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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2001:

  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
  C. 9.96

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  Explanation

• Question 2002:

  Given that the P/E ratio on a common stock is 15, the expected dividend payout ratio is 0.6, and the required rate of return is 19%, what is the dividend growth rate?

  A. 13. 4%
  B. 9%
  C. 12. 8%
  D. Not enough information
  E. 15%
  E. 15%

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  Explanation

  The infinite period Dividend Discount Model claims that the current price of a common stock is equal to D1 / (k - g), where D1 is next period's (most often next year's) dividend, k is the required rate of return, and g is the growth rate of dividends. The earnings multiplier model goes a step further by dividing both sides of the infinite period Dividend Discount Model equation by expected earnings during the next 12 months, yielding P/E = (D1/E) / (k - g). Rearranging this results in g = k - (D1/E) / (P/E). In this question, the dividend growth rate is equal to 0.19 - 0.6/15 = 0.15 = 15%

• Question 2003:

  If you buy an item for $500 and agree to pay for it with 24 monthly payments of $24. 50, beginning next month, what annual interest rate, compounded monthly, are you being charged?

  A. 1.34%
  B. 26. 53%
  C. 16. 08%
  D. 11.15%
  E. 14. 92%
  C. 16. 08%

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  Explanation

  The interest rate returned by the calculator will be the periodic interest rate. It must be multiplied by the number of periods per year to have the correct answer. On the BAII Plus, press 24 N, 500 PV, 24. 50 +/- PMT, 0 FV, CPT I/Y. Then press x 12 = to see the answer. On the HP12C, press 24 n, 500 PV, 24. 50 CHS PMT, 0 FV, i. Then press 12 x to see the answer. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2004:

  Investments-R-Us is a growing investment advisory firm, which recently hired 5 CFA charter-holders for senior management positions. In an advertisement, the firm promised clients excellent client service and timely investment advice. To bolster this motto, all 5 CFA charter-holders were praised in the advertisement for their commitment, professionalism and high intelligence displayed in passing the CFA program in 3 straight attempts. IRU has

  A. violated the AIMR Presentation Standards by selectively presenting its expertise in the field.
  B. violated Standard II (A) - Use of Professional Designation - by implying superior results based on the fact that the CFA charter-holders passed every exam in first attempt.
  C. none of these answers.
  D. not violated any of standards in the AIMR code.
  B. violated Standard II (A) - Use of Professional Designation - by implying superior results based on the fact that the CFA charter-holders passed every exam in first attempt.

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  Explanation

  Implications that CFA Charter-holders who pass their exams in the first attempt can generate superior results or display a higher level of intelligence are considered inappropriate by Standard II (A) of the AIMR Code of Ethics.

• Question 2005:

  Which of the following statements is most correct?

  A. None of the answers are correct.
  B. All is these answers are correct.
  C. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
  D. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
  E. If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's net present value (NPV) must be positive.
  E. If a project's internal rate of return (IRR) exceeds the cost of capital, then the project's net present value (NPV) must be positive.

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  Explanation

  The IRR on a project is its expected rate of return. If the return exceeds the cost of the funds used to finance the project, a surplus remains after paying for the capital, and this surplus accrues to the firm's stockholders. Therefore, a project whose IRR exceeds its cost of capital increase shareholders' wealth, just as a positive NPV does.

• Question 2006:

  The short interest ratio is

  A. the cumulative number of shares that have been sold short, divided by outstanding short interest.
  B. outstanding short interest divided by total daily volume on the exchange.
  C. total daily volume on the exchange divided by outstanding short interest.
  D. the cumulative number of shares that have been sold short by investors and not covered.
  B. outstanding short interest divided by total daily volume on the exchange.

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  Explanation

  Technical analysts measure short interest through the short interest ratio, which is equal to the outstanding short interest divided by the average daily volume of trading on the exchange. A higher ratio is interpreted as bullish because a larger relative short interest is indicative of high potential demand for stock from those who have sold short but have not yet covered their sales.

• Question 2007:

  The probability that a technology stock will fall in price over the next 12 months, given a decline in consumer confidence over the same period, is called:

  A. an unconditional probability.
  B. a conditional probability.
  C. a joint probability.
  D. a likelihood.
  B. a conditional probability.

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  Explanation

  A conditional probability takes the form of P(A|B), the probability that an event (A) will happen, given the occurrence of another event, B. It is conditional because it is conditioned on another event, B.

• Question 2008:

  Which of the following is/are true?

  I. Multiplying a variable by a positive constant will cause its standard deviation to be multiplied by the square of that constant.

  II. Multiplying a variable by a constant will cause its mean to be multiplied by that constant.

  III. Adding a constant leaves the mean of a variable unchanged.

  IV.

  Adding a positive constant to a variable causes the standard deviation of the variable to increase by the same amount.

  A. IV only
  B. I, II and IV
  C. II only
  D. I only
  E. I and II
  F. III only
  G. II only
  H. II and IV
  C. II only

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  Explanation

  Adding a constant changes the mean by the same amount and leaves the variance and standard deviation unchanged. Multiplying with a constant causes the mean and the standard deviation to be multiplied by the same constant. The variance gets multiplied by the square of the constant.

• Question 2009:

  Which of the following is not subject to depreciation?

  A. automobiles
  B. land
  C. machinery
  D. land improvements
  B. land

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  Explanation

  Land has unlimited useful life and is not consumed when it is used, and therefore not subject to depreciation.

• Question 2010:

  When assets in a defined-benefit plan are worth less than the present value of the promised benefits,the fund is considered to be:

  A. underfunded.
  B. unfunded.
  C. overfunded.
  D. fully funded.
  A. underfunded.

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  Explanation