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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3171:

  The interest expense on a premium bond _______ over time.

  A. decreases
  B. remains constant
  C. can increase or decrease, depending on interest rate movements
  D. increases
  A. decreases

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  Explanation

  Remember that the book value of the liability of any straight bond equals the face value at maturity. Hence, when the bond is issued at a premium, the premium amount is amortized over the life of the bond. The outstanding liability thus decreases steadily toward the face value. The decreasing liability decreases the interest expense over time.

• Question 3172:

  Brikland Strickowski learned a month ago that one of his clients, Stratmann, had been regularly using inside information provided by numerous "contacts" in various firms to generate his trading activity with Brikland. Brikland was surprised at Stratmann's recklessness but did not want to get him into trouble so he did not inform anyone about this. AIMR has been tipped about Stratmann's activity and one of the investigators from AIMR's Professional Conduct Program (PCP) recently got in touch with Brikland about this. Brikland, in his desire not to have his CFA designation voided by AIMR, decided to divulge everything he knew about Stratmann's investment activity, though this information is considered confidential even by AIMR. Which of the following is/are true about this sordid mess?

  I. Brikland violated Standard IV (B.5) - Preservation of Confidentiality -by revealing confidential information about Strattman to the PCP investigator.

  II. Strattman violated Standard V (A) - Prohibition Against Use of Non-Public Information.

  III. Brikland violated Standard I - Fundamental Responsibilities - by not informing his supervisor and/or the SEC about the insider trading.

  IV.

  Brikland violated Standard I - Fundamental Responsibilities - by not dissociating himself from Strattman's portfolio.

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

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  Explanation

  As an AIMR member, Brikland must cooperate fully with any investigation carried out by the PCP. Since the information revealed during the investigation is kept in strict confidentiality, such a cooperation is not considered a violation of Standard IV (B.5) - Preservation of Confidentiality. Indeed, the Code of Ethics expressly requires members to cooperate with such investigations, failing which the member can be summarily suspended. Note that the Code does not require members to report criminal activity to proper authorities, though doing so is most often prudent and a suggested course of action (Standard I - Fundamental Responsibilities). However, if the member knowingly participates in illegal activities or does not dissociate himself from such activities, he would be violating the code.

• Question 3173:

  A common size balance sheet shows all quantities as a percentage of ________ while an income statement uses ___________ as the base amount.

  A. sales, assets
  B. assets, sales
  C. equity, sales
  D. assets, equity
  B. assets, sales

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  Explanation

  A common size balance sheet shows all quantities as a percentage of assets while an income statement uses sales as the base amount.

• Question 3174:

  Money market funds

  A. were first developed in 1973 when short-term interest rates were at record levels. These funds attempt to provide current income, safety of principal, and liquidity by investing in diversified portfolios of short-term securities including Treasury bills, certificates of deposit, bank acceptances, and commercial paper.
  B. were first developed in 1981 when short-term interest rates were at record levels. These funds attempt to provide current income, safety of principal, and liquidity by investing in diversified portfolios of short and medium-term securities including Treasury bills, government agency bonds, and commercial paper.
  C. were first developed in 1981. These funds attempt to provide current income, safety of principal, high returns, and liquidity by investing in diversified portfolios of short and medium-term securities including Treasury bills and notes, certificates of deposit, bank acceptances, and commercial paper.
  D. were first developed in 1973 when interest rates were at record levels. These funds attempt to provide safety of principal and liquidity by investing in diversified portfolios of short-term securities including Treasury bills, municipal bonds, certificates of deposit, and commercial paper.
  A. were first developed in 1973 when short-term interest rates were at record levels. These funds attempt to provide current income, safety of principal, and liquidity by investing in diversified portfolios of short-term securities including Treasury bills, certificates of deposit, bank acceptances, and commercial paper.

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  Explanation

  Money market accounts generally allow investors to write checks against them. Their growth rate is often associated with investor attitudes toward the stock market. When investors are bullish, they move funds from their money market accounts and invest in stocks. When they are bearish, they sell off stocks and put some of the proceeds in money market accounts. Municipal bonds are not included in this type of investment.

