cfa level 1 mock-exam

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MOCK EXAM 1

LEVEL I CFA® Copyright © 2012 soleadea.com

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Contents

Questions 1 through 18 relate to Ethical and Professional Standards ................................................... 2

Questions 19 through 32 relate to Quantitative Methods ..................................................................... 8

Questions 33 through 44 relate to Economics ...................................................................................... 11

Questions 45 through 68 relate to Financial Statement Analysis ......................................................... 14

Questions 69 through 78 relate to Corporate Finance ......................................................................... 19

Questions 79 through 90 relate to Equity Investments ........................................................................ 22

Questions 91 through 96 relate to Derivative Investments .................................................................. 25

Questions 97 through 108 relate to Fixed Income Investments ........................................................... 27

Questions 109 through 114 relate to Alternative Investments ............................................................ 30

Questions 115 through 120 relate to Portfolio Management .............................................................. 31

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products

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CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA

Institute.

The exam lasts for 180 minutes. There is always one correct answer for each question. You may score

1 point for every correct answer. If your answer is incorrect or you omit a question, you receive

0 points.

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Questions 1 through 18 relate to Ethical and Professional Standards

1. George, a CFA candidate, works in the City. At a firm luncheon he meets Raoul, one of his

colleagues from his previous work and a CFA charterholder. Raoul asks George whether he

heard that Cloud Airlines are about to declare its insolvency next week. According to the

Code and Standards, George:

a. must wait till the next week before he uses the information.

b. must not use the information as he has no reasonable basis to use it.

c. is permitted to use the information but only for the benefit of his clients and not his

own.

2. JJ & Brothers is a family business run by brothers holding the CFA designation. Erik, one of

the brothers working on a high managerial position, tells Samantha Fey, the employee of JJ

& Brothers and a CFA candidate, to carry out one of some major transactions “the old way”.

If Samantha does as she is told, she will disregard the current change in law that has just

been introduced. When she said that to Erik, he replied that she will most certainly “find the

way”, and besides it’s been just a couple of days since the new regulation is in force and not

everybody knows it should apply. She decides to consult Johannes, the senior brother,

about the matter. Johannes tells Samantha, to her greatest disappointment, that “Erik is the

one to decide about all this”. What should Samantha do in this situation?

a. Samantha should dissociate from the activity and even consider handing in her

resignation in order to comply with Standard I (A).

b. Samantha should carry out the transaction the way her employer wants her to, but

she should keep it secret so as not to violate Standard I (A).

c. Samantha should act the way her employer wants her to because if she does not

she will violate Standard IV (A) by not being loyal to her supervisor.

3. Lee Burgman, CFA, is an investment adviser. During the first meeting with her client, Lee

thoroughly interviewed him and gathered all the necessary information, including his

profile, investment objectives, constrains and benchmarks. The IPS was accepted by the

client and no amendments were introduced to the IPS for three months. Investment

advisers in the firm where Burgman works are obliged to update the IPS for their clients on

a semi-annual basis. After three months from the first meeting, the client came to Burgman

dissatisfied with her services because he lost some money on one of the investment Lee

advised to him. He also said that he lost his job two weeks ago and accused Lee of

unsuitability of her actions. In this situation, which of the following statements is the most

appropriate under Standard III (C)?

a. Lee violated the Standard because she failed to determine the suitability of the

investment.

b. Lee did not violate the Standard because she performed all her duties to the client

thoroughly.

c. Lee violated the Standard because she should have updated the client’s IPS before

taking any investment actions.

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4. Jonathan Smith, a CFA charterholder, works as a broker in America's Finest Finance Ltd.

Lately, he’s been trading a lot for a client who comes from a small island in the Tonga

archipelago. The client is a patriot and often talks about his country in his conversations

with Smith. When trading for the client, Smith should abide by:

a. the Code and Standards.

b. the law of the country that his client comes from if the clients wishes so.

c. the law of the country that his client comes from only if the regulations governing

any of the trades are stricter than the Code and Standards.

5. Which of the following statements most likely holds under the Code and Standards?

a. Members and Candidates must never accept gifts or gratuities from their clients.

b. Members and Candidates may accept gifts or gratuities from their clients up to a

certain limit established by the firm.

c. Members and Candidates must never accept gifts from their clients but they may

accept gratuities unless they exceed a certain limit established by the firm.

6. Naomie Kowalsky, CFA, was hired as an equity analyst in a corporate finance department of

an investment services firm for three years. Last month, there were dismissals in the firm

and she lost her job. She had worked on the project on TrackMontains, Inc. In this situation,

Standard I (C) will be breached if:

a. other employees of the department use the project on TrackMontains, Inc.

b. Naomie issues the project under her name to use it when applying for a new job.

c. employees of the department use Naomie’s project for further research without

giving her name.

