Try 2_CFA Institute 2012 Mock

Primary factors influencing the price elasticity of demand for a product are least likely to include: A) changes in consumer price expectations. B) the amount of time that has passed since the price change. C) the relative amount of consumer budgets spent on the product.

A) changes in consumer price expectations. Changes in consumer price expectations shift the aggregate demand curve to the right or left, but do not necessarily affect the price elasticity of demand for a product. The three primary factors influencing the price elasticity of demand for a product are the availability and closeness of substitute goods, the proportion of income spent on the product, and the time since the price change.

During 2010, the following events occurred at a company. The company: 1. purchased a customer list for $100,000, which is expected to provide equal annual benefits for the next 4 years. 2. recorded $200,000 of goodwill in the acquisition of a competitor. It is estimated that the acquisition would provide substantial benefits for the company for at least the next 10 years. 3. spent $300,000 on media placements announcing the company had donated products and services to the community. The CEO believes the firm's reputation was enhanced substantially and the company will likely benefit from it for the next 5 years. Based on those events, the amortization expense that the company should report in 2011 is closest to: A. $25,000. B. $45,000. C. $85,000.

A. $25,000. A is correct. The customer list is the only identifiable intangible asset, and it should be amortized on a straight-line basis over its expected future life: $100,000 ÷ 4 = $25,000/year. Goodwill is an unidentifiable intangible and should be tested for impairment but not amortized. All advertising and promotion costs, such as the media placements, are typically expensed. If the reputation of the company has been enhanced as the CEO suggests, this is an internally generated intangible that is not recorded on the balance sheet and is therefore not amortized.

The following information is available about a manufacturing company: $ million Cost of ending inventory computed using FIFO 4.3 Net realizable value 4.1 Current replacement cost 3.8 If the company is using International Financial Reporting Standards (IFRS), instead of U.S. GAAP, its cost of goods sold ($ millions) is most likely: A. 0.3 lower. B. the same. C. 0.3 higher.

A. 0.3 lower. A is correct. Under IFRS, the inventory would be written down to its net realizable value ($4.1 million), whereas under U.S. GAAP, market is defined as current replacement cost and hence would be written down to its current replacement cost ($3.8 million). The smaller write down under IFRS will reduce the amount charged to the cost of goods sold, as compared with U.S. GAAP, and result in a lower cost of goods sold of $0.3 million.

The "per unit contribution margin" for a product is $12. Assuming fixed costs of $12,000, interest costs of $3,000, and taxes of $2,000, the operating breakeven point (in units) is closest to: A. 1,000. B. 1,250. C. 1,417.

A. 1,000. A is correct. The operating breakeven point is: fixed costs / contribution margin = 12,000 / 12

A retail company that leases the majority of its space has: • total assets of $4,500 million, • total long-term debt of $2,125 million, and • average interest rate on debt of 12%. Note 8 to the 2011 financial statements contains the following information about the company's future beginning of year lease commitments: Note 8: Operating leases Year Millions 2012 $ 200 2013 $ 200 2014 $ 200 2015 $ 200 2016 $ 200 Total $ 1,000 After adjustment for the off-balance-sheet financing, the debt-to-total-assets ratio for the company is closest to: A. 55%. B. 57%. C. 65%.

A. 55%. Explain appropriate analyst adjustments to a company's financial statements to facilitate comparison with another company. A is correct. The present value of the operating leases should be added to both the total debt and the total assets. The present value of an annuity due of $200 for 5 years at 12% = $807.5. (N = 5; I = 12; PMT = 200; Mode = Begin) Adjusted debt to total assets = (2,125 + 807.5) ÷ (4,500 + 807.5) = 55.3%.

A 30-day $10,000 U.S. Treasury bill sells for $9,932.40. The discount-basis yield (%) is closest to: A. 8.11. B. 8.17. C. 8.28.

A. 8.11.

Based on a need to borrow $2 million for one month, which of the following alternatives has the least expensive effective annual cost? A. A banker's acceptance with an all-inclusive annual rate of 6.1% B. A credit line at 6.0% annually with a $4,000 annual commitment fee C. Commercial paper at 5.9% annually with a dealer's annual commission of $1,500 and a backup line annual cost of $3,500

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

Which of the following is most likely considered an example of matrix pricing? A. Debt-rating approach only B. Yield-to-maturity approach only C. Both the yield-to-maturity and the debt-rating approaches

A. Debt-rating approach only A is correct. The debt-rating approach is an example of matrix pricing. The yield-to-maturity approach is not an example of matrix pricing.

Ileana Inkster, CFA, was recently offered a senior management position within the trust department at a regional bank. The department is new, but the bank has plans to expand it significantly over the next few months. Inkster has been told she will be expected to help grow the client base of the trust department. She is informed the trust department plans to conduct educational seminars and pursue the attendees as new clients. Inkster notices recent seminar advertisements prepared by the bank's marketing department do not mention investment products will be for sale at the seminar. The ads indicate attendees can "learn how to immediately add $100,000 to their net worth." What should Inkster most likely do to avoid violating any CFA Institute Standards of Professional Conduct? A. Decline to accept the new position B. Accept the position and revise the marketing material C. Accept the position and inform senior management of inadequate compliance procedures

A. Decline to accept the new position A is correct because the prospective supervisor's first step should be to not take the position. Accepting the position with inadequate procedures in place or improper marketing material would leave Inkster at risk of incurring a violation of the Code and Standards—Standard IV (C) Responsibilities of Supervisors. She could agree to be hired as an interim consultant with the bank in order to implement adequate procedures before taking on any supervisory role.

