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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3821:

  To determine whether to make an investment you must estimate the value of the investment based on your ________ and compare that to the market price.

  A. opportunity costs
  B. required rate of return
  C. all of these answers
  D. risk-return preferences
  B. required rate of return

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  Explanation

  Typically one invests in order to get a series of returns in the future, to discount these future returns to net present value (NPV), one must use a discount rate, which is the rate one requires the investment to yield. Using this discount rate, one can then compare the NPV with the market price to determine if the investment is attractive.

• Question 3822:

  When formulating an investment policy for a client, all of the following fall under the category of "investor constraints," except:

  A. risk tolerance
  B. liquidity needs
  C. expected cash flows
  D. regulatory and legal circumstances
  E. time horizon
  F. tax considerations
  G. investable funds
  H. investor preferences, circumstances and unique needs
  A. risk tolerance

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  Explanation

  Risk tolerance is considered under "investor objectives," not "investor constraints."

• Question 3823:

  What is the Net Present Value of this series of annual cash flows at an interest rate of 20% per year: Year 0: <$15,000>, Year 1: $2,000, Year 2: $0, Year 3: $15,000, Year 4 $0, Year 5 $18,000? (Note that the <> are used to indicate a negative number).

  A. $2,947. 49>
  B. $2,581.02
  D. $2,442. 21
  E. $2,414. 37
  B. $2,581.02

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 15000 +/- ENTER DownArrow 2000 ENTER DownArrow DownArrow 0 ENTER DownArrow DownArrow 15000 ENTER DownArrow DownArrow 0 ENTER DownArrow DownArrow 18000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 20 ENTER DownArrow CPT. On the HP12C, press these keys: 15000 CHS BlueShift CFo 2000 BlueShift CFj 0 BlueShift CFj 15000 BlueShift CFj 0 BlueShift CFj 18000 BlueShift CFj. Then press 20 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 3824:

  Standard III (C) deals with conflicts of interest of a member with ________.

  A. colleagues at the same firm
  B. the employer
  C. none of these answers
  D. the client
  E. other investment professionals
  F. the investing public
  B. the employer

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  Explanation

  Standard III (C) deals with conflicts of interest in any actions or decisions of a member and focuses on responsibility to the employer. By complying with employer guidelines, members allow their employers to avoid potentially embarrassing and costly violations.

• Question 3825:

  Pierce Products is deciding whether it makes sense to purchase a new piece of equipment. The equipment costs $100,000 (payable at t = 0). The equipment will provide before-tax cash inflows of $45,000 a year at the end of each of the next four years (t = 1, 2, 3, 4). The equipment can be depreciated according to the following schedule: t = 1: 0.33 t = 2: 0.45 t = 3: 0.15 t = 4: 0.07 At the end of four years the company expects to be able to sell the equipment for a salvage value of $10,000 (after-tax). The company is in the 40 percent tax bracket. The company has an after-tax cost of capital of 11 percent. Since there is more uncertainty about the salvage value, the company has chosen to discount the salvage value at 12 percent. What is the net present value of purchasing the equipment?

  A. $22,853. 90
  B. $9,140.78
  C. $28.982. 64
  D. $20,564. 23
  E. $16,498.72
  A. $22,853. 90

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  Explanation

  First, find the after-tax CFs associated with the project. This is accomplished by subtracting the depreciation expense from the raw CF, reducing this net CF by taxes and then adding back the depreciation expense.

  For t = 1: ($45,000 - $33,000)(1 - 0.4) + $33,000 = $40,200.

  Similarly, the after-tax CFs for t = 2, t = 3, and t = 4 are $45,000, $33,000, and $29,800, respectively.

  Now, enter these CFs along with the cost of the equipment to find the pre-salvage NPV (note that the salvage value is not yet accounted for in these CFs). The appropriate discount rate for these CFs is 11%. This yields a pre-salvage NPV of

  $16,498.72. Finally, the salvage value must be discounted. The PV of the salvage value is: N = 4, I = 12, PMT = 0, FV = -10,000, and PV = $6,355. 18. Adding the PV of the salvage amount to the pre-salvage NPV yields the project NPV of

  $22,853. 90.

• Question 3826:

  Leading economists have predicted that the Federal Reserve will continue to pursue a stable monetary policy that has characterized the last five years, keeping the price level constant into the future. Given the Fed's monetary policy, the pure expectations theory and the liquidity preference theory would predict, respectively, the following yield curve shapes:

  A. flat and flat
  B. upward sloping and flat
  C. flat and upward sloping
  C. flat and upward sloping

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  Explanation

• Question 3827:

  If you owe a debt of $1,000 today and also owe $2,000 in 24 months, what single payment could you make 15 months from today that would pay off both of these debts, if interest is assessed at 8% per year, compounded monthly?

  A. $2,988.71
  B. $2,751.62
  C. $3,041.93
  D. $3,000.00
  E. $1,980.86
  A. $2,988.71

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  Explanation

  To solve this question, set the problem up as the sum of two compound interest calculations. Move the $1,000 from today over to month 15 and add it to the $2,000 brought back from month 24 to month 15. On the BAII Plus, press 15 N, 8 divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV which yields $1,104. 80. Then press STO 1. Then press 9 N, 2000 FV, CPT PV, which yields $1,883. 91. Finally press + RCL 1 = to see the answer. On the HP12C, press 15 n, 8 ENTER 12 divide i, 1000 PV, 0 PMT, FV. Then press STO 1. Then press 9 n, 2000 FV, PV. Finally press RCL 1 + to see the answer. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3828:

  Xuanchi Zuan is a successful portfolio manager with Up and Away, a money management fund that operates strongly bullish funds. One of Zuan's clients, Margo Margolis, is about to retire in a couple of years. Margo has been phasing out her risky investments over the past five years, moving them into longterm treasury bonds. However, she recently read in a financial magazine the attractiveness of investing in emerging markets. She was especially enticed by the 30% and 40% annual returns observed in these markets over the past 2-3 years. She approaches Zuan and instructs him to move 30% of her funds into these markets. Zuan should:

  A. none of these answers.
  B. evaluate the emerging market investments and move the funds only if he considers them suitable for investment for Margo.
  C. refuse to do so, pointing out the high risks involved in such investments.
  D. move the funds into emerging market securities per Margo's request.
  A. none of these answers.

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  Explanation

  Zuan cannot refuse to do something that his client instructs him to do, as long as it is legal. However, it is his duty to apprise his clients of the risks and returns associated with different instruments and advise them about the suitability of including such investments in their portfolios. Once the client is aware of all the pitfalls and rewards, the final decision must rest with the client. In Margo's case, Zuan should do the same before acting on her instructions. This question relates most directly to Standard IV (B.1) - Fiduciary Duties.

• Question 3829:

  The U.S. Department of Education reported that for the past seven years 4,033, 5,652, 6,407, 7,201, 8,719, 11,154, and 15,121 people received bachelor's degrees in computer and information sciences. What is the mean annual number receiving this degree?

  A. None of these answers
  B. About 6,217
  C. About 8,327
  D. About 15,962
  E. About 12,240
  C. About 8,327

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  Explanation

  (4033 + 5652 + 6407 + 7201 + 8719 + 11154 + 15121)/7 = 8327

• Question 3830:

  Which of the following are not required disclosures under the Performance Presentation Standards?

  A. Portfolio size range and percentage of total assets in the same class.
  B. The existence of a minimum asset size for the inclusion in composites.
  C. The inclusion of any non-fee paying portfolios in composites.
  D. Whether balanced portfolio segments are included in single-asset composites.
  A. Portfolio size range and percentage of total assets in the same class.

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  Explanation

  The existence of a minimum asset size below which portfolios are excluded from a composite must be disclosed. Whether balanced portfolio segments are included in single-asset composites and an explanation of how cash has been allocated among segments must be disclosed. The inclusion of any non-fee-paying portfolios in composites and included in the definition of total firm assets must be disclosed. Only the number of portfolios, their description, the amount of assets in a composite, the percentage of the firm's total assets the composite represents need be disclosed. The portfolio size range or percentage of total assets in the same class are only recommended, not required disclosures.