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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2991:

  Standard IV (A) is known as ________.

  A. Interactions with Clients and Prospects
  B. Preservation of Confidentiality
  C. Professional Misconduct
  D. Prohibition against Use of Material Nonpublic Information
  E. Duty to Employer
  F. Fair Dealing
  G. None of these answers
  H. Investment Process
  H. Investment Process

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  Explanation

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 2992:

  Urvashi Kulkarni is an investment manager with Amritrust Bank, a mid-size investment bank. Urvashi is managing the pension plan assets of Megalith ICs, a maker of cloned integrated chips for PCs. Megalith is planning a take-over of Microchip Corp., a fast-growing rival which recently patented a technology which promises to change the face of chip cloning business. The pension plan assets of Megalith consist of 17% of Microchip's stock. Megalith's management has decided to buy up to 33% of the stock in a tender offer and transfer the 17% stock holdings of the pension plan to the company investment account. So it instructs Urvashi to sell the Microchip stock to Megalith's general account at the current market price and invest the cash in other stock as she feels appropriate. Urvashi knows that this action and the subsequent takeover of Microchip will substantially elevate Megalith's stock price, creating shareholder value. Urvashi should

  A. refuse to follow the directive since she can be held liable under ERISA if she follows directives issued by the plan sponsor.
  B. refuse to follow the directive since the action is harmful to the pension plan beneficiaries and Urvashi owes fiduciary loyalty to them, not the plan sponsor.
  C. follow the management's directive and sell the stock to the general account.
  D. none of these answers.
  B. refuse to follow the directive since the action is harmful to the pension plan beneficiaries and Urvashi owes fiduciary loyalty to them, not the plan sponsor.

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  Explanation

  Urvashi owes fiduciary loyalty to the plan beneficiaries, not the management of Megalith. She must not sell Microchip's stock prior to the tender offer since in doing so, she will be selling the plan assets at a much lower price than would be available once the tender is floated. While such an action benefits Megalith shareholders, it harms the plan beneficiaries. Urvashi owes absolutely no allegiance to Megalith shareholders. Standard IV (B.1) - Fiduciary Duties - and the Topical Study, "Fiduciary Duties."

• Question 2993:

  3 months ago, Fred Hoyle received the AIMR letter, informing him that he had passed Level II exam. He has now registered for Level III exam. Fred can do which of the following?

  I. Put "CFA-II" on his business card, as long as it is in a smaller font than his name.

  II. Mention on his resume that he has passed Level II exam of the CFA program.

  III. Mention that he is a Level III candidate in the CFA program.

  IV.

  Inform his clients of his professional progress and assure them of his quality as an analyst.

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

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  Explanation

  Standard II (A).

• Question 2994:

  Which of the following are characteristics of material nonpublic information?

  A. The information may be considered relevant by reasonable investors.
  B. The information would have a substantial impact on the market if released.
  C. All of these answers.
  D. The information has not been generally disclosed.
  C. All of these answers.

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  Explanation

  Information is "material" if its disclosure would be likely to have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision. In other words, information is material if it would significantly alter the total mix of information currently available regarding a security. Information is "nonpublic" until it has been disseminated to the marketplace in general and investors have had an opportunity to react to the information.

• Question 2995:

  MacDonald Inc. reported net income of $300,000 for 1996. Changes occurred in several balance sheet accounts as follows:

  Equipment $25,000 increase

  Accumulated depreciation 40,000 increase

  Note payable 30,000 increase

  Additional information:

  During 1996, MacDonald sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.

  In December 1996, MacDonald purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.

  Depreciation expense for the year was $52,000.

  In MacDonald's 1996 statement of cash flows, net cash used in investing activities is ________.

  A. $12,000
  B. $18,000
  C. $20,000
  D. $32,000
  E. $2,000
  E. $2,000

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  Explanation

  The purchase and sale of equipment are investing activities. The firm spent $20,000 cash to buy equipment and received $18,000 cash (net book value was $13,000 plus $5,000 gain) by selling its old equipment. Therefore, the net cash used in investing is $2,000. The issuance of a note payable is part of the acquisition price of equipment and is classified as a noncash financing and investing activity.

• Question 2996:

  Assuming that the nominal risk-free rate of interest is currently at 4. 90% per year, with the real inflationfree rate of return at 2. 05% per year, what is the inflation premium? Further, assuming that the inflation premium is to fall by 130 basis points, what would be the adjusted nominal risk-free rate of interest?