7. Kayah is a Level I candidate in the CFA Program. To prepare herself well for the exam she

registered to Soleadea. Yesterday she sat for the exam. After the exam she logged in to the

portal and wrote a post: “Hello everyone☺. I closed the door of the exam room about two

hours ago and ever since I just can’t stop being satisfied with myself. I must say that I was

well prepared for the exam and I feel I did a good job. The exam wasn’t as tough as I

expected it to be, though I was surprised that they care so much about Standard VII. I

thought there would be fewer questions on this. I hope everyone is at least as happy as I

am. All the best to you all and see you soon in Soleadea Level II preparation workspace.”

Which statement is the most adequate according to the Standards?

a. Kayah violated Standard VII (A) by breaking the Candidate Pledge.

b. Kayah did not violate Standard VII (A) because her intent was just to share her

opinion with other Soleadians.

c. Kayah did not violate Standard VII (A) because she did not disclose any material

information or specific details about the exam.

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8. According to Standard III (A), in dealing with the client’s portfolio a Member or Candidate:

a. may use client brokerage to purchase research services that will benefit the

investment manager.

b. should inform the client about not getting best execution before satisfying client

directed brokerage request.

c. may pay higher commissions for buying products for the client if it is for the benefit

of the client or the investment manager.

9. The management of Tyres & Trunks, Plc. hired an analyst to provide a recommendation for

the firm. The analyst works at a local brokerage and is a CFA charterholder. He is asked to

participate in an automotive event organized by Tyres & Trunks, Plc. The company arranges

accommodation and covers the costs of travel. What is the best course of action for the

analyst to follow?

a. He should not participate in the event because it will compromise his

independence and objectivity.

b. He should take part in the event but he should pay for his travel and

accommodation by his own in order to avoid a potential conflict of interest.

c. He should take part in the event and accept the arranged accommodation because

otherwise he will not be able to fulfill his duties to the client prudently.

10. Ingrid Thoe, CFA, in an experienced manager of a hedge fund. A new high-net-worth client

wants to invest in the fund. Thoe has noticed that Ernesto, the manager responsible for the

new clients’ assets, acts to the detriment of other clients. Ingrid wishes to consult with her

supervisor. Thoe’s supervisor reassures her that everything is “under control and that

there’s nothing to be worried about”. Thoe is not satisfied, however, with the conversation.

In order to remain in compliance with the Standards, it would be best if Thoe:

a. communicated her concerns to the compliance officer at the firm.

b. remained her loyalty to the supervisor and follow his instructions concerning the

hedge fund regardless of her mixed feelings.

c. reported the potential unethical activity to the appropriate regulator immediately

after the conversation with her supervisor.

11. Which of the following statements is the most appropriate according to Standard

II (A)?

a. Trading on inside information is permissible only in the short run.

b. If information is disclosed to a wide group of analysts during firm meetings it is

made public.

c. Even if an investment research report is considered material it does not have to be

made public before it is used.

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12. Ray Jameson, CFA, has been given a task to provide a recommendation about a clothing

industry company for his client. While preparing the recommendation, Ray contacts the

company’s management and visits the company’s premises. He also does extensive

research based on press releases, information published on financial portals and by other

means of public information delivery. When producing the recommendation, Ray is

permitted to form opinions on the basis of:

a. information obtained during his visit to the company’s premises even if the

information is nonpublic and material.

b. all public information, but not information obtained during his visit to the

company’s premises, which is always nonpublic.

c. all information he gathers provided that he properly documents his research and

that the information is not material nonpublic information even if his conclusions

are material.

13. Management boards of animGuard and Protect Environment had a verbal agreement

concerning the acquisition of animGuard by Protect Environment. It turned out, however,

that annual reports of animGuard were not as good as the managing directors of Protect

Environment had expected. In this case, the acquisition was withheld. Meg Torres, one of

the managing directors at animGuard and a CFA charterholder, let the journalist speculate

about the acquisition during a phone conversation she had after the decision was made.

She was hoping that the speculations will strengthen the position of the animGuard’s

stock, which will in consequence draw Protect Environment management’s attention to

animGuard once again and help finalize the intended acquisition. In this situation Meg

Torres most likely:

a. violated Standard II (B) by letting the journalist speculate.

b. violated Standard II (B) by undermining the integrity of the market.

c. did not violate Standard II (B) because she did not spread any misleading

information.

14. Dominique Beautier, CFA, works in an investment banking firm and is responsible for

conducting derivative transactions. One of his clients, the CEO of Prosperity, Inc., has many

long call options on the shares of CVAC, Inc. left in his portfolio and the maturity date is

drawing near. The CEO of Prosperity, Inc. happens to be a good friend of Dominique’s

supervisor and Dominique is asked to “somehow attract other clients” so that they bought

the options before their maturity is due. Beautier decides to carry out a number of

transactions between the accounts of those of his clients who already possess the CVAC

shares. Which of the following statements is the most adequate according to the Standards?

a. Beautier breached Standard II (B) by carrying out deceitful transactions.

b. Beautier did not breach any of the Standards because he fulfilled his duty by taking

care of his client’s interests, which is a top priority in the profession.

c. Beautier remained in compliance with Standard III (C) as he carried out the

transactions only between the accounts of the clients who already possessed the

CVAC shares.

