CFA Mock Missed Questions

Greene Company discloses that its net income for the most recent period was reduced by a writedown of inventory to net realizable value. What effect is the inventory writedown most likely to have on Greene's net income in future periods? A) Increase. B) Decrease. C) No effect.

A) Increase. Explanation In future periods, lower-valued inventory will result in lower cost of sales and higher net income.

A bond with nine years to maturity is quoted at an interpolated spread of +150 basis points. The benchmark yield for this bond is: A) a swap rate. B) a matrix rate. C) a government bond yield.

A) a swap rate. Explanation Interpolated spreads (I-spreads) are spreads to swap rates.

The source of a hedge fund's return that is attributable to security selection is best described as: A) alpha. B) market beta. C) strategy beta.

A) alpha. Explanation Alpha is the return resulting from the manager's security selections. Market beta is the return related to the broad market index. Strategy beta is the return related to specific factors to which a fund has exposure.

Reasons why no-arbitrage pricing models for forward commitments differ from no-arbitrage pricing models for contingent claims least likely include the fact that contingent claims: A) are leveraged. B) have one-sided payoffs. C) have nonzero values at initiation.

A) are leveraged. Explanation Both a forward commitment and a contingent claim have returns that are leveraged compared to a spot market investment. Because options have premiums (i.e., positive values at initiation) and one-sided payoffs, we must use a different arbitrage and replication approach than the approach we use for forward commitments, which have values of zero at initiation and symmetrical payoffs.

A researcher has data on the 20 largest firms in each state and samples the data by choosing 20 states at random and then selecting 10 firms at random from each of the samples. Her sampling method is referred to as: A) cluster sampling. B) convenience sampling. C) stratified random sampling.

A) cluster sampling. Explanation The procedure described is an example of two-stage cluster sampling. With stratified random sampling, all subsets of the data (all states) would be included, and random samples would be selected from each. Convenience sampling is based on the low cost or easy availability of the data used.

A 10-year note issued by Gaullic Finance will be paid from a bankruptcy-remote pool of Gaullic's balance sheet assets. These notes are best described as: A) covered bonds. B) securitized bonds. C) asset-backed bonds.

A) covered bonds. Explanation Covered bonds are an obligation of the corporation that issues them, but their interest and principal payments are provided by a pool of assets that are legally recognized as bankruptcy remote. They are different from securitized bonds (i.e., asset-backed securities), which are issued by a special purpose entity to which the underlying assets are sold.

A change from a neutral monetary policy to a contractionary monetary policy is most likely to be reflected in the economy by: A) decreases in price for financial assets. B) decreased lending rates in the banking system. C) depreciation of the domestic currency in the foreign exchange market.

A) decreases in price for financial assets. Explanation Contractionary monetary policy typically results in increased interest rates, which decrease the prices of financial assets by decreasing the present value of future cash flows. Increasing interest rates typically cause the domestic currency to appreciate.

The type of credit risk that is most directly reflected in a bond's rating is: A) default risk. B) downgrade risk. C) credit spread risk.

A) default risk. Explanation Default risk is the possibility that the issuer will fail to meet its obligations under the indenture, for which investors demand a premium above the return on a default-risk-free security. Bond ratings indicate default risk. Downgrade risk is the risk that a bond will be reclassified as a riskier security by a credit rating agency. Credit spread risk is the risk that the default risk premium on a bond can increase.

Clement Company has revalued an intangible asset with an indefinite life upward by €25 million. In its financial statements, Clement will most likely: A) disclose how it determined the fair value of the intangible asset. B) report lower net income in subsequent periods because of increased amortization expense on the asset. C) report higher assets, net income, and shareholders' equity in the most recent period than it would have reported under the cost model.

A) disclose how it determined the fair value of the intangible asset. Explanation For firms that revalue assets upward, IFRS requires disclosure of the date the asset was revalued, how management determined its fair value, the asset's carrying value using the historical cost model, and (for intangible assets) whether the asset's useful life is finite or indefinite. Although assets and shareholders' equity will increase as a result of the revaluation, net income will not increase. The increase in the value of the asset is reported as a revaluation surplus in shareholders' equity. Amortization expense will not increase because indefinite-lived intangible assets are not amortized.