  Assume that both the new inflation rate and the inflation-free rate of interest are considered small by historical standards.

  A. 2. 85% per year, increase by 70 basis points
  B. 2. 05% per year, increase by 130 basis points
  C. The answer cannot be calculated from the information provided.
  D. 2. 85% per year, increase by 130 basis points
  E. None of these answers is correct.
  F. 2. 05% per year, decrease by 130 basis points
  E. None of these answers is correct.

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  Explanation

  Remember that the nominal risk-free rate of interest is comprised of two components, the real "inflation-free" rate of interest and an inflation premium. The inflation premium is equal to the anticipated inflation rate.

  The equation for the calculation of the nominal interest rate when the real inflation-free rate of interest and/or the inflation premium are significantly small is as follows:

  Risk-free rate of return = k* + IP

  where: k* = the real inflation-free rate of return and IP = the inflation premium

  In this example, the nominal risk-free interest rate is provided as 4. 90%, and the inflation-free rate of return as 2. 05%. Incorporating these values into the equation illustrated above will yield a value of 2. 85% for the inflation premium.

  Increasing the inflation premium by 130 basis points will lead to a 130 basis point increase in the nominal risk-free interest rate. None of the answers correctly illustrate these findings.

  When either the real "inflation-free" interest rate or the expected inflation rate are significantly large, the calculation of the nominal risk-free rate differs from the equation used when these factors are significantly small. Specifically, the

  calculation of the nominal risk-free rate of interest when the inflation-free rate of interest and/or the inflation premium are significantly high, the calculation of the nominal risk-free rate is as follows:

  Nominal RFR = (1 + Real RFR)(1 + E(I)) - 1

  Where: Real RFR = the real inflation-free rate of interest and E(I) = the anticipated inflation rate

• Question 2997:

  How many monthly payments of $30, beginning next month, are needed to pay off a debt of $1,000, if interest accrues at 10% per year, compounded monthly?

  A. No solution/Error
  B. 32. 80
  C. 51.48
  D. 39.21
  E. 27. 60
  D. 39.21

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  Explanation

  On the BAII Plus, press 10 divide 12 = I/Y, 1000 PV, 30 +/- PMT, 0 FV, CPT N. On the HP12C, press 10 ENTER 12 divide i, 1000 PV, 30 CHS PMT, 0 FV, n. Note that the HP12C will display 40 as the answer. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2998:

  Sixty percent of the customers of a fast food chain order the Whopper, fries and a drink. If a random sample of 15 cash register receipts is selected, what is the probability that 10 or more will show that the above three food items were ordered?

  A. 0.186
  B. None of these answers
  C. 1,000
  D. 0.403
  E. 0.000
  D. 0.403

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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)!. Therefore, we need to find out the probability of getting 10, 11,12,13,14,15 successes and add them up. Here n=15, p=0.6 and q=0.4. r changes from 10 to 15.

  P(10 successes) = 15!(0.6^10)(0.4^5)/10!(15-10)! = 0.1859 P(11 successes) = 15!(0.6^11)(0.4^4)/11!(15-11)! = 0.1268 P(12 successes) = 15!(0.6^12)(0.4^3)/12!(15-12)! = 0.0634 P(13 successes) = 15!(0.6^13)(0.4^2)/13!(15-13)! = 0.0219 P(14 successes) = 15!(0.6^14)(0.4^1)/14!(15-14)! = 0.0047 P(15 successes) = 15!(0.6^15)(0.4^0)/15!(15-15)! = 0.00047

  The sum of all the probabilities is 0.403.

• Question 2999:

  Complete the following: According to The Code of Ethics, members of AIMR shall: "Practice and encourage others to practice in a professional and ethical manner that will ________ members and their profession."

  A. improve the qualifications of
  B. reflect credit on
  C. none of these answers
  D. improve the compensation of
  E. improve the access of
  B. reflect credit on

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  Explanation

  According to The Code of Ethics, members of AIMR shall: "Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession."

• Question 3000:

  Investment companies often start numerous funds to ________.

  A. justify investment in more securities
  B. attract many investors with different risk-return preferences
  C. diversify the aggregate portfolio
  D. all of these answers
  B. attract many investors with different risk-return preferences

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  Explanation

  Investment companies often start numerous funds to attract many investors with different risk-return preferences, which increases the total capital managed by the investment company.