» CFA 1 – 50 questions

Which of the following is most accurate regarding a futures contract but not a forward contract?

A futures contract is not marked to market.

A futures contract is subject to more default risk

A futures contract is standardized and sold on an exchange

When a company finances share repurchases with cash:

leverage increases, shareholders’ equity decreases and assets remain unchanged.

assets and shareholders’ equity decrease and leverage increases.

assets and shareholders’ equity decrease and leverage remains - unchanged.

Which of the following most likely represents valid criticisms concerning the neoclassical and Austrian schools?

It is difficult to achieve market equilibrium through reduction in generalized price and wage.

Neoclassical and Austrian policies are focused on the short term only.

Economic forecasts are imperfect as fiscal policies are implemented with a time lag.

The debt-to-assets ratio is most accurately classified as a:

solvency ratio.

liquidity ratio.

valuation ratio.

The financial leverage ratio of a firm, whose total debt ratio is 54% and debt-to- equity is 1.15, is closest to:

0.62

0.47

2.13

GIPS standards least likely resolve misleading practices related to:

survivorship bias.

analyst financial statement adjustments.

varying time periods.

A real exchange rate is different from a nominal exchange rate in that the real exchange rate:

Is easier to calculate than the nominal rate

Is measured in the local currency

Considers changes in purchasing power

A high-tech industry only has 3 large firms operating in it. This is most likely a:

low-cost industry.

fragmented industry.

concentrated industry.

Gilbert Love worked as financial analyst at Milton Securities. During his employment at Milton, Love covered Indigo Corp and developed detailed financial models, assumptions and supporting reports. When Milton switched his job, his new employer assigned him to analyze Indigo Corp. Milton developed a new model with improved assumptions and specifications and re-created the supporting records by gathering data from the covered company. Has Milton violated any CFA Institute Code and Standards?

Yes, he violated ‘Misrepresentation’ and ‘Record Retention’ by developing the model and re-creating the supporting records for Indigo Corp.

Yes, he has violated Standard V-C ‘Record Retention’ by re-creating the supporting records.

No, he is in compliance with the Code and Standards.

Which of the following is least likely a macroeconomic influence that affects an industry’s growth? Changes in:

interest rates.

technologies.

inflation.

The production process of a calculator involves several steps. Suppose the pieces of the chain add the following value to the process: Raw materials supplier: $4 Factory: $3 Retailer: $2 The price that the retailer buys the calculator from the factory will be closest to:

$7

$3

$2

Samuel Lopez wants to calculate the GDP or a specific country without taking into account the effect of inflation on prices. Which of the following is the most appropriate GDP measure Lopez should use?

Real GDP

GDP based on current prices

Nominal GDP

A dealer has entered into an equity swap as the fixed-rate payer. The swap is based on the returns of the S&P500 index. On the last settlement date, the index fell by 2% due to a significant drop in the value of a few of its component stocks. On the last settlement date, the dealer would have to pay:

the entire fixed payment it owes.

a fixed-rate payment and an equity payment.

a netted amount of fixed payment.

An investor purchases a 2-year zero-coupon bond with par value of $1,000 at $960. The implied interest earned on the bond is closest to:

$40.

$0.

$21.

In repurchase agreements, repo margin provides a margin of safety to the:

cash lender, if the collateral’s market value declines.

security lender, if the collateral’s market value declines.

dealer, if the lender of the cash defaults.

Demand is most accurately described as:

Consumer's willingness to purchase a product

Producer's ability to provide a product

Consumer's ability to use the product

Jason Briggs purchased a 3-month call option by paying $0.08. The exercise price of the option is $1.32 while the underlying is priced at $1.35. Is the option currently in-the-money and at what price will break-even occur?

In-the-money: No; Break-even price: $1.27.

In-the-money: Yes; Break-even price: $1.35.

In-the-money: Yes; Break-even price: $1.40.

Identify the most appropriate explanation of ''channel stuffing''.

Channel stuffing is an aggressive revenue recognition strategy in which the firm oversupplies goods to the distribution channel.