The greater of either zero or the present value of the exercise price minus the underlying price is most likely the lower bound on the price of a(n): A. European put option. B. American put option. C. American call option.

A. European put option. A is correct because, for a European put, the exercise price must be adjusted to the present value because the option can only be exercised on expiration.

The following items are from a company's cash flow statement. Classification of cash flow; Description; Amount (£000s) Operating activities; Cash received from customers; 55,000 Investing activities; Interest and dividends received; 10,000 Financing activities; Net repayment of revolving credit loan; 12,000 Which of the following standards and formats did the company most likely use in the preparation of its financial statements? A. IFRS, direct format B. IFRS, indirect format C. Either IFRS or U.S. GAAP, direct format

A. IFRS, direct format A is correct. The direct method of cash flow statement presentation shows the specific cash inflows and outflows that result in reported cash flow from operating activities (cash from customers, cash to suppliers, etc.). Companies using IFRS can decide to report interest and dividend receipts as either an investing or operating activity, whereas under U.S. GAAP, they must report such income as an operating activity. The listed operating and investment activities indicate that the company reports under IFRS, using the direct method.

Compared with investment in an open-ended index mutual fund, which of these is least likely a benefit to an investor in an index exchange traded fund (ETF) on the same index? A. Lower bid-ask spreads B. Managing the timing of capital gains C. Ability to sell short and buy on margin

A. Lower bid-ask spreads A is correct because open-ended mutual fund shares are created and redeemed at net asset value with no bid-ask spread, whereas ETFs trade like stocks with a bid-ask spread.

Which of the following is least likely to be a general feature underlying the preparation of financial statements within the IFRS Conceptual Framework? A. Matching B. Materiality C. Accrual basis

A. Matching A is correct. The IFRS Conceptual Framework specifies a number of general features underlying the preparation of financial statements, including materiality and accrual basis. Matching is not one of those general features; it is a general principle of expense recognition.

Which of the following capital budgeting techniques is most directly related to stock price? A. Net present value B. Profitability index C. Discounted payback period

A. Net present value "The NPV criterion is the criterion most directly related to stock prices. If a corporation invests in positive NPV projects, these should add to the wealth of its shareholders."

Beth Kozniak, a CFA candidate, is an independent licensed real estate broker and a well-known property investor. She is currently brokering the sale of a commercial property on behalf of a client in financial distress. If the client's building is not sold within 30 days, he will lose the building to the bank. A year earlier, another client of Kozniak's had expressed interest in purchasing this same property. However, she is unable to contact this client, nor has she discovered any other potential buyers. Given her distressed client's limited time frame, Kozniak purchases the property herself and foregoes any sales commission. Six months later, she sells the property for a nice profit to the client who had earlier expressed interest in the property. Does Kozniak most likely violate the CFA Institute Standards of Professional Conduct? A. No B. Yes, she did not disclose her potential conflicts of interest to either client. C. Yes, she profited on the real estate to the detriment of her financially stressed client.

A. No A is correct because Kozniak does not appear to have violated any CFA Institute Standards of Professional Conduct. Because she is known in the market for investing and brokering property and both parties have worked with Kozniak in the past, both parties would know of her interests. In addition, in both cases she acts for her own account as a primary investor, not as a broker. She buys the property for her own portfolio and then sells the property from her own portfolio. Therefore, Kozniak did not violate Standard VI (A) Disclosure of Conflicts. When she purchased the property for her portfolio, she saved her client from losing the building to the bank and did not charge a sales commission. Because the sale of the property to her other client did not take place until six months after her purchase and she was unable to contact the client who had earlier expressed interest prior to her purchase, she cannot be accused of violating any loyalty, prudence, or care to either client (Standard III (A) Loyalty, Prudence, and Care).

Which of the following measures of profit is most likely necessary for a firm to stay in business in the long run? A. Normal B. Economic C. Accounting

A. Normal A is correct. Normal profit is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs. This is all that a firm needs to earn in the long run to remain in business. Failing to earn normal profits over the long run has a debilitating impact on the firm's ability to access capital and to function properly as a business enterprise.

Which of these embedded options most likely benefits the investor? A. The floor in a floating-rate security B. An accelerated sinking fund provision C. The call option in a fixed-rate security

A. The floor in a floating-rate security A is correct because the floor guarantees a minimum rate the investor will earn.

According to the industry life-cycle model, an industry in the shakeout stage is best characterized as experiencing: A. slowing growth and intense competition. B. little or no growth and industry consolidation. C. relatively high barriers to entry and periodic price wars.

A. slowing growth and intense competition. A is correct. The shakeout stage is usually characterized by slowing growth, intense competition, and declining profitability. During the shakeout stage, demand approaches market saturation levels because few new customers are left to enter the market. Competition is intense as growth becomes increasingly dependent on market share gains.

As a condition of his employment with an investment bank, Abasi Hasina, CFA, was required to sign an employment contract, including a non-compete clause restricting him from working for a competitor for three years after leaving the employer. After one year, Hasina quits his job for a comparable position with an investment bank in a country where non-compete clauses are illegal. Lawyers with whom he consulted prior to taking the new position determined the non-compete clause was a violation of human rights and thus illegal. Did Hasina most likely violate the CFA Institute Code of Ethics? A. Yes B. No, because the non-compete clause violates his human rights C. No, because the non-compete clause is illegal in the new country of employment

A. Yes A is correct because by failing to adhere to the non-compete clause he agreed to abide by when signing his employment contract, Hasina shows a lack of professional integrity toward his employer. This behavior reflects poorly on the good reputation of members and is a violation of the Code of Ethics, which states that members and candidates must act with integrity, and Standard I (D) Misconduct, which states that members and candidates must not engage in any professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence. The Code of Ethics at times requires a member or candidate to uphold a higher standard than that required by law, rule, or regulation, or in this case the strict application of the employment agreement.

The financial statement that would be most helpful to an analyst in understanding the changes that have occurred in a company's retained earnings over a year is the statement of: A. changes in equity. B. financial position. C. comprehensive income.

A. changes in equity. A is correct. The statement of changes in equity reports the changes in the components of shareholders' equity over the year, which would include the retained earnings account.

The three main sources of return for commodities-related investments are: A. collateral yield, roll yield, and spot price return. B. collateral yield, convenience yield, and roll yield. C. convenience yield, dividend yield, and spot price return.

A. collateral yield, roll yield, and spot price return. A is correct because the three main sources of return for a commodities investment are collateral yield, roll yield, and spot price return.

When market participants expect the spot price of a commodity to be higher in the future, the commodity market is most likely said to be in: A. contango. B. full carry. C. backwardation.

A. contango. A is correct because when a commodity market is in contango, futures prices are higher than the spot price because market participants believe the spot price will be higher in the future. When spot prices are above the futures price, the market is said to be in backwardation.

Euribor would most likely be the interest rate quoted on a large: A. euro time deposit in Toronto. B. dollar time deposit in Frankfurt. C. euro dollar time deposit in the United States.

A. euro time deposit in Toronto. A is correct because Euribor is the interest rate on large euro currency time deposits traded in most major world cities.

Consider two countries, A and B. Country A is a closed country with a relative abundance of labor and holds a comparative advantage in the production of textiles. Country B has a relative abundance of capital. When the textile trade is opened between the two countries, Country A will most likely experience a favorable impact on: A. labor. B. capital. C. both capital and labor.

A. labor. A is correct. As a country opens up to trade, the benefit accrues to the abundant factor, which is labor in Country A.

Which of the following is most likely a reason that a lessor can offer attractive lease terms and lower cost financing to a lessee? Because the: A. lessor retains the tax benefits of ownership. B. lessor avoids reporting the liability on its balance sheet. C. lessee is better able to resell the asset at the end of the lease.

A. lessor retains the tax benefits of ownership. A is correct. The lessor often retains the tax benefits of ownership of the leased asset, which allows the lessor to pass those savings along to the lessee in the form of lower financing costs or other attractive terms.

Carolina Ochoa, CFA, is the chief financial officer at Pantagonia Computing. Ochoa is currently the subject of an inquiry by Pantagonia's corporate investigations department. The inquiry is the result of an anonymous complaint accusing Ochoa of falsifying travel expenses for senior management related to a government contract. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, it is most appropriate for Ochoa to disclose the allegations: A. on her Professional Conduct Statement. B. to CFA Institute when the investigation concludes. C. to CFA Institute if the allegations are proven correct.

A. on her Professional Conduct Statement. A is correct because members and candidates must self-disclose on the annual Professional Conduct Statement all matters that question their professional conduct, such as involvement in civil litigation or criminal investigations or being the subject of a written complaint.

The least likely reason that a security analyst needs to understand the accounting process is to: A. prevent earnings manipulation by management. B. make adjustments to reflect items not reported in the financial statements. C. aid in the assessment of management's judgment in accruals and valuations.

A. prevent earnings manipulation by management. A is correct. Understanding the accounting process may assist an analyst in identifying earnings manipulation, but it will not prevent the manipulation of earnings by management. It is important for analysts to understand the accounting process so they can make adjustments for items not reported and to aid in the assessment of management's judgment of accruals and valuations.

A two-tailed t-test of the null hypothesis that the population mean differs from zero has a p-value of 0.0275. Using a significance level of 5%, the most appropriate conclusion is: A. reject the null hypothesis. B. accept the null hypothesis. C. the chosen significance level is too high.

A. reject the null hypothesis. A is correct. The p-value is the smallest level of significance at which the null hypothesis can be rejected. In this case, the given p-value is less than the given level of significance and we reject the null hypothesis.

The spot exchange rate between the U.S. dollar (USD) and the Swiss franc (CHF) is 1.34 USD/CHF. The 1-year riskless interest rate in the United States is 3%, and the 1-year interest rate in Switzerland is 5%. The arbitrage-free 1-year USD/CHF forward rate is closest to: A) 0.761 USD/CHF. B) 1.315 USD/CHF. C) 1.366 USD/CHF.

B) 1.315 USD/CHF. The arbitrage-free one-year forward rate is computed as follows: spot rate × (1 + idomestic) / (1 + iforeign), or 1.34 × (1.03 / 1.05) = 1.3145 USD/CHF.

Under the IASB Conceptual Framework, one of the qualitative characteristics of useful financial information is that different knowledgeable users would agree that the information is a faithful representation of the economic events that it is intended to represent. This characteristic is best described as: A. verifiability. B. comparability. C. understandability.

A. verifiability. A is correct. Under the International Accounting Standards Board's Conceptual Framework, verifiability is the qualitative characteristic that means that different knowledgeable and independent users would agree that the information presented faithfully represents the economic events that it is intended to represent.

At the beginning of the year, a company had total shareholders' equity consisting of ¥200,000 in common share capital and ¥50,000 in retained earnings. During the year, the following events occurred: Net income reported: 42,000 Dividends paid: 7,000 Unrealized loss on available-for-sale investments: 3,000 Repurchase of company stock, to be held as Treasury stock: 6,000 The total shareholders' equity at the end of the year is closest to: A. ¥276,000. B. ¥279,000. C. ¥282,000.

