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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2431:

  An investor wants to take advantage of the 5-year spot rate, currently at a level of 4. 0%. Unfortunately, the investor just invested all of his funds in a 2-year bond with a yield of 3. 2%. The investor contacts his broker, who tells him that in two years he can purchase a 3-year bond and end up with the same return currently offered on the 5-year bond. What 3-year forward rate beginning two years from now will allow the investor to earn a return equivalent to the 5-year spot rate?

  A. 3. 5%.
  B. 4. 5%.
  C. 5. 6%.
  B. 4. 5%.

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  Explanation

• Question 2432:

  Anamese Barrytone is a broker with Caledonia Investments. Caledonia also provides investment recommendations through its weekly letter. In its last letter released 3 days ago, Caledonia changed its investment recommendation on Sell-Me-Now, Inc. from "hold" to "sell." Anamese has just received a call from Sloan who wants to place a market-buy order on 600 shares of Sell-Me-Now. Anamese should

  A. not execute the order since her firm has placed the stock on the sell list.
  B. inform her supervisor about the order and then decide if the order should be executed.
  C. execute the order as is without trying to change Sloan's mind by telling him about Caledonia's recommendation since she is required to be a neutral broker by SEC rules.
  D. inform Sloan about the change in Caledonia's recommendation before executing the order.
  D. inform Sloan about the change in Caledonia's recommendation before executing the order.

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  Explanation

  According to the SEC rules, if a person places an order contrary to current firm recommendation, he or she should first be informed about the firm's position before accepting the order. Standard IV (B.3) - Fair Dealing.

• Question 2433:

  Market risk in a revenue-producing project can best be adjusted for by

  A. Ignoring it.
  B. Adjusting the discount rate downward for increasing risk.
  C. Picking a risk factor equal to the average discount rate.
  D. Adjusting the discount rate upward for increasing risk.
  E. Reducing the NPV by 10 percent for risky projects.
  D. Adjusting the discount rate upward for increasing risk.

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  Explanation

  An increase in a project's beta will cause its stock price to decrease unless the increased beta were offset by a higher expected rate of return. Therefore, high-risk investments require higher rates of return, whereas low-risk investments require lower rates of return.

• Question 2434:

  What single deposit could you make today in order to have $500,000 in 30 years, assuming it earns interest at 9% per year, compounded monthly?

  A. $19,423. 23
  B. $215,024. 60
  C. $23,682. 82
  D. $33,943. 00
  E. $53,512. 59
  D. $33,943. 00

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  Explanation

  On the BAII Plus, press 360 N, 9 divide 12 = I/Y, 0 PMT, 500000 FV, CPT PV. On the HP12C, press 360 n, 9 ENTER 12 divide i, 0 PMT, 500000 FV, PV. Note that the answer is displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2435:

  The following financial data on CashCow, Inc. have been taken from its financial statements for 1996:

  a.

  Dividends paid $25,000

  b.

  Sale of land $64,000

  c.

  Inventory purchases $29,000

  d.

  Purchase of a warehouse $208,000

  e.

  Bonds issued $90,000

  f.

  Dividends received from investments $17,000

  g.

  Interest paid on bonds $2,400

  h.

  Salaries paid $107,400

  i.

  Cash collection from customers $28,400

  j.

  Loss on land sale $18,000

  k.

  Beginning cash balance $312,000

  In the above question, the investing cash flow is ________.

  A. -$208,000
  B. -$126,000
  C. -$144,000
  D. -$162,000
  C. -$144,000

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  Explanation

  Items b and d are the investing cash flows. Note that item j is a non-cash event.

• Question 2436:

  Which of the following best describes the relationship between the relative maturation of an industry and the retention ratio of companies within the industry? Further, what is the proposed relationship between expected growth and the relative maturity of an industry?

  A. Negative relationship; no correlation
  B. Negative relationship; negative relationship
  C. Positive relationship; negative relationship
  D. Positive relationship; positive relationship
  E. Negative relationship; positive relationship
  B. Negative relationship; negative relationship

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  Explanation

  As an industry advances in maturity, growth of the overall industry will decline. As growth opportunities diminish, companies within the industry will be forced to pay out a larger proportion of their earnings as dividends; i.e. the dividend payout ratio will increase. Remember that the retention ratio is equal to (1 - the dividend payout ratio). Thus, the retention ratio of companies will likely decline as the industry advances in maturity. The relationship between the dividend payout ratio and the maturity of the industry is negative and loosely linear.

  As an industry becomes more mature, growth opportunities decline. This relationship is also loosely linear.

• Question 2437:

  Which of the following is/are growth stocks?

  I. The stock of Omega Corp., which is a highly successful firm that has had above average growth in sales and earnings in the past 5 years.

  II. The stock of InstyPrints, a paper company which has been poorly managed in the past, causing the firm's stock price to plunge below what most analysts consider to be its fair value.

  III.

  The stock of Zygotes, Etc., a biotech firm that has high business and financial risk.

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

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  Explanation

  You have to be careful in distinguishing between a growth stock and a growth firm. A growth stock need not represent a growth firm. Rather, it is defined as a stock that has consistently generated returns higher than those justified by the risks. Such a situation arises either because the company has surprise windfalls or because at some point in the past, the market underestimated the firm's growth potential. Since InstyPrints has been identified and commonly tagged as being "undervalued," one can reasonably expect the stock to generate higher than required rates of return in the near future. (Again, keep in mind that the return on the stock is different from the return on the firm's investments in various projects). Therefore, InstyPrints' stock is a growth stock. On the other hand, Omega Corp. is a growth firm but its stock need not necessarily be a growth stock. Indeed, if Omega's stock is "overvalued," it may be a bad investment.

• Question 2438:

  Given the following:

  Return on Investor's Equity with 80% Financing = -75%

  Return on Investor's Equity with 0% Financing = -15%

  The investor is experiencing the effects of ________.

  A. cannot be determined by the information given
  B. negative leverage
  C. positive leverage
  D. none of these answers
  B. negative leverage

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  Explanation

  Remember that, in real estate, the use of debt financing to purchase a piece of property will affect its risk-return parameters. In this case, leverage has a negative effect.

• Question 2439:

  Level ________ verification assures that all of the firm's actual, discretionary, fee-paying portfolios are included in at least one composite.

  A. V
  B. II
  C. IV
  D. I
  E. III
  D. I

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  Explanation

  Level I Verification requires that each of the firm's discretionary, fee-paying portfolios is included in at least one composite and that the firm's procedures for assigning portfolios to composites are reasonable and have been consistently applied over time.

• Question 2440:

  An end-of-period adjustment for depreciation of fixed assets involves an entry to an expense and

  A. the increase of a contra account
  B. the decrease of a contra account
  C. the reduction of a liability
  D. the increase of a liability
  A. the increase of a contra account

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  Explanation

  An adjustment for depreciation expense matches expenses with revenues for the period. An expense is incurred and the asset is reduced by increasing the contra account.