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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1911:

  An analyst is evaluating an annual-pay bond with a yield to maturity of 7. 0%. The bond-equivalent yield of this bond is:

  A. equal to 7. 0%
  B. less than 7. 0%
  C. greater than 7. 0%
  B. less than 7. 0%

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  Explanation

• Question 1912:

  A portfolio manager for Klein Capital Management has been slowly increasing the number of stocks in his portfolio randomly over the last five years. Currently, the portfolio contains 20 stocks. Over time, what has most likely happened to the risk of the portfolio if macroeconomic variables have remained steady?

  A. Unsystematic risk has been decreasing.
  B. Systematic risk has been decreasing.
  C. Both systematic and unsystematic risk remain at average levels.
  A. Unsystematic risk has been decreasing.

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  Explanation

• Question 1913:

  For a one-tailed hypothesis test, the critical value of the test statistic is -2. 33. Which of the following is true about the hypothesis test?

  A. alpha = .05 for a lower-tailed test
  B. alpha = .01 for an upper-tailed test
  C. alpha = .05 for an upper-tailed test
  D. alpha = .01 for a lower-tailed test
  E. none of these answers
  D. alpha = .01 for a lower-tailed test

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  Explanation

  This is a one tailed test and the z-value of -2. 33 suggests that it is a lower tailed test and that it is for a 1% level of significance.

• Question 1914:

  If a bond sells at a discount:

  A. its YTM will exceed its horizon yield.
  B. its current yield is greater than its YTM.
  C. its coupon rate is greater than its current yield.
  D. its coupon rate is less than the market rate of interest.
  D. its coupon rate is less than the market rate of interest.

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  Explanation

  When a bond sells at a discount, the market rate goes above the coupon rate and the bond's price falls below par. The current yield is the coupon rate / price, so as price falls below 1000 the current yield rises above the coupon rate. The YTM considers the current yield plus the capital gain associated with the discount.

• Question 1915:

  Martin Corporation currently sells 180,000 units per year at a price of $7. 00 per unit; its variable cost is $4. 20 per unit; and fixed costs are $400,000. Martin is considering expanding into two additional states which would increase its fixed costs to $650,000 and would increase its variable unit cost to an average of $4. 48 per unit. If Martin expands it expects to sell 270,000 units at $7. 00 per unit. By how much will Martin's break-even sales dollar level change?

  A. $910,667
  B. $183,333
  C. $456,500
  D. $1,200,000
  E. $805,556
  E. $805,556

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  Explanation

  Calculate the initial breakeven volume in dollars:

  Old S(BE) = FC/(1-(VC/S)) = $400,000/1-(4. 20/7. 00) = $1,000,000.

  Calculate the new breakeven volume in sales dollars:

  New S(BE) = FC/(1-(VC/S)) $650,000/1-(4. 48/7. 00) = $1,805,556.

  The increase in SB = $1,805,556 - $1,000,000 = $805,556.

• Question 1916:

  Assume the following information about a stock market series:

  Retention rate = 70% Expected growth rate of dividends = 8% per year Expected growth rate of earnings = 20% per year Required rate of return = 15% per year

  What is the appropriate earnings multiplier for this stock market series? Further, what is the value of this series?

  A. None of these answers is correct.
  B. 4. 29; $53. 63
  C. The answer cannot completely be determined from the information provided.
  D. 6. 00; $30.00
  E. 6. 00; $120.00
  F. 4. 29; $21.43
  C. The answer cannot completely be determined from the information provided.

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  Explanation

  The answer cannot completely be determined from the information provided. Specifically, while the appropriate earnings multiplier can be found from the given information (and it is 4. 29), the correct value for the series cannot be determined

  without an estimation of EPS at t1. The following explains the derivation of the earnings multiplier for a stock market series.

  Estimating the earnings multiplier for a stock market series requires the estimation of each of the following components:

  The dividend payout ratio.

  The required rate of return on common stock in the country/region/industry/sector being analyzed.

  The expected growth rate of dividends for the stocks in the country/region/industry/sector being analyzed.

  Once values for each of these components have been determined, they are imputed into the following formula:

  P/E = [D/E / (k - g)]

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  Had this example provided a figure for the EPS at t1, then the value of the index could be found by multiplying the EPS at t1 by the earnings multiplier.

• Question 1917:

  For which measure of central tendency will the sum of the deviations of each value from that average always be zero?

  A. Median
  B. Geometric mean
  C. Mean
  D. Mode
  E. None of these answers
  C. Mean

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  Explanation

  For the mean, the sum of the deviations from the average is always zero because the mean is the average.

• Question 1918:

  Proctor Ltd. sells major household appliance service contracts for cash. The service contracts are for a 1-year, 2-year, or 3-year period. Cash receipts from contracts are recorded as unearned contract revenues. This account had a balance of $720,000 at December 31, 1996. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 1996. Outstanding service contracts at December 31, 1996 expire as follows:

  During 1997 $150,000 During 1998 $225,000 During 1999 $100,000

  What amount should be reported as unearned service contract revenues in Proctor's December 31, 1996 balance sheet?

  A. $475,000
  B. None of these answers
  C. $295,000
  D. $245,000
  E. $540,000
  A. $475,000

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  Explanation

  Unearned service contract revenues relate to outstanding contracts for which the agreed service has not yet been provided. Thus, the amount to be reported as unearned service contract revenues covers all contracts that are outstanding at December 31, 1996 which totals $475,000 (150,000 + 225,000 + 100,000)

• Question 1919:

  How many years will it take money to double at 7. 25% per year, compounded annually?

  A. 7. 15 years
  B. 12. 14 years
  C. 7. 29 years
  D. 8.03 years
  E. 9.90 years
  E. 9.90 years

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  Explanation

  To solve this question, choose a future value that is twice the size of the present value. The actual number will not matter. On the BAII Plus, press 7. 25 I/Y, 1000 PV, 0 PMT, 2000 +/- FV, CPT N. On the HP12C, press 7. 25 i, 1000 PV, 0 PMT, 2000 CHS FV, n. Note that the HP12C will show 10 for the answer. The answer will be the same as long as the FV is twice as large as the PV. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 1920:

  Duration of a bond normally increases with an increase in:

  A. time to maturity.
  B. coupon rate.
  C. yield to maturity.
  D. par value.
  A. time to maturity.

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  Explanation

  Duration is directly related to maturity and inversely related to the coupon rate and yield to maturity (YTM). Duration is approximately equal to the point in years where the investor receives half of the present value of the bond's cash flows.

  Therefore, the later the cash flows are received, the greater the duration.

  The longer the time to maturity, the greater the duration (and vice versa). A longer-term bond pays its cash flows later than a shorter-term bond, increasing the duration. The lower the coupon rate, the greater the duration (and vice versa). A

  lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration. The lower the YTM, the higher the duration. This is because the bond's price (or present value) is inversely related to

  interest rates. When market yields fall, the value (or cash flow) of a bond increases without increasing the time to maturity.

  Consider the purchase of an existing bond selling for $1,150. This bond has 28 years to maturity, pays a 12 percent annual coupon, and is callable in 8 years for $1,100.