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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1831:

  Which would not be considered an important characteristic when studying industry analysis?

  A. sales growth comparisons
  B. evaluation of stage in industrial life cycle
  C. effective tax rate comparisons
  D. common stock yields
  E. regulatory changes
  C. effective tax rate comparisons

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  Explanation

  Tax issues would not be of overall importance in industry analysis, yet are to be considered when forecasting industry profit margins.

• Question 1832:

  You need to estimate the market value of an income producing property located in your town. Through research you have found that the property should have net operating income of $956,000, taxes of $143,400, a capitalization rate of 16 percent, and an inflation rate of 3 percent. What is the estimated property value?

  A. $5,078,750.
  B. $5,975,000.
  C. $7,353,846.
  D. $8,456,923.
  B. $5,975,000.

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  Explanation

  

• Question 1833:

  What annual interest rate, compounded annually, is equivalent to 7% per year, compounded quarterly?

  A. 6. 88%
  B. 7. 19%
  C. 7%
  D. 7. 03%
  E. 7. 09%
  B. 7. 19%

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  Explanation

  Questions of this type are illustrating the concept of an Effective Interest Rate, which is a rate compounded annually that has the same effect as a rate compounded more often than one time a year. As such, a depositor or a creditor is indifferent between them, since they have the same effect. To solve this question, make any deposit and see how much is in the account after one year. The ratio of the ending FV to the beginning PV will indicate the annual rate earned. On the BAII Plus, press 4 N, 7 divide 4 = I/Y, 100 PV, 0 PMT, CPT FV. On the HP12C, press 4 n, 7 ENTER 4 divide i, 100 PV, 0 PMT, FV. The number displayed will be 107. 19. In other words, after one year, $100 has become $107. 19. An interest rate of 7. 19%, compounded annually, would cause a $100 deposit to become $107. 19 in one year. Choosing an initial deposit of $100 helps a great deal in these situations. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 1834:

  Judging from recent experience, 5 percent of the worm gears produced by an automatic, high speed machine are defective. What is the probability that out of six gears selected at random, exactly zero gears will be defective?

  A. 0.500
  B. 0.167
  C. 0.735
  D. 0.001
  E. None of these answers
  C. 0.735

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  Explanation

  Using Binomial probability with n = 6, p = 0.05 and q = 0.95 and r = 0 we get [6!(0.05^0)(0.95^6)]/0!(6 - 0)! = 0.735.

• Question 1835:

  Assume an investor makes the following investments:

  During year one, the stock paid a $5. 00 per share dividend. In year two, the stock paid a $7. 50 per share dividend.

  The time-weighted return is:

  A. 51.4%.
  B. 51.7%.
  C. 23. 2%.
  D. 14. 7%.
  A. 51.4%.

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  Explanation

  To calculate the time-weighted return:

  Step 1: Separate the time periods into holding periods and calculate the return over that period:

  Holding period 1:P0= $50.00

  D1= $5. 00

  P1= $75. 00 (from information on second stock purchase)

  HPR1 = (75 ?50 + 5) / 50 = 0.60, or 60%

  Holding period 2:P1= $75. 00

  D2= $7. 50

  P2= $100.00

  HPR2 = (100 ?75 + 7. 50) / 75 = 0.433, or 43. 3%.

  Step 2: Use the geometric mean to calculate the return over both periods

  Return = [(1 + HPR1) * (1 + HPR2)]1/2?1 = [(1.60) * (1.433)]1/2?1 = .5142, or51.4%.

• Question 1836:

  A bell-shaped, symmetrical frequency distribution has a mean of 50. If 68% of the observations in the distribution fall between 40 and 60, what's the range within which 99% of the observations in the distribution fall?

  A. [19.79; 80.21]
  B. [23. 1; 76. 9]
  C. [30; 70]
  D. [24. 2; 75. 8]
  D. [24. 2; 75. 8]

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  Explanation

  For a bell-shaped, symmetrical frequency distribution, approximately 68% of the observations lie within one standard deviation of the mean. The mean equals (40 + 60)/2 = 50. Therefore, the standard deviation equals 50 - 40 = 10. Now, by the normal rule, 99% of the observations lie within 2. 58 standard deviations of the mean. Hence, the requisite range equals [50 - 2. 58*10, 50 + 2. 58*10] = [24. 2, 75. 8].

• Question 1837:

  Which of the following is false?

  A. The IRR rule is not dependable when applied to projects with non-normal cash flows.
  B. For independent projects with normal cash flows, the IRR and NPV rules give the same accept/reject results.
  C. For mutually exclusive projects, the IRR and NPV rules can give conflicting results.
  D. None of these answers.
  D. None of these answers.

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  Explanation

  Remember to always use the NPV result. There are quite a few problems with using other decision rules like IRR and payback period.

• Question 1838:

  An investor has a required rate of return of 5% per year. How much will he pay for a seven-year ordinary annuity that pays $200 per year?

  A. $1,093
  B. $1,157
  C. $1,215
  D. $1,213
  B. $1,157

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  Explanation

  The value of the annuity = (200/0.05)*(1- 1/(1.05^7)) = 1,157

• Question 1839:

  Studies of short-interest trading rules

  A. have tended to support their effectiveness.
  B. have strongly supported their effectiveness.
  C. have had mixed results.
  D. have not supported their effectiveness.
  C. have had mixed results.

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  Explanation

  Technical analysts believe that the short-interest ratio is a bullish indicator; the higher the ratio, the more bullish an indication for the market. But studies that have examined short-interest trading rules have had mixed results. For every study that has supported the rules, there is one that has not.

• Question 1840:

  PRC International just completed a S234 million floating rate convertible bond offering. As stated in the indenture, the interest rate on the bond is the lesser of 90-day LIBOR or 10%. The indenture also requires PRC to retire $5. 6 million per year with the option to retire as much as $10 million. Which of the following embedded options is most likely to benefit the investor? The:

  A. 10% cap on the floating interest rate.
  B. accelerated sinking fund provision for principal repayment.
  C. conversion option on the convertible bonds
  C. conversion option on the convertible bonds

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  Explanation