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15. New Obligations and Checks Co. is a large brokerage company. Loren Ipsen, a CFA

candidate and an independent portfolio manager, often handles her trading activities

through the brokerage because she is frequently given more beneficial prices when she

places her orders with Derek Doe, a broker in New Obligations and Checks Co. and an old

acquaintance of hers. In order to be in compliance with Standard III (A), Loren should:

a. always accept the same prices both for client and private transactions.

b. never direct her clients’ transactions to New Obligations and Checks Co. because of

the conflict of interests.

c. make sure that handling transactions with New Obligations and Checks Co. is

consistent with the client’s investment parameters.

16. According to Standard III (B), fair dealing in disseminating investment recommendations

and taking investment actions means that:

a. clients should always be provided with the same investment service.

b. clients should always be informed about new recommendations and offerings at

exactly the same time.

c. clients should never be deprived of objective treatment in relation to their

investment objectives and circumstances.

17. Eleonora Abramović, an independent research analyst and a CFA candidate, sought

prospective clients. Her first action was to obtain from a prospective client an e-mail

consent to receiving her offering. She also sent a form on client objectives that the

interested individuals were to fill in and send back to Eleonora so that she was able to

prepare an individualized offering for the prospective client. Some of the individuals filled

in the form and send it back. Theo Czech, a hedge fund manager and a friend of Eleonora,

asked her to let him see her e-mail correspondence with the prospective clients that send

her the filled-in form. In order to remain in compliance with Standard III (E), Eleonora

should:

a. not allow Theo to see the e-mail correspondence with her prospective clients by

any means.

b. allow Theo to see the e-mail correspondence but only if the prospective client

consents to the disclosure.

c. allow Theo to see the e-mail correspondence but only if he promises that he will

not use the information in any way.

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18. Max Shindler is a CFA candidate. He successfully passed Level I and sat for Level II two

weeks ago. Presently, he is looking for a job. In an interview with a potential future

employer, Max mentions the prestige of the CFA designation and says: “While aiming for

the CFA certificate I managed to master FRA. I think this is important because CFA

candidates have the best skills in reading annual reports. I must admit that my abilities in

this area has improved greatly since I started my preparations for the exam.” According to

Standard VII (B), Max:

a. violated the Standard because he boasted about his participation in the CFA

Program.

b. violated the Standard because he referred to the CFA designation in an appropriate

manner.

c. did not violate the Standard because all he did was to stress to his potential future

employer the significance of the CFA designation and his skills resulting from the

preparations for the exam.

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Questions 19 through 32 relate to Quantitative Methods

19. According to Chebyshev’s inequality, what percentage of observations lies within two-

standard-deviation interval around the mean?

a. No less than 75 percent

b. No less than 89 percent

c. No more than 75 percent

20. What is the appropriate test statistic concerning a single mean, if population variance is

unknown, the sample is small, and population is approximately normally distributed?

a. t-Test

b. Chi-square test

c. z-Test alternative

21. An investor wants to deposit $435 000 in a bank account. The bank pays a stated annual

rate of 15 percent. What is the effective annual rate using continuous compounding?

a. 15.00 percent

b. 16.08 percent

c. 16.18 percent

22. Which of the following statements is the most accurate for a positively skewed distribution?

a. Mode is bigger than mean.

b. Mean is bigger than median.

c. Median is bigger than mode.

23. Which of the following statements is the most appropriate?

a. The third quartile is smaller than the fourth quintile.

b. The third quintile is smaller than the 50th percentile.

c. The third quartile is smaller than the 50th percentile.

24. An analyst stated that decreasing a sample size will increase the width of a confidence

interval and decrease the standard error. The analyst’s statement is incorrect with respect

to:

a. both the standard error and the confidence interval.

b. the confidence interval, but correct with respect to the standard error.

c. the standard error, but correct with respect to the confidence interval.

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25. Assume that a stock’s price at the end of the next two periods is as shown below:

Period 0 1 2

Stock prices

100 120 144

83.33 100

69.44

The probability that the stock’s prices will go down in a given period is 50%. What is the

probability that the stock’s price at the end of the second period will be the same as today

(period 0)?

a. 25%

b. 50%

c. 75%

26. A project offers the following incremental after-tax cash flows:

Year 0 1 2 3

Cash flow ($) -15,000 3,000 3,000 16,000

The appropriate discount rate to use in evaluating the project is 12.5 percent.

The IRR of the project is closest to:

a. 12.5 percent

b. 14.2 percent

c. 16.2 percent

27. Regarding normal distribution, which of the statements given below is the least accurate?

a. Excess kurtosis of normal distribution is equal to zero.

b. Normal distribution contrary to lognormal distribution is positively skewed.

c. A linear combination of three normal random variables is normally distributed.

