CFA Prep Problem With Solution Quiz

30 Questions | Total Attempts: 19

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CFA Prep Problem With Solution Quiz

The Chartered Financial Analyst (CFA) exam is designed to prepare one to venture into the business environment and give others ideas on their investments. These exams are super hard for those that don't study enough. Take up the CFA prep problem with solution quiz below and find out where you stand before the exam.


Questions and Answers
  • 1. 
    The difference between nominal spread and zero‐volatility spread will most likely begreater for a:
    • A. 

      U.S. Treasury security with short maturity in a flat yield curve environment

    • B. 

      Mortgage‐backed security in a steep upward‐sloping yield curve environment

    • C. 

      Zero coupon Treasury security

  • 2. 
    With respect to the formation of portfolios, which of the following statements is mostaccurate?
    • A. 

      Portfolios affect risk more than returns.

    • B. 

      Portfolios affect risk less than returns.

    • C. 

      Portfolios affect risk and returns equally.

  • 3. 
    Investing the majority of the portfolio on a passive or low active risk basis while aminority of the assets is managed aggressively in smaller portfolios is best described as:
    • A. 

      The core–satellite approach.

    • B. 

      A top–down investment policy.

    • C. 

      A delta–neutral hedge approach.

  • 4. 
    Which of the following constraints would most likely appear in the unique needs andpreferences section of a trusts Investment policy statement? The portfolio is:
    • A. 

      Prohibited from investing in tobacco companies.

    • B. 

      Subject to income taxes of 40%.

    • C. 

      Subject to the prudent‐man standard.

  • 5. 
    The optimal portfolio on the efficient frontier is likely to be:
    • A. 

      The same for all investors irrespective of their utility curves.

    • B. 

      More risky for investors with steeper utility curves.

    • C. 

      More risky for investors with flatter utility curves.

  • 6. 
    Compared with an otherwise identical amortizing security, a zero‐coupon bond will mostlikely have:
    • A. 

      The same reinvestment risk and less interest rate risk.

    • B. 

      Less reinvestment risk and more interest rate risk

    • C. 

      Less interest rate risk and more reinvestment risk

  • 7. 
    Which of the following is not an embedded option that benefits the bondholder?
    • A. 

      A conversion privilege.

    • B. 

      A floor on a floater.

    • C. 

      An accelerated sinking fund provision.

  • 8. 
    Enterprise value is most often determined as market capitalization of common equityand preferred stock minus the value of cash equivalents plus the:
    • A. 

      Book value of debt.

    • B. 

      Market value of long‐term debt.

    • C. 

      Market value of debt.

  • 9. 
    An investor  wants to estimate the enterprise value multiple (EV/EBITDA) of a company with following data:  Firm’s marginal tax rate 40%  Market value of debt $10 mn     Market capitalization $45 mn     Cash and short‐term investments $2.5 mn    EBITDA  $15 mn  What is the EV/EDITDA value?
    • A. 

      2.5.

    • B. 

      5.8.

    • C. 

      3.5.

  • 10. 
    All else being equal, an increase in expected yield volatility is most likely to result in an increase in the price of a/an:
    • A. 

      Putable bond.

    • B. 

      Callable bond

    • C. 

      Option‐free bond

  • 11. 
    If the price return of an equal‐weighted index exceeds that of a market¬capitalization‐ weighted index comprised of the same securities, the most likely explanation is:
    • A. 

      Dividend distributions.

    • B. 

      Outperformance of small‐market‐capitalization stocks

    • C. 

      Stock splits.

  • 12. 
    Security market indices are used as:
    • A. 

      Proxies to measure unsystematic risk.

    • B. 

      Proxies for specific asset classes in asset allocation models.

    • C. 

      Measures of investment returns.

  • 13. 
    Zho Xuan, CFA, is a sell side investment analyst. At a software industry conference, Xuan hears rumors that Green Run Software may have falsified its financial results. When she returns to her office, Xuan conducts a thorough analysis of Green Run.Based on her research, including discussions with some of Green Run's customers, Xuan is convinced that Green Run's reported 50 percent increase in net income in recent quarters is fictitious. However, Xuan is the only analyst that is suspicious about the company's reported earning. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the least appropriate action for Xuan is to:
    • A. 

      Report her suspicions to Green Run's management.

    • B. 

      Do nothing, until her analysis is supported by other analysts.

    • C. 

      Recommend that her clients sell their Green Run shares immediately.

  • 14. 
    Ryan Barret, CFA, provides investment advice hard assets to several large institutions. To broaden his business and meet increased interest in these assets from retail customers, Barrett advertises his services in publications that serve a general audience. As the client base for the institutions that Barrett serves is large, he is comfortable stating in the ad that thousands of his clients have benefited from his advice.Does Barrett’s advertisement violate any CFA Institute Standards of Professional Conduct?
    • A. 

      Yes, related to Communication with Clients

    • B. 

      Yes, related to Misrepresentation

    • C. 

      No

  • 15. 
    Bob Dan, CFA, is a product development specialist at a bank. Knight is responsible for creating collateralized debt obligations (CDOs) consisting of residential mortgage bonds. In the marketing brochure for his most recent CDO, Knight provided a list of the mortgage bonds that the CDO was created from. The brochure also states that “ an independent third party, the collateral manager, had sole authority over the selection of all mortgage bonds used as collateral in the CDO.” However, Knight met with the collateral manager and helped her select the bonds for the CDO. Knight is least likely to be in violation of which CFA Institute Standards of Professional Conduct?
    • A. 

      Suitability

    • B. 

      Communications with Clients and Prospective Clients

    • C. 

