» CFA 1 – 25 questions

Nisha Mazhar is a risk analyst, and she has been given the task to identify the factor that helps measure her organization's risk tolerance. Which of the following factors will help Mazhar complete her task?

Financial strength

Interest rates

Market demand

Which of the following statement is least accurate regarding Standard V(C) - Record Retention?

A press release issued by the covered company is an example of supporting documentation.

An employee's notes supporting a recommendation belong to his or her firm.

If the review of a security does not lead to a change in position, there is no record retention requirement.

Which of the following statements is most likely correct regarding the major sections of GIPS standards?

According to Section 3’Composite Construction’, a composite return is the asset weighted average of the performance of all portfolios in the composite.

According to section 5 ‘Presentation and Reporting’, firms cannot include in GIPS-compliant presentations information not addressed by the GIPS standards.

According to Section 4 ‘Disclosures’, firms are required to make negative assurance disclosures.

Flotation costs are those costs which are incurred by a company during the process of raising additional capital. The value of these flotation costs is typically related to the amount and type of capital being raised. Which of the following statements is least likely accurate regarding flotation costs? 2

Flotation costs should be deducted as one of the project's initial-period cash flows.

Flotation costs cannot be applied to bonds issuance.

If flotation costs are 5%, issuing $20 million in stocks will result in the company receiving an amount of cash equal to $19 million.

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

Put and call prices will increase.

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

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

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:

Debt/Total capital ratio will improve.

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

interest coverage ratio will deteriorate.

Sullivan Investments, an asset management firm, complied with the GIPS standards on 1 January 2006. Can Sullivan link its non-GIPS compliance performance for periods beginning on or after 1 January 2000 with its GIPS compliance performance?

No

Yes

Only if it discloses periods of non-compliance.

Which of the following is least accurately considered a firm's factor of production?

Land

Customers

Materials

According to Standard I-A ‘Knowledge of Law’, members and candidates are required to:

dissociate from the activity if they have reasonable grounds to believe that employer’s or client’s activities is unethical.

maintain readily accessible current reference copies of applicable statutes, rules and regulations.

report potential violations of the Code and Standards committed by fellow members and candidates to regulatory organizations.

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.

Market equilibrium is most likely described as the price at which:

Both the buyers and the sellers are happy

Quantity supplied is equal to quantity demanded

Excess demand is maximized

Two hypothetical currencies – ABC and XYZ – are trading at a spot rate of 1.60 ABC/XYZ . If the interest rate in ABC and XYZ's countries are 7% and 5%, respectively, the arbitrage-free forward rate ABC/YXZ is closest to:

1.5410.

1.7113.

1.6304.

Which of the following schools of economists applies the utility theory and argues that the government should not counteract business cycles?

Austrian school

Neoclassical school

Social economics school

The correlation of a risk-free asset to a risky portfolio is closest to

-1

1

0

Which of the following elements of a financial statement is least likely to be directly related to the measurement of financial position?

Income

Assets

Equity

In the event of bankruptcy, which of the following is most accurate?

Senior subordinated loans are subordinate to junior subordinated loans.

Junior subordinated loans are subordinate to senior subordinated loans.

Senior secured loans are subordinate to subordinated loans.

A publishing firm contributed $250,000 to support some philanthropic projects. The firm immediately expensed that amount in its income statement for the current fiscal year. According to applicable tax legislation such contributions are not tax-deductible.

A deferred tax asset arises, as taxable income is greater than accounting profit.

The treatment of $250,000 for accounting and tax purposes represents a permanent difference.

A temporary difference of $250,000 gives rise to a deferred tax liability.

McKinney Alpha is an accredited research firm that only hires experienced and competent analysts offering them training and financial courses from time to time. The firm allows analysts to either prepare their own research or rely on secondary sources. Tyler Klein, an analyst at McKinney uses a research report prepared at Gemma Brokerage. If Klein will use that report, he will:

violate Standard IV-A ‘Loyalty to employers’ as he is not allowed to use the report prepared by Gemma Brokerage.

violate Standard I-C ‘Misrepresentation’ by relying on work not prepared by himself for his clients.

not violate any standard if he makes reasonable efforts to determine that research is sound and uses the information in good faith.

Samantha Bjork, CFA, has been offered an equity analyst position at a firm that has not adopted a formal code of ethics. Which of the following statements is most likely correct? Bjork:

must refuse to accept a position with any firm that has not adopted the CFA Institute's Code of Ethics.

must refuse to accept a position with any firm that has not adopted a code of ethics.

may accept the position and should encourage the firm to adopt a code of ethics if she does.

Determine the conversion value of a convertible bond if the conversion ratio is 7:3 and the market price of the bond is $30.

$30

$70

$13

Anne Berry purchased an electric vaporizer to reduce the contamination in fruit juices in her plant. She paid $550,000 to the vendor and $4,000 to another company for the installation of the machine. She recorded the vaporizer in her books at $554,000. Which valuation method was adopted in this case?

Fair value

Settlement value

Historical cost

According to the Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, a risk factor related to opportunity exists when:

firm’s communication channels are ineffective for reporting inappropriate behavior.

management’s personal financial situation is threatened by the firm’s financial performance.

organizational structure is unstable or complex.

The production process of a calculator could look something like the following: Cost of factory buying raw materials: $2.00 Cost of retailer buying from factory: $5.00 Cost of customer buying from retailer: $9.00

$5

$3

$4

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

inflation.

technologies.

interest rates.

Bill Hardwick, CFA, is a bond specialist and a fixed-income portfolio manager for a large pension fund. Hardwick is considering inclusion of highly structured mortgage securities in the pension fund. However, his team has analyzed these products and has come to the conclusion that it is difficult to distinguish between good and bad investment options due to the complexity and layers of the securities. Rather than sort it all out, Hardwick opts to just simply avoid this sector entirely and invest instead in simpler securities that can be more easily analyzed and understood. Has Hardwick most likely violated the Standards?

Yes, with respect to misrepresentation.

No

Yes, with respect to diligence and reasonable basis

CFA 1 - 25 Questions