28. An analyst describing the binomial distribution assumptions stated that the probability of

success is constant for all trials, and that trials are independent. The analyst’s statement is

correct with respect to:

a. both the constant probability of success and independent trials.

b. neither the constant probability of success nor independent trials.

c. the constant probability of success but not with respect to independent trials.

29. An analyst stated that the geometric mean is good for reporting past returns on a portfolio,

and that the arithmetic mean is good for calculating the average return on a portfolio over

one period horizon. The analyst’s statement is correct with respect to:

a. both.

b. the arithmetic mean return, but incorrect with respect to the geometric mean

return.

c. the geometric mean return, but incorrect with respect to the arithmetic mean

return.

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30. Which of the following can most likely be considered as a relative dispersion:

a. Standard deviation

b. Coefficient of variation

c. Mean absolute deviation

31. Regarding covariance and correlation, an analyst stated that covariance between random

variable A and random variable B has the same value that covariance between random

variable B and random variable A, and that correlation is a measure of the linear

relationship between two random variables. The analyst’s statement is correct with regard

to:

a. both covariance and correlation.

b. neither covariance nor correlation.

c. covariance, but incorrect with regard to correlation.

32. An analyst estimates that Precious Bank quarterly revenues will come in between 150

million and 270 million US dollars. Every outcome from this range is equally probable. What

is the probability that revenues are going to be greater than 200 million dollars?

a. 42 percent

b. 50 percent

c. 58 percent

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Questions 33 through 44 relate to Economics

33. The demand function is given by equation:

� = 10.5 − 0.6 + 0.1� − 0.25�

Where:

� – demand

– price A

� – income

� – price B

Holding all other things constant, � increases by 1. Which of the following statements is

the least accurate?

a. Demand for B decreases by 1.

b. Demand for A decreases by 0.25.

c. A and B are probably complementary goods.

34. The nominal GDP is equal to $55,240,000 and the real GDP is equal to $52,040,000. The GDP

deflator is closest to:

a. 94

b. 100

c. 106

35. Which of the following statements is least likely correct?

a. For two consumers A and B, the two corresponding indifference curves can

intersect.

b. For a given consumer A, two indifference curves cannot intersect because it would

violate the transitivity assumption.

c. For two consumers A and B, the two corresponding indifference curves cannot

intersect because it would violate the transitivity assumption.

36. Which of the following statements regarding market structures is the least accurate?

a. Under imperfect competition, total revenue is a linear function of quantity.

b. Under imperfect competition, the marginal revenue line is below the price line.

c. Under imperfect competition, the marginal revenue line is below the average

revenue line.

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37. The table below presents currency exchange rates:

Exchange rate

USD/EUR 1.3250

CHF/EUR 1.2090

The amount of Swiss Franc (CHF) that an investor will receive for $120,000 is closest to:

a. CHF 109,494

b. CHF 131,514

c. CHF 192,231

38. Which of the following is least likely one of the primary factors of production?

a. Labor

b. Capital

c. Technology

39. Profit maximization least likely occurs when:

a. marginal revenue is equal to marginal cost.

b. the difference between total revenue and average fixed cost is the greatest.

c. the revenue value of the output from the last unit of input employed is equal to the

cost of employing that input unit.

40. If the cross-price elasticity of demand between two goods is positive it is most likely that

these two goods are:

a. substitutes.

b. Giffen goods.

c. complements.

41. The table below provides information about an economy:

Consumption function C=1000+0.65(Y-T)

Investment function I=100+0.1Y-10r

Government spending G=400

Tax function T= -100+0.35Y

Net export function X-M=700-0.15Y

Where:

Y – aggregate income

R – real interest rate

If government spending increases by 250 the IS curve is given by:

a. Y=3370.5-15.9r

b. Y=3609.6-15.9r

c. Y=4008.0-15.9r

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a. Under monopolistic competition, firms do not have pricing power.

b. If demand is very elastic, the market is closed to perfect competition.

c. If a monopolist is able to absorb the entire consumer surplus, it is defined as first

degree of price discrimination.


a. The unemployed are all people without a job.

b. Unemployment rate is the ratio of the unemployed to labor force.

c. Usually the number of the employed does not include illegal workers.

44. The demand function for butter is given by equation:

� = 25 − 2.6� + 0.002� + 0.15�

Where:

� – yearly demand

� – price of margarine

� – monthly income

� – price of butter

Monthly income is equal to 3000, the price of butter is 3 and the price of margarine

is 4. The price elasticity of demand for butter is closest to:

a. –2.6

b. -0.4

c. -0.3

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Questions 45 through 68 relate to Financial Statement Analysis


a. The cash flow statement is sometimes called the statement of operations.

b. Under U.S. GAAP, dividends received and interest paid can be attributed only to

cash flow from operating activities.

c. Under IFRS, dividends paid and interest paid can be attributed to cash flow from

operating or financing activities.

46. Which of the following is most likely a liquidity ratio:

a. ROE

b. Current ratio

c. Debt-to-equity ratio

47. Fox&Lee Co. depreciates equipment on a straight-line basis at a rate of 12.5 percent per

year. Equipment costs incurred amount to $10 million, and the residual value is equal to $0.

The depreciation for tax purposes equals 14 percent per year. The difference between the

carrying amount and tax base in Year 1 is closest to:

a. $125,000

b. $140,000

c. $150,000

48. Regarding “fraud triangle”, which of the following is least likely an example of fraud risk

factor related to incentives or pressures?

a. New accounting requirements

b. High turnover of board members

c. Management personal guarantees of debts of the entity

49. BringIt Ltd. earns revenue before receiving cash but has not recognized the revenue yet.

Which of the below is most likely correct?

a. Adjusting entry involves reducing the liability as cash is paid.

b. Adjusting entry involves reducing the liability while recording revenue.

c. Originating entry involves recording revenue and establishing an asset.

50. According to IAS No. 1, which of the following is least likely one of the general features

characteristic of the preparation of financial statements:

a. Accrual basis

b. Fair presentation

c. Offsetting of all assets and liabilities

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51. The coherent financial reporting framework is least likely characterized by:

a. Transparency

b. Comparability

c. Comprehensiveness

52. JJ&C, Plc. has entered a three-year construction contract for $8 million. It is probable that

cost will be recovered but given uncertainty of future price of materials, technology and

labor outcome cannot be measured reliably. The following table gives information about

expenditures related to this construction contract:

Year 1 Year 2 Year 3

Cash expenditure incurred $1.5 million $2.5 million $2.5 million

What is the revenue that the company will recognize in Year 3 under:

IFRS? U.S. GAAP?

a. $2.5 million $6 million

b. $4 million $4 million

c. $4 million $8 million

53. The cost of property is equal to $5 million. The total sales price is $7 million. The buyer pays

a down payment of $1 million. The rest of the sales amount is to be received in the next

three years. There is a serious risk that the buyer will not be able to make all payments. How

much profit will be recognized attributable to the down payment if the installment method

is used?

a. $0

b. $286,000

c. $710,000

54. The following table presents information about a company:

Net income for year ended 31 December 2011 $12 million

Paid preferred dividends $0.5 million

Common dividends $2.5 million

Shares outstanding on 1 January 2011 6 million

Shares issued on 1 October 2011 2 million

The company’s basic earnings per share (EPS) is closest to:

a. $1.4

b. $1.8

c. $2.3

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55. The table below presents information about a company’s inventory:

Date Purchased Sold

21 March 2011 12,000 units at $2 per unit

5 May 2011 8,500 units at $1.9 per unit

17 July 2011 11,000 units at $2.4 per unit

2 September 2011 10,600 units at $2.1 per unit

12 November 2011 6,000 units at $2.4 per unit

Using the perpetual inventory system and the LIFO method, the ending inventory

is closest to:

a. $27,990

b. $28,660

c. $28,910

56. Which of the following is least likely correct?

a. Leases can provide less costly financing.

b. One of the types of leases is investing lease.

c. Usually leasing requires little down payment.


a. Under U.S. GAAP, a part of taxes paid can be included in investing cash flows.

b. Both U.S. GAAP and IFRS allow direct or indirect methods of presenting cash flows.

c. Under IFRS, interest received can be classified either as operating or investing

activities.

58. The table below presents information about a company (U.S.GAAP is assumed):

Cash flow from operating activities $10,500,000

Interest expense $1,340,000

Tax rate 30%

Capital expenditures $5,484,000

Net borrowing $2,150,000

The company’s FCFE is closest to:

a. $4,016,000

b. $5,954,000

c. $7,166,000

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59. The table below presents information about the inventory of PaperFactory, Inc.:

Date of purchasing and

receiving calendars

Quantity of calendars Price per calendar

1 March 2011 17,000 $18

15 May 2011 22,400 $19

22 November 2011 18,650 $21

On 10 December 2011, PaperFactory, Inc. sold 25,000 calendars for $25 per item. Under the

LIFO method, the reported gross profit is closest to:

a. $112,700

b. $135,400

c. $167,000

60. On 1 January 2009, a company issues a seven-year bond with a par value equal to

$1,000,000 and an annual coupon equal to 8 percent. The sales proceeds are equal to

$902,632. The carrying amount of the bond at 31 December 2013 assuming the effective

interest method would be closest to:

a. $950,263

b. $965,289

c. $981,818

61. The company producing wooden toys sells 10 toys at $50 per toy and ships them to the

customer. Payments are due in 14 days – no payments have been made yet. Cost of goods

sold increases by $400. Which of the below least likely occurs?

a. Revenue increases by $500.

b. Inventory decreases by $400.

c. Accounts receivable increases by $100.


a. The term depreciation applies to tangible assets.

b. The term amortization applies to intangible assets.

c. Intangible assets with indefinite lives are tested for impairment at least

semiannually.

