Practice Test - Fact Recall Questions

Price Elasticity of Demand

% Change of Quantity Demanded/% Change in the Px of a Product or Slope Coefficient times Price/Quantity

Real Rate of Return

(1+Nominal Return)/(1+Inflation Rate)-1

Basic EPS

(Net Income - Preferred Dividends)/(Weighted Average of Shares Outstanding)

Choosing the floating rate coupon payment:

03/01 3M Referrence Rate + Spread = Coupon Paid on 06/01

What may lead to entrenchment ?

When the overall level of board director or manager compensation, or tenure, is excessive, the result may lead to the avoidance of risk motivated by a vested interest in keeping one's position. In such a scenario, directors may avoid speaking out against management in the interest of shareholders or other stakeholders.

What ethical principles are addressed within the Standards of Practice Handbook ?

1/ Individual Professionalism 2/ Integrity in Capital Markets 3/ Responsiblities to Clients 4/ Responsibilities to Employers 5/ Ethics Involved in Investment Analysis, Recommendations, and Actions 6/ Possible Conflicts of Interest

What are some procedures in relation to misconduct ?

1/Check references 2/Disseminate to all employees a list of potential violations by investment personnel and the associated disciplinary sanctions imposed by the firm

What are the four enhancing qualitative characteristics according to the Conceptual Framework ?

1/Comparability 2/Verifiability 3/Timeliness 4/Understandibility

What are the two principles of the Rules of Procedure for Proceedings Related to Professional Conduct ?

1/Confidentiality of Proceedings 2/Fair Process to the Member and Candidate

What is a Eurobond ?

1/Issued Internationally 2/ Outside Juresdiction of a Single Country

What are the two fundamental qualitative characteristics according to the Conceptual Framework ?

1/Relevance 2/Faithful Representation

Capital Allocation vs Capital Market Line

1/Risk Free & Risky 2/Risk Free & Market

Under IFRS impairment of a patent is tested by looking at carrying value vs ?

1/value in use (pv of future cash flows) 2/Fair value - costs to sell Lower is taken

After a firm presents a minimum required number of years of GIPS- compliant performance, the firm must present an additional year of performance each year, building up to a minimum of:

10 years

To be compliant with the GIPS standards, after a firm presents five years of performance history, it must build up to a minimum of:

10 years of compliant performance presentation

Points Equal

10000 x (Forward Rate - Spot Rate)

1 2 & