2009 Level I Mock Exam: Morning Session

The morning session of the 2009 Level I Chartered Financial Analyst

Mock
Eamination has !20 "#estions$ To %est sim#late the eam day e&erience' candidates
are advised to allocate an average of !$( min#tes &er "#estion for a total of !)0 min#tes
*+ ho#rs, for this session of the eam$
Questions
!-!)
Topic
Ethical and .rofessional /tandards
Minutes
20
!9-+2 1#antitative Methods 2!
++-22 Economics !)
2(-3) Financial /tatement Analysis +3
39-0) Cor&orate Finance !(
09-90 E"#ity Investments !)
9!-93 4erivative Investments 9
90-!0) Fied Income Investments !)
!09-!!2 Alternative Investments 9
!!(-!20 .ortfolio Management 9
Total: 180
Questions 1 troug 18 relate to Etical an! "ro#essional Stan!ar!s$
!$ 5hich of the follo6ing is a key characteristic of the 7lo%al Investment
.erformance /tandards *7I./,8 The 7I./ standards9
A$ rely on the integrity of in&#t data$
:$ consist of re"#ired &rovisions for firms to follo6 to achieve %est &ractice$
C$ m#st %e a&&lied 6ith the goal of achieving ecellence in &erformance
&resentation$
2$ According to the Standards of Practice Handbook' a mem%er 6ho is an
investment manager is least likely to %reach his d#ty to clients %y9
A$ disclosing confidential client information to the CFA Instit#te .rofessional
Cond#ct .rogram$
:$ #sing client %rokerage to &#rchase goods or services that are #sed in the
investment decision-making &rocess$
C$ consistently s#&&orting management;s recommendations %y voting 6ith
management on &roies related to non-ro#tine governance iss#es$
+$ Carla /cott' CFA' is a &ortfolio manager for a com&any that manages investment
acco#nts for 6ealthy individ#als$ /cott has no %eneficial interest in any of the
fee-&aying acco#nts she manages' incl#ding her #ncle;s acco#nt$ 5hen shares in
initial &#%lic offerings *I.<s, %ecome availa%le' /cott first allocates shares to all
her other clients for 6hom the investment is a&&ro&riate= only if shares are still
availa%le does she &#rchase shares in her #ncle;s acco#nt' if the iss#e is
a&&ro&riate for him$ /cott &rovides each of her clients 6ith f#ll disclos#re of her
allocation &roced#res and has received each client;s ver%al consent to her
allocation &roced#res$ According to the Standards of Practice Handbook' does
/cott;s method of allocating overs#%scri%ed I.<s violate any CFA Instit#te
/tandards of .rofessional Cond#ct8
A$ >o$
:$ ?es' %eca#se she has %reached her d#ty to her #ncle$
C$ ?es' %eca#se she has not &recleared and re&orted her @ncle;s transactions$
2$ Aim Li' CFA' is a &ortfolio manager for an investment advisory firm$ Li
delegates some of her s#&ervisory d#ties to Banet Marshall' CFA' after ed#cating
Marshall on methods to &revent and detect violations of the firm;s com&liance
&roced#res$ 4es&ite these efforts' Li discovers that an em&loyee re&orting to
Marshall may have violated the &roced#res$ According to the Standards of
Practice Handbook' Li;s least likely initial co#rse of action m#st %e to9
A$ s#s&end the em&loyee$
:$ increase s#&ervision of Marshall$
C$ initiate an investigation to determine the etent of the 6rongdoing$
($ The Standards of Practice Handbook is least likely to re"#ire a mem%er to
disclose 6hich of the follo6ing to clients and &ros&ective clients8
A$ @nder6riting relationshi&s$
:$ /ervice on a &#%licly-traded com&any;s %oard of directors$
C$ <%ligation to a%ide %y CFA Instit#te Code of Ethics and /tandards of
.rofessional Cond#ct$
3$ A CFA charterholder is the F#nd Manager for a non-&rofit organiCation$ 4#ring a
&resentation regarding the restr#ct#ring of their investment &ortfolio;s asset
allocation' the Dead of the Finance Committee "#estions the manager$ As &art of
his res&onse' the manager states' EI am a CFA charterholder' I kno6 6hat I;m
talking a%o#t' yo# sho#ld do 6hat I sayF$ According to the Standards of Practice
Handbook' has the charterholder violated any of the CFA Instit#te /tandards of
.rofessional Cond#ct8
A$ >o$
:$ ?es' Ges&onsi%ilities as a CFA Instit#te Mem%er$
C$ ?es' Comm#nication 6ith Clients and .ros&ective Clients$
0$ A CFA candidate 6as res&onsi%le for develo&ing &resentations regarding >e6
Hision Asset Managers; investment &rocess and historical investment
&erformance$ 5hen the candidate moved to another firm' he %ro#ght 6ith him the
&resentation he develo&ed for >e6 Hision' changed the name of the com&any and
&resented it to a client of his ne6 em&loyer$ The client asked the candidate if he
had >e6 Hision;s &ermission to #se their &resentation$ The candidate res&onded'
EI created the &resentation in my last month 6orking there$ It 6as' after my
resignation' so it;s mine to #se$ :esides the investment &erformance is 6hat I
achieved for my clients at >e6 Hision$F According to the Standards of Practice
Handbook' the CFA candidate is least likely to have violated the CFA Instit#te
/tandards of .rofessional Cond#ct that relate to9
A$ Loyalty$
:$ Misre&resentation$
C$ Comm#nication 6ith Clients and .ros&ective Clients$
)$ As the Managing 4irector of a commercial %ank' a CFA charterholder sat in on a
%oard meeting of a &#%licly listed com&any that the %ank had lent a large s#m of
money$ The &#r&ose of the %oard meeting 6as to renegotiate the terms of the
commercial loan d#e to the &ending restr#ct#ring of the com&any$ The net day
all of the Managing 4irector;s shares of the &#%licly listed com&any are sold on
the stock echange' the sell order having %een given t6o days &rior to the
meeting$ According to the Standards of Practice Handbook' the CFA
charterholder 6as least likely in violation of 6hich CFA Instit#te /tandards of
.rofessional Cond#ct8
A$ 4isclos#re of Conflicts$
:$ .riority of Transactions$
C$ Material >on&#%lic Information$
9$ In order to com&ly 6ith the 7I./ /tandards' a firm m#st initially sho6 7I./-
com&liant history for a minim#m of9
A$ five years' or since ince&tion if the firm has %een in eistence for less than five
years$
:$ t6o years' or since ince&tion if the firm has %een in eistence for less than t6o
years$
C$ three years' or since ince&tion if the firm has %een in eistence for less than
three years$
!0$ :#ta /ingh' CFA' has a large etended family and manages the &ortfolios of
several family mem%ers$ /ingh does not charge the family mem%ers a
management fee' %#t receives a small &ercentage of each &ortfolio;s &rofits$
/ingh acce&ts a &osition as &ortfolio manager for :hotmange Investments to
manage high net 6orth acco#nts$ :eca#se the family &ortfolios are not c#stomary
or normal client relationshi&s' /ingh does not inform his ne6 em&loyer of his side
activity$ /ingh is least likely to have violated 6hich CFA Instit#te /tandard of
.rofessional Cond#ct8
A$ Loyalty$
:$ .reservation of Confidentiality$
C$ Additional Com&ensation Agreements$
!!$ A CFA Candidate &#rchased co&yrighted CFA eam &re&aratory st#dy g#ide
from a &#%lisher$ T6o 6eeks &rior to the eam' the Candidate lost the st#dy
g#ide so he &hotoco&ied a co&y that his friend had &#rchased$ According to the
Standards of Practice Handbook' did the CFA Candidate most likely violate the
CFA Instit#te /tandards of .rofessional Cond#ct8
A$ ?es$
:$ >o' %eca#se he had &#rchased his o6n co&y$
C$ >o' %eca#se %oth had &#rchased their o6n co&ies$
!2$ Crandall Temasek' CFA' filed for &ersonal %ankr#&tcy t6o years ago after
inc#rring large medical e&enses$ De 6as hired recently as a &ortfolio manager$
According to the CFA Instit#te /tandards' m#st Temasek disclose his %ankr#&tcy
filing to his ne6 em&loyer8
A$ >o$
:$ ?es' %eca#se he has a d#ty of loyalty to his em&loyer$
C$ ?es' %eca#se %ankr#&tcy re&resents a &otential conflict of interest$
!+$ /allie Le6is' CFA' is a research analyst covering the mining ind#stry$ Along
6ith other analysts' Le6is visits the &rimary mine of 7old G#sh Mines *7G,$
4#ring the visit' a maIor &iece of e"#i&ment fails and Le6is overhears an
#nidentified em&loyee state that &rod#ction 6ill %e stalled for si months$ Le6is
immediately files a sell recommendation on 7G 6itho#t any additional research$
Das Le6is violated any CFA Instit#te /tandards8
A$ >o$
:$ ?es' 6ith res&ect to diligence and reasona%le %asis$
C$ ?es' 6ith res&ect to material non&#%lic information$
!2$ Clive :o6ers' CFA' is a &ortfolio manager at :#rlington Advisors *:A,$ :o6ers
manages t6o m#t#al f#nds along 6ith a n#m%er of individ#al acco#nts$ All of the
&ortfolios' incl#ding the m#t#al f#nds' have similar ret#rn o%Iectives' risk
tolerances' and ta constraints$ 5hen :o6ers allocates shares from %lock trades
he fills the m#t#al f#nd orders first and then allocates the remaining shares to the
individ#al acco#nts %ased on their &ortfolio siCe$ 5hen allocating shares from
%lock trades' does :o6ers violate any CFA Instit#te /tandards8
A$ >o$
:$ ?es' 6ith res&ect to fair dealing$
C$ ?es' 6ith res&ect to &riority of transaction$
!($ >ar#&a Ghasta' CFA' is manager of the fast-gro6ing individ#al acco#nt division
of a %ank and treats all clients e"#ally$ 5hen the %ank;s research de&artment
iss#es a %#y or sell recommendation on a sec#rity' she ens#res that the
recommended action is im&lemented in all acco#nts$ 4o Ghasta;s investment
actions violate any CFA Instit#te /tandards8
A$ >o$
:$ ?es' 6ith res&ect to s#ita%ility$
C$ ?es' 6ith res&ect to diligence and a reasona%le %asis$
!3$ Bimmy Lee' CFA' is an investment %anker in a co#ntry 6ith strict confidentiality
la6s$ De is 6orking on an ac"#isition for .anda Mining Co$ *.MC,$ 5hile
&erforming d#e diligence' Lee notices that .MC has a n#m%er of "#estiona%le
offshore &artnershi&s$ De investigates the legality of the &artnershi&s and finds
evidence of illegal activity$ According to the /tandards of .rofessional Cond#ct'
Lee;s best co#rse of action 6o#ld %e to9
A$ alert CFA Instit#te$
:$ cons#lt o#tside co#nsel$
C$ notify reg#latory a#thorities$
!0$ Gene 5hatcom' CFA' is an inde&endent contractor 6ho 6rites research re&orts
for several investment &#%lications$ 5hatcom ref#ses to sign contracts 6ith
ecl#sivity cla#ses$ 5hatcom sometimes revises 6ork he s#%mits to one
&#%lication and sends slightly altered versions of the re&ort to additional
&#%lications$ 4oes 5hatcom violate any CFA Instit#te /tandards8
A$ >o$
:$ ?es' 6ith res&ect to loyalty$
C$ ?es' 6ith res&ect to disclos#re of conflicts$
!)$ Ang#s 4ra&er' CFA' is a senior &ortfolio manager and mem%er of the investment
committee at Tillahook Investments$ 4ra&er serves as a %oard mem%er for
several non-&rofit organiCations$ These commitments re"#ire eight 6orkdays &er
month of 4ra&er;s time$ :eca#se he does not receive any form of com&ensation
for these activities' 4ra&er does not tell anyone at 6ork a%o#t his %oard activities$
4oes 4ra&er violate any CFA Instit#te /tandards8
A$ >o$
:$ ?es' 6ith res&ect to conflict of interest$
C$ ?es' 6ith res&ect to res&onsi%ilities of s#&ervisors$
Questions 19 troug %2 relate to Quantitative Meto!s
!9$ The yield to mat#rity on other6ise identical o&tion-free %onds iss#ed %y the @$/$
Treas#ry and a large ind#strial cor&oration is 3 &ercent and ) &ercent'
res&ectively$ If ann#al inflation is e&ected to remain steady at 2$( &ercent over
the life of the %onds' the most likely e&lanation for the difference in yields is a
&remi#m d#e to9
A$ mat#rity$
:$ inflation$
C$ defa#lt risk$
20$ A 22 year old is #sing the follo6ing information to &lan her retirement9
C#rrent age 22
E&ected retirement age 3)
Life e&ectancy 9+
C#rrent ann#al e&endit#res J+0'000
E&ected inflation rate of c#rrent
e&endit#res #ntil retirement +K
E&ected ret#rn on investment )K
/he ass#mes her cons#m&tion e&endit#res 6ill increase 6ith the rate of inflation'
+ &ercent' #ntil she retires$ @&on retiring she 6ill have end-of-year e&endit#res
e"#al to her cons#m&tion e&endit#re at age 3)$ The minim#m amo#nt that she
m#st acc#m#late %y age 3) in order to f#nd her retirement is closest to9
A$ J92)'000$
:$ J!'!03'000$
C$ J!'((2'000$
2!$ A &roIect has the follo6ing e&ected cash flo6s9
T ime &as 'lo( )*+
0 *!2('000,
! !00'000
2 200'000
If the risk-free interest rate is 2 &ercent' e&ected inflation is + &ercent' the market
risk &remi#m is ) &ercent and the :eta for the &roIect is !' the investment;s net
&resent val#e *>.H, is closest to9
A$ J!!+'000$
:$ J!22'000$
C$ J!+9'000$
22$ An analyst gathers the follo6ing information a%o#t a common stock investment9
,ate -mount L
/tock &#rchase !( Ban#ary 200) 2)$00
Cash dividend received !2 B#ly 200) 2$00
/tock sale !( B#ly 200) (2$00
The holding &eriod ret#rn on the common stock investment is closest to9
A$ !2$(K$
:$ 20$)K$
C$ 2!$0K$
2+$ A 200-day @$/$ Treas#ry %ill 6ith a face val#e of J!00'000 sells for J93'(00
6hen iss#ed$ Ass#ming an investor holds the %ill to mat#rity' the investor;s
money market yield is closest to9
A$ +$3+K$
:$ 2$)2K$
C$ 2$9+K$
22$ An analyst gathered the follo6ing ann#al ret#rn information a%o#t a &ortfolio
since its ince&tion on ! Ban#ary 200+9
.ear "ort#olio return
200+
2002
200(
2003
2000
)$3K
!!$2K
!2$9K
!($!K
M9$2K
The &ortfolio;s mean a%sol#te deviation for the five-year &eriod is closest to9
A$ +$03K$
:$ 3$)+K$
C$ 0$3)K$
2($ An analyst gathered the follo6ing information a%o#t a common stock &ortfolio9
Arithmetic mean ret#rn !2$+K
7eometric mean ret#rn !2$0K
Hariance of ret#rns +)0
.ortfolio %eta !$+(
If the risk-free rate of ret#rn is 2$2( &ercent' then the coefficient of variation is
closest to9
A$ 0$(2$
:$ !$+3$
C$ !$(+$
23$ If an analyst estimates the &ro%a%ility of an event for 6hich there is no historical
record' this &ro%a%ility is best descri%ed as9
A$ a &riori$
:$ em&irical$
C$ s#%Iective$
20$ 5hich of the follo6ing statements best descri%es the relationshi& %et6een
correlation and covariance8 The correlation %et6een t6o random varia%les is
their covariance standardiCed %y the &rod#ct of the varia%les;9
A$ variances$
:$ standard deviations$
C$ coefficients of variation$
2)$ 5hich of the follo6ing best descri%es the discrete #niform distri%#tion8 The
discrete #niform distri%#tion9
A$ has a finite n#m%er of s&ecified o#tcomes$
:$ is %ased on the :erno#lli random varia%le$
C$ has an infinite n#m%er of #ns&ecified o#tcomes$
29$ According to the central limit theorem' a sam&ling distri%#tion of the sam&le
mean 6ill %e a&&roimately normal only if the9
A$ sam&le siCe is large$
:$ #nderlying distri%#tion is normally distri%#ted$
C$ variance of the #nderlying distri%#tion is kno6n$
+0$ 5hich of the follo6ing is least likely to %e a desira%le &ro&erty of an estimator8
A$ Efficiency
:$ Gelia%ility
C$ Consistency
+!$ An analyst gathers the follo6ing information a%o#t the &rice-earnings *.NE, ratios
for the common stocks held in a &ortfolio9
Interval "/E range 're0uenc1
I
II
III
IH
)$00 M !3$00
!3$00 M 22$00
22$00 M +0$00
+0$00 M +)$00
20
(2
22
!2
The relative fre"#ency for Interval II is closest to9
A$ 20$20K$
:$ (2$00K$
C$ 3($2(K$
+2$ Gent is J000$00 monthly and is d#e on the first day of every month$ If the stated
ann#al interest rate is 3 &ercent' the &resent val#e of a f#ll year;s rent &ayments is
closest to9
A$ J)'!++$
:$ J)'!0+$
C$ J)')++$
Questions %% troug 22 relate to Economics
++$ 4emand for g#est rooms in a resort hotel increases from !00 to !(0 rooms &er night
6hen the nightly room rate increases from J!(0 to J200$ The elasticity of s#&&ly of
g#est rooms in the resort hotel is closest to9
A$ 0$02$
:$ !$20$
C$ !$(0$
+2$ A recessionary ga& is more likely to %e o%served 6hen9
A$ real 74. is a%ove &otential 74.$
:$ real 74. is %elo6 &otential 74.$
C$ em&loyment is a%ove f#ll-em&loyment e"#ili%ri#m$
:y accessing this mock eam' yo# agree to the follo6ing terms of #se9 This mock eam is &rovided to
c#rrently-registered CFA candidates$ Candidates may vie6 and &rint the eam for &ersonal eam
&re&aration only$ The follo6ing activities are strictly &rohi%ited and may res#lt in disci&linary andNor
legal action9 accessing or &ermitting access %y anyone other than c#rrently-registered CFA candidates=
co&ying' &osting to any 6e%site' emailing' distri%#ting andNor re&rinting the mock eam for any &#r&ose$
+($ 5hich of the follo6ing statements is most acc#rate in regard to the ta division %et6een
%#yers and sellers of &rod#cts 6ith &erfectly elastic demand8
A$ /ellers &ay the entire ta$
:$ :#yers %ear the entire ta %#rden$
C$ :#yers and sellers share the ta %#rden$
+3$ A com&any com&iles the follo6ing information9
Total reven#e J+00'000
Hal#e of %#ildings and machinery
- At the %eginning of the year J+00'000
- At the end of the year J2)0'000
Cost of ra6 materials J!00'000
5ages &aid d#ring the year J (0'000
>ormal &rofit for the year J 20'000
The com&any;s economic &rofit is closest to9
A$ J90'000$
:$ J!!0'000$
C$ J!+0'000$
+0$ In the short r#n' an increase in o#t&#t at lo6 levels of &rod#ction 6ill most likely ca#se9
A$ an increase in the marginal cost d#e to the rising total fied cost$
:$ an increase in the marginal cost d#e to the la6 of diminishing ret#rns$
C$ a decrease in the marginal cost d#e to economies from greater s&ecialiCation$
+)$ In reg#lating a nat#ral mono&oly' the most commonly ado&ted com&romise &ricing r#le
%y a reg#lator is the9
A$ total cost &ricing r#le$
:$ average cost &ricing r#le$
C$ marginal cost &ricing r#le$
+9$ 5hich of the follo6ing statements &rovides the best descri&tion of >ash e"#ili%ri#m of
t6o firms in the game of &risoners; dilemma8
A$ <ne firm com&lies and the other cheats$
:$ :oth firms cheat and each firm makes Cero economic &rofit$
C$ :oth firms com&ly and each firm makes a &ositive economic &rofit$
:y accessing this mock eam' yo# agree to the follo6ing terms of #se9 This mock eam is &rovided to
c#rrently-registered CFA candidates$ Candidates may vie6 and &rint the eam for &ersonal eam
&re&aration only$ The follo6ing activities are strictly &rohi%ited and may res#lt in disci&linary andNor
legal action9 accessing or &ermitting access %y anyone other than c#rrently-registered CFA candidates=
co&ying' &osting to any 6e%site' emailing' distri%#ting andNor re&rinting the mock eam for any &#r&ose$
20$ The best characteriCation of the nat#ral reso#rces market is that9
A$ s#&&ly of a nonrene6a%le nat#ral reso#rce is &erfectly inelastic and firms are
&rice takers$
:$ &rice is determined %y market demand in a rene6a%le reso#rces market and %y
s#&&ly in a nonrene6a%le reso#rce market$
C$ s#&&ly of a rene6a%le nat#ral reso#rce is &erfectly elastic and the &rice is
e"#al to the &resent val#e of the net &eriodOs e&ected &rice$
2!$ :ased on s#&&ly-side effects' an increase in income ta 6ill most likely9
A$ shift the demand c#rve for la%or$
:$ decrease the f#ll-em&loyment "#antity of la%or$
C$ increase &otential 7ross 4omestic .rod#ct *74.,$
22$ A change in the nat#ral rate of #nem&loyment 6ill most likely shift9
A$ the short-r#n %#t not the long-r#n .hilli&s c#rves$
:$ %oth the short-r#n and the long-r#n .hilli&s c#rves$
C$ neither the short-r#n nor the long-r#n .hilli&s c#rves$
2+$ 5hich of the follo6ing goals of monetary &olicy is best descri%ed to %e the key
goal8
A$ .rice sta%ility$
:$ F#ll em&loyment$
C$ Moderating long-term interest rates$
22$ The least likely reason 6hy a firm in &erfect com&etition is a &rice taker is
%eca#se9
A$ %#yers are 6ell informed a%o#t &rices of other firms$
:$ it can set its &rod#cts; &rice at or a%ove the market &rice$
C$ it &rod#ces a very small &ortion of the total o#t&#t of a &artic#lar good$
Questions 23 troug 48 relate to 'inancial Statement -nal1sis
2($ An analyst finds information a%o#t significant #ncertainties affecting a com&any;s
li"#idity' ca&ital reso#rces and res#lts of o&erations in the9
A$ notes to the financial statements$
:$ %alance sheet and income statement$
C$ management disc#ssion and analysis$
23$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
5hich of the follo6ing is least likely to %e classified as a financial statement
element8
A$ Asset$
:$ Geven#e$
C$ >et income$
20$ An analyst &re&ares common-siCe %alance sheets for t6o com&anies o&erating in
the same ind#stry$ The analyst notes that %oth com&anies had the same
&ro&ortion of c#rrent lia%ilities' long-term lia%ilities' and shareholders; e"#ity and
the follo6ing ratios9
Com&any ! Com&any 2
C#rrent ratio 2$0 2$0
Cash ratio 0$+ 0$+
1#ick ratio 0$( 0$)
The most reasona%le concl#sion is that' com&ared 6ith Com&any 2' Com&any !
had a9
A$ higher &ercentage of assets associated 6ith inventory$
:$ higher &ercentage of assets associated 6ith acco#nts receiva%le$
C$ lo6er &ercentage of assets associated 6ith marketa%le sec#rities$
2)$ If a com&any has a c#rrent ratio of 2$0' re&aying J!(0'000 in short-term
%orro6ing 6ill most likely decrease9
A$ the c#rrent ratio' %#t not the cash flo6 from o&erations$
:$ the cash flo6 from o&erations' %#t not the c#rrent ratio$
C$ neither the c#rrent ratio nor the cash flo6 from o&erations$
29$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
At the end of the year' a com&any sold e"#i&ment for J+0'000 cash$ The
com&any &aid J!!0'000 for the e"#i&ment several years ago and had recorded
acc#m#lated de&reciation of J00'000 at the time of its sale$ All else e"#al' the
e"#i&ment sale 6ill res#lt in the com&any;s cash flo6 from9
A$ investing activities increasing %y J+0'000$
:$ investing activities decreasing %y J!0'000$
C$ o&erating activities %eing J!0'000 less than net income$
(0$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any re&orts net income of J)00'000 for the year$ The ta%le %elo6
indicates selected items 6hich 6ere incl#ded in net income and their associated
ta stat#s$
Inclu!e! in !etermining
5et Income Tax Status
4e&reciation E&ense J00'000 J90'000 allo6ed for ta &#r&oses
4ividend Income J!20'000 4ividends not taa%le
Fine related to
environmental damage J!00'000 >ot ded#cti%le for ta &#r&oses
GP4 E&endit#res J(0'000 J20'000 allo6ed for ta &#r&oses
The com&any;s ta rate is +( &ercent$ The com&any;s c#rrent income taes
&aya%le *in J, is closest to9
A$ 203'(00$
:$ 203'(00$
C$ +30'(00$
(!$ An analyst gathers the follo6ing ann#al information *J millions, a%o#t a com&any
that &ays no dividends and has no de%t9
>et income 2($)
4e&reciation !)$2
Loss on sale of e"#i&ment !$3
4ecrease in acco#nts receiva%le 2$2
Increase in inventories +$2
Increase in acco#nts &aya%le 2$(
Ca&ital e&endit#res 0$+
.roceeds from sale of stock )$(
The com&any;s ann#al free cash flo6 to e"#ity *J millions, is closest to9
A$ (+$!$
:$ ()$2$
C$ 3!$3$
(2$ 5hich of the follo6ing statements best descri%es the level of acc#racy &rovided
%y a standard a#dit re&ort 6ith res&ect to errors8 The a#dited financial statements
are9
A$ f#lly ass#red to %e free of material errors$
:$ reasona%le ass#red to %e free of all errors$
C$ reasona%le ass#red to %e free of material errors$
(+$ Making any necessary adI#stments to the financial statements to facilitate
com&arison 6ith res&ect to acco#nting choices is done in 6hich ste& of the
financial statement analysis frame6ork8
A$ Collect data$
:$ .rocess data$
C$ AnalyCeNinter&ret the &rocessed data$
(2$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
For the most recent year a man#fact#ring com&any re&orts the follo6ing items on
their income statement9
Interest e&ense J32'(00
Loss on dis&osal of fied assets J(0'000
GealiCed gain on sale of availa%le-for-sale sec#rities J!0'0(0
5hich of the items is classified as an o&erating item in the com&any;s income
statement8
A$ Interest e&ense$
:$ Loss on dis&osal of fied assets$
C$ GealiCed gain on sale of availa%le-for-sale sec#rities$
(($ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
The follo6ing information is availa%le from the acco#nting records of a com&any
as at +! 4ecem%er 200) *all fig#res in J tho#sands,9
-ccount: *
Acco#nts &aya%le 20
Acco#nts receiva%le )2
:ank loan' d#e on demand 22
Cash !2
Income taes &aya%le (
Inventory 20
Investments acco#nted for %y the e"#ity method !!2
Loan &aya%le' d#e +0 B#ne 20!0 (0
4e&osits from c#stomers for deliveries in 2009 )
The 6orking ca&ital for the com&any *in J tho#sands, is closest to9
A$ 32$
:$ 02$
C$ !03$
(3$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
4#ring late 4ecem%er 200) Com&any A ac"#ires a small com&etitor' Com&any
:$ 4#ring the eval#ation of the ac"#isition it is determined that the c#stomer lists
of Com&any : have a fair val#e of J(0'000$ Com&any A has s&ent J!('000
d#ring the year #&dating and maintaining its o6n c#stomer lists$ 5hat 6ill %e the
val#e of the c#stomer list intangi%le asset on Com&any A;s +! 4ecem%er 200)
consolidated financial statements8
A$ J!('000$
:$ J(0'000$
C$ J3('000$
(0$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any has e"#i&ment 6ith an original cost of J)(0'000' acc#m#lated
amortiCation of J+00'000 and ( years of estimated remaining #sef#l life$ 4#e to a
change in market conditions the com&any no6 estimates that the e"#i&ment 6ill
only generate cash flo6s of J)0'000 &er year over its remaining #sef#l life$ The
com&any;s incremental %orro6ing rate is ) &ercent$ 5hich of the follo6ing
statements concerning im&airment and f#t#re ret#rn on assets *G<A, is most
acc#rate8 The asset is9
A$ im&aired and f#t#re G<A increases$
:$ im&aired and f#t#re G<A decreases$
C$ not im&aired and f#t#re G<A increases$
()$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
<n ! Ban#ary 200) a com&any enters into a lease agreement to lease a &iece of
machinery as the lessor 6ith the follo6ing terms9
Ann#al lease &ayment d#e +! 4ecem%er J(0'000
Lease term ( years
Estimated #sef#l life of the machine 3 years
Estimated salvage val#e of the machine J0
Carrying val#e *cost, of leased asset J!30'000
Im&lied interest rate on lease )K
The firm is reasona%ly ass#red of the collection of the lease &ayments$
5hich of the follo6ing best descri%es the classification of the lease on the
com&any;s financial statements for 200)8
A$ <&erating lease$
:$ /ales ty&e lease$
C$ 4irect financing lease$
(9$ 5hich of the follo6ing is the most #sef#l to an analyst assessing the credit
6orthiness of a com&any8 Information related to9
A$ o&erating cash flo6$
:$ the scale and diversity of a com&any;s o&erations$
C$ o&erational efficiency of the com&any;s o&erations$
30$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any ac"#ires some ne6 de&recia%le assets$ 5hich of the follo6ing
com%inations of estimated salvage val#e and #sef#l life 6ill most likely &rod#ce
the highest net &rofit margin8
A$ lo6 salvage val#e estimates and long average lives$
:$ high salvage val#e estimates and long average lives$
C$ high salvage val#e estimates and short average lives$
3!$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
An analyst gathers the follo6ing information a%o#t a com&any *J millions,9
2008 2006
/ales 2)+$( 2+2$9
?ear-end inventory *LIF< inventory method, )!$2 (+$0
LIF< reserve +3$2 2!$)
Cost of goods sold *LIF<, 20+$9 !30$+
If the com&any #ses the FIF< inventory method instead of LIF<' the com&any;s
200) gross &rofit margin is closest to9
A$ 22$9K$
:$ 29$)K$
C$ ++$2K$
32$ 5hich of the follo6ing 6ill most likely %e an incentive for management to
#nderre&ort earnings8
A$ Meeting analysts; e&ectations$
:$ Contract negotiations 6ith #nions$
C$ Meeting restrictive de%t covenants$
3+$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any #ses the LIF< inventory method' %#t most of the other com&anies in
the same ind#stry #se FIF<$ 5hich of the follo6ing best descri%es one of the
adI#stments that 6o#ld %e made to the com&any;s financial statements to com&are
it 6ith other com&anies in the ind#stry8 The amo#nt re&orted for the com&any;s
ending inventory sho#ld %e9
A$ increased %y the ending %alance in its LIF< reserve$
:$ decreased %y the ending %alance in its LIF< reserve$
C$ increased %y the change in its LIF< reserve for that &eriod$
32$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
An analyst gathers the follo6ing information a%o#t a com&any9
Average market &rice &er share of common stock d#ring the year J20
Eercise &rice &er share for o&tions on (0'000 common shares J(0
Eercise &rice &er share for 6arrants on 20'000 common shares J+0
@sing the treas#ry stock method' the n#m%er of incremental shares #sed to
com&#te dil#ted earnings &er share is closest to9
A$ ('000$
:$ !('000$
C$ 20'000$
3($ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
At the %eginning of the year' a lessee com&any enters into a ne6 lease agreement
that is correctly classified as a finance lease' 6ith the follo6ing terms9
Ann#al lease &ayments d#e at the end of the year J!00'000
Lease term ( years
A&&ro&riate disco#nt rate !2K
4e&reciation method straight-line %asis
Estimated salvage val#e J0
5ith res&ect to the effect of the lease on the com&any;s financial statements in the
first year of the lease' 6hich of the follo6ing is most acc#rate8 The red#ction in
the com&any;s9
A$ &reta income is J02'093$
:$ cash flo6 from financing is J(3'022$
C$ cash flo6 from o&erations is J02'093$
33$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
The follo6ing information relates to a &rofita%le com&any that offers a 6arranty
on a ne6 &rod#ct introd#ced in 200)9
Accr#ed 6arranty e&enses for the 6arranty in 200) J+00'000
Act#al e&endit#res for re&airs #nder the 6arranty in 200) J200'000
If the com&any;s ta rate is +( &ercent' 6hich of the follo6ing most acc#rately
descri%es the deferred ta recorded in 200) 6ith res&ect to the ne6 &rod#ct
6arranty8
A$ 4eferred ta asset of J+('000$
:$ 4eferred ta asset of J3('000$
C$ 4eferred ta lia%ility of J+('000$
30$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
At the %eginning of the year' a com&any iss#es a J!'000 face val#e' semiann#al
co#&on' %ond 6ith an ) &ercent co#&on rate mat#ring in !0 years$ The ann#al
market rate of interest at iss#ance 6as !2 &ercent$ The initial lia%ility recorded
for this %ond is closest to9
A$ J00!$
:$ J002$
C$ J!'000$
3)$ Financial re&orting standards are most likely enforced %y9
A$ %oth standard-setting %odies and reg#latory %odies$
:$ reg#latory a#thorities' s#ch as the /EC and I</C' only$
C$ standard-setting %odies' s#ch as the FA/: and IA/:' only$
Questions 49 troug 68 relate to &orporate 'inance
39$ A large cor&oration acce&ts a &roIect 6hich generates no reven#e and has a
negative net &resent val#e$ The &roIect most likely is classified in 6hich of the
follo6ing categories8
A$ Ge&lacement &roIect$
:$ >e6 &rod#ct or service$
C$ Geg#latory or environmental &roIect$
00$ A com&any recently o&ened a limestone "#arry at a location o#tside its traditional
service area$ :eca#se limestone is a maIor ingredient in concrete' if the "#arry is
s#ccessf#l the com&any &lans to %#ild a ready-mi concrete &lant at the same
location$ The investment in the concrete &lant is best descri%ed as9
A$ an eternality$
:$ &roIect se"#encing$
C$ an eam&le of investment synergy$
0!$ An analyst determines the follo6ing cash flo6s for a ca&ital &roIect9
?ear 0 ! 2 + 2 (
Cash flo6 *L, -!00 +0 20 20 +0 20
The re"#ired rate of ret#rn for the &roIect is !+ &ercent$ The net &resent val#e
*>.H, of the &roIect is closest to9
A$ L!2$)($
:$ L30$00$
C$ L2!2$)($
02$ An analyst gathers the follo6ing information a%o#t the ca&ital str#ct#re and
%efore-ta com&onent costs for a com&any$ The com&any;s marginal ta rate is
20 &ercent$
Ca&ital com&onent :ook Hal#e *000, Market Hal#e *000, Com&onent cost
4e%t
.referred stock
Common stock
J!00
J20
J!00
J)0
J20
J200
)K
!0K
!2K
The com&any;s 6eighted average cost of ca&ital *5ACC, is closest to9
A$ )$((K$
:$ 9$9(K$
C$ !0$)0K$
0+$ A com&any is considering iss#ing a !0-year' o&tion-free' semiann#al co#&on %ond
6ith a 9 &ercent co#&on rate$ The %ond is e&ected to sell at 9( &ercent of &ar
val#e$ If the com&any;s marginal ta rate is +0 &ercent' then the after-ta cost of
de%t is closest to9
A$ 3$+0K$
:$ 3$)3K$
C$ 9$)0K$
02$ A com&any &lans to iss#e nonconverti%le' noncalla%le' fied-rate &er&et#al
&referred stock 6ith a J3 ann#al dividend$ The &referred stock is e&ected to sell
for J20$ If the com&any;s marginal ta rate is +0 &ercent' then the cost of
&referred stock is closest to9
A$ 3$30K$
:$ !0$(K$
C$ !($0K$
0($ An analyst gathers the follo6ing information a%o#t a com&any and the market9
&urrent market price per sare o# common stock 7%2$00
Most recent !ivi!en! per sare pai! on common stock 72$20
E&ected dividend &ayo#t rate 20K
E&ected ret#rn on e"#ity *G<E, !(K
:eta for the common stock !$(
E&ected ret#rn on the market &ortfolio !2K
Gisk-free rate of ret#rn 2K
@sing the dividend disco#nt model a&&roach' the cost of common e"#ity for the
com&any is closest to9
A$ !3$0K$
:$ !3$(K$
C$ !0$2K$
03$ A com&any is investigating the &#rchase of a %anker;s acce&tance *:A,$ The
J!'000'000 face val#e :A has !(0 days to mat#rity and is "#oted at 2$0( &ercent
on a disco#nt-%asis yield$ If the com&any;s marginal ta rate is 2( &ercent' then
the money market yield on the :A is closest to9
A$ +$!+K$
:$ 2$!2K$
C$ 2$!)K$
00$ Gegarding cor&orate governance' 6hich of the follo6ing is most likely a reason
for concern 6hen eval#ating the com&ensation committee8 The com&ensation
committee9
A$ incl#des mem%ers of eec#tive management$
:$ &#rchases shares on the o&en market to f#nd stock o&tion commitments$
C$ discloses information a%o#t com&ensation &aid to eec#tives and %oard
mem%ers$
0)$ 5hich of the follo6ing is least likely classified as a takeover defense8
A$ 7reenmail$
:$ C#m#lative voting$
C$ 7olden &arach#tes$
Questions 69 troug 90 relate to E0uit1 Investments
09$ In sec#rities echange markets' a mem%er 6ho eec#tes sto& loss or sto& %#y
orders 6hen the s&ecified &rice occ#rs is most likely a9
A$ s&ecialist$
:$ registered trader$
C$ commission %roker$
)0$ An analyst gathers the follo6ing data for a com&any to estimate the e&ected
gro6th rate of dividends and #se it as an in&#t for val#ing the com&any;s common
stock$
Get#rn on Assets !0K
.rofit Margin ( K
Financial Leverage !$30
.ayo#t Gatio 2(K
The com&any;s e&ected gro6th rate is closest to9
A$ 2$2K$
:$ 3$+K$
C$ !2$(K$
)!$ 5hich of the follo6ing statements a%o#t the short sale of a stock is least
acc#rate8
A$ The short seller m#st &ay any dividends d#e to the lender of shares$
:$ A sto& %#y order 6o#ld ena%le a short seller to minimiCe &otential losses$
C$ /hort sales involve time limits for ret#rning the shares %orro6ed to the lender$
)2$ An analyst gathers the follo6ing data to determine the attractiveness of the
com&any;s common stock9
4ividends &er share in 2002 J2
4ividends &er share in 200) J+
E&ected ret#rn on the market !0K
E&ected nominal risk-free ret#rn 9K
/tock;s %eta !$)
/tock;s market &rice as of ! Ban#ary 2009 J!9
@sing the constant gro6th dividend disco#nt model' the stock;s intrinsic val#e is
closest to9
A$ J!2$)2$
:$ J!)$29$
C$ J!9$(0$
)+$ Hal#e Line Inde' an #n6eighted inde' #ses 6hich of the follo6ing methods in
the com&#tation of the holding &eriod ret#rns of #nderlying stocks8
A$ 7eometric mean$
:$ Arithmetic mean$
C$ Hal#e-6eighted mean$
)2$ The %ehavior of investors 6ho &#t more money into a fail#re that they feel
res&onsi%le for' rather than into a s#ccess' is most acc#rately descri%ed as9
A$ escalation %ias$
:$ confirmation %ias$
C$ overconfidence %ias$
)($ An analyst gathers the follo6ing data a%o#t a com&any9
/tock &rice J20
/tock;s re"#ired ret#rn !2K
Consens#s estimate of net year;s dividend J2$00
Com&any;s ret#rn on e"#ity !0K
@sing the dividend disco#nt model' the com&any;s dividend &ayo#t ratio is
closest to9
A$ (K$
:$ +0K$
C$ 00K$
)3$ 5hich of the follo6ing attri%#tes is least likely to %e associated 6ith the
characteristics of a 6ell f#nctioning sec#rities market8
A$ Market de&th$
:$ 5ide %id-ask s&reads$
C$ Ga&id adI#stment of &rices to ne6 information$
)0$ The best descri&tion of the meas#re of cash flo6 to #se 6hen estimating the total
val#e of a firm is the o&erating free cash flo69
A$ &rior to interest &ayments on de%t$
:$ &rior to interest &ayments on de%t %#t after ded#cting f#nds needed for ca&ital
e&endit#res$
C$ after adI#stment for &ayments to de%t holders' %#t %efore dividend &ayments
to common stockholders$
))$ 5hich of the follo6ing is the least likely so#rce of #nrelia%ility of a &ricing
anomaly8
A$ 4ata mining$
:$ Ar%itrage activity$
C$ >onsynchrono#s trading$
)9$ The best characteriCation of the strong-form of efficient market hy&othesis *EMD,
6ith res&ect to the information set is that it encom&asses9
A$ %oth 6eak-form and semistrong-form hy&otheses$
:$ neither 6eak-form nor semistrong-form hy&othesis$
C$ the semistrong-form %#t not the 6eak-form hy&othesis$
90$ Among a com&any;s &rice to earnings *.NE,' &rice to sales *.N/,' and &rice to cash
flo6 *.NCF, ratios' it is most acc#rate to state that .NE ratios are generally more
sta%le from &eriod to &eriod than9
A$ .N/ ratios %#t not .NCF ratios$
:$ .NCF ratios %#t not .N/ ratios$
C$ neither .N/ ratios nor .NCF ratios$
Questions 91 troug 94 relate to ,erivative Investments$
9!$ A series of interest rate &#t o&tions that e&ire on different dates %#t have the
same eercise rate is best defined as a *n,9
A$ interest rate ca&$
:$ interest rate floor$
C$ interest rate collar$
92$ The &arty making the fied-rate &ayment #nder a s6a& contract co#ld also have to
make the varia%le &ayment on that contract if the &ayments are related to a *n,9
A$ e"#ity s6a&$
:$ c#rrency s6a&$
C$ interest rate s6a&$
9+$ An investor esta%lishes a short &osition in a f#t#res contract on 4ay 0 6hen the
&rice &er contract is J!00$ The investor de&osits J( &er contract to meet the initial
margin re"#irement$ The maintenance margin re"#irement &er contract is J+$
The 4ay ! settlement &rice that 6o#ld re"#ire the investor de&osit additional
f#nds on 4ay 2 e"#al to J2 &er contract is closest to9
A$ J93$
:$ J!0+$
C$ J!02$
92$ T6o &arties agree to a for6ard contract to deliver the /P. (00 Inde at a &rice of
J+0('000 in 2 months time$ 5hen the for6ard contract e&ires' the &rice of the
/P. (00 Inde is J+(0'000 %#t the long &arty is #na%le to &ay the cash
settlement$ The short &arty is most likely o%ligated to9
A$ 4efa#lt on the for6ard contract
:$ 4o nothing #ntil the long makes &ayment
C$ Acce&t delivery of /P. (00 stocks from the long
9($ A E#ro&ean %ank 6ants to short a !+ for6ard rate agreement on E#ri%or$ A
dealer &rovides the %ank 6ith a "#ote of !$0( &ercent$ The %ank agrees to enter
the FGA 6ith the dealer$ At contract mat#rity' 6hat E#ri%or rate 6o#ld most
likely res#lt in the E#ro&ean %ank receiving a &ayment from the dealer8
A$ 30-day E#ri%or at !$00K
:$ 30-day E#ri%or at !$)0K
C$ 90-day E#ri%or at !$3(K
93$ According to &#t-call &arity' a synthetic &#t contains a9
A$ long &osition in the call$
:$ long &osition in the #nderlying$
C$ short &osition in the risk-free %ond$
Questions 96 troug 108 relate to 'ixe! Income Investments$
90$ The s&read %et6een the yields on a 7innie Mae &assthro#gh sec#rity and a
com&ara%le Treas#ry sec#rity is best e&lained %y9
A$ credit risk$
:$ &re&ayment risk$
C' reinvestment risk$
9)$ 5hich of the follo6ing &rovides the most flei%ility for the %ond iss#er8
A$ .#t &rovision$
:$ Call &rovision$
C$ /inking f#nd &rovision$
99$ An ann#al-&ay %ond has a yield to mat#rity of ($00 &ercent$ The %ond-e"#ivalent
yield of the ann#al-&ay %ond is closest to9
A$ 2$92K$
:$ ($00K$
C$ ($03K$
!00$ An analyst gathered the follo6ing information9
.eriods ?ears
Ann#al .ar ?ield
to Mat#rity
:E? *K,
Theoretical
/&ot rate
:E? *K,
/i-month
For6ard Gates
:E? *K,
! 0$( +$00 +$00 +$00
2 !$0 +$+0 +$+0 +$3!
+ !$( +$(0 +$(! +$9!
2 2$0 +$90 +$92 ($!(
The val#e of a single' defa#lt-free cash flo6 of J(0'000 at the end of .eriod 2 is
closest to9
A$ J23'23($
:$ J23'299$
C$ J23'+!3$
!0!$ The Cero-volatility s&read *Q-s&read, is a meas#re of the s&read off9
A$ all &oints on the s&ot c#rve$
:$ all &oints on the Treas#ry yield c#rve$
C$ one &oint on the Treas#ry yield c#rve$
!02$ If an instit#tional investor 6ants to %orro6 money for +0 days to finance a %ond
&#rchase' 6hich of these is most likely to %e the lo6est loan rate availa%le8
A$ Term re&o rate
:$ Call money rate
C$ :roker loan rate
!0+$ The o&tion adI#sted s&read *<A/, is best descri%ed as the9
A$ Q-s&read min#s the o&tion cost$
:$ Q-s&read &l#s the cost of the o&tion$
C$ val#e of the sec#rity;s em%edded o&tion$
!02$ If interest rates are e&ected to decline' an investor can earn a higher co#&on
interest rate %y &#rchasing a*n,9
A$ calla%le %ond$
:$ inverse floater$
C$ floater 6ith a floor$
!0($ The d#ration of a fied-income &ortfolio is best inter&reted as the9
A$ first derivative of the &rice f#nction for the %onds in the &ortfolio$
:$ &ercentage change in the &ortfolio;s val#e if interest rates change %y !00 %asis
&oints$
C$ 6eighted average n#m%er of years to receive the &resent val#e of the
&ortfolio;s cash flo6s$
!03$ Gelative to the d#rationNconveity a&&roach' a shortcoming of the f#ll val#e
a&&roach to meas#ring the interest rate risk of a %ond &ortfolio is that it9
A$ is relatively time cons#ming$
:$ cannot %e #sed for stress testing$
C$ ignores the im&act of em%edded o&tions$
!00$ A &ortfolio manager #ses her val#ation model to estimate the val#e of a %ond as
!2($2)2$ @sing the same model' she estimates that the val#e 6o#ld increase to
!20$02+ if interest rates fell +0 %&s and 6o#ld decrease to !22$!32 if interest rates
rose +0 %&s$ @sing these estimates' the effective d#ration of the %ond is closest to9
A$ 2$22$
:$ 0$+)$
C$ !2$00$
!0)$ If a %ond is trading at 93$)29 6ith a yield to mat#rity of 2$(+ &ercent and d#ration
e"#al to ($+)' its &rice val#e of a %asis &oint *.H:., is closest to9
A$ 0$02+9$
:$ 0$0(2!$
C$ 0$0(+)$
Questions 109 troug 112 relate to -lternative Investments$
!09$ Echange traded f#nds *ETFs, are affected %y trading risk' 6hich is most likely
to9
A$ e&ose investors to co#nter&arty credit risk$
:$ res#lt in &rices that differ from >et Asset Hal#e * >AH,$
C$ &rovide investment res#lts that do not corres&ond to the &rice and yield
&erformance of their res&ective indees$
!!0$ 5hen #sing the net income a&&roach *><I, in real estate val#ation' if inflation is
&assed thro#gh' then the a&&raisal &rice 6ill most likely9
A$ increase$
:$ decrease$
C$ remain #nchanged$
!!!$ An investor eval#ates an a&artment com&le #sing the income a&&roach$ Gecent
sales in the area consist of an a&artment com&le and an office %#ilding$ The data
on the a&artment com&le and the recently sold &ro&erties are &rovided %elo6$ All
income and e&enses are ann#al$
7ross &otential rental
income
J2))'000
Estimated vacancy and
collection losses (K
Ins#rances and taes J2('000
@tilities J!3'000
Ge&airs and
maintenance
J23'000
4e&reciation J+2'000
Interest on &ro&osed
financing
J20'000
The ><I of the a&artment com&le #nder consideration is closest to9
A$ J!20'300$
:$ J!02'300$
C$ J203'300$
!!2$ An analyst collects the follo6ing data9
-partment &omplex
8n!er &onsi!eration
-partment &omplex
9ecentl1 Sol!
:##ice ;uil!ing
9ecentl1 Sol!
>et <&erating
Income *><I,
J2(0'000 J9!'000 J2)0'000
/ales &rice J000'000 J+'000'000
:ased on the data &rovided' the a&&raisal &rice of the a&artment com&le #nder
consideration is closest to9
A$ J!'(32'(00$
:$ J!'022'!+)$
C$ J!'92+'000$
!!+$ 5hen a commodity market is in contango' the roll yield is most likely9
A$ Cero$
:$ &ositive$
C$ negative$
!!2$ For a commodity if f#t#res &rices are a%ove the s&ot &rice' then the market is most
likely to %e9
A$ in contango$
:$ in %ack6ardation$
C$ trading at a &remi#m$
Questions 113 troug 120 relate to "ort#olio Management$
!!($ An analyst collected the follo6ing data for an asset9
.ossi%le Gate
of Get#rn *.ercent, .ro%a%ility
-!0K 0$20
-( 0$+0
!0 0$20
2( 0$!0
The variance of ret#rns for the asset are closest to9
A$ !2!$
:$ !))$
C$ 2!+$
!!3$ An analyst gathered the follo6ing information a%o#t a &ortfolio com&rised of t6o
assets9
Asset 5eight *K, E&ected Get#rn E&ected /tandard 4eviation
R 0( !!K (K
? 2( 0K 2K
If the correlation of ret#rns for the t6o assets e"#als 0$0(' and the risk-free
interest rate ! &ercent' then the e&ected standard deviation of the &ortfolio is
closest to9
A$ +$00K$
:$ 2$2+K$
C$ 2$((K$
!!0$ An analyst has gathered monthly ret#rns for t6o stock indees A and :9
Month
Get#rns for
Inde A
Get#rns for
Inde :
! -3$2K -3$2K
2 3$3K !9$0K
+ !2$9K -0$0K
2 +$2K 2$0K
The covariance %et6een Inde A and Inde : is closest to9
A$ !0$+0$
:$ !+$)2$
C$ !9$32$
!!)$ A com&letely diversified &ortfolio 6ill most likely res#lt in the elimination of9
A$ systematic variance$
:$ #nsystematic variance$
C$ %oth systematic and #nsystematic variance$
!!9$ :eta can %e vie6ed as9
A$ a meas#re of #nsystematic risk$
:$ covariance of an asset 6ith the market &ortfolio$
C$ correlation coefficient 6ith the market &ortfolio$
!20$ For an investor %orro6ing money at the risk-free interest rate to invest in the
market &ortfolio' the estimated rate of ret#rn of his &ortfolio is most likely to9
A$ increase$
:$ decrease$
C$ remain #nchanged$
2009 Level I Mock Exam: -#ternoon Session
The afternoon session of the 2009 Level I Chartered Financial Analyst

Mock
Eamination has !20 "#estions$ To %est sim#late the eam day e&erience' candidates
are advised to allocate an average of !$( min#tes &er "#estion for a total of !)0 min#tes
*+ ho#rs, for this session of the eam$
Questions
!-!)
Topic
Ethical and .rofessional /tandards
Minutes
20
!9-+2 1#antitative Methods 2!
++-22 Economics !)
2(-3) Financial /tatement Analysis +3
39-0) Cor&orate Finance !(
09-90 E"#ity Investments !)
9!-93 4erivative Investments 9
90-!0) Fied Income Investments !)
!09-!!2 Alternative Investments 9
!!(-!20 .ortfolio Management 9
Total: 180
LE<EL I M:&= E>-M -'TE95::5
Questions 1 troug 18 relate to Etical an! "ro#essional Stan!ar!s$
!$ According to the Standards of Practice Handbook' 6hich of the follo6ing
statements a%o#t fair dealing is least acc#rate8 The /tandard related to fair
dealing9
A$ states that mem%ers sho#ld treat all clients e"#ally$
:$ im&oses a d#ty 6ith res&ect to %oth clients and &ros&ective clients$
C$ &ertains to %oth investment recommendations and investment actions$
2$ An asset manager' a CFA charterholder' manages small-ca& &ortfolios for
instit#tional clients$ The manager is convinced' given the deteriorating economic
conditions' that as a gro#&' small-ca& e"#ities 6ill #nder&erform d#ring the net
!2-22 months$ To &reserve her client;s 6ealth' the manager sells small-ca&
e"#ities that she considers most v#lnera%le to &rice declines$ After considera%le
research' the manager %#ys large-ca& e"#ities that she %elieves are %etter
&ositioned to 6eather the e&ected economic do6nt#rn$ The manager &rovides
com&lete disclos#re of these trades to her clients after the &#rchase$ Das the
manager violated any CFA Instit#te /tandards of .rofessional Cond#ct8
A$ >o$
:$ ?es' relating to s#ita%ility$
C$ ?es' relating to miscond#ct$
+$ According to the Standards of Practice Handbook' a s#&ervisor esta%lishing
&roced#res to eliminate conflicts of interest relating to &ersonal trading 6o#ld
least likely recommend re"#iring9
A$ a %an on em&loyee investments$
:$ disclos#res of %eneficial o6nershi&s$
C$ d#&licate confirmations of em&loyee transactions$
2$ 4avid /andridge earned the right to #se the CFA designation in /e&tem%er !93)$
/andridge recently retired from the investment management &rofession$ As he is
retired' /andridge no longer attends CFA Instit#te society meetings and has
sto&&ed &aying his CFA Instit#te d#es$ According to the Standards of Practice
Handbook' ho6 sho#ld /andridge refer to his affiliation 6ith the CFA .rogram8
A$ 4avid /andridge' CFA$
:$ 4avid /andridge' CFA *retired,$
C$ EI 6as a6arded the CFA charter in !93)$F
($ A CFA Candidate' 6ho is an investment %ank e"#ity analyst 6rites a research
re&ort on an oil com&any recommending a %#y$ After revie6ing the re&ort and
not seeing any disclos#res a &ension f#nd manager asks the analyst if the
investment %ank is c#rrently #ndertaking any cor&orate finance activity 6ith this
oil com&any$ The analyst states that the investment %ank is &resently not 6orking
6ith the oil com&any %#t has done so in the &ast$ The analyst does not mention or
incl#de in the research re&ort' that she is related to the maIority shareholder of the
investment %ank and that she o6ns shares in the oil com&any$ According to the
Standards of Practice Handbook' the analyst is least likely to have violated the
CFA Instit#te /tandards of .rofessional Cond#ct that relates to9
A$ 4isclos#re of Conflicts$
:$ Inde&endence and <%Iectivity$
C$ Additional Com&ensation Arrangements$
3$ According to the Standards of Practice Handbook' mem%ers are least likely
re"#ired to disclose to clients their9
A$ service as directors$
:$ firm;s market-making activities$
C$ res&onsi%ilities as CFA charterholders$
0$ According to the Standards of Practice Handbook' a mem%er 6ith s#&ervisory
res&onsi%ilities violates the CFA Instit#te /tandards of .rofessional Cond#ct if
the mem%er fails to9
A$ &revent violations of the la6$
:$ &revent violations of the CFA Code and /tandards$
C$ esta%lish and im&lement 6ritten com&liance &roced#res$
)$ For the &ast decade' Gachel .ederson' CFA' has managed the acco#nt of <lga
/tefansson and in that time develo&ed a close relationshi& 6ith her client$
/tefansson has a %each ho#se in the :ahamas 6hich she offers to .ederson and
her family free #se of for t6o 6eeks as a re6ard for the ecellent ret#rns
generated in her acco#nt$ .ederson is so %#sy at 6ork she does not tell anyone
6here she is going for vacation$ 5hen acce&ting /tefansson;s offer' .ederson
least likely violates the CFA Instit#te /tandard relating to9
A$ Loyalty to Em&loyer$
:$ 4isclos#re of Conflicts$
C$ Inde&endence and <%Iectivity$
9$ A CFA charterholder o6ns an asset management firm 6ith offices do6nto6n$ To
minimiCe rent e&enses' each year the charterholder shi&s the &revio#s year;s
research records to a near%y 6areho#se$ There' the re&orts are digitiCed and stored
in %oth electronic and hard-co&y forms$ After five years' all &a&er co&ies are
destroyed and only electronic co&ies are retained$ Are the charterholder;s record-
retention &roced#res in com&liance 6ith the CFA Instit#te /tandards of .ractice8
A$ >o$
:$ ?es' %eca#se he is only re"#ired to retain hard co&ies for five years$
C$ ?es' %eca#se he still retains electronic co&ies of the original doc#ments$
!0$ After 6ork each day' /hinichi Takada' CFA' r#ns a &o&#lar internet %log 6here
he comments on micro-ca& stocks$ The %log incl#des a %io of Takada 6ith his
ed#cation and em&loyment history$ De receives no com&ensation for the %log$
<n the %log' Takada recommends &#rchases and sales of stocks %ased #&on
astrology$ 5hen %logging' Takada least likely violates CFA Instit#te /tandard
relating to9
A$ Fair 4ealing$
:$ 4#ty to Em&loyer$
C$ 4iligence and Geasona%le :asis$
!!$ A CFA charterholder agreed in 6riting 6ith his former em&loyer not to solicit
former clients for a &eriod of one year after his termination$ After he left his
former em&loyer' he cons#lted 6ith a la6yer a%o#t 6hether the agreement 6as
legally enforcea%le$ The la6yer advised the charterholder that it 6as do#%tf#l
that the agreement co#ld %e enforced' so the charterholder sent a marketing
%roch#re a%o#t his ne6 firm to his former clients$ According to the Standards of
Practice Handbook' 6hich of the follo6ing statements is most acc#rate 6ith
res&ect to the charterholder;s cond#ct8
A$ The /tandards do not a&&ly to the charterholder;s cond#ct$
:$ The /tandards re"#ire the charterholder to com&ly 6ith the agreement 6ith
his former em&loyer$
C$ :eca#se the charterholder relied #&on the o&inion of legal co#nsel' he did not
violate the /tandards$
!2$ A CFA charterholder is asked to revie6 her firm;s soft dollar &ractices$ As &art
of the revie6' she notes that her firm has failed to disclose the &ractices to the
firm;s clients in 6riting as re"#ired %y la6$ The charterholder "#ickly &re&ares
and distri%#tes the a&&ro&riate disclos#res$ /he does not re&ort the firm;s
violation to the a&&ro&riate reg#latory a#thority$ According to the Standards of
Practice Handbook' %y not re&orting the violation to the reg#latory a#thority' has
the charterholder violated any CFA Instit#te /tandards of .rofessional Cond#ct8
A$ >o$
:$ ?es' %eca#se she failed to act in the %est interest of her em&loyer$
C$ ?es' %eca#se she is re"#ired to re&ort legal violations to the a&&ro&riate
a#thority$
!+$ Gomar :rockman' CFA' is a sell-side analyst$ A&&roimately half of :rockman;s
com&ensation comes from his firm;s investment-%anking division$ :rockman is
asked to 6rite a re&ort a%o#t Anacortes Concrete *AC,' an investment-%anking
client$ 4es&ite his concerns a%o#t a slo6do6n in concrete demand' :rockman
iss#es a very &ositive re&ort on AC$ 5hen iss#ing his re&ort' :rockman least
likely violates the CFA Instit#te /tandard relating to9
A$ Loyalty to Em&loyer$
:$ 4isclos#re of Conflicts$
C$ Loyalty' .r#dence' and Care$
!2$ Eric .antoIa is enrolled as a candidate in the CFA eamination &rogram$ De
6orks as an assistant for Chehalis Investments *CI,$ .antoIa sees CI;s &#rchase
list and &#rchases several of the recommended stocks$ .antoIa least likely
violates the CFA Instit#te /tandard relating to9
A$ Loyalty to Em&loyer$
:$ .riority of Transactions$
C$ 4iligence and Geasona%le Care$
!($ Fred :r#%acher' CFA' is an analyst at Han City :ank *HC:,$ :r#%acher receives
com&ensation for referrals to the %ank;s %rokerage and &ersonal financial-
&lanning divisions$ Dis recent referrals are long-time clients from his &revio#s
em&loyer' and :r#%acher does not mention HC:;s referral arrangement$ 4oes
:r#%acher violate any CFA Instit#te /tandards8
A$ >o$
:$ ?es' 6ith res&ect to misre&resentation$
C$ ?es' 6ith res&ect to conflicts of interest$
!3$ A CFA charterholder has decided to revise her firm;s 6ritten com&liance man#al$
/he checks 6ith co#nsel regarding changes to a&&lica%le la6s' r#les' and
reg#lations$ /he incor&orates these changes as 6ell as changes to the Code and
/tandards in the ne6 version and distri%#tes co&ies to her staff along 6ith a
memorand#m$ The memorand#m states that the #&dated man#al incl#des
com&liance &roced#res designed to meet ind#stry standards' reg#latory
re"#irements' re"#irements of the Code and /tandards' and circ#mstances of the
firm$ According to the Standards of Practice Handbook' did the charterholder
violate any /tandard of .rofessional Cond#ct8
A$ >o$
:$ ?es' %eca#se com&liance &roced#res may not %e designed to meet ind#stry
standards$
C$ ?es' %eca#se com&liance &roced#res sho#ld not %e altered to meet the
circ#mstances of the firm$
!0$ A CFA charterholder r#ns a small investment management firm$ The firm
s#%scri%es to a service from a large investment research firm that &rovides
research re&orts that can %e re&ackaged as in-ho#se research %y smaller firms$
The firm distri%#tes these re&orts to clients 6ith s&ecific references as to their
so#rce and a#thor$ According to the Standards of Practice Handbook, has the
charterholder violated the /tandard related to misre&resentation8
A$ >o$
:$ ?es' %eca#se she distri%#ted &lagiariCed material$
C$ ?es' %eca#se she misre&resented her firm;s services$
!)$ Firms claiming com&liance 6ith the 7I./ /tandards are least likely to %e re"#ired
to9
A$ #ndertake a verification &rocess$
:$ &rovide a com&osite list and descri&tion to any &ros&ective client on re"#est$
C$ doc#ment their &olicies and &roced#res #sed in esta%lishing and maintaining
com&liance$
Questions 19 troug %2 relate to Quantitative Meto!s
!9$ A money manager has J!'000'000 to invest for one year$ /he has identified three
alternative one-year certificates of de&osit *C4, sho6n %elo69
&ompoun!ing #re0uenc1 -nnual interest rate
C4!
C42
C4+
Monthly
1#arterly
Contin#o#sly
0$)2K
)$00K
0$9(K
5hich C4 has the highest effective ann#al rate *EAG,8
A$ C4 !
:$ C4 2
C$ C4 +
20$ A cons#mer is sho&&ing for a home$ Dis %#dget 6ill s#&&ort a monthly &ayment
of J!'+00 on a +0-year mortgage 6ith an ann#al interest rate of 0$2 &ercent$ If the
cons#mer &#ts a !0 &ercent do6n &ayment on the home' the most he can &ay for
his ne6 home is closest to9
A$ J!9!'(!)$
:$ J2!0')20$
C$ J2!2')00$
2!$ An analyst gathers the follo6ing information a%o#t a common stock investment9
,ate -mount L
/tock &#rchase *! share, !( Ban#ary 2003 )3$00
/tock &#rchase *! share, !( Ban#ary 2000 92$00
/tock sale *2 shares S ! 0 3 &er share, !( Ban#ary 200) 2!2$00
The stock does not &ay a dividend$ The money-6eighted rate of ret#rn on the
investment is closest to9
A$ !!$02K
:$ !!$30K
C$ !!$)9K
22$ An analyst gathers the &rice-earnings ratios *.NE, for the firms in the /P. (00
and then ranks the firms from highest to lo6est .NE$ /he then assigns the n#m%er
! to the gro#& 6ith the lo6est .NE ratios' the n#m%er 2 to the gro#& 6ith the
second lo6est .NE ratios' and so on$ The meas#rement scale #sed %y the analyst
is best descri%ed as9
A$ ordinal$
:$ interval$
C$ nominal$
2+$ @sing Che%yshev;s ine"#ality' 6hat is the minim#m &ro&ortion of o%servations
from a &o&#lation of (00 that m#st lie 6ithin t6o standard deviations of the mean'
regardless of the sha&e of the distri%#tion8
A$ 0(K
:$ )9K
C$ 99K
22$ If a distri%#tion ehi%its &ositive ske6ness' then the mean most likely is located to
the9
A$ left of %oth the median and mode$
:$ right of %oth the median and mode$
C$ left of the median and right of the mode$
2($ The manager of a &ension f#nd determines that d#ring the &ast five years )(
&ercent of the stocks in the &ortfolio have &aid a dividend and 20 &ercent of the
stocks have anno#nced a stock s&lit$ If 9( &ercent of the stocks have &aid a
dividend andNor anno#nced a stock s&lit' the Ioint &ro%a%ility of a stock &aying a
dividend and anno#ncing a stock s&lit is closest to9
A$ +0K$
:$ 2(K$
C$ ((K$
23$ 5hich of the follo6ing statements a%o#t a normal distri%#tion is least acc#rate8
A normal distri%#tion9
A$ has an ecess k#rtosis of +$
:$ is com&letely descri%ed %y t6o &arameters$
C$ can %e the linear com%ination of t6o or more normal random varia%les$
20$ A &ortfolio manager gathers the follo6ing information a%o#t three &ossi%le asset
allocations9
-llocation Expecte! annual return Stan!ar! !eviation o# return
I
II
III
!+K
23K
+2K
3K
!2K
20K
The manager;s client has stated that her minim#m acce&ta%le ret#rn is ) &ercent$
:ased on Goy;s safety-first criterion' the most a&&ro&riate allocation is9
A$ I$
:$ II$
C$ III$
2)$ An analyst gathers the follo6ing information a%o#t a sam&le9
Mean !2
>#m%er of o%servations (0
Hariance +2
The standard error of the sam&le mean is closest to9
A$ 0$20$
:$ 0$32$
C$ 0$)0$
29$ Com&ared to the normal distri%#tion' the /t#dent;s t-distri%#tion most likely9
A$ has fatter tails$
:$ is more &eaked$
C$ has greater degrees of freedom$
+0$ 5hich of the follo6ing ste&s in hy&othesis testing most likely follo6s collecting
the data and calc#lating the test statistic8
A$ /tating the decision r#le$
:$ Making the statistical decision$
C$ /&ecifying the significance level$
+!$ The follo6ing end of month &ayments of J200' J000' and J+00' *res&ectively, are
d#e$ 7iven a stated ann#al interest rate of +$30 &ercent' the minim#m amo#nt of
money needed in an acco#nt today to satisfy these f#t#re &ayments is closest to9
A$ J!'+0)$
:$ J!'+)0$
C$ J!'+9!$
+2$ 5hich of the follo6ing investments 6ill gro6 to the largest f#t#re val#e8
Investment
State! -nnual
Interest 9ate: 're0uenc1:
I
II
III
)$20K
)$30K
)$32K
Monthly
1#arterly
/emi-ann#ally
A$ I$
:$ II$
C$ III$
Questions %% troug 22 relate to Economics
++$ If mangoes cost India G#&ees *I>G, !0 each' a cons#mer s&ends his %#dget on fr#its that
he val#es more highly than mangoes$ Do6ever' at a &rice of I>G 2 &er mango the
cons#mer %#ys 20 mangoes$ The total cons#mer s#r&l#s *in I>G, is closest to9
A$ 23$
:$ 30$
C$ !20$
+2$ The best characteriCation of a firm that is o&erating on its long-r#n average cost c#rve is
6hen it9
A$ e&eriences constant ret#rns to scale$
:$ &rod#ces a given o#t&#t at the least &ossi%le cost$
C$ chooses a &lant siCe that minimiCes the average fied cost$
+($ As the "#antity of la%or increases' 6hich of the follo6ing is the most likely
o#tcome 6ith res&ect to the marginal reven#e &rod#ct *MG., of la%or8
A$ MG. increases for a mono&oly$
:$ MG. decreases for a firm in &erfect com&etition$
C$ MG. increases for %oth mono&oly and a firm in &erfect com&etition$
+3$ The cross elasticity of demand for a com&lementary &rod#ct 6o#ld most likely %e9
A$ Cero$
:$ &ositive$
C$ >egative$
+0$ The ret#rn to entre&rene#rial a%ility in a firm that makes a &ositive economic
&rofit is most likely9
A$ normal$
:$ less than normal$
C$ greater than normal$
+)$ The %elief that money 6age rates are sticky is least likely to %e associated 6ith9
A$ classical macroeconomics$
:$ monetarist macroeconomics$
C$ Aeynesian macroeconomics$
+9$ For a firm in &erfect com&etition' as o#t&#t increases the marginal reven#e 6ill
most likely9
A$ increase$
:$ decrease$
C$ remain constant$
20$ .rice discrimination is most likely an attem&t %y a mono&oly to9
A$ resell a &rod#ct$
:$ ca&t#re a &rod#cer s#r&l#s$
C$ ca&t#re a cons#mer s#r&l#s$
2!$ 5hich of the follo6ing 6ill most likely lead to cost-&#sh inflation8
A$ A decrease in the cost of financing$
:$ An increase in the money &rices of ra6 materials$
C$ A technology change that lo6ers &rod#ction costs$
22$ 5hich of the follo6ing is least likely to %e a tool availa%le to central %anks for
im&lementing monetary &olicy8
A$ Inflation targeting$
:$ AdI#sting taation$
C$ Managing interest rates$
2+$ The monetary &olicy tools availa%le to the Federal Geserve are least likely to
incl#de9
A$ o&en market o&erations$
:$ the a%ility to determine the re"#ired reserve ratios of its mem%er %anks$
C$ adI#stments to the amo#nt of gold held as reserves against Federal Geserve
notes$
22$ /#&&ose the C.I %asket contains only t6o goods and services9 oranges and
hairc#ts$ In the %ase &eriod' cons#mers %o#ght !( oranges at J2 each and (
hairc#ts at J!0 each$ In the c#rrent &eriod' cons#mers %#y !( oranges at J!$0(
each and ( hairc#ts at J!2 each$ The C.I for the c#rrent &eriod is closest to9
A$ !00$)!$
:$ !!2$()$
C$ !!0$90$
Questions 23 troug 48 relate to 'inancial Statement -nal1sis
2($ An analyst gathers the follo6ing information a%o#t a com&any9
Cost of goods sold J!)$2 million
Average inventory J2$( million
Geceiva%les t#rnover 22 times
>#m%er of days of &aya%les 2( days
The com&any;s cash conversion cycle *in days, is closest to9
A$ 20$
:$ (9$
C$ 3($
23$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
T6o com&anies o&erating in the same ind#stry %oth achieved the same ret#rn on
e"#ity 6ith the same net sales' %#t the t6o com&anies 6ere different 6ith res&ect
to ret#rn on total assets$ Com&ared 6ith the com&any that had the higher ret#rn
on total assets' the com&any 6ith the lo6er ret#rn on total assets most likely had a
higher9
A$ total asset t#rnover$
:$ financial leverage m#lti&lier$
C$ &ro&ortion of common e"#ity in its ca&ital str#ct#re$
20$ If an analyst is &re&aring common-siCe financial statements the most a&&ro&riate
6ay of e&ressing the interest e&ense is as a &ercentage of9
A$ sales$
:$ total lia%ilities$
C$ total interest-%earing de%t$
2)$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
An analyst gathers the follo6ing information a%o#t three e"#i&ment sales that a
com&any made at the end of the year9
:riginal
&ost
-ccumulate! ,epreciation
at ,ate o# Sale
Sales
"rocee!s
! J200'000 J!(0'000 J00'000
2 J200'000 J200'000 J+0'000
+ J+00'000 J2(0'000 J20'000
All else e"#al for that year' the com&any;s cash flo6 from o&erations 6ill
most likely %e9
A$ the same as net income$
:$ J20'000 less than net income
C$ J!20'000 less than net income$
29$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
The follo6ing information is from a com&any;s 200) financial statements *J
millions,9
;alances as o# te 1ear en!e! %1 ,ecem?er 2008 2006
Getained earnings !20 !20
Acco#nts receiva%le 2+ +)
Inventory 2) 2(
Acco#nts &aya%le 29 +3
In 200) the com&any declared and &aid cash dividends of J( million and recorded
de&reciation e&ense in the amo#nt of J2( million$ The com&any;s 200) cash
flo6 from o&erations *J millions, is closest to9
A$ 2($
:$ +0$
C$ +($
(0$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any #sing the LIF< inventory method re&orts a LIF< reserve at year-end
of J)('000' 6hich is J20'000 lo6er than the &rior year$ If the com&any had #sed
FIF< instead of LIF< in that year' the com&any;s financial statements 6o#ld
have re&orted9
A$ a lo6er cost of goods sold' %#t a higher inventory %alance$
:$ a higher cost of goods sold' %#t a lo6er inventory %alance$
C$ %oth a higher cost of goods sold and a higher inventory %alance$
(!$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
The year-end %alances in a com&any;s LIF< reserve are J(3$) million in the
com&any;s financial statements for %oth 2000 and 200)$ For 200)' the meas#re
that 6ill most likely %e the same regardless of 6hether the com&any #ses the LIF<
or FIF< inventory method is the9
A$ inventory t#rnover$
:$ gross &rofit margin$
C$ amo#nt of 6orking ca&ital$
(2$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
An analyst gathers the follo6ing information a%o#t a com&any9
/hares of common stock o#tstanding !'000'000
>et income for the year J!'(00'000
.ar val#e of converti%le %onds 6ith a 2 &ercent co#&on rate J!0'000'000
.ar val#e of c#m#lative &referred stock 6ith a 0 &ercent dividend rate J2'000'000
Ta rate +0K
The %onds 6ere iss#ed at &ar and can %e converted into +00'000 common shares$
All sec#rities 6ere o#tstanding for the entire year$ 4il#ted earnings &er share is
closest to9
A$ J!$0($
:$ J!$23$
C$ J!$+3$
(+$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
At the %eginning of the year' t6o com&anies iss#ed de%t 6ith the same market
rate' mat#rity date' and total face val#e$ <ne com&any iss#ed co#&on-%earing
%onds at &ar and the other com&any iss#ed Cero-co#&on %onds$ All other factors
%eing e"#al for that year' com&ared 6ith the com&any that iss#ed &ar %onds' the
com&any that iss#ed Cero-co#&on de%t 6ill most likely re&ort9
A$ higher cash flo6 from o&erations %#t not higher interest e&ense$
:$ %oth higher cash flo6 from o&erations and higher interest e&ense$
C$ neither higher cash flo6 from o&erations nor higher interest e&ense$
(2$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
5hich of the follo6ing is the simplest 6ay for a com&any to increase its re&orted
o&erating cash flo68
A$ Gecord sales on a %ill-and-hold %asis$
:$ /lo6 do6n the rate of &ayment to s#&&liers$
C$ @se a third &arty financial instit#tion to &ay s#&&liers$
(($ 5hen the financial statements materially de&art from acco#nting standards and
are not fairly &resented' the a#dit o&inion 6o#ld %e a*n,9
A$ adverse o&inion$
:$ "#alified o&inion$
C$ disclaimer of o&inion$
(3$ An iss#e s#%Iect to a vote at a stockholders; meeting is &resented in a*n,9
A$ interim re&ort$
:$ &roy statement$
C$ management statement of res&onsi%ility$
(0$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any ac"#ires a man#fact#ring facility in 6hich it 6ill &rod#ce toic
chemicals$ The cost of the facility *ecl#sive of the #nderlying land, is J2(
million and it is e&ected to &rovide a !0-year #sef#l life' after 6hich time the
com&any 6ill demolish the %#ilding and restore the #nderlying land$ The cost of
this restoration and clean#& is estimated to %e J+ million at that time$ The facility
6ill %e amortiCed on a straight-line %asis$ The com&any;s disco#nt rate associated
6ith this o%ligation is 3$2( &ercent$ The total e&ense that 6ill %e recorded in the
first year associated 6ith the asset retirement o%ligation on this &ro&erty is closest
to9
A$ J!3+'3!)$
:$ J222'92($
C$ J23(')09$
()$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any receives a &ayment of J!0'000 on ! 4ecem%er' for rent on a &ro&erty
for 4ecem%er and Ban#ary$ <n recei&t' they correctly record it as cash and
#nearned reven#e$ If at +! 4ecem%er' their year-end' they failed to make an
adI#sting entry related to this &ayment' ignoring taes' 6hat is the effect on the
financial statements for the year8
A$ Assets are overstated %y J('000 and Lia%ilities are overstated %y J('000
:$ Assets are overstated %y J('000 and <6ner;s e"#ity is overstated %y J('000
C$ Lia%ilities are overstated %y J('000 and <6ners; e"#ity is #nderstated %y
J('000
(9$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
An analyst gathers the follo6ing information from a com&any;s acco#nting
records *all fig#res in tho#sands,9
Assets' +! 4ecem%er 200) J('2(0
Lia%ilities' +! 4ecem%er 200) 2'200
Contri%#ted ca&ital' +! 4ecem%er 200) !'200
Getained earnings' ! Ban#ary 200) )00
4ividends declared d#ring 200) 200
The analyst;s estimate of net income *J tho#sands, for 200) is closest to9
A$ 3(0$
:$ )(0$
C$ !'0(0$
30$ 5hich of the follo6ing is least likely to %e a characteristic of an effective
financial re&orting frame6ork8
A$ Consistency$
:$ Com&ara%ility$
C$ Com&rehensiveness$
3!$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
An analyst gathers the follo6ing data a%o#t a com&any and the ind#stry in 6hich
it o&erates9
Com&any
*J millions,
Ind#stry Averages
as a &ercent of sales
Geven#es ('000 !00K
Cost of goods sold 2'!00 2(K
<&erating e&enses !'0(0 +2K
.rofit margin 20( 9$(K
5hich of the follo6ing concl#sions is most reasona%le8 Com&ared to the
ind#stry' the com&any9
A$ has the same cost str#ct#re and net &rofit margin$
:$ has a lo6er gross &rofit margin and s&ends more on its o&erating costs$
C$ is %etter at controlling &rod#ct costs' %#t less effective at controlling o&erating
costs$
32$ A E#ro&ean %ased com&any follo6s IFG/ *International Financial Ge&orting
/tandards, and ca&italiCes ne6 &rod#ct develo&ment costs$ 4#ring 200) they
s&ent L2( million on ne6 &rod#ct develo&ment and re&orted an amortiCation
e&ense related to a &rior year;s ne6 &rod#ct develo&ment of L!0 million$ <ther
information related to 200) is as follo6s9
L millions
>et income 22(
Cash flo6 from o&erations 290
An analyst 6o#ld like to com&are the E#ro&ean com&any to a similar @$/$ %ased
com&any and has decided to adI#st their financial statements to @$/$ 7AA.$
@nder @$/$ 7AA.' and ignoring ta effects' the cash flo6 from o&erations *L
millions, for the com&any 6o#ld %e closest to9
A$ 23($
:$ 20($
C$ 290$
3+$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
5hich of the follo6ing best descri%es taes &aya%le8
A$ Total lia%ility for c#rrent and f#t#re taes$
:$ Ta ret#rn lia%ility res#lting from c#rrent &eriod taa%le income$
C$ Act#al cash o#tflo6 for income taes incl#ding &ayments *ref#nds, for other
years$
32$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any is considering iss#ing either a straight co#&on %ond or a co#&on %ond
6ith 6arrants attached$ The &roceeds from either iss#e 6o#ld %e the same$ If the
firm iss#es the %ond 6ith 6arrants attached instead of the straight co#&on %ond'
6hich of the follo6ing ratios 6ill most likely %e lo6er for the %ond 6ith 6arrants8
A$ Get#rn on assets$
:$ 4e%t to e"#ity ratio
C$ Interest coverage ratio$
3($ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
An analyst is forecasting E./ for a com&any$ /he &re&ares the follo6ing common
siCed data from its recent ann#al re&ort and estimates sales for 2009$
2009
#orecast
2008
actual
2006
actual
/ales J millions 2'2(0$0 2'!(0$0 !'990$0
/ales as K of sales !00$00K !00$00K
Cost of goods sold 2($00K 2($00K
<&erating E&enses 20$00K 20$00K
Interest e&ense +$02K 2$02K
Gestr#ct#ring e&ense 0$20K
.re-ta margin !!$2)K +$0)K
Taes *+(K, +$9(K !$+2K
>et Income 0$++K 2$23K
The ca&ital str#ct#re of the com&any has not changed and the com&any has no
short-term interest %earing de%t o#tstanding$ The &roIected net income *in J
millions, for 2009 is closest to9
A$ !32$)
:$ !32$9
C$ !30$2
33$ The #nrealiCed gains and losses arising from changes in the market val#e of
availa%le-for-sale sec#rities are re&orted #nder @$/$ 7AA. and International
Financial Ge&orting /tandards *IFG/, in the9
A$ e"#ity section for %oth$
:$ e"#ity section for @$/$ 7AA. and the income statement for IFG/$
C$ income statement for @$/$ 7AA. and the e"#ity section for IFG/$
30$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
A com&any records the follo6ing t6o transactions9
I$ L+00'000 of rental reven#e is received in advance on a t6o-year lease$ It is taed on
a cash %asis' %#t deferred for acco#nting &#r&oses$
II$ L(00'000 of installment sales$ >o &ayments are re"#ired for one year after 6hich
collections 6ill %e made on an e"#al %asis over !2 months and taed on a cash %asis$
The entire sale and related &rofit 6ill %e recogniCed for financial re&orting &#r&oses
in the year of sale$
5hich of the a%ove transactions 6ill most likely give rise to a deferred ta
lia%ility on the %alance sheet8
A$ I only$
:$ II only$
C$ :oth I and II$
3)$ Ass#me @$/$ 7AA. *generally acce&ted acco#nting &rinci&les, a&&lies #nless
other6ise noted$
<n ! Ban#ary 200) a com&any enters into a lease agreement to lease a &iece of
machinery as the lessor 6ith the follo6ing terms9
Ann#al lease &ayment d#e +! 4ecem%er J0('000
Lease term 3 years
Estimated #sef#l life of the machine 0 years
Estimated salvage val#e of the machine J0
Carrying val#e *cost, of leased asset J+00'000
Im&lied interest rate on lease 0K
The firm is reasona%ly ass#red of the collection of the lease &ayments$
The total affect on 200) &re-ta income for the lessor from this lease is closest to9
A$ J+2'!2+$
:$ J0('000$
C$ J)2'(!9$
Questions 49 troug 68 relate to &orporate 'inance
39$ 5hich of the follo6ing is least likely classified as an o&&ort#nity cost8
A$ The cash savings related to ado&ting a ne6 &rod#ction &rocess$
:$ The cash flo6s generated %y an old machine that is to %e re&laced$
C$ The market val#e of vacant land to %e #sed for a distri%#tion center$
00$ A ca&ital &roIect 6ith a net &resent val#e *>.H, of J2+$29 has the follo6ing cash
flo6s9
?ear 0 ! 2 + 2 (
Cash flo6 *L, -!00 +0 20 20 +0 20
The internal rate of ret#rn *IGG, for the &roIect is closest to9
A$ !0K$
:$ !2K$
C$ !9K$
0!$ T6o m#t#ally ecl#sive &roIects have conventional cash flo6s' %#t one &roIect
has a larger >.H 6hile the other &roIect has a higher IGG$ 5hich of the
follo6ing least likely e&lains this conflict8
A$ Geinvestment rate ass#m&tion$
:$ /iCe of the &roIects; initial investments$
C$ Gisk of the &roIects as reflected in the re"#ired rate of ret#rn$
02$ An analyst gathers the follo6ing information a%o#t the cost and availa%ility of
raising vario#s amo#nts of ne6 de%t and e"#ity ca&ital for a com&any9
Amo#nt of ne6 de%t
*in millions,
Cost of de%t
*after ta,
Amo#nt of ne6 e"#ity
*in millions,
Cost of
e"#ity
T L2$0
U L2$0
2K
(K
T L($0
U L($0
!+K
!(K
The com&any;s target ca&ital str#ct#re is 30 &ercent e"#ity and 20 &ercent de%t$
If the com&any raises L9$( million in ne6 financing' the marginal cost of ca&ital is
closest to9
A$ 9$)K$
:$ !0$3K$
C$ !!$0K$
0+$ An analyst gathers the follo6ing information for a com&any9
Li"#idity meas#re Com&any
Inventory t#rnover
Acco#nts &aya%le t#rnover
Acco#nts receiva%le t#rnover
20$0
!2$!
!2$(
The com&any;s o&erating cycle is closest to9
A$ 20$9 days$
:$ ++$2 days$
C$ 23$) days$
02$ A com&any is offered trade credit terms of 2N!0' net 2($ The im&licit cost of
failing to take the disco#nt and instead &aying the acco#nt in 2( days is closest to9
A$ 2!$2)K$
:$ 2+$!0K$
C$ 2+$2(K$
0($ A com&any &lans to iss#e L2'(00'000 *face val#e, of commercial &a&er for one
month$ The com&any is "#oted a rate of ($)) &ercent 6ith a dealer;s commission
of !N) &ercent and a %ack#& line cost of !N2 &ercent' %oth of 6hich 6ill %e
assessed on the face val#e$ The effective cost of the financing is closest to9
A$ 3$0+K$
:$ 3$!3K$
C$ 3$29K$
03$ Gegarding cor&orate governance' 6hich of the follo6ing most likely 6o#ld %e a
reason for concern 6hen eval#ating an inde&endent %oard mem%er;s
"#alifications8 The %oard mem%er9
A$ has served on the %oard for !2 years$
:$ o6ns !'000 shares of the cor&oration;s e"#ity$
C$ has formerly served on the %oards of several s#ccessf#l com&anies$
00$ 5hich of the follo6ing is least likely to concern an investor eval#ating a
cor&oration;s shareo6ner rights &rovisions8
A$ /hareo6ners may nominate %oard mem%ers$
:$ /hares held %y the fo#nding family have s#&ernormal voting rights$
C$ To ens#re acc#racy' com&any eec#tives ta%#late and verify shareo6ner
voting$
0)$ A com&any;s o&timal ca&ital %#dget is best descri%ed as the amo#nt of ne6
ca&ital re"#ired to #ndertake all &roIects 6ith an internal rate of ret#rn greater
than the9
A$ marginal cost of ca&ital$
:$ cost of ne6 de%t ca&ital$
C$ 6eighted average cost of ca&ital$
Questions 69 troug 90 relate to E0uit1 Investments
09$ 5hich of the follo6ing is the least acc#rate rationale to I#stify the #se of &rice-to-
%ook val#e *.N:, ratio as a meas#re of relative val#ation of com&anies or
common stocks8
A$ .N: is a #sef#l meas#re of val#e for firms that are not e&ected to contin#e as
a going concern$
:$ Com&ared to .NE' the .N: ratio is not infl#enced %y s#ch acco#nting effects as
e&ensing a ca&ital investment as o&&osed to ca&italiCing it$
C$ .N: is &artic#larly a&&ro&riate to val#e com&anies &rimarily com&osed of
li"#id assets' for eam&le' those in the financial services ind#stry$
)0$ An analyst is creating a ne6 stock market inde that is not affected %y stock
s&lits$ The inde the analyst is least likely to develo& is9
A$ #n6eighted$
:$ &rice-6eighted$
C$ val#e-6eighted$
)!$ An analyst gathers the follo6ing information a%o#t a com&any9
Common stock J!$(0 &ar val#e M A#thoriCed ('000'000 shares
-- Iss#ed 2'000'000 shares
Additional &aid-in-ca&ital J20'000'000
Getained earnings J('000'000
Treas#ry stock *(00'000 shares, J!0'000'000
C#rrent &rice &er share J2!