Changes in a fixed-coupon bond's cash flows that result from changes in yield would be reflected in the bond's: A) effective duration. B) modified duration. C) Macaulay duration.

A) effective duration. Explanation Effective duration and effective convexity capture the effects from changes in a bond's cash flows when the yield changes (e.g., an increase in the likelihood of a bond being called when its yield has decreased). For this reason, they are the appropriate measures of interest rate sensitivity for bonds with embedded options.

Yvette Michaels, CFA, an analyst for Torborg Investments, inadvertently overhears a conversation between two executives of Collective Healthcare in which they mention an upcoming tender offer for Network, a stock she covers. Michaels has followed both companies extensively and feels their consolidation would be very beneficial for both companies. She tells her supervisor, a senior analyst, about the proposed tender offer. Michaels' actions are: A) in violation of the Standards. B) not in violation of the Standards because she told only her supervisor. C) not in violation of the Standards because she has not traded shares of Network or changed her report on the company.

A) in violation of the Standards. Explanation Michaels has violated Standard II(A) Material Nonpublic Information. Members who possess material nonpublic information are prohibited from acting or causing others to act on that information. She may not share the information with anyone except designated supervisory or compliance employees within her firm. Disclosing to her supervisor, who is not identified as a designated supervisor of compliance issues, is not permitted.

To comply with the Code and Standards, analysts who send research recommendations to clients must: A) keep records of all the data and analysis that went into creating the report. B) send recommendations only to those clients for whom the investments are suitable. C) not send recommendations without including the underlying analysis and basic investment characteristics.

A) keep records of all the data and analysis that went into creating the report. Explanation Standard V(C) Record Retention requires members to maintain records of the data and analysis they use to develop their research recommendations. Recommendations may be brief, in capsule form, or simply a list of buy/sell recommendations. A list of recommendations may be sent without regard to suitability, including both safe income stocks and aggressive growth stocks, for example.

According to the Code and Standards, members and candidates who are involved in distributing an initial public offering (IPO) of equity shares and wish to participate in the IPO: A) may participate unless the IPO is oversubscribed. B) may not participate because this creates a conflict of interest. C) must obtain pre-clearance from a supervisor before participating.

A) may participate unless the IPO is oversubscribed. Explanation Standard VI(B) Priority of Transactions recommends, but does not require, that a member or candidate obtain pre-clearance from his or her supervisor before participating in an equity IPO. Guidance for Standard III(B) Fair Dealing states that members and candidates distributing IPO shares must distribute shares in an oversubscribed IPO to clients and may not withhold shares for themselves.

If a company's forecast current liability balances reflect an undesirable net working capital position, the company is most likely faced with: A) solvency risk. B) accounting risk. C) operational risk.

A) solvency risk. Explanation Solvency risk is the risk the organization will not be able to continue operations because it has run out of cash. Current liabilities are due within the next 12 months, and because the company will have to pay those with cash, the risk is once the liabilities are covered, the company will not have enough cash to continue. Operational risk is the risk that faulty organizational processes, human error, poor security, or business interruptions will result in losses. Accounting risk is the risk the company's accounting policies and estimates will be deemed to be incorrect.

During the life of an option, the amount by which its price is greater than its exercise value is most accurately described as its: A) time value. B) moneyness. C) intrinsic value.

A) time value. Explanation Before expiration, an option can have a price greater than its exercise or intrinsic value. This amount by which an option's price is greater than its exercise value is referred to as its time value.

According to the Standard related to loyalty, prudence, and care, which of the following statements regarding the voting of proxies on client holdings is least accurate? A) Proxies have economic value to a client. B) An investment management firm should vote all proxies on client holdings unless the client reserves that right. C) Members and candidates should explicitly disclose the firm's proxy voting policies to clients.

B) An investment management firm should vote all proxies on client holdings unless the client reserves that right. Explanation Standard III(A) Loyalty, Prudence, and Care does not require the voting of all proxies. A cost-benefit analysis may support the conclusion that the voting of all proxies is not beneficial to the client in light of the time and effort required. Voting on nonroutine issues that have a material impact is required.

A Canadian city issues a CAD 100 million general obligation bond. Which of the following credit measures is most relevant in analyzing the risk of this bond? A) Minimum coverage ratio covenants. B) Attractiveness of the local business climate. C) Riskiness of cash flows from infrastructure funded by the bonds.

