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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3341:

  Rapacity Consultants has just finished a project feasibility study for a cash-rich firm at a cost of $3 million. The consultants have concluded after much analysis that the project's cash flows have a net present value of $1.3 million and a payback period of 5. 3 years. The firm should:

  A. reject the project since it has a long payback period.
  B. reject the project since it has a negative NPV.
  C. none of these answers.
  D. accept the project since it has a positive NPV.
  D. accept the project since it has a positive NPV.

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  Explanation

  The $3 million spent on consultants represent sunk costs and must be ignored while looking toward the future. In that direction, the project has a positive NPV and should be accepted.

• Question 3342:

  What is the value of a preferred stock with a par value of $150, an annual dividend equal to 15% of par value, and a required rate of return of 12%?

  A. $150.00
  B. $187. 50
  C. Not enough information
  D. $123. 49
  E. 230.54
  B. $187. 50

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  Explanation

  The value of a preferred stock is the present value of its dividends, which is equal to the annual dividend divided by the required rate of return. In this question, the annual dividend is equal to 150 x .15 = $22. 5, and the preferred stock is worth $22. 5/0.12 = $187. 50

• Question 3343:

  Rob Ealey, CFA, has just purchased an option-free bond with a 6. 50% coupon that is currently selling at 94. 73 to yield 7. 25%. If yields increase by 50 bps, the new price of the bonds would be 91.41, and if yields decrease by 50 bps the new price of the bond would be 98.20. Determine the approximate new price of the bond if yields decrease by 75 basis points.

  A. 89.64.
  B. 99.82.
  C. 104. 92.
  B. 99.82.

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  Explanation

• Question 3344:

  Full employment means that which of the following is zero?

  A. frictional unemployment
  B. aggregate unemployment
  C. cyclical unemployment
  D. structural unemployment
  E. total unemployment
  C. cyclical unemployment

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  Explanation

  Full employment is the level of employment that results from the efficient use of the labor force after allowance is made for the normal rate of unemployment due to information cost, dynamic changes and the structural conditions of the economy. Cyclical unemployment is short run and therefore must be zero in order to attain full employment.

• Question 3345:

  Which of the following statements is NOT true relating to Standard IV (B.3) - Fair Dealing?

  A. This standard covers the conduct of two groups: those who prepare recommendations and those who take investment action.
  B. Members shall deal equally and objectively with all clients.
  C. Only through the fair treatment of all parties can the investment management profession maintain the confidence of the investing public.
  D. None of these answers.
  E. This standard covers investment action such as general purchases, new issues, or secondary offerings.
  B. Members shall deal equally and objectively with all clients.

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  Explanation

  The operative word is "fairly," not "equally." The term "fairly" implies that the member must take care not to discriminate against any customers or clients when disseminating investment recommendations. Members could not possibly reach all clients "equally" (i.e., simultaneously). In addition, each client has unique needs, investment criteria and investment objectives.

• Question 3346:

  Which of the following is not an assumption of the infinite period Dividend Discount Model?

  A. Earnings grow at a constant rate.
  B. The required rate of return is greater than the growth rate of dividends.
  C. The constant dividend growth rate will continue for an infinite period.
  D. Dividends grow at a constant rate.
  A. Earnings grow at a constant rate.

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  Explanation

  The infinite period dividend discount model does not concern itself with earnings. It assumes that dividends (which are the basis for its valuation of stock), rather than earnings, grow at a constant rate. But implicit in this assumption is the further assumption that earnings remain high enough to finance the constant and often growing dividend payments.

• Question 3347:

  A set of projects where only one can be accepted is known as ________.

  A. Project Net Worth Optimization
  B. Equity Enhancement
  C. Independent Projects
  D. Optimal Capital Budgeting
  E. Mutually Exclusive Projects
  E. Mutually Exclusive Projects

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  Explanation

  Mutually Exclusive Projects are defined as a set of projects where only one can be accepted.

• Question 3348:

  In year 1, the nation of Economica has no government debt, production is at potential, the nominal interest rate is 8.6% and the real rate is 5. 2%. In year 2, the nominal rate is 11.1% and the real rate is 6. 7%. Which of the following would be most likely to cause such a situation?

  A. Federal budget deficit
  B. Monetary expansion
  C. Recession
  D. Trade surplus
  E. Increase in aggregate supply
  A. Federal budget deficit

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  Explanation

  In this case, the real rate has increased, as well as the rate of inflation. This is most likely to be caused by a budget deficit. Deficit spending causes the real rate to rise due to government demand for debt. Inflation would also increase because government spending amounts to an increase in aggregate demand, which would shift the price level higher.

• Question 3349:

  Trisdale is a portfolio manager who has consistently outperformed the market on a risk-adjusted basis for the past 3 years. As an appreciation for his work, one of his clients recently gave him a travel package to Vancouver worth around $5,000. Trisdale informed his supervisor about this gift and then took time off from work to enjoy a vacation in Vancouver. Trisdale has

  A. violated Standard III (D) - Disclosure of Additional Compensation Arrangements.
  B. violated Standard IV (A.3) - Independence and Objectivity.
  C. not violated the AIMR code of ethics.
  D. violated Standard IV (B.3) - Fair Dealing.
  C. not violated the AIMR code of ethics.

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  Explanation

  The AIMR code of ethics does not preclude members from accepting gifts in excess of the modest amount of $100 from clients, as long as they are disclosed to the immediate supervisor. What the code does prohibit is acceptance of gifts in excess of $100 from parties that have a strong motive to influence the judgment of the members (e.g., companies that a member might be researching for investment recommendations). The disclosure of additional compensation arrangements with clients allows the supervisory authorities to monitor the portfolio activity and ensure that the gift-giving client's portfolio is not receiving any undue favorable treatment.

• Question 3350:

  If a broad increase in the price of stocks causes an increase in the real wealth of individuals, then the

  A. aggregate demand curve will shift to the left.
  B. aggregate demand curve will shift to the right.
  C. general price level will fall.
  D. aggregate quantity demanded must rise.
  B. aggregate demand curve will shift to the right.

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  Explanation

  As the real wealth of households increases, people demand more goods and services. This causes the entire aggregate demand curve to shift to the right.