A. ¥276,000.

An analyst is evaluating an investment in an apartment complex based on the following annual data: Gross potential rental income $2,100,000 Estimated vacancy and collection expenses 3% Operating expenses $1,600,000 Depreciation 300,000 Current mortgage rate 5% Financing percentage 80% Market capitalization rate 12% Cost of equity 15% Based on the income approach, the value of the investment is closest to: A. $1,141,667. B. $3,641,667. C. $6,242,857.

B. $3,641,667. B is correct because using the income approach, ($2,100,000 - .03 × $2,100,000 - $1,600,000)/0.12 = $437,000/0.12 = $3,641,667. The property is appraised based on cash flows and is independent of the financing decision. Thus, the market capitalization rate is used rather than the lending rate. Depreciation is also not deducted because it is implicitly assumed that repairs and maintenance allow the investor to keep the building in good condition.

An investor evaluating a company's common stock for investment has gathered the following data. Earnings per share (2012) $2.50 Dividend payout ratio (2012) 60% Dividend growth rate expected during Years 2013 and 2014 25% Dividend growth rate expected after Year 2014 5% Investors' required rate of return 12% Using the two-stage dividend discount model, the value per share of this common stock in 2012 is closest to: A. $28.57. B. $31.57. C. $38.70.

B. $31.57.

A futures trader takes a long position of 10 contracts. The initial margin requirement is $10 per contract and the maintenance margin requirement is $7 per contract. She deposits the required initial margin on the trade date. On Day 3, her margin account balance is $40. What is the variation margin on Day 4? A. $30 B. $60 C. $70

B. $60 B is correct because on any day when the balance in the margin account falls below the maintenance margin, the trader must deposit sufficient funds to bring the balance back up to the initial margin requirement. This additional amount is called the "variation margin." Therefore, $100 - $40 = $60 variation margin.

In a sales-driven pro forma analysis, net income grows from $1.2 million to $1.26 million. Assuming a dividend payout ratio of 40%, the increase in retained earnings is closest to (in $ millions): A. 0.720. B. 0.756. C. 1.260.

B. 0.756. B is correct. The retained earnings in a pro forma analysis increases by net income less dividends:

Independent samples drawn from normally distributed populations exhibit the following characteristics: Sample Size; Sample mean; Sample SD A 25; 200; 45 B 18; 185; 60 Assuming that the variances of the underlying populations are equal, the pooled estimate of the sample variance is 2,678.05. The t-test statistic appropriate to test the hypothesis that the two population means are equal is closest to: A. 0.29. B. 0.94. C. 1.90.

B. 0.94. Mean deviation = 7.3 SD = 51.75 mean deviation / standard error

The current spot rate for the USD/EUR is 0.7500. The forward rate for the EUR/Australian dollar (AUD) is 1.4300, which represents a 400 point forward premium to the spot rate (scaled up by four decimal places). The USD/AUD spot rate is closest to: A. 1.0296. B. 1.0425. C. 1.1154.

B. 1.0425. Convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation. .75* (1.43 - 400/10,000) = 1.0425

An investor's transactions in a mutual fund and the fund's returns over a four-year period are provided in the table below: Based on these data, the money-weighted return (or internal rate of return) for the investor is closest to: A. 2.15%. B. 3.96%. C. 7.50%.

B. 3.96%.

A fixed income security's current price is 101.45. You estimate that the price will rise to 103.28 if interest rates decrease 0.25% and fall to 100.81 if interest rates increase 0.25%. The security's effective duration is closest to: A. 1.22. B. 4.87. C. 9.74.

B. 4.87. B is correct because the effective duration equals (Price if rates fall - Price if rates rise)/(2 × Current price × Change in rates) = (103.28 - 100.81)/(2 × 101.45 × 0.0025) = 4.87.

An analyst has established the following prior probabilities regarding a company's next quarter's earnings per share (EPS) exceeding, equaling, or being below the consensus estimate. Prior probabilities EPS exceed consensus 25% EPS equal consensus 55% EPS are less than consensus 20% Several days before releasing its earnings statement, the company announces a cut in its dividend. Given this information, the analyst revises his opinion regarding the likelihood that the company will have EPS below the consensus estimate. He estimates the likelihoods the company will cut the dividend given that EPS exceed/meet/fall below consensus as reported below. P(Cut div│EPS exceed) 5% P(Cut div│EPS equal) 10% P(Cut div│EPS below) 85% Using Bayes' formula (given above), the updated (posterior) probability that the company's EPS are below the consensus is closest to: A. 24%. B. 72%. C. 85%.

B. 72%. 85%*20% / (23.75%) - i.e. sum product of posterior probs

Which of the following is least likely to be directly reflected in the returns on a commodity index? A. Roll yield B. Changes in the spot prices of underlying commodities C. Changes in the futures prices of commodities in the index

B. Changes in the spot prices of underlying commodities B is correct. Commodity index returns reflect the changes in future prices and the roll yield. Changes in the underlying commodity spot prices are not reflected in a commodity index.

Which of the following most likely trades in the secondary markets? A. Open-end funds B. Closed-end funds C. Unit investment trusts

B. Closed-end funds B is correct because closed-end funds trade in the secondary markets and do not offer a redemption feature.

Given two otherwise identical bonds, when interest rates rise, the price of Bond A declines more than the price of Bond B. Compared to Bond B, Bond A most likely: A. is callable. B. has a lower coupon. C. has a shorter maturity.

B. has a lower coupon. B is correct because the lower the coupon rate, the greater the bond's price sensitivity to changes in interest rates.

