accounting?

  A. Change in accounting principle

  B. Change in past accounting error

  C. Changing in accounts reporting entity

  D. Changing in accounting estimate

  Correct Answer: B

  Correction to an accounting error is not considered a change in accounting. It is treated as a "prior period adjustment" to the beginning balance of retained earnings. All other are considered accounting changes.

• Question 1810:

  Rocky Johnson, CFA, manages a large capitalization equity mutual fund. His superiors have requested

  that he provide them the appropriate benchmarks to compare future performance against. Johnson makes

  the following statements:

  Statement 1:We should use an unweighted index because it would best reflect the large company bias in

  the portfolio.

  Statement 2:Stocks in the portfolio frequently split the number of shares outstanding. Therefore, in the long

  run, the Dow Jones Industrial Average would best reflect these events.

  Are Johnson's two statements correct?

  A. No. Both statements are incorrect.

  B. Statement 1 is correct and Statement 2 is incorrect.

  C. Statement 1 is incorrect and Statement 2 is correct.

  Correct Answer: A