B) Attractiveness of the local business climate. Explanation General obligation bonds are unsecured bonds issued by non-sovereign governments that are backed by the general revenues of the issuer, rather than by specific collateral or a specific revenue stream. Key credit measures in analyzing general obligation bonds include the attractiveness of the local business climate, the government's ability to levy and collect taxes, the stability of the tax base, and economic diversification. The other choices are more relevant for revenue bonds.

Which of the following conditions is most likely to result in expansionary effects from fiscal policy being felt when an economic expansion is already underway? A) Slow economic growth is being caused by supply shortages rather than low aggregate demand. B) Expansionary fiscal policy requires policymakers to recognize an economic contraction and enact legislation. C) Government borrowing to finance expansionary spending is increasing interest rates faced by private sector borrowers.

B) Expansionary fiscal policy requires policymakers to recognize an economic contraction and enact legislation. Explanation Fiscal policy takes effect with a lag due to the time it takes for policymakers to recognize the business cycle stage (recognition lag) and enact legislation to change fiscal policy (action lag), and the time it takes for individuals and businesses to react to the policy changes (impact lag). As a result of these lags, fiscal policy changes may result in pro-cyclical rather than countercyclical effects. Supply shortages and higher interest rates as a result of government borrowing (the crowding-out effect) both act to reduce the expansionary effect of expansionary fiscal policy but are not related directly to its time lags.

Which of the following statements about a United States public corporation's annual reports, SEC filings, and press releases is most accurate? A) Annual and quarterly SEC filings must be audited. B) Interim SEC filings typically update the major financial statements and footnotes. C) Annual reports to shareholders are typically the most factual and objective source of information about a company.

B) Interim SEC filings typically update the major financial statements and footnotes. Explanation Besides the annual SEC filings, an analyst should examine a company's quarterly or semiannual filings. These interim filings typically update the major financial statements and footnotes, but are not necessarily audited. Annual reports to shareholders and press releases are written by management and are often viewed as public relations or sales materials.

Which of the following is least likely a limitation of mechanisms used to discipline financial reporting quality? A) An unqualified audit opinion offers reasonable assurance rather than a guarantee. B) Securities regulators may require public disclosure of the results of disciplinary proceedings. C) Loan covenants may give the borrowing company an incentive to manipulate reported results.

B) Securities regulators may require public disclosure of the results of disciplinary proceedings. Explanation All three statements are accurate, but public disclosure of the results of disciplinary proceedings is seen as a deterrent to poor financial reporting quality rather than a limitation. It can be seen as a limitation that audit opinions only offer reasonable assurance rather than guarantees with regards to the financial statements. Private contracts often contain clauses such as loan covenants to protect the lender from default. However, this could create an incentive for the borrowing firm to produce low quality financial reports that technically do not breach covenants, and so can be seen as a limitation.

Consider two option-free, 5% annual-pay bonds from the same issuer and with the same seniority. One of the bonds has a modified duration of 3.5 and approximate convexity of 15. The other has a modified duration of 8.5 and approximate convexity of 75. Can the lower-duration bond have more price volatility than the higher-duration bond? A) No, because it also exhibits lower convexity. B) Yes, because shifts in the yield curve may be non-parallel. C) No, because its price will respond relatively less in response to changes in yield.

B) Yes, because shifts in the yield curve may be non-parallel. Explanation Duration-based estimates of bond value changes assume the yield curve shifts in a parallel manner. If instead short-term interest rates are more volatile than long-term interest rates, it is possible for a bond with lower duration to have more price volatility than a bond with higher duration.

A public offering of bonds issued over a period of time is most accurately described as: A) a serial structure. B) a shelf registration. C) a waterfall structure.

B) a shelf registration. Explanation In a shelf registration, an entire issue is registered with securities regulators but the bonds are sold to the public over a period of time as the issuer needs to raise funds. In a serial bond issue, bonds with multiple maturity dates are issued at the same time. A waterfall structure is issued in tranches with differing priority of claims.

A 7.5% coupon, semiannual-pay, five-year bond has a yield to maturity of 6.80%. Over the next year, if the bond's yield to maturity remains unchanged, its price will: A) increase. B) decrease. C) remain unchanged.

B) decrease. Explanation Because the coupon rate is greater than its yield to maturity, the bond price is at a premium to par value. If the yield remains unchanged, the price will decrease toward par value along its constant-yield price trajectory.

What is the main benefit of a permissionless network, in contrast with a permissioned network? A permissionless network: A) is more cost efficient. B) has no single point of failure. C) enables faster transfer of ownership.

B) has no single point of failure. Explanation The main benefit of permissionless networks is that there is no single point of failure due to the consensus mechanism; every node stores a copy of the transaction database. Permissionless networks are less cost efficient than permissioned networks because decentralization usually requires more processing power. Permissionless can be slower with a large number of members.

An industry is experiencing a significant increase of unionized labor. In the context of Porter's Five Forces, this change most likely implies: A) decreasing threat of new entrants. B) increasing bargaining power of suppliers. C) decreasing bargaining power of customers.

B) increasing bargaining power of suppliers. Explanation A more unionized labor force increases the bargaining power of the suppliers of labor.

Dudley Thompson is a bond salesman for a small broker/dealer in London. His firm is the lead underwriter on a new junk bond issue for Ibex Corporation, and Thompson has sent details of the offering to clients. Thompson calls only his accounts over £1,000,000 for whom he thinks the issue is suitable. Thompson also posts his firm's optimistic projections for Ibex's performance in several Internet chat rooms. According to the Standards concerning market manipulation and fair dealing, Thompson is in violation of: A) both of these Standards. B) neither of these Standards. C) only one of these Standards.

B) neither of these Standards. Explanation Thompson has not violated Standard II(B) Market Manipulation by posting his firm's projections for Ibex. A firm's recommendation of a security may increase its price without any intent to mislead the market. The firm has disseminated the details of the offering to its clients fairly, so Thompson may call individual clients without violating the Standard III(B) Fair Dealing.

Among real estate investment forms, a mortgage REIT is most accurately described as a(n): A) equity investment. B) public debt investment. C) private debt investment.

B) public debt investment. Explanation Mortgage real estate investment trusts (REITs) are considered a form of public real estate debt investment. Other forms of public real estate debt include mortgage-backed securities (MBSs), commercial mortgage-backed securities (CMBSs), collateralized mortgage obligations (CMOs), covered bonds, mortgage REITs, and mortgage ETFs.

A permanent difference between pretax and taxable income is least likely to arise when a firm: A) receives tax-exempt interest. B) uses the installment sales method for financial reporting. C) pays premiums on life insurance of key employees.

B) uses the installment sales method for financial reporting. Explanation The installment sales method of revenue recognition does not result in permanent differences between pretax and taxable income. Premium payments on life insurance of key employees is an expense on the financial statements, but is not deducted on tax returns. Tax exempt interest is recognized as revenue on the financial statements. These items result in permanent differences between pretax income and taxable income.

Angie Franklin, CFA, who covers technology stocks, joins a conference call for analysts presented by Cynthia Lucas, chief technology officer for LevelTech. Lucas tells the analysts that overseas shipments of the company's important new product are going to be delayed due to manufacturing defects, which is new information to the analysts. After the meeting Franklin changes her rating on LevelTech from "buy" to "hold" and sends a note to accounts recommending the sale of LevelTech. Franklin: A) did not violate the Standards. B) violated the Standard on nonpublic information by revising her rating on LevelTech. C) violated the Standard on fair dealing by rating the stock a "hold" but recommending sale of the shares to her accounts.

B) violated the Standard on nonpublic information by revising her rating on LevelTech. Explanation Telling a selected group of analysts new information does not constitute public disclosure, and therefore acting or causing others to act on this information is a violation of Standard II(A) Material Nonpublic Information. Recommending the sale of a stock rated as a "hold" is not a violation of Standard III(B) Fair Dealing.

An analyst gathered the following data about a company: Collections from customers are $5,000. Depreciation is $800. Cash expenses (including taxes) are $2,000. Tax rate = 30%. Net cash increased by $1,000. If inventory increases over the period by $800, cash flow from operations equals: A) $1,600. B)$2,400. C) $3,000.

C) $3,000. Explanation Use the direct method. Collections from customers$5,000Cash expenses-$2,000Cash flow from operations$3,000 Cash expenses are given. If you had been given COGS, you would need to adjust that for inventory changes to get cash expenses for inputs. Depreciation is a non-cash change. Changes in depreciation are used with the indirect method. Net change in cash will reflect CFI and CFF, not just CFO.