According to International Financial Reporting Standards, which of the following conditions should be satisfied in order to report revenue on the income statement? A. Payment has been received. B. Costs can be reliably measured. C. Goods have been delivered to the customer.

B. Costs can be reliably measured. B is correct. The IFRS conditions that should be met include that the costs incurred can be reliably measured, and it is likely that the economic benefits will flow to the entity, not the actual receipt of any payment, and that the significant risks and rewards of ownership have been transferred, which is normally when the goods have been delivered, but not always.

Which of the following is least likely one of main purposes of derivative markets? A. Reveal prices and volatility of the underlying assets B. Improve market efficiency by lowering transaction costs C. Enable companies to more easily practice risk management

B. Improve market efficiency by lowering transaction costs B is correct because derivative markets improve market efficiency for the underlying assets by increasing market fairness and competitiveness, not by lowering transaction costs. Low transactions costs are a characteristic of derivative markets, not one of their purposes.

A retailer provides credit cards only to its most valued customers who pass a rigorous credit check. A credit card customer ordered an item from the retailer in May. The item was shipped and delivered in July. The item appeared on the customer's July credit card statement and was paid in full by the due date in August. The most appropriate month in which the retailer should recognize the revenue is: A. May. B. July. C. August.

B. July. B is correct. The appropriate time to recognize revenue would be in the month of July; the risks and rewards have been transferred to the buyer (shipped and delivered), the revenue can be reliably measured, and it is probable that the economic benefits will flow to the seller (the rigorous credit check was completed). Neither the actual payment date nor the credit card statement date is relevant here.

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

B. Qc and Qb.

An observation that stocks with above average price-to-earnings ratios have consistently underperformed those with below average price-to-earnings ratios least likely contradicts which form of the market efficiency? A. Weak form B. Strong form C. Semi-strong form

B. Strong form B is correct. The observation that stocks with high above-average price-to-earnings ratios have consistently underperformed those with below-average price-to-earnings ratios is a cross-sectional anomaly. It is a contradiction to the semi-strong form of market efficiency and weak-form market efficiency because all the information used to categorize stocks by their price-to-earnings ratios is publicly available.

Consumer surplus is best described as: A. always less than or equal to zero. B. always greater than or equal to zero. C. at times positive and at other times negative.

B. always greater than or equal to zero. B is correct. Consumer surplus arises when one pays less for a good than the maximum price that she or he was willing to pay for it. Consumer surplus is the value (or marginal benefit) of a good minus the price paid for it, summed over the quantity bought. Because no consumer will (willingly) pay a price greater than the marginal value or benefit, consumer surplus is always positive.

When a bank creates a collateralized loan obligation (CLO) to divest of commercial loans that it owns, the process is best described as a(n): A. arbitrage transaction. B. balance sheet transaction. C. capital infusion transaction.

B. balance sheet transaction. B is correct because a balance sheet transaction is one that removes assets from the balance sheet of the institution and is often motivated by the desire to reduce the institution's risk.

Four countries operate within a customs union. One country proposes moving to a common market structure. What additional level of economic integration between the countries would most likely arise if this change took place? They would: A. establish common trade barriers against non-members. B. begin to allow free movement of the factors of production. C. establish common economic institutions and coordination of economic policies.

B. begin to allow free movement of the factors of production. B is correct. A common market structure incorporates all aspects of the customs union and extends it by allowing free movement of factors of production among members.

Dorian Solot, CFA, is responsible for a team of research analysts at Apac Bank, located in a country with strict laws prohibiting intellectual property transfers. Solot believes the work of one of her analysts, Blaine Paddock, CFA, is not completed as carefully and thoroughly as it should be. Solot completely reviews all of Paddock's research and confirms her suspicions. Solot then confronts Paddock about his poor quality research and tells him he can leave Apac voluntarily or be fired. Paddock chooses to leave the bank, walking out with his personal papers and research notes that were created prior to his joining Apac. Subsequently, Paddock uses this intellectual property to help establish a high-net-worth investment advisory firm. When a prospective client asks Paddock if he left Apac because of questions on the quality of his work, Paddock says it was to start his own business. Paddock least likely violated the CFA Institute Standards of Professional Conduct concerning his: A. research. B. intellectual property. C. prospective client disclosure.

B. intellectual property. B is correct because the analyst has not violated Standard I (A) Knowledge of the Law related to intellectual property because there is no indication the analyst was ignorant of, or has violated, any law related to intellectual property. Taking his personal papers and research notes would not be a violation of strict local laws on intellectual property transference because these documents were created by the analyst prior to his employment at Apac.

The slope of the security market line (SML) represents the portion of an asset's expected return attributable to: A. total risk. B. market risk. C. diversifiable risk.

B. market risk. B is correct. The slope of the SML is the market risk premium, E(Rm) - Rf. It represents the return of the market less the return of a risk-free asset. Thus, the slope represents the portion of expected return that reflects compensation for market or systematic risk.

Raymond Ortiz, CFA, provides investment advice to high-net-worth investors. Ortiz has just completed an analysis of Continental Wheat, a manufacturer of wheat-based food products. He rated the company a long-term hold for investors seeking growth and income. Ortiz's analysis included a review of the company's management team, financial data, pro forma financial positions, dividends and dividend policy, and a comparison of Continental with its competitors. Although he does not tell anyone, five years ago, Ortiz worked for and managed the commodities derivatives trading unit of Continental. As part of his compensation at Continental, he received stock, which he still owns. Based upon his research, Ortiz recommends Continental to clients who have a moderate risk tolerance. Two weeks later Continental announces its quarterly earnings are 30% less than a year ago. Consequently, shares of Continental drop by 50%. Ortiz most likely violated the CFA Institute Code of Ethics and Standards of Professional Conduct related to his stock: A. research. B. ownership. C. recommendation.