The &rice-to-%ook *.N:, ratio of the com&any is closest to9
A$ 2$+!$
:$ +$(0$
C$ 2$20$
)2$ A call market is least likely characteriCed as a market9
A$ 6ith %id-ask &rices &osted %y dealers$
:$ 6here %#y-sell orders are cleared at a single e"#ili%ri#m &rice$
C$ 6ith &artici&ation %y a small n#m%er of active investors-traders$
)+$ The ann#al re&ort of a com&any as at the end of its first year of its o&eration
contains the follo6ing data9
Common stock J0$(0 &ar val#e M A#thoriCed *2'(00'000 shares, J !'2(0'000
M Iss#ed *2'000'000 shares, J !'000'000
Additional &aid-in-ca&ital J!0'000'000
Getained earnings J 2'000'000
C#rrent &rice &er share J+0
The com&any;s ending inventories #sing LIF< are val#ed at J!'(00'000 and a
footnote to financial statements re&orts inventories val#ed #sing FIF< 6o#ld %e
J!'900'000$ The com&any;s ta rate is +0 &ercent$ The FIF< adI#sted &rice-to-
%ook val#e of the com&any is closest to9
A$ +$9+$
:$ 2$00$
C$ 2$0)$
)2$ An analyst gathers the follo6ing data a%o#t a com&any 6ith a do#%le-digit gro6th
rate that is e&ected to contin#e for three more years9
C#rrent year;s dividend &er share L2$00
7ro6th rate in dividend d#ring the net three years
+0K in each of the years ! and 2=
20K in year +
7ro6th rate in dividend for year 2 and %eyond )K
5eighted average cost of ca&ital !2K
Cost of e"#ity ca&ital !(K
The %est estimate of the com&any;s val#e &er share is closest to9
A$ L2)$3)$
:$ L(0$3)$
C$ L)($9+$
)($ An e"#ity f#nd manager gathers the follo6ing data in order to assess the
investment &otential of a com&any and its stock9
&ompan1 In!ustr1
-verage
5eighted average cost of ca&ital *5ACC, !2K !2K
Get#rn on Assets *G<A, 20K !(K
4ividend ?ield 0 K !$2K
Consens#s estimate of stock;s val#e J(+ >NA
C#rrent &rice of com&any;s stock J(0 >NA
:ased on the a%ove information' 6hich of the follo6ing statements most acc#rately
descri%es the com&any and its stock8 The com&any is a9
A$ gro6th com&any and its stock is a gro6th stock$
:$ gro6th com&any and its stock is a s&ec#lative stock$
C$ s&ec#lative com&any and its stock is a gro6th stock$
)3$ Free cash flo6 to e"#ity is most acc#rately descri%ed as o&erating free cash flo6
adI#sted for9
A$ only interest &ayments to de%t holders$
:$ &ayments to %oth de%t holders *interest and &rinci&al, and &referred
stockholders$
C$ %oth interest and &rinci&al &ayments to de%t holders' %#t not &ayments to
&referred stockholders$
)0$ Ass#ming efficient markets and a lack of access to s#&erior analysts' 6hich of the
follo6ing is the least im&ortant activity in managing &ortfolios8
A$ MinimiCing total transaction costs$
:$ 4iversifying com&letely on a glo%al %asis$
C$ .aying close attention to the monetary &olicy environment$
))$ An analyst gathers the follo6ing data a%o#t a com&any in order to estimate its
&riceNearnings *.NE, ratio$
E&ected dividend &ayo#t ratio 20K
Get#rn on e"#ity !(K
Ge"#ired rate of ret#rn !2K
/tock;s c#rrent market &rice J0(
The .NE ratio is closest to9
A$ 3$0 $
:$ !+$+ $
C$ 20$0 $
)9$ For gro6th com&anies 6hich of the follo6ing com&onents of G<E is most likely
to decline first8
A$ .rofit margin$
:$ Financial leverage$
C$ Total assets t#rnover$
90$ 5hich of the follo6ing is least likely incl#ded in the ass#m&tions of an
informationally efficient sec#rities market8
A$ A large n#m%er of &rofit-maimiCing &artici&ants analyCe and val#e
sec#rities$
:$ >e6 information regarding sec#rities comes to the market in a &redicta%le
manner$
C$ .rofit-maimiCing investors adI#st sec#rity &rices ra&idly to reflect the effect
of ne6 information$
Questions 91 troug 94 relate to ,erivative Investments$
9!$ An investor takes a short &osition of !0 f#t#res contracts at J90 on 4ay 0$ The
initial margin is J!0 &er contract$ The maintenance margin is J( &er contract$ <n
4ay !' the f#t#res settlement &rice is J93 and on 4ay 2' the f#t#res settlement
&rice is J92$ At the end of 4ay 2' the cash ending %alance in the margin acco#nt
is closest to9
A$ J)0$
:$ J!20$
C$ J!20$
92$ The lo6er %o#nd on a E#ro&ean call &rice is the greater of Cero and9
A$ the #nderlying &rice min#s the eercise &rice$
:$ the &resent val#e of the eercise &rice min#s the #nderlying &rice$
C$ the #nderlying &rice min#s the &resent val#e of the eercise &rice$
9+$ A descri&tion least likely to e&lain &#t-call &arity is9
A$ A fid#ciary call o&tion strategy and a &rotective &#t o&tion strategy for an
#nderlying asset are e"#al in val#e$
:$ A &#t is e"#ivalent to a long call' a long &osition in the #nderlying asset' and a
long &osition in the risk-free asset$
C$ A call is e"#ivalent to a long &#t' a long &osition in the #nderlying asset' and a
short &osition in the risk-free asset$
92$ An investor goes long an FGA that e&ires in +0 days for 6hich the #nderlying is
90-day LI:<G for a notional of J!0 million$ A dealer "#otes this instr#ment at
2$( &ercent$ At e&iration' 30-day LI:<G is +$( &ercent and 90-day LI:<G is 2
&ercent$ The &ayment made at e&iration is closest to9
A$ J !2'+03 from the investor to the dealer$
:$ J !2'+03 from the dealer to the investor$
C$ J !3'(00 from the investor to the dealer$
9($ A market &artici&ant has a vie6 regarding the &otential movement of a stock$ De
sells a c#stomiCed over-the-co#nter &#t o&tion on the stock 6hen the stock is
trading at J+)$ The &#t has an eercise &rice of J+3 and the &#t seller receives
J2$2( in &remi#m$ The &rice of the stock is J+( at e&iration$ The &rofit or loss
for the &#t seller at e&iration is9
A$ J*!$2(,
:$ J!$2(
C$ J2$2(
93$ An investor &#rchases a stock at J30 and at the same time' sells a +-month call on
the stock$ The short call has a strike &rice of J3( and a &remi#m of J+$30$ The
risk-free rate is 2 &ercent$ The %reakeven #nderlying stock &rice at e&iration is
closest to9
A$ J(3$20
:$ J30$)0
C$ J3!$20
Questions 96 troug 108 relate to 'ixe! Income Investments$
90$ If market interest rates rise' the &rice of a calla%le %ond' com&ared to an other6ise
identical o&tion-free %ond' 6ill most likely decrease %y9
A$ less than the o&tion-free %ond$
:$ more than the o&tion-free %ond$
C$ the same amo#nt as the o&tion-free %ond$
9)$ A @$/$ investor 6ho &#rchases an o&tion-free %ond 6ith a 0 &ercent co#&on rate'
mat#ring in 20 years' and iss#ed %y a @$/$-%ased com&any is most likely e&osed
to9
A$ volatility risk and credit risk$
:$ event risk and interest rate risk$
C$ volatility risk and yield c#rve risk$
99$ All else e"#al' an increase in e&ected yield volatility is most likely to res#lt in an
increase in the &rice of a*n,9
A$ &#ta%le %ond$
:$ calla%le %ond$
C$ o&tion-free %ond$
!00$ An analyst is eval#ating the t6o %onds %elo69
:ond A :ond :
Co#&on 3$90K )$2(K
Mat#rity <ct 29' 20!9 >ov 2' 20!9
Calla%le >o >o
.rice J!02$!0 J!02$+9
?ield 3$30K 0$90K
Com&ared 6ith :ond A' :ond : most likely 6ill have9
A$ less interest rate risk and more reinvestment risk$
:$ less reinvestment risk and more interest rate risk$
C$ more interest rate risk and more reinvestment risk$
!0!$ An analyst determined that if interest rates increase !20 %asis &oints the &rice of a
%ond 6o#ld %e J)9$00' %#t if interest rates decrease !20 %asis &oints the &rice of
that %ond 6o#ld %e J99$+0$ If the initial &rice of the %ond is J9($20' the
a&&roimate &ercentage &rice change for a !00 %asis &oint change in yield is
closest
to9
A$ 2$(K$
:$ 2$2K$
C$ )$2K$
!02$ For an A- rated cor&orate %ond that has deteriorating f#ndamentals' %#t is
e&ected to remain investment grade' the greatest risk is most likely9
A$ defa#lt risk
:$ li"#idity risk
C$ credit s&read risk
!0+$ The difference %et6een nominal s&read and Cero-volatility s&read 6ill most likely
%e greatest for a mortgage-%acked sec#rity9
A$ in an inverted yield c#rve environment$
:$ in a stee& #&6ard-slo&ing yield c#rve environment$
C$ 6ith short mat#rity in a flat yield c#rve environment$
!02$ A fied income &ortfolio manager is eval#ating investments in the mortgage
market %#t is concerned a%o#t &re&ayment risk$ The sec#rity that 6ill most likely
minimiCe &re&ayment risk is9
A$ a mortgage &assthro#gh sec#rity$
:$ a &ortfolio of interest-only mortgage loans$
C$ tranche : of a collateraliCed mortgage o%ligation$
!0($ An analyst is eval#ating vario#s de%t sec#rities iss#ed %y a com&any$ The ty&e of
sec#rity that is most likely to yield the lo6est recovery in a %ankr#&tcy is a9
A$ mortgage %ond
:$ de%ent#re %ond$
C$ collateral tr#st %ond$
!03$ A @$/$ investor has &#rchased a ta-eem&t (-year m#nici&al %ond at a yield of
+$)3 &ercent 6hich is !00 %asis &oints less than the yield on a (-year o&tion-free
@$/$ Treas#ry$ If the investor;s marginal ta rate is +2 &ercent' then the yield ratio
are closest to9
A$ 0$09$
:$ !$23$
C$ ($3) $
!00$ An analyst has gathered the follo6ing information &rovided in the ta%le %elo69
.eriod ?ears @$/$ Treas#ry /&ot Gate
*K,
Credit /&read
*K,
!
2
+
2
(
!
2
+
2
(
+$00
+$(0
2$00
2$(0
($00
0$20
0$+0
0$20
0$(0
0$30
:ased on the information &rovided in the ta%le' the c#rrent market &rice of a
J!'000 &ar val#e' o&tion-free' 0 &ercent co#&on cor&orate %ond mat#ring in ( years
is closest to9
A$ J0()$00$
:$ J0)!$20$
C$ J)02$22$
!0)$ An analyst gathered the follo6ing information a%o#t a &ortfolio com&rised of
three %onds9
:ond .rice *J, .ar Amo#nt
<6ned
4#ration
A !02$000 J0 million !$)9
: 92$+(3 J( million 0$00
C ))$3)) J+ million !!$((
Ass#ming there is no accr#ed interest' then the &ortfolio d#ration is closest to9
A$ ($(( years$
:$ ($03 years$
C$ 3$)2 years$
Questions 109 troug 112 relate to -lternative Investments$
!09$ Dedge f#nds that contain infre"#ently traded assets 6o#ld most likely ehi%it a
do6n6ard %ias 6ith res&ect to9
A$ meas#red risk %#t not correlations 6ith conventional e"#ity investments$
:$ correlations 6ith conventional e"#ity investments %#t not meas#red risk$
C$ %oth meas#red risk and correlations 6ith conventional e"#ity investments$
!!0$ Hent#re ca&ital investments #sed to &rovide ca&ital for com&anies initiating
commercial man#fact#ring and sales are most likely to %e considered a form of9
A$ seed-stage financing$
:$ first-stage financing$
C$ second-stage financing$
!!!$ 5hich classification of hedge f#nds is least likely to #se a short &osition in stock
as a &art of its strategy8
A$ Market-ne#tral f#nds$
:$ Emerging-market f#nds$
C$ 4istressed sec#rities f#nds$
!!2$ The infre"#ent trading of some assets that hedge f#nds invest in most likely res#lts
in hedge f#nd9
A$ risk %eing #nderstated$
:$ ret#rns %eing #nderstated$
C$ correlations 6ith other assets %eing overstated$
!!+$ 5hich of the follo6ing is the least accurate a&&roach #sed to val#e closely held
com&anies8 :asing the val#e of com&any on the9
A$ &resent val#e of f#t#re economic income$
:$ historic cost of the assets of similar com&anies$
C$ average market &rice of similar com&anies recently sold$
!!2$ The &rimary motivation for investing in commodity-linked %onds is that they most
likely &rovide9
A$ an income stream$
:$ ca&ital gains ret#rns$
C$ &rotection against interest rate risk$
Questions 113 troug 120 relate to "ort#olio Management$
!!($ 5hich of the follo6ing constraints 6o#ld most likely a&&ear in the #ni"#e needs
and &references section of a tr#st;s investment &olicy statement8 The &ortfolio is9
A$ s#%Iect to the &r#dent-man standard$
:$ &rohi%ited from investing in to%acco com&anies$
C$ &rohi%ited from holding less than (K in cash instr#ments$
!!3$ <ver time' the maIor so#rce of investment ret#rn and risk can most likely %e
attri%#ted to9
A$ stock selection$
:$ asset allocation$
C$ risk management$
!!0$ The risk-free interest rate is ( &ercent' and the ret#rn on market &ortfolio is )
&ercent$ A stock 6ith a %eta of 0$( that has an estimated rate of ret#rn of 0 &ercent
is most likely9
A$ overval#ed$
:$ #nderval#ed$
C$ correctly val#ed$
!!)$ The minim#m variance Cero-%eta &ortfolio most likely has some9
A$ systematic and #nsystematic risk$
:$ #nsystematic risk and no systematic risk$
C$ systematic risk and no #nsystematic risk$
!!9$ 5hich of the follo6ing statements is least likely to %e an ass#m&tion a%o#t
investor %ehavio#r #nderlying the Marko6itC model8
A$ Investors maimiCe one-&eriod e&ected ret#rn
:$ Investors %ase their decisions solely on e&ected ret#rn and risk
C$ Investors have #tility c#rves that are a f#nction of e&ected ret#rns and
variance$
!20$ Com&ared to the traditional Ca&ital Asset .ricing Model *CA.M,' 6here lending
and %orro6ing are carried o#t at the risk-free rate' a Cero-%eta CA.M 6o#ld most
likely res#lt in a sec#rity market line */ML, 6ith9
A$ #nchanged interce&t and slo&e$
:$ a higher interce&t and flatter slo&e$
C$ a lo6er interce&t and stee&er slo&e$