63. Which of the following terms is least likely synonymous with the term accounting profit:

a. Pretax income

b. Taxable income

c. Income before taxes

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64. Regarding IFRS framework, an analyst stated that financial statements elements should be

recognized in the financial statement if:

1) It is probable that any future economic benefit associated with the item will flow to or

from the enterprise.

2) The item has cost or value that can be measured with reliability.

Recognizing requires:

a. meeting both conditions.

b. meeting only the first condition.

c. meeting only the second condition.

65. Which of the ratios given below is a solvency ratio?

a. Current ratio

b. Acid test ratio

c. Financial leverage ratio

66. Which of the following statements is most likely correct?

a. Straight-line method is one of the method for amortizing the premium or discount

of bonds.

b. Under U.S. GAAP, a company initially reports bonds as liability at the amount of the

sales proceeds net of issuance costs.

c. U.S. GAAP requires that the effective interest rate method for amortizing the

premium or discount of bonds is used.

67. Regarding financial statement analysis framework, which of the below is least likely one of

the output of process data?

a. Ratios and graphs

b. Financial data tables

c. Adjusted financial statements


a. Both U.S. GAAP and IFRS permit the use of the LIFO method.

b. The main principle of expense recognition is the matching principle.

c. Both U.S. GAAP and IFRS permit the use of the weighted average cost method to

assign cost of goods sold.

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Questions 69 through 78 relate to Corporate Finance

69. Income statement of BlueMaster Ltd. is provided below:

Income statement

Revenues 19

Variable Operating Costs 13

Fixed Operating Costs 3

Operating Income 3

Interest 1

Net income 2

Calculate the degree of total leverage:

a. 1.5

b. 2

c. 3

70. Company’s fixed operating costs are equal to $12.3 million and fixed financial costs are

equal to $8.1 million. Variable cost per unit is $40 and the price per unit is $55. The

operating breakeven point is closest to:

a. 540,000 units

b. 820,000 units

c. 1,360,000 units

71. Primary sources of liquidity least likely include:

a. Trade credit

b. Bank lines of credit

c. Liquidation of long-term assets

72. A project has the following annual cash flow:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

-$25,143 $30,512 $30,512 -$43,500 $23,681 -$12,115

Which of the following discount rates most likely produces the highest net present

value (NPV)?

a. 6%

b. 10%

c. 15%

73. Who is responsible, according to corporate governance, for delivering complete, accurate

and reliable financial information to shareowners?

a. Audit committee

b. Board of directors

c. Compensation committee

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74. The table below presents information about sources of a company’s capital and estimated

cost of its different types:

Source of capital Capital structure Estimated cost of the capital

Debt 30% 7%

Preferred stock 15% 10%

Common stock 16%

Tax rate is equal to 35%. The company’s weighted average cost of capital (WACC)

is closest to:

a. 11.0%

b. 11.7%

c. 12.4%

75. An analyst stated that if the net present value (NPV) is higher or equal to 0 then the

profitability index (PI) is always bigger or equal to 1 and that the discounted payback

period (DPP) is always shorter or equal to the payback period (PP). Are the statements most

likely correct or incorrect?

a. Both statements are incorrect.

b. Statement 1 is incorrect and Statement 2 is correct.

c. Statement 1 is correct and Statement 2 is incorrect.

76. The annual cost of trade credit assuming a 365-day year for terms 2.5/10 net 35 is closest to:

a. 30%

b. 43%

c. 45%

77. Which of the statements below regarding cost of capital is the most accurate?

a. The beta of debt is equal to 1.

b. The business risk of a project is sales risk plus operating risk.

c. Investment opportunity schedule is an upward-sloping curve.

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78. The company’s income statement for year 2012 is presented below:

Revenues $250,000

Cost of goods sold $130,000

Gross profit $120,000

Selling, general and administrative expenses $50,000

Operating income $70,000

Interest expense $10,000

Earnings before tax $60,000

Taxes $24,000

Net income $36,000

All elements of income statement are sales-driven, except for tax burden and interest

burden. Company’s tax rate in 2013 will increase to 45% and interest expenses will remain

at the same level as in 2012. If expected growth rate of revenues is 10 percent, 2013 pro

forma net income is closest to:

a. $36,300

b. $36,850

c. $41,880

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Questions 79 through 90 relate to Equity Investments

79. The table below presents information about the company’s preferred stock:

Par value $80

Dividend rate 8%

Yield on comparable preferred stock 10.5%

Price $60

The preferred stock is:

a. overvalued.

b. well priced.

c. undervalued.

80. Which of the following statements is the least accurate?

a. Cash ratio is one of the solvency ratios.

b. A complete company’s research report should include analysis of pricing.

c. An asset management is an example of fragmented industry with strong pricing

power.

81. Which of the following is least likely one of Porter’s five forces?

a. Threat of new entrants

b. Bargain power of customers

c. Currency regime in a given country

82. A technician analyst assumes that market is:

a. weak form efficient.

b. semi strong efficient.

c. weak form inefficient.