Channel stuffing is an aggressive revenue recognition strategy in which the firm increase the supplier's orders and recognizes the expense before the goods are received.

Channel stuffing is a conservative revenue recognition strategy in which the firm hold goods and delays the supply of goods to the distribution channel.

If you were offered to invest your money at interest rate of 4% and can choose how it is compounded, which compounding frequency would yield the highest effective return?

Continuous compounding

Annual compounding

Quarterly compounding

As of September 5, 2014, the current price of corn is $3.60 per bushel. Farmers have stopped asking if they will profit this year - the question now is how much will they lose for their year's work. Under which of the following 6-month futures corn prices would backwardation most likely be present?

$3.60 per bushel

$3.20 per bushel

$4.00 per bushel

Under which of the following cases is the capitalization of development cost most likely prohibited?

In the case of a company following IFRS.

In the case of software development by a company following US GAAP.

In the case of the development of a lifesaving drug by a company following US GAAP.

What would be a recommended action for a firm that has disclosed material non-public information in an analyst meeting?

The firm should promptly issue a notification to the analysts for not taking any action until the information is disseminated.

The firm should promptly issue a press release.

The firm should not act on the information for at least 5 working days.

As compared to firms with high degree of financial leverage, firms with high degree of operating leverage:

are less flexible in making changes and bankruptcy protection help little to reduce operating costs.

can easily emerge as a going concern by using bankruptcy laws and protection.

do not lead to major dislocations in the rights and privileges of owners, lenders and management.

Under U.S. GAAP at the end of year 1, EBB would recognize $0 revenue, $0 cost of construction and $0 income. The $26 million expenditure would be recorded as an increase in inventory account and decrease in cash (if EBB paid cash for all expenditures).

debt-to-equity.

Cash outflows from operations.

Total assets.

Which of the following is least likely an (International Organization of Securities Commissions) (IOSCO) principle for issuers? Issuers should:

make consistent choices with respect to accounting standards and their financial statements should be comparable.

timely, fully and accurately disclose financial results, risks and other material information to investors.

prepare their financial statements using internationally acceptable accounting standards.

In which of the following circumstances can a producer of agricultural products value the product at the net realizable value (NRV)?

In all cases

The cost is higher than NRV

The cost is less than NRV

Investors have the tendency to be:

less risk averse when faced with potential gains.

more risk averse when faced with potential gains.

less risk averse when faced with potential losses.

Zooror, a Japanese notepad maker, has an inventory turnover of 8.7 times per year. The average number of days of inventory for notepad manufacturing is 45 days. How does Zooror compare to its competition?

Zooror is average with its competition

Zooror has quicker turnover than its average competition

Zooror has slower turnover than its average competition

A high yield bond issuer has offered the ‘change of control put’ to its bondholders. Under this covenant in the event of acquisition, the bondholder has a (n):

right to put limits on how much secured debt an issuer can have.

right to require the issuer to buy back their debt at par or at some premium to par.

option to change a certain percentage of his bond value with the equity of the issuer.

What is the most likely result of a decrease in the risk-free rate of return on put and call option prices?

Put option prices will decrease and call option prices will increase.

Put option prices will increase and call option prices will decrease.

Put and call prices will increase.

How does the oil the industry most likely maintain a premium pricing strategy?

The bargaining power of the buyers

The threat of substitutes

Significant barriers of entry

A portfolio manager's small cap portfolio has a beta of 1.2 and standard deviation of 40%. Over the past year, the portfolio returned 10%, the market returned 7%, and the risk-free rate was 2%. The Sharpe ratio is closest to:

0.3

0.2

0.4

Which of the following would most appropriately describe an investor's liquidity constraint?

No less than a 1% loss in capital

10% of assets must be available immediately, 50% available within 2 days

Fund should return 5% per year

In the case of a collusion, firms agree to:

share profits/losses.

share the quantity of output.

share technologies.

Generating higher returns from security selection most likely depends upon:

lower index turnover and passive management.

higher informational efficiency and lower index turnover.

lower informational efficiency and higher skills of investment managers.

An investment management firm has been in existence for eight years. To enhance the quality of reported performance, the firm's senior compliance officer decides to make the firm's presented performance compliant with the GIPS standards. To comply with the GIPS standards, the firm is required to initially present a GIPS-compliant performance track record of: 2

five years.

eight years.

one year.

A consumer with a steeper indifference curve most likely indicates that his marginal rate of substitution (MRSXY) is:

lower and he can give up more of good X to get an additional unit of good Y.

greater and he cannot gain from voluntary exchange with the consumer whose MRSXY is lower.

greater and he can give up more of good Y to get an additional unit of good X.

If the yield curve rises uniformly, how would the price of a 8.5% coupon bond yielding 2.75% most likely change in a year?

It will decrease.

It will increase.

It will not change.

Bonds issued by special purpose vehicles most likely have a higher credit ratings than their sponsor's unsecured bonds because they:

have a shorter maturity.

pay a higher coupon rate.

are backed by collateral.

Return on capital will most likely be higher in which of the following cases?

Return on capital is not affected by market shares.

If the firm has 50% of the market share and another firm has the other 50%.

If the firm has 10% market share and all other firms have less than 5% of the market share.

The performance of commodity indices can be quite different from their underlying commodities because

commodity returns are more volatile than commodity index returns.

returns of commodity indices are influenced by more than one factor.

commodity indices are relatively illiquid and depict less information transparency.

Which of the following statements is most likely correct regarding the depreciation of property, plant and equipment under IFRS and U.S. GAAP?

Unlike U.S. GAAP, under IFRS each component of an asset must be depreciated separately.

Both IFRS and U.S. GAAP require an annual review of residual value and useful life.

Unlike IFRS, U.S. GAAP requires an annual review of residual value and useful life.

Which of the following statements regarding market efficiency is least likely accurate?

In an efficient market, prices of stocks will slowly adjust to new information.

There are three forms of market efficiency: weak, semi-strong and strong.

An efficient capital market reflects all of the information about its securities, including risk.

Which of these characteristics best describe commodity goods?

Low competition and high profitability.

High competition and low profitability.

High competition and high profitability.

Investor A has a lower risk aversion than Investor B, and Investor C has a lower risk tolerance than Investor B. Which investor's optimal portfolio will most likely have the highest expected return on the capital allocation line?

Investor B's optimal portfolio

Investor A's optimal portfolio

Investor C's optimal portfolio

The value, at 6% interest, of a bond paying 8% annual coupon payments, redeemable at par in 5 years, with a $25,000 face amount is closest to:

$27,100

$25,600

$27,600

Which statement most accurately describes risk transfer and risk shifting?

Risk transfer is handled through an insurance policy, while risk shifting involves derivatives to modify a firm’s risk levels.

Risk shifting and risk transfer are the same – both involve insurance, and can cover all of the insured risk.

Risk transfer occurs when the insurer sells many policies with risks that have high correlations, while risk shifting involves derivatives so that the firm may adjust its probability distribution of returns.

A company has just issued $5 million of mandatory redeemable preferred shares with a par value of $100 per share and a 7 percent dividend. The issue matures in 5 years. Which of the following statements is least likely correct? The company’s:

interest coverage ratio will deteriorate.

preferred shareholders will rank below debt holders should the company file for bankruptcy.

Debt/Total capital ratio will improve.

A recently issued sovereign bond for a given maturity is also referred to as:

floating issue.

of the run issue.

benchmark issue.

Reginald Fuller manages institutional portfolios on behalf of BDY Advisors. Fuller also manages an account of a trust company named SOTO Trust. The trust offered Fuller a $50,000 cash gift if he succeeded in achieving a 20% return this year. The best practice for Fuller includes:

accepting the offer and achieving the target without compromising his objectivity towards other clients.

refusing the offer of SOTO trust to avoid a conflict of interest with his employer.

making an immediate written report to his employer specifying the$50,000 cash offer proposed by the trust

CFA 1 - 50 Questions