      Conflicts of interest

  • 16. 
    Four years ago, a company purchased a $500,000 machine with an estimated useful lifeof 10 years. For accounting purposes, the machine is being depreciated in the amount of$50,000 annually. The machine is used to manufacture a particular product and has noalternative use or scrap value. The annual revenue generated from operating themachine is $650,000 and the annual cost of the factors of production, other thandepreciation, employed to generate that revenue is $600,000. Should the companycontinue to operate the machine?
    • A. 

      No, because operating costs are equal to operating revenues.

    • B. 

      No, because the opportunity cost of operating the machine is zero.

    • C. 

      Yes.

  • 17. 
    An agricultural firm operating in a perfectly competitive market supplies wheat tomanufacturers of consumer food products and animal feeds. If the firm were able toexpand its production and unit sales by 10%, the most likely result would be:
    • A. 

      An increase in total revenue of less than 10%.

    • B. 

      A 10% increase in total revenue.

    • C. 

      A 10% increase in average revenue.

  • 18. 
    If adding one additional unit of labor results in a positive but declining marginal productof labor, then total product most likely is:
    • A. 

      Increasing at a decreasing rate.

    • B. 

      Decreasing.

    • C. 

      Constant

  • 19. 
    A firm develops and markets consumer electronic devices in a perfectly competitive,decreasing‐cost industry. The firm's products have grown in popularity. The most likelyequilibrium response in the long run to rising demand for such devices is for sellingprices to:
    • A. 

      Rise and per‐unit production costs to decrease.

    • B. 

      Fall and per‐unit production costs to decrease.

    • C. 

      Remain constant and per‐unit production costs to remain constant.

  • 20. 
    Cash manager for Wicker Enterprises is investigating the purchase of a banker’s acceptance (BA). The $1,000,000 face value BA has 150 days to maturity and is quoted at 4.05% on a discount‐basis yield. If Wicker’s marginal tax rate is 25%, then the money market yield on the BA is closest to:
    • A. 

      4.12%.

    • B. 

      3.13%.

    • C. 

      3.09%.

  • 21. 
    A company is offered trade credit terms of 2/10, net 45. The implicit cost of failing totake the discount and instead paying the account in 45 days is closest to:
    • A. 

      23.10%

    • B. 

      23.45%.

    • C. 

      21.28%.

  • 22. 
    A company increasing its credit terms for customers from 1/10, net 30 to 1/10, net60 will most likely experience:
    • A. 

      An increase in the average collection period.

    • B. 

      A higher level of uncollectible accounts.

    • C. 

      An increase in cash on hand.

  • 23. 
    PAC Inc., an automobile manufacturer, is planning to be financed by 1 million euro for 1year. A consultant recommended the following three means of short‐term financing:‐ A credit line with an interest rate of 3% and a commitment fee of a quarter percent‐ A banker’s acceptance with an interest rate of 3.25% all inclusive‐ Commercial paper with an interest rate of 3% and a dealer’s commission of 1/4 percentWhich of the means will the company choose because of the low cost?
    • A. 

      Credit line

    • B. 

      Banker’s acceptance

    • C. 

      Commercial paper

  • 24. 
    Based on a need to borrow $2 million for one month, which of the following alternativeshas the least expensive effective annual cost?
    • A. 

      A credit line at 6.0% annually with a 0.5% annual commitment fee

    • B. 

      A banker's acceptance with an all‐inclusive annual rate of 6.1%

    • C. 

      Commercial paper at 5.9% annually with a dealer's commission of $3,000 (or 0.15%) and a backup line cost of $4,000 (or 0.20%)

  • 25. 
    As part of working capital management, the short‐term investment strategy that has thehighest degree of risk for an entity and requires very accurate and reliable forecasts ofcash flows is:
    • A. 

      A mismatching strategy.

    • B. 

      A laddering strategy.

    • C. 

      A matching strategy.

  • 26. 
    Other factors held constant, the reduction of a company’s average accounts payablesdue to suppliers offering less trade credit will most likely:
    • A. 

      Not affect the operating cycle.

    • B. 

      Increase the operating cycle.

    • C. 

      Reduce the operating cycle.

  • 27. 
    Given the following financial statement data, calculate the net operating cycle forthis company. InMillions($)   Credit sales  40,000  Costof goodssold  30,000  Accounts receivable  3,000  Inventory–Beginningbalance  1,500  Inventory–Endingbalance  2,000  Accounts payable  4,000 The net operating cycle of this company is closest to:
    • A. 

      3.8 days.

    • B. 

      24.3 days.

    • C. 

      51.7 days.

  • 28. 
    • A. 

      A banker's acceptance at 7.1 percent, an all–inclusive rate.

    • B. 

      Option 2

    • C. 

      Commercial paper at 6.9 percent with a dealer's commission of 1/4 percent and a backup line cost of 1/3 percent, both of which would be assessed on the $1 million of commercial paper issued.

    • D. 

      Drawing down on a line of credit at 7.2 percent with a 1/2 percent commitment fee on the full amount with no compensating balances.

  • 29. 
    Which item is most likely to be evaluated as a percentage of debt within asales–driven pro forma analysis?
    • A. 

      Interest expense.

    • B. 

      Current liabilities.

    • C. 

      Cost of goods sold.

  • 30. 
    The diagram illustrates a consumer’s allocation of her budget between items X and Y. With an initial budget (BC1) she consumes Qa units of item Y. When the price of Y drops, she consumes Qc units of item Y. Lines BC2 and BC3 are parallel to one another.The income effect arising from this change in the price of Y is best described as thedistance between:
    • A. 

      Qc and Qb.

    • B. 

      Qb and Qa.

    • C. 

      Qc and Qa.