83. An investor buys 200 stocks of company A on margin. The leveraged ratio is 2 and the stock

price is equal to $8. If the maintenance margin requirement is 30%, the investor will receive

margin call when the stock price is closest to:

a. $4.0

b. $5.2

c. $5.7

84. Which of the following statements is the most accurate?

a. Indices are used as gauges of market sentiment.

b. Regular rebalancing is especially important for price-weighted indices.

c. The value of market-capitalization index changes if there is 2-for-1 stock split in one

of the index’s constituent security.

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85. Which of the following most likely impedes market efficiency?

a. Active arbitrageurs

b. Restriction on short selling

c. Greater availability of information

86. The table below presents information about the company’s stock:

Dividend per share (Year 0) $10

Payout ratio 20%

Dividend growth rate (Year 1) 12%



If an investors’ required rate of return is 11%, and the value of the company’s stock (Year 0)

is $90, what is the dividend growth rate after Year 3 (in your calculations use the two-stage

dividend discount model)?

a. -9.2%

b. -5.4%

c. -4.8%

87. The company’s financial year ends on 31 of December. The table below presents

information about the company’s net income and total shareholders’ equity:

31 December 1999 1 January 2000 31 December 2000

Net income for

a given year

$15,254,890 $17,312,800

Total shareholders’

equity

$80,400,000 $80,400,000 $85,000,000

If only the equity existing at beginning of the 2000 was used to generate the company’s

net income, the return on equity in 2000 is closest to:

a. 19.0%

b. 20.9%

c. 21.5%


a. To calculate the company’s cost of equity, investors can use dividend discount

model.

b. To calculate the minimum required rate of return, investors can use capital asset

pricing model.

c. To calculate the weighted average cost of capital, investors commonly use the cost

of debt before taxes.

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89. Which of the below is most likely one of cross-sectional anomalies?

a. Value effect

b. Earnings surprise

c. Turn-of-the-year effect

90. Commercial Aircraft is an industry:

a. fragmented with strong pricing power.

b. concentrated with weak pricing power.

c. concentrated with strong pricing power.

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Questions 91 through 96 relate to Derivative Investments

91. The price of the stock is $45. The European call option with the exercise price $42 and the

time to expiration 1 year is priced $6. The annual risk-free rate is equal to 5 percent. Based

on put-call parity, the price of the European put option with the exercise price $42 and the

time to expiration 1 year is closest to:

a. $1.0

b. $3.0

c. $5.1

92. Which of the following statements is the most accurate?

a. Futures contracts are customized.

b. Forward contracts are standardized.

c. Futures positions are settled on a daily basis.

93. If the expected dividend increases then the value of the:

call option decreases? put option increases?

a. Yes Yes

b. No Yes

c. Yes No


a. Swaps can be described as a set of options.

b. In an equity swap at least one party pays the return on a stock or stock index.

c. In plain vanilla interest rate swap all payments are made in the same currency.

95. An investor purchases futures contract priced at $150. The initial margin is $22 and the

maintenance margin requirement is $15. The following table presents the end-of-day

prices over the next six days:

Day Price

1 $160

2 $155

3 $142

4 $130

5 $120

6 $144

What is the ending margin account balance on Day 6:

a. $16

b. $34

c. $46

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96. A dealer quotes a forward rate agreement (FRA) based on 90-day LIBOR at 3.8%. An investor

goes long for the contract and the dealer goes short. The notional principal of the contract

is $2 million. At expiration the 90-day LIBOR is 4.3%. The investor is most likely to:

a. pay the dealer $1,237.

b. receive from the dealer $1,237.

c. receive from the dealer $2,473.

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Questions 97 through 108 relate to Fixed Income Investments

97. An investor buys a corporate bond with 5.5-year maturity and $100 face value. The full price

of the bond is $110.30 and accrued interest is $5.50. The dirty price of the bond is closest to:

a. $104.80

b. $110.30

c. $115.80

98. The table below presents information about 4 bonds:

Bond Price Maturity Duration

A $85.25 10-year 7.4

B $91.12 7-year 5.4

C $98.76 6-year 4.7

D $104.25 4-year 3.4

The par value of all bonds is $100. The duration of the portfolio is closest to:

a. 5.11

b. 5.23

c. 5.69

99. Which of the following bonds is characterized by the smallest interest rate risk?

a. Inverse floater with the maturity of 6 years.

b. Option-free floater with the maturity of 5 years.

c. Option-free coupon bond with the maturity of 5 years.

