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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2361:

  A firm has purchased heavy machinery with a useful life of 7 years. It cost $28,000 and its salvage value is estimated at $4,000. If the firm uses double declining method, what's the depreciation expense recognized in Year 1?

  A. $3,429
  B. $8,000
  C. $6,857
  D. $4,000
  B. $8,000

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  Explanation

  In Double Declining method, depreciation = (2/n)*book value = (2/7)*28,000.

• Question 2362:

  When a marketable security's classification is changed, which of the following apply?

  I. The transfer is accounted for at the amortized historical cost of the security.

  II. The change in the fair value of the security is reported as part of the income statement.

  III.

  The switch in classification is at management's discretion.

  A. I and II
  B. I, II and III
  C. III only
  D. I and III
  C. III only

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  Explanation

  When the classification of a marketable security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement (in the case of trading and held-to-maturity securities) or as a separate component of shareholder equity (in the case of available-for-sale securities). The classification and reclassification of securities is largely based on management intent. This allows the firm to manipulate current income by timing the reclassifications. Consequently, any financial statement analysis must take into account the effects of such artificial effects on income.

• Question 2363:

  Complete the following: According to The Code of Ethics, members of AIMR shall: "Act with integrity, competence, ________ and in an ethical manner when dealing with the public, clients, prospects, employers, employees and fellow members."

  A. honorability
  B. dignity
  C. morality
  D. none of these answers
  E. virtue
  B. dignity

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  Explanation

  According to The Code of Ethics, members of AIMR shall: "Act with integrity, competence, dignity and in an ethical manner when dealing with the public, clients, prospects, employers, employees and fellow members."

• Question 2364:

  James Morrison is a profit-seeking banker. His bank has $25 million in excess reserves. Mr. Morrison

  A. can probably increase his profits by increasing his excess reserves.
  B. cannot affect his profits by changing the amount of excess reserves held by his bank.
  C. cannot change excess reserves held by his bank because this level is set and strictly enforced by the Fed.
  D. can probably increase his profits by reducing his excess reserves.
  D. can probably increase his profits by reducing his excess reserves.

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  Explanation

  A bank holding excess reserves can increase its profits by extending more loans and holding fewer excess reserves. This is because the excess reserves held by the bank do not earn any interest. However, excess reserves extended as loans earn a positive interest rate and therefore will allow the bank to make a positive profit. Excess reserves represent the portion of reserves held by the bank in excess of the required reserve ratio set by the Fed.

• Question 2365:

  When purchased, plant assets are recorded at ________.

  A. future value
  B. market value
  C. lower of cost or market
  D. cost
  D. cost

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  Explanation

  Fixed assets are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready to use.

• Question 2366:

  Arbaaz, an AIMR member, works for an investment advisory firm, Leon Investments. His friend, Shahzad, recently asked him for some investment recommendations. Arbaaz analyzed Shahzad's portfolio over a weekend and suggested some changes. While he did not accept any remuneration, Shahzad promised him some gifts if his portfolio "performed well." Arbaaz did not inform his employer since he thought he was helping a friend and in any case, the Shahzad's account was extremely small and there were no financial payments. Arbaaz has:

  A. violated Standard III (B), Duty to Employer.
  B. has not violated Standard III (B), Duty to Employer, because there was no financial remuneration.
  C. has not violated Standard III (B), Duty to Employer, because Shahzad's account was too small to be deemed lost business for Leon Investments.
  D. has not violated Standard III (B), Duty to Employer, because Arbaaz is free to do what he wants on his time as long as it doesn't affect Leon Investments.
  A. violated Standard III (B), Duty to Employer.

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  Explanation

  While Arbaaz did not receive any monetary compensation, there is a possibility of gifts in the future. Standard III (B) applies even when there is no actual receipt of compensation; what is important is the possibility of future payments in cash or kind. By not obtaining a written permission from his employer before advising Shahzad, Arbaaz violated Standard III (B).

• Question 2367:

  If you owe $5,000 today and will repay it with 8 annual payments of $900 beginning next year, what is the annual interest rate, compounded annually, that you are paying?

  A. 9.80%
  B. 9.98%
  C. 18%
  D. 8.90%
  E. 44%
  D. 8.90%

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  Explanation

  On the BAII Plus, press 8 N, 5000 PV, 900 +/- PMT, 0 FV, CPT I/Y. On the HP12C, press 8 n, 5000 PV, 900 CHS PMT, 0 FV, i. Note that the PMT must be entered with a sign that is opposite that given the PV.

• Question 2368:

  Ron Travis, CFA, manages a portfolio of long-term and short-term bonds. The portfolio is equally weighted between 1-year, 2-year, 10-year, and 20-year maturities and currently has a portfolio duration equal to 7. 0. Travis is concerned that 1and 2-year interest rates are going to increase by 100 basis points while 10- and 20-year rates decrease by 100 basis points. If his prediction is correct, Travis' measure of duration will be ineffective at predicting interest rate risk since portfolio duration is only accurate when the:

  A. yield curve does not shift.
  B. shift in the yield curve is parallel.
  C. yield curve steepens.
  B. shift in the yield curve is parallel.

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  Explanation

• Question 2369:

  Which of the following AIMR Standards states that the financial analyst shall indicate the basic characteristics of the investment involved when preparing a research report not directly related to a specific portfolio or client?

  A. III D
  B. III C
  C. None of these answers
  D. IV (A.2)
  D. IV (A.2)

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  Explanation

  Standard IV (A.2) - Research Reports states: "Members shall indicate the basic characteristics of the investment involved when preparing for public distribution a research report that is not directly related to a specific portfolio or client."

• Question 2370:

  The significance level of a test is usually equal to which of the following:

  A. The power of a test.
  B. The probability of a Type I error.
  C. None of these answers is correct.
  D. The probability of a Type II error.
  E. More than one of these answers is correct.
  F. (1 - the probability of a Type I error).
  B. The probability of a Type I error.

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  Explanation

  The standard method of hypothesis testing involves stating the significance level as equal to the probability of incorrectly rejecting the null hypothesis. This action is defined as a Type I error. The converse of a Type I error, in which the null hypothesis is incorrectly rejected, is a Type II error, in which a false null hypothesis is mistakenly accepted.