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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 201:

  Myra Addison, Luz Bazo, and Erik Jenss, three equity traders, are having a quick lunch around the corner from the exchange. Bazo's cell phone beeps, letting him know that he has a text message. He reads the message, then quietly tells Addison and Jenss that Badger Distributors, Inc. has just won exclusive rights to supply all major league baseball parks with uniforms for hot dog/soda vendors. Bazo stands up, gathers his unfinished lunch, and announces, "I'm going back to the exchange to trade." Jenss calmly eats his sandwich and says, "There's plenty of time to trade." Addison shakes her head and mutters, "It's too late already." Based on their reactions to the news on Badger Distributors, which statement best identifies the trading view of these three traders?

  A. Addison uses fundamental analysis, Bazo is a technician, and Jenss supports the efficient market hypothesis.
  B. Addison and Jenss both use fundamental analysis and Bazo is a technician.
  C. Addison and Jenss both use fundamental analysis and Bazo supports the efficient market hypothesis.
  D. Addison supports the efficient market hypothesis, Bazo uses fundamental analysis, and Jenss is a technician.
  D. Addison supports the efficient market hypothesis, Bazo uses fundamental analysis, and Jenss is a technician.

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  Explanation

  One major difference between technicians, fundamental analysis traders, and those who support the efficient market hypothesis is the speed at which they believe the market reflects new information, The order, from slowest to fastest, is: technical analysis (Jenss), fundamental analysis (Bazo), and efficient market hypothesis (Addison).

• Question 202:

  Which of the following temporary differences will result in a deferred tax asset?

  A. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
  B. Prepaid expenses accounted for on the accrual basis for financial statement purposes and on a cash basis for income tax purposes.
  C. Use of the straight-line depreciation method for financial statement purposes and the Modified Accelerated Cost Recovery System (MACRS) for income tax purposes.
  D. None of these answers.
  E. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.
  E. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash basis for tax purposes.

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  Explanation

  A deferred tax asset records deferred tax consequences attributable to deductible temporary differences. Advance rental receipts accounted for on the accrual basis for accounting purposes and on a cash basis for tax purposes would give rise to a deferred tax asset. The income statement would show no revenue and no related tax expense. However, on the tax return, the cash received is reported as revenue and the tax would be due now, resulting in a prepaid tax on the balance sheet called a deferred tax asset.

• Question 203:

  Estimates of earnings per share for a market series will consider which of the following factors?

  A. Sources for an estimate GNP
  B. Operating profit margin for the series
  C. All of these answers
  D. Depreciation and interest expense per share
  C. All of these answers

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  Explanation

  To estimate expected earnings per share considering an outlook for the aggregate economy and for the corporate sector, it is necessary to estimate GNP and sales per share, the operating profit margin, depreciation, interest expense and the corporate tax rate per share for the next year.

• Question 204:

  If the level of confidence is lowered from 95% to 90%, but the allowable error and the standard deviation remain the same, what happens to the required sample size?

  A. None of these answers
  B. Decreases
  C. Increases
  D. Remain unchanged
  B. Decreases

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  Explanation

  This is related to the degree or confidence and the maximum error allowed. If you want to have a lower degree of confidence, you can have a smaller sample size (given that the standard deviation is constant). If you want 100% confidence, you want to use the whole population as your sample.

• Question 205:

  According to the AIMR-Performance Presentation Standards, ________ must be used when calculating investment performance.

  A. benchmark
  B. asset-weighted return
  C. aggregate return
  D. total return
  D. total return

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  Explanation

  Total return, including realized and unrealized gains plus income, must be used when calculating investment performance. Portfolios must not be switched from one composite to another unlessdocumented changes in client guidelines make switching appropriate. This is a requirement for calculation of returns.

• Question 206:

  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.
  A. Only Analyst A is correct.

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  Explanation

• Question 207:

  How much will you have in an account two years from now if you start with $100 in it today and add $300 to it one year from now? Assume that interest is 6% per year, compounded annually.

