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

• Question 3491:

  How much would you have in a savings account 12 months from now if you start with a balance of $3,000 today, make a deposit of $1,000 in 6 months and make another deposit 6 months after that of $500? Assume that interest accrues at 6% per year, compounded monthly.

  A. $4,684.42

  B. $4,777.55

  C. $4,715.41

  D. $4,500.00

  E. $2,500.00

  Correct Answer: C

  Find the answer to this question by solving a couple of compound interest problems. Move the $3,000 to month 12, then move the $1,000 forward 6 months to month 12, then add $500. On the BAII Plus, press 12 N, 6 divide 12 = I/Y, 3000 PV, 0 PMT, CPT PV. Then press STO 1. Then press 6 N, 1000 PV, CPT FV. Then press + RCL 1 =. Make this number positive by pressing +/- and then press + 500 = to see the answer. On the HP12C, press 12 N, 6 ENTER 12 divide i, 3000 PV, 0 PMT, FV. Then press STO 1. Then press 6 N, 1000 PV, FV. Then press RCL 1 +. Make this number positive by pressing CHS and then press 500 + to see the answer. Make sure that the BAII Plus has the value of P/Y set to 1.

• Question 3492:

  Suppose you are modeling long-term interest rates, and you believe that supply of corporate debt is a major contributing factor. Suppose you believe that the probability that rates will rise if supply of corporate debt rises is 60%; if the supply of corporate debt stays constant, you believe that there is a 35% chance of increasing interest rates; if the supply of corporate debt falls, you believe that there is a 5% chance of rates increasing. You think that the likelihood of corporate debt increasing is 50%; of staying the same is 40%; of dropping is 10%. What is the unconditional probability of interest rates rising?

  A. 55.4%.

  B. 44.4%.

  C. 44.5%.

  D. 55.5%.

  Correct Answer: C

  We use the total probability rule: P(A), the unconditional probability, = P(A|S_1)*P(S_1) + P(A|S_2) *P (S_3) + P(A|S_3) *P(S_3), where the S_i represent mutually exclusive and exhaustive events. So the likelihood of interest rates increasing is 0.60 * 0.50 + 0.35 * 0.40 + 0.05 * 0.10 = 0.30 + 0.14 + 0.005 = 0.445.

• Question 3493:

  If you deposit $1,111 a year, beginning next year, for 20 years into an account paying 7% per year, compounded annually, how much is in your account after that last deposit?

  A. $50,598.15

  B. $47,003.98

  C. $45,545.99

  D. $30,118.37

  E. $48,304.12

  Correct Answer: C

  On the BAII Plus, press 20 N, 7 I/Y, 0 PV, 1111 PMT, CPT FV. On the HP12C, press 20 n, 7 i, 0 PV, 1111 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is displayed as a negative number.

• Question 3494:

  Given the following points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3)

  What is the critical value necessary to determine a confidence interval for a 90% level of confidence?

  A. 1.638

  B. 1.533

  C. None of these answers

  D. 2.132

  E. 2.353

  Correct Answer: E

  Look at the t tables for n-2 degrees of freedom at the 10% level. Here, we look for a two tailed test with 5-2 = 3 degrees of freedom. This is 2.353.

• Question 3495:

  A coefficient of skewness of +2.48 indicates:

  A. all of these answers are correct

  B. the mean is larger than the median

  C. the tail of the distribution is to the right

  D. none of these answers are correct

  E. a large positive skewness

  Correct Answer: A

  In a positively skewed distribution, the mean is greater than the median or mode. The coefficient of skewness (Sk) generally lies between -3 and +3, therefore an Sk of +2.48 indicates significant positive skewness.

• Question 3496:

  If you deposit $250 a month, beginning next month, for 20 years into an account paying 7% per year, compounded monthly, how much is in your account after that last deposit?

  A. $58,205.58

  B. $308,663.09

  C. $148,833.09

  D. $147,577.02

  E. $130,231.66

  Correct Answer: E

  On the BAII Plus, press 240 N, 7 divide 12 = I/Y, 0 PV, 250 PMT, CPT FV. On the HP12C, press 240 n, 7 ENTER 12 divide i, 0 PV, 250 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is displayed as a negative number.

• Question 3497:

  What simple annual interest rate would cause a $200 deposit to earn $15 interest in one year?

  A. 5.00%

  B. 12.50%

  C. 10.25%

  D. 7.5%

  E. 6.67%

  Correct Answer: D

  To solve this question, rearrange the simple interest formula I=PRT to isolate R. On the BAII Plus, press 15 divide 200 divide 1 = to see the answer. On the HP12C, press 15 ENTER 200 divide 1 divide to see the answer. Note that the final division by 1 (which is the time T in this question) is not necessary.

• Question 3498:

  What percent of the observations will lie above the mean plus two standard deviations?

  A. 5%

  B. 68%

  C. 2.5%

  D. None of these answers

  E. 95%

  Correct Answer: C

  95% of the observations lie between plus and minus two standard deviations from the mean. Therefore, 2.5% lie over and above two standard deviations on each side of the mean.

• Question 3499:

  The ERISA fiduciary needs to be as prudent as

  A. the average investment advisor.

  B. the average person.

  C. the average expert.

  D. none of these answers.

  Correct Answer: C

  Under ERISA, the fiduciary is held to a higher standard than the Prudent Man Rule. The ERISA fiduciary needs to be as prudent as the average expert, not simply as prudent as the average person. Like all fiduciaries, however, the ERISA fiduciary must act solely in the best interest of the plan participants and beneficiaries and use all available care, skill, prudence and diligence.

• Question 3500:

  Ward is scheduled to visit the corporate headquarters of Evans Industries. Ward expects to use the information obtained to complete his research report on Evans stock. Ward learns that Evans plans to pay all of Ward's expenses for the trip, including the cost of meals, hotel room and air transportation. Which of the following actions would be the best course for Ward to take under the Code and Standards?

  A. Accept the expense-paid trip and write an objective report.

  B. Write the report without taking the trip.

  C. Pay for all travel expenses, including costs of meals and incidental items.

  D. Accept the expense paid trip but disclose the value of the services accepted in the report.

  Correct Answer: C

  The best course of action, under Standard IV (A.3), Independence and Objectivity, is to avoid a conflict of interest whenever possible. Therefore, paying for all expenses is the correct answer. Merely disclosing the conflict is not as appropriate as avoiding the conflict of interest altogether. Writing an objective report would not remove the appearance of a conflict of interest. Not taking the trip is incorrect, because Ward would not be taking advantage of close inspection of the company and his report would not be using all the information available.