B. ownership. B is correct because there is a violation of Standard VI (A) Disclosure of Conflicts; the analyst worked for Continental and still has ties to the company in the form of his stock ownership.

When purchasing a futures contract, the initial margin requirement refers to the: A. minimum account balance required as prices change. B. performance bond ensuring fulfillment of the obligation. C. amount needed to finance the purchase of the underlying asset.

B. performance bond ensuring fulfillment of the obligation. B is correct because the initial margin required is a good faith deposit or performance bond.

A BBB-rated corporation wishes to issue debt to finance its operations at the lowest cost possible. If it decides to sell a pool of receivables into a special purpose vehicle (SPV), its primary motivation is most likely to: A. allow the corporation to retain a first lien on the assets of the SPV. B. segregate the assets into a bankruptcy-remote entity for bondholders. C. receive a guaranty from the SPV to improve the corporation's credit rating.

B. segregate the assets into a bankruptcy-remote entity for bondholders. B is correct because a key motivation for a corporation to establish a special purpose vehicle (SPV) is to separate it as a legal entity. In the case of bankruptcy for the corporation, the SPV is unaffected because it is not a subsidiary of the corporation. Given this arrangement, the SPV can achieve a rating as high as AAA and borrow at lower rates than the corporation.

A firm reported the following financial statement items: Net income 2,100 Non-cash charges 400 Interest expense 300 Capital expenditure 210 Working capital expenditures 0 Net borrowing 1,600 Tax rate 40% The free cash flow to the firm is closest to: A. €2,110. B. €2,470. C. €2,590.

B. €2,470. 2100 +400 +300*(1-tax) -210

On 1 January 2011 the market rate of interest on a company's bonds is 5% and it issues a bond with the following characteristics: Face value €50 million Coupon rate, paid annually 4% Time to maturity 10 years (31 December 2020) Issue price (per €100) 92.28 If the company uses IFRS, its interest expense (in millions) in 2011 is closest to: A. €1.846. B. €2.307. C. €2.386.

B. €2.307. B is correct. IFRS requires the effective interest method for the amortization of bond discounts/premiums. The bond is issued for 0.9228 × €50 million = €46.140. Interest expense = Liability value × Market rate at issuance: 0.05 × €46.140 = €2.307.

A company recently purchased a warehouse property and related equipment (shelving, forklifts, etc.) for €50 million, which were valued by an appraiser as follows: Land €10 million, building €35 million, and equipment €5 million. The company incurred the following additional costs in getting the warehouse ready to use: • €2.0 million for repairs to the building's roof and windows • €0.5 million to modify the interior layout to meet their needs (moving walls and doors, inserting and removing partitions, etc.) • €0.1 million on an orientation and training session for employees to familiarize them with the facility The cost to be capitalized to the building account (in millions) for accounting purposes is closest to: A. €37.0. B. €37.5. C. €38.5.

B. €37.5. B is correct. The capitalized cost of the building would include the other costs that are directly attributable to the building and are involved in extending its life or getting it ready to use: Initial cost €35.00 Repairs to roof and windows 2.00 Modifications to interiors 0.50 Total cost €37.5 million

An analyst collects the following data related to paired observations for Sample A and Sample B. Assume that both samples are drawn from normally distributed populations and that the population variances are not known. Paired Observation Sample A; B Value 25; 18 12; 9 -5; -8 6; 3 -8; 1 The t-statistic to test the hypothesis that the mean difference is equal to zero is closest to: A. 0.23. B. 0.27. C. 0.52. JTE Provided: Differences: 7, 3, 3, 3, -9 mean difference = 1.4

C. 0.52. SD = 6.066 SE = 6.066/ sqrt(5) = 2.713 t = 1.4/2.713 = .52

A financial contract offers to pay €1,200 per month for five years with the first payment made today. Assuming an annual discount rate of 6.5%, compounded monthly, the present value of the contract is closest to: A. €61,330. B. €61,663. C. €63,731.

B. €61,663. B is correct. Enter the following into a financial calculator: number of periods (5 × 12), N = 60; the discount rate, I/Y = (6.5/12) = 0.54166667; payment, PMT = 1,200. Calculate the present value, PV, using "Begin" mode because this is an annuity due (the first payment is to be made immediately). The solution is 61,662.62. Two alternate approaches are also available. 1) Find the PV of an ordinary annuity of 59 periods (60,462.62) and add 1,200 (the time zero first payment) to that value. 2) Find the PV of a 60-period ordinary annuity and multiply that value by one plus the monthly periodic interest rate (1.0054166667).

Using the company's income statement presented, its degree of operating leverage is closest to: Income Statement Revenues 9.8 Variable Operating Costs 7.2 Fixed Operating Costs 1.5 Operating Income 1.1 Interest 0.6 Taxable Income 0.5 Tax 0.2 Net Income 0.3 A. 1.1. B. 1.7. C. 2.4.

C. 2.4. (Revenues - Variable Operating Costs) / (Revenues - Variable - Fixed)

In a simple economy with no foreign sector, the following equations apply: Consumption function C = 2,500 + 0.80 × (Y - T) Investment function I = 500 + 0.30 × Y - 25 × r Government spending G = 1,000 Tax function T = -250 + 0.30 × Y Y: Aggregate income r: Real interest rate If the real interest rate is 3% and government spending increases to 2,000, the increase in aggregate income will be closest to: A. 1,000. B. 1,163. C. 7,143.