  A. $430.36
  B. $424. 00
  C. $449.44
  D. $372. 02
  E. $400.00
  A. $430.36

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  Explanation

  Solve this question by working 2 compound interest problems. On the BAII Plus, press 2 N, 6 I/Y, 100 PV, 0 PMT, CPT FV, which yields $112. 36. Then press STO 1. Then press 1 N, 300 PV, CPT FV, which yields $318.00. To find the answer, press + RCL 1 =. On the HP12C, press 2 n, 6 i, 100 PV, 0 PMT, FV. Then press STO 1. Then press 1 n, 300 PV, FV. Then press RCL 1 + to show the answer.

• Question 208:

  A manufacturer of headache medicine claims it is 70 percent effective within a few minutes. That is, out of every 100 users 70 get relief within a few minutes. A group of 12 patients are given the medicine. If the claim is true, what is the probability that 8 have relief within a few minutes?

  A. None of these answers
  B. 0.168
  C. 0.667
  D. 0.001
  E. 0.231
  E. 0.231

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  Explanation

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 12, r = 8,p =

  0.7 and q = 0.3. Therefore we have 12!(0.7^8)(0.3^4)/8!4! = 0.231.

• Question 209:

  John was offered a salary of $25,000 when he graduated from school 15 years ago. He was somewhat depressed to read that the average starting salary for someone with his degree today was $45,000. He then decided to determine the annual, compound rate of increase implied in the increase of the starting salary from $25,000 to $45,000 in 15 years. What is this annually compounded growth rate?

  A. 4. 00%
  B. 7. 15%
  C. 1.03%
  D. 8.42%
  E. 12. 00%
  A. 4. 00%

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  Explanation

  Essentially, this question is a compound interest problem with the interest rate as the unknown value. On the BAII Plus, press 15 N, 25000 PV, 0 PMT, 45000 +/- FV, CPT I/Y. On the HP12C, press 15 n, 25000 PV, 0 PMT, 45000 CHS FV, i. John would seem to have no reason to be depressed, since the starting salary today has increased by only 4% per year over the last 15 years, which might be somewhat near the past rate of inflation. Make sure the BAII Plus has the P/Y value set to 1.

• Question 210:

  Intelligent Semiconductor is considering issuing additional common stock. The current yield to maturity on the firm's outstanding senior long-term debt is 13%. The company's combined federal/state income tax is 35%. The risk-free rate of return is 5. 6%, and the annual return on the broadest market index is expected to be 13. 5%. Shares of Intelligent Semiconductor have a historical beta of 1.6. In the past, the firm has assumed a 265 basis point risk premium when calculating the cost of equity. What is the cost of equity for this proposed common stock issue using the Bond-Yield-plus-Risk-Premium approach?

  A. 15. 65%
  B. 16. 15%
  C. 18.24%
  D. 11.20%
  E. The cost of equity using the Bond-Yield-plus-Risk-Premium approach cannot be calculated from the information provided.
  A. 15. 65%

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  Explanation

  The cost of issuing common stock can be calculated using several methods, including the Bond-Yield- Plus-Risk-Premium approach, Discounted Cash Flow method, or by using the Capital Asset Pricing Model. In this example, you have been asked to calculate the cost of equity using the Bond-Yield-plus- Risk-Premium approach. This method is a rather ad hoc procedure used by finance professionals, and involves adding a subjective "risk premium" to the yield to maturity of the firm's outstanding debt. This approach should be used with a degree of caution, as the subjective nature of the procedure leaves significant room for variation in estimates. In using the Bond-Yield-Plus-Risk-Premium approach, a subjective risk premium is added to the yield to maturity of the firm's outstanding long-term debt, and the calculation of the correct answer in this case is as follows: {yield to maturity of the outstanding senior debt 13% + subjective risk premium 2. 65%} =15. 65%.