100. An investor is considering the purchase of two bonds and he wants to add one of them to

his portfolio. One bond is tax-exempt with a yield of 6.40%, the other is taxable with a yield

of 8.50%. At what marginal tax rate would the investor be indifferent to the choice

between the two bonds for his portfolio?

a. 25%

b. 35%

c. 75%

101. Which of the embedded options given below is most likely beneficial for an issuer?

a. Put option

b. Call option

c. Conversion privilege

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102. A $100 par value bond with a 6% coupon paid semiannually, maturing in 15 years sells for

$103.40. The yield to maturity is closest to:

a. 5.66%

b. 5.74%

c. 6.52%

103. Regarding theories of the term structure of interest rates the least accurate statement is:

a. The pure expectation theory can be used to justify any shape of the yield curve.

b. One of the variants of the preferred habitat theory is the market segmentation

theory.

c. According to the liquidity preference theory, the term structure of interest rates

depends, among other things, on expectations about future interest rates.

104. The table below presents Treasury spot rates:

Year Spot rate

0.5 2.40%

1.0 2.55%

1.5 2.90%

2.0 3.00%

The arbitrage-free value of a 2-year Treasury with $100 par value and 5.40% coupon rate is

closest to:

a. $99.98

b. $98.93

c. $104.65

105. An analyst stated that duration can be defined as the first derivative of bond’s value with

respect to its yield and a measure of interest risk. Are the statements most likely correct or

incorrect?

a. Both statements are correct.

b. Statement 1 is incorrect and Statement 2 is correct.

c. Statement 1 is correct and Statement 2 is incorrect.

106. The table below provides different kind of spreads for a putable bond:

Nominal spread Z-spread Option adjusted spread

1.5% 2% 3%

What is the option cost?

a. 0.5%

b. 1%

c. 1.5%

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107. Which of the following statements regarding bond types is the least accurate?

a. Coupon rate of TIPS is set at a fixed rate.

b. Treasury STRIPS are created by private sector.

c. Usually on-the-run Treasury securities yield more than equivalent off-the-run

Treasury securities.

108. If the yield to maturity (YTM) is 5% and coupon is 6% and reinvestment rate is going to be

5.5%, then:

the realized return will be bigger than YTM? the bond sells at discount?

a. Yes Yes

b. No Yes

c. Yes No

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Questions 109 through 114 relate to Alternative Investments


a. ETFs are actively managed.

b. Investors can buy ETFs on margin.

c. ETFs are less costly for investors than traditional mutual funds.

110. Which of the following biases in hedge fund performance in hedge fund database an

investor suffers from when hedge fund managers decide whether they want to be included

in databases or not?

a. Backfilling bias

b. Survivorship bias

c. Self-selection bias

111. When market is in backwardation:

a. the future price is above the spot price.

b. the future price is below the spot price.

c. investors expect the spot price to be higher in the future.

112. Which of these is not a valuation approach for real estate?

a. Income approach

b. Gordon approach

c. Sales comparison approach

113. Which of the following is most likely a venture capital characteristic?

a. Liquidity

b. Short-term commitment required

c. Difficulty in calculating market value of a venture portfolio

114. Which of the following statements regarding FOF (fund of funds) is least likely correct?

a. FOFs invest in hedge funds.

b. Small investor can purchase FOFs for a reasonable amount of money.

c. One of the disadvantage of FOFs is that they do diversify investors’ portfolio.

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Questions 115 through 120 relate to Portfolio Management

115. The following table provides information for two stocks:

Company Stock expected return Stock variance Correlation between X and Y

X 12% 0.0225 0.8

Y 20% 0.160

The covariance between X and Y is:

a. 0.0029

b. 0.0480

c. 13.3300

116. Regarding portfolio management, which of the following statements is least likely correct?

a. The capital market line is a specific example of the capital allocation line.

b. A person with risk aversion coefficient of 3 has greater risk tolerance than a person

with risk aversion coefficient of 4.

c. Assuming the same capital allocation line, the optimal portfolio for an investor with

risk aversion coefficient of 2 has greater expected rate of return than the optimal

portfolio for an investor with risk aversion coefficient of -1.

117. An analyst describing different types of risk stated that the market risk and unsystematic

risk of the portfolio can be reduced by diversifying the portfolio. The analyst’s statement is

correct with respect to:

a. both.

b. market risk, but incorrect with respect to unsystematic risk.

c. unsystematic risk, but incorrect with respect to market risk.

118. The following table gives information for a company’s stock:

Expected return of company’s stock 12%

Expected return of market 10%

Covariance between stock and market 0.034

Variance of market return 0.04

Standard deviation of stock’s return 0.20

Knowing that a risk-free rate is 5 percent decide, using CAPM, if stock is:

a. overvalued.

b. undervalued.

c. fairly valued.

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119. Market portfolio is a portfolio consisting of:

a. all risky assets.

b. all risky and risk-free assets.

c. all common shares in a given stock exchange.


a. The global minimum-variance portfolio consists only of risky assets.

b. The global minimum-variance portfolio lies on the minimum-variance frontier.

c. The curve that lies above and to the left of the global minimum-variance portfolio

is called Markowitz efficient frontier.

cfa level 1 mock-exam

Economy & Finance

cfa charterholder

cfa candidate

cfa institute

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samantha fey

standard iv

lee burgman

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