C. 7,143. Y = C + I + G

At the start of the year, a company's capital contributed by owners and retained earnings accounts had balances of $10,000 and $6,000, respectively. During the year, the following events took place: Net income earned $4,000 Interest paid on debt $ 500 Repayment of long-term debt $1,000 Proceeds from shares issued $1,000 Dividends paid $ 600 The end of year owners' equity is closest to: A. $19,400. B. $19,900. C. $20,400.

C. $20,400. No debt, yes dividend Start of year capital contributed by owners $10,000 Additional shares issued 1,000 Initial retained earnings 6,000 Net income 4,000 Dividends paid (600) Increase in retained earnings 3,400 Ending owners' equity $20,400

A trader who buys a stock priced at $64 on margin with a leverage ratio of 2.5 and a maintenance margin of 30% will most likely receive a margin call when the stock price is at or falls just below: A. $36.57. B. $44.80. C. $54.86.

C. $54.86.

For which of the following assets is it most appropriate to test for impairment at least annually? A. Land B. A patent with a legal life of 20 years C. A trademark with an expected indefinite life

C. A trademark with an expected indefinite life C is correct. Intangible assets with indefinite lives need to be tested for impairment at least annually. PP&E (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment.

For a 90-day U.S. Treasury bill selling at a discount, which of the following methods most likely results in the highest yield? A. Money market yield B. Discount-basis yield C. Bond equivalent yield

C. Bond equivalent yield

Which of the following is least likely a reason for discounting the value of stock in a closely held company? A. Illiquidity B. Marketability C. Controlling interest

C. Controlling interest C is a correct because company control would increase the value of the closely held company or add a premium.

Which of the following statements regarding biases in hedge fund performance in hedge fund databases is least likely correct? A. Only hedge fund managers with good track records enter the database, creating a positive bias. B. The correlations between asset class returns are artificially low when underlying assets trade infrequently. C. Hedge fund database administrators decide which funds to include in the database to overcome self-selection bias.

C. Hedge fund database administrators decide which funds to include in the database to overcome self-selection bias. C is correct because hedge fund managers themselves, not database administrators, decide whether they want to be included in a database. Managers who have funds with an unimpressive track record will not wish to have that information exposed.

Which of the following statements most closely relates to the concept of moneyness? A. The sum of money the option buyer pays the seller is called the premium. B. Both call and put option prices decline as the time to expiration becomes shorter. C. One would never exercise a call option if the price of the underlying is below the strike price.

C. One would never exercise a call option if the price of the underlying is below the strike price. C is correct because only an in-the-money option would be exercised. Moneyness describes the relationship between the price of the underlying and an option's exercise price.

Which of the following is least likely a tool used by the U.S. Federal Reserve Bank to directly influence the level of interest rates? A. Verbal persuasion B. Open market operations C. Setting the rate on 30-year bonds

C. Setting the rate on 30-year bonds C is correct because the U.S. Federal Reserve Bank (Fed) uses policy tools to directly influence short-term interest rates. It only indirectly influences long-term interest rates. The market, not the Fed, sets rates on 30-year bonds.

Prudence Charmaine, a CFA charterholder, was recently accused in writing of cheating on a professional accounting exam. She denied cheating and successfully defended herself against the allegation. As part of her defense and as evidence of her character, Charmaine stated she is a CFA charterholder and upholds the CFA Institute Code of Ethics and Standards of Professional Conduct. On her next annual Professional Conduct Statement, Charmaine does not report this allegation to CFA Institute. Did Charmaine most likely violate the CFA Institute Code of Ethics or Standards of Professional Conduct? A. No B. Yes, she improperly used the CFA Institute Code and Standards to defend herself. C. Yes, she did not report the allegation on her annual Professional Conduct Statement.

C. Yes, she did not report the allegation on her annual Professional Conduct Statement. C is correct because Charmaine should have reported the cheating allegation when making her annual Professional Conduct Statement. Even though she successfully defended herself against the charges and the charges were dropped, she has a responsibility to report the written complaint involving her integrity. The Code of Ethics requires CFA charterholders to practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.

A buyer would face the greatest risk of default with: A. a farmer making physical delivery on a short soybean futures position. B. an investment bank making cash settlement on a short euro futures position. C. a multinational firm making cash settlement on a short U.S. dollar forward contract.

C. a multinational firm making cash settlement on a short U.S. dollar forward contract. C is correct because in a forward contract, each party assumes the risk that the other party will default.

Consider three bonds that have the same yield to maturity and maturity. The bond with the greatest reinvestment risk is most likely the one selling at: A. par. B. a discount. C. a premium.

C. a premium. C is correct because yield to maturity is based on the assumption a bond is held to maturity, does not default, and has its coupon payments reinvested at the yield to maturity. The bond selling at a premium has the highest coupon rate and is expected to earn the most reinvestment income from reinvesting those coupon payments at the yield to maturity. If the reinvestment rate falls, this bond will suffer the greatest loss.

An investor sells a bond at the quoted price of $98.00. In addition he receives accrued interest of $4.40. The clean price of the bond is: A. par value plus accrued interest. B. accrued interest plus agreed upon bond price. C. agreed upon bond price excluding accrued interest.

C. agreed upon bond price excluding accrued interest. C is correct because the agreed upon bond price without accrued interest is simply referred to as the price as well as the clean price.

A technical analyst has detected a price chart pattern with three segments. The left segment shows a decline followed by a reversal to the starting price level. The middle segment shows a more pronounced decline than in the first segment and again a reversal to near the starting price level. The third segment is roughly a mirror image of the first segment. This chart pattern is most accurately described as: A. a triple bottom. B. a head and shoulders. C. an inverse head and shoulders.

