CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 3171:

  What is the present value today of these annual cash flows: $300, $1,200, $2,500? Assume the first cash flow occurs 1 year from today and an interest rate of 9% per year, compounded annually.

  A. $3,215.70

  B. $2,989.06

  C. $3,244.09

  D. $3,298.82

  E. $3,308.86

  Correct Answer: A

  You could solve this question using 3 different compound interest problems, but it is easier to solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 0 ENTER DownArrow 300 ENTER DownArrow DownArrow 1200 ENTER DownArrow DownArrow 2500 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 9 ENTER DownArrow CPT. On the HP12C, press these keys: 0 BlueShift CFo 300 BlueShift CFj 1200 BlueShift CFj 2500 BlueShift CFj. Then press 9 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 3172:

  A perpetual preferred stock has a face value of $1,000 and a coupon rate of 6% per year. If it is issued at $850, what's the implicit annual discount rate?

  A. 6.94%

  B. 7.00%

  C. 7.19%

  D. 7.06%

  Correct Answer: D

  A preferred stock is valued like a perpetuity. The price of a preferred stock with a face value F and a coupon rate c equals F*c/r, where r is the implicit discount rate. In this case, we have 850 = 1,000*0.06/r, giving r = 7.06%.

• Question 3173:

  If you deposit $2,250 today into a savings account paying 8% per year, compounded semiannually, how much is in your account in 10 years?

  A. $4,587.85

  B. $10,487.15

  C. $3,330.55

  D. $4,857.58

  E. $4,930.03

  Correct Answer: E

  On the BAII Plus, press 20 N, 8 divide 2 = I/Y, 2250 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 8 ENTER 2 divide i, 2250 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/ Y value set to 1.

• Question 3174:

  Of 900 consumers surveyed, 414 said they were very enthusiastic about a new home decor scheme. What is the 99% confidence interval for the population proportion (in percent)?

  A. 42 and 50

  B. None of these answers

  C. 30 and 40

  D. 30 and 60

  E. 31 and 51

  Correct Answer: A

  Interval estimate can be found from p +/- z[p(1-p)/n]^0.5. Here we have n = 900, p = 414/900 = 0.46 and z = 2.58 (for 99%). Therefore 0.46 +/- 2.58*0.01661 and we get 0.42 and 0.50.

• Question 3175:

  If the sample variance for a frequency distribution consisting of hourly wages was computed to be 10, what is the sample standard deviation?

  A. $3.16

  B. None of these answers

  C. $1.96

  D. $4.67

  E. $10.00

  Correct Answer: A

  Sample standard deviation is the square root of the sample variance.

• Question 3176:

  Type II error refers to the event that we will:

  A. Fail to reject the null when it is false.

  B. Accept the alternative when it is false.

  C. Reject the null when it is true.

  D. Reject the alternative when it is true.

  Correct Answer: A

  Remember that the null hypothesis is the one that you maintain to be true unless there is sufficient evidence to prove otherwise. Therefore, the first type of mistake that can happen is that you reject the maintained hypothesis when in fact, it is true. This error is referred to as "Type I" error. On the other hand, you may not have sufficient evidence to disprove the null when in fact, it is false. This failure to appropriately reject the null is referred to as "Type II" error.

• Question 3177:

  What is the area under the normal curve between z = -1.0 and z = -2.0?

  A. 0.0228

  B. 0.4772

  C. 0.3413

  D. 0.1359

  E. None of these answers

  Correct Answer: D

  From the z-tables, z = 1 is 0.3413 and z = 2 is 0.4772. So the area in between is 0.4772 - 0.3413 = 0.1359.

• Question 3178:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$14,000>, Year 1: $5,000, Year 2: $4,000, Year 3: $5,000, Year 4 a negative number).

  A. 10.69%

  B. 11.14%

  C. 12.04%

  D. 45.29%

  E. 10.49%

  Correct Answer: B

  On the BAII Plus, press CF 2nd CLRWork 14000 +/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 5000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 14000 CHSBlueShift CFo 5000 BlueShift CFj 4000 BlueShift CFj 5000 BlueShift CFj 4000 BlueShift CFj. Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3179:

  The significance level in hypothesis testing refers to the:

  A. probability of Type II error.

  B. 1-probability of Type I error.

  C. joint significance of the associated regression, indicated by the F-statistic.

  D. probability of Type I error.

  E. none of these answers.

  Correct Answer: D

  Type I error refers to the event that we will reject the null when, in fact, it is true. The probability of this error is called the "significance level" of the test used to evaluate the hypothesis. Clearly, lower significance levels are better, all else equal.

• Question 3180:

  Assume you buy a car for $20,000 today and agree to pay $200 a month, beginning next month, for 4 years with a final payment also due 4 years from today to pay off any remaining balance. How large will that final payment be, if interest accrues at 5.9% per year, compounded monthly?

  A. $19,590.32

  B. $24,280.77

  C. $19,204.41

  D. $10,400.00

  E. $14,511.19

  Correct Answer: E

  There are 48 months in 4 years. This is a problem known as a balloon payment. On the BAII Plus, press 48 N, 5.9 divide 12 = I/Y, 20000 PV, 200 +/- PMT, CPT FV. On the HP12C, press 48 n, 5.9 ENTER 12 divide i, 20000 PV, 200 CHS PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.