Annual spot interest rates are as follows: 1-year: 3.5% 2-year: 3.7% 3-year: 4.0% 4-year: 4.2% Based on these spot rates, the 4-year par rate is closest to: A) 3.92%. B) 4.05%. C) 4.18%.

C) 4.18%. Explanation The par rate is the coupon rate that would result in a bond value equal to par, given the spot rates in the market.

An analyst estimates a stock has a 40% probability of earning a 10% return, a 40% probability of earning a 12.5% return, and a 20% probability of earning a 30% return. The stock's standard deviation of returns based on this returns model is closest to: A) 3.74%. B) 5.75%. C) 7.58%.

C) 7.58%. Explanation Expected value = (0.4)(10%) + (0.4)(12.5%) + (0.2)(30%) = 15% Variance = (0.4)(10 − 15)^2+ (0.4)(12.5 − 15)^2+ (0.2)(30 − 15)^2 = 57.5 Standard deviation =√57.5=7.58%

Which of the following statements about short-selling equity shares is least accurate? A) A short seller is required to set up a margin account. B) A short sale involves securities the investor does not own. C) A short seller loses if the price of the stock sold short decreases.

C) A short seller loses if the price of the stock sold short decreases. Explanation The short seller loses if the stock price increases. The other choices are accurate statements.

resources when which of the following actual rates is below its target rate? A) Interest rate. B) Inflation rate. C) Exchange rate.

C) Exchange rate. Explanation With exchange rate targeting, a central bank's ability to increase the value of the domestic currency is limited by the amount of foreign reserves the country has available to buy its own currency in the foreign exchange market. While inflation targeting and interest rate targeting have limitations (e.g., liquidity trap conditions may exist, interest rates are bounded by zero), the central bank's resources are not typically a limitation.

At his golf club on Saturday morning, Paul Corwin, CFA, sees Frank Roberts, a friend and institutional client of his, who tells him that he is planning to sell his house on the 7th fairway. While golfing that day, Corwin tells Robert Lowe, a realtor, that Roberts is planning to sell his house and may need a realtor. He also tells Lowe that he manages an equities account for Roberts. If Corwin has not received permission from Roberts, he has violated the Standard on preservation of confidentiality: A) both by disclosing Roberts' plan to sell his home and that he is a client. B) by disclosing Roberts' plan to sell his home but not by mentioning that he was a client. C) by disclosing that Roberts is a client of his but not by mentioning Roberts' plan to sell his home.

C) by disclosing that Roberts is a client of his but not by mentioning Roberts' plan to sell his home. Explanation Corwin violated Standard III(E) Preservation of Confidentiality by revealing his business relationship with Roberts without permission. Because the information that Roberts' plans to sell his home is not received as part of his professional relationship with Roberts, it is not covered by the Standard.

Relative to economic cycles, credit cycles: A) coincide with economic cycles. B) tend to dampen economic cycles. C) have historically been longer than economic cycles.

C) have historically been longer than economic cycles. Explanation Economic cycles and credit cycles do not always coincide. On average, credit cycles have historically been longer than economic cycles. Data suggest that credit cycles may amplify economic cycles.

A borrower under a repurchase (repo) transaction would like to borrow exactly $100,000. If the repo haircut is 3%, the borrower must provide as collateral bonds worth: A) less than $103,000. B) exactly $103,000. C) more than $103,000.

C) more than $103,000. Explanation The repo haircut is determined as: Haircut = (Security Price - Purchase Price) / Security Price 0.03 = (Security Price - $100,000) / Security Price Security Price = $100,000 / 0.97 = $103,093

An analyst writes the following about two nations: 1. East Dumerde has a state-dominated domestic economy and conducts little foreign trade. 2. West Dumerde uses its large economy and geophysical resource endowment to discourage other nations from criticizing its human rights record. In this analyst's opinion, the geopolitics of both East Dumerde and West Dumerde are most accurately described as: A) hegemony. B) nationalism. C) non-cooperation.

C) non-cooperation. Explanation In this analyst's opinion, East Dumerde is best described as practicing autarky (nationalism and non-cooperation) and West Dumerde is best described as practicing hegemony (globalization and non-cooperation).