C. an inverse head and shoulders. C is correct. An inverse head and shoulders pattern consists of a left segment that shows a decline followed by a reversal to the starting price level, a middle segment that shows a more pronounced decline than in the first segment and again a reversal to near the starting price level, and a third segment that is roughly a mirror image of the first segment.

Which of the following statements best describes the role of the International Organization of Securities Commissions (IOSCO)? The IOSCO: A. is responsible for regulating financial markets of member nations. B. is the oversight body to which the International Accounting Standards Board (IASB) reports. C. assists in attaining the goal of cross-border cooperation in combating violations of securities laws.

C. assists in attaining the goal of cross-border cooperation in combating violations of securities laws. C is correct. The IOSCO is not a regulator of financial markets. To ensure consistent application of international financial standards, it is important to have uniform regulation and enforcement across national boundaries. IOSCO assists in attaining this goal of uniform regulation as well as cross-border cooperation in combating violations of securities and derivatives laws.

To gain insight into what portion of the company's assets is liquid, an analyst will most likely use: A. the cash ratio. B. the current ratio. C. common-size balance sheets.

C. common-size balance sheets. C is correct. A common-size balance sheet expresses all balance sheet accounts as a percentage of total assets and provides insight into what portion of a company's assets is liquid. In contrast, cash and current ratios measure liquidity relative to current liabilities, not relative to total assets.

An analyst collects data relating to five commonly used measures of use of debt (leverage) and interest coverage for a randomly chosen sample of 300 firms. The data comes from those firms' fiscal year 2011 annual reports. This data is best characterized as: A. time-series data. B. longitudinal data. C. cross-sectional data.

C. cross-sectional data. C is correct. Data on some characteristics of companies at a single point in time are cross-sectional data.

The type of voting in board elections that is most beneficial to shareholders with a small number of shares is best described as: A. statutory voting. B. voting by proxy. C. cumulative voting.

C. cumulative voting. C is correct. Cumulative voting allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates. Thus, applying all of the votes to one candidate provides the opportunity for a higher level of representation on the board than would be allowed under statutory voting.

For periods beginning on or after 1 January 2011, the aggregate fair value of total firm assets most likely includes all: A. fee-paying discretionary accounts. B. fee- and non-fee-paying discretionary accounts. C. fee- and non-fee-paying discretionary and non-discretionary accounts.

C. fee- and non-fee-paying discretionary and non-discretionary accounts. C is correct because for periods beginning on or after 1 January 2011, total firm assets must include the aggregate fair value of all discretionary and non-discretionary assets managed by the firm. This includes both fee-paying and non-fee-paying portfolios (0.A.13).

A company has announced that it is going to distribute a group of long-lived assets to its owners in a spin-off. The most appropriate way to account for the assets until the distribution occurs is to classify them as: A. held for sale with no depreciation taken. B. held for use until disposal with no deprecation taken. C. held for use until disposal with depreciation continuing to be taken.

C. held for use until disposal with depreciation continuing to be taken. C is correct. Long-lived assets that will be disposed of other than by sale, such as a spin-off, an exchange for other assets, or abandonment, are classified as held for use until disposal and continue to be depreciated until that time.

Which of the following is least likely a benefit of the direct method for reporting cash flow from operating activities? Compared with the indirect method, the direct method provides: A. supplementary data under U.S. GAAP. B. details on the specific sources of operating receipts and payments. C. insight on differences between net income and operating cash flows.

C. insight on differences between net income and operating cash flows. C is correct. Providing insight on the differences between net income and cash flow is a benefit of the indirect method. The indirect method starts with net income and integrates a series of adjustments to calculate cash flow from operations.

First degree price discrimination is best described as pricing that allows producers to increase their economic profit while consumer surplus: A. increases. B. decreases. C. is eliminated.

C. is eliminated. C is correct. In the first degree price discrimination, the entire consumer surplus is captured by the producer: The consumer surplus falls to zero.

The least likely way to terminate a swap is to: A. purchase and exercise a swaption. B. pay the market value to the counterparty. C. sell an offsetting swap listed on an exchange.

C. sell an offsetting swap listed on an exchange. C is correct because swaps are not listed on an exchange.

Demand for a good is most likely to be more elastic when: A. the good is a necessity. B. a lesser proportion of income is spent on the good. C. the adjustment to a price change takes a longer time.

C. the adjustment to a price change takes a longer time. C is correct. The longer the time that has elapsed since a price change, the more elastic demand is. For example, if gas prices rise, consumers cannot quickly change their mode of transportation

In the classification of currency regimes, a currency board system (CBS) most likely differs from a fixed-rate parity system in that: A. a CBS has a discretionary target level of foreign exchange reserves. B. a CBS can peg to a basket of currencies but a fixed-rate system cannot. C. the monetary authority within a CBS does not act as a traditional lender of last resort.

C. the monetary authority within a CBS does not act as a traditional lender of last resort. C is correct. In a CBS, the monetary authority has an obligation to maintain 100% foreign currency reserves against the monetary base. It thus cannot lend to troubled financial institutions. As long as the country under a fixed-parity regime maintains its exchange peg, the central bank can serve as a lender of last resort.

Risk that can be attributed to factor(s) that impact a company or industry is best described as: A. market risk. B. systematic risk. C. unsystematic risk.

C. unsystematic risk. C is correct. Risk that is due to company-specific or industry-specific factors is referred to as unsystematic risk.

Return on Equity 3 Part Dupoint Approach or ROA and Leverage

ROE = Net Margin * Asset Turnover * Financial Leverage ROE = ROA * Leverage