• Question 3175:

  Howard Keane is a strategist for Dove Investments. His models indicate that the expected inflation rate will be 3. 0%. The real rate of return on the SandP 500 index is expected to be 8.7%, while the real rate of return on U.S. Treasury notes is

  expected to be 1.0%. Howard is interested in the current equity risk premium. Based on the information above, the equity risk premium is closest to:

  A. 4%.
  B. 6%.
  C. 8%.
  C. 8%.

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  Explanation

• Question 3176:

  With regard to calculation of returns for international portfolios, a consistent source of ________ should be used.

  A. exchange rates
  B. trades
  C. settlements
  D. disclosures
  E. taxes
  A. exchange rates

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  Explanation

  Whenever the currency overlay manager is notified of changes in the underlying currency exposures as a result of a shift in the underlying assets, the currency overlay portfolios should be revalued to ensure consistency.

• Question 3177:

  Using the following assumptions, calculate the rate of return on a margin transaction and the stock price at which the investor who purchases the stock will receive a margin call. What of the following choices is closest to the correct answer? The margin transaction return is:

  A. 83. 33%, and the investor will receive a margin call at a stock price of $15. 43.
  B. 33. 33%, and the investor will receive a margin call at a stock price of $15. 43.
  C. 111.11%, and the investor will receive a margin call at a stock price of $21.00.
  D. 111.11%, and the investor will receive a margin call at a stock price of $15. 43.
  A. 83. 33%, and the investor will receive a margin call at a stock price of $15. 43.

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  Explanation

  To obtain the result:

  Part 1: Calculate Margin Return:

  Margin Return % = [((Ending Value - Loan Payoff) / Beginning Equity Position)

• Question 3178:

  The first thing one does using the top-down, three step approach to stock valuation is

  A. analyze specific company performance. One undertakes such analysis to find the best performing companies in a particular industry. After finding industry favorites, one would then examine which industries look promising.
  B. analyze the general economic influences affecting a national or regional economy. Such analysis includes research on fiscal policy, monetary policy (with its multiplier effect), inflation, and other events such as wars or political upheavals.
  C. analyze the general economic influences affecting a national or regional economy. There is a particular focus on inflation because of the important multiplier effect that inflation has on the rest of the economy, particularly aggregate demand.
  D. analyze the general economic influences affecting a national or regional economy. There is a particular focus on government monetary policy because of the important multiplier effect that monetary policy has on the rest of the economy.
  E. analyze the general economic influences affecting a national or regional economy. Such analysis includes research on fiscal policy (with its multiplier effect), monetary policy, inflation, and other events such as wars or political upheavals.
  E. analyze the general economic influences affecting a national or regional economy. Such analysis includes research on fiscal policy (with its multiplier effect), monetary policy, inflation, and other events such as wars or political upheavals.

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  Explanation

  The first step in the top-down, three-step approach to valuation is analysis of alternative economies and securities markets in order to decide how to allocate investment among different countries and securities. That includes analysis of fiscal and monetary policies, inflation, and other events such as wars and political upheavals that might affect these decisions.

• Question 3179:

  Contrary-opinion technicians would view a high put/call ratio as A. a bearish sign.

  B. a sign of a market peak.

  C. a bullish sign.

  D. an unimportant statistic.

  E. a sign of a flat market.

  Correct Answer. C
  C

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  Explanation

  A high put/call ratio indicates that a relatively large number of investors are betting that the market will go down by holding put options. Contrary-opinion traders believe that such sentiment is the opposite of the truth; they view it as a bullish sign.

• Question 3180:

  Under ERISA, fiduciaries must:

  -act solely in the interest of and for the exclusive purpose of benefiting, the plan participants and beneficiaries;

  -act with the care, skill, prudence and diligence of a prudent person acting in like capacity;

  -diversify the plan's investments to protect it from the risk of substantial loss;

  -act in accordance with the provisions of the plan documents to the extent that the documents comply with ________;

  -refrain from engaging in prohibited transactions.

  A. AIMR regulations
  B. AIMR code of ethics
  C. None of these answers
  D. ERISA
  D. ERISA

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  Explanation

  ERISA establishes several guidelines for fiduciary conduct with respect to employee benefit plans. These principles evolved from the common law of trusts, as interpreted by state courts and pre-ERISA requirements for the tax qualification of plans. Fiduciaries must observe these guidelines in all aspects of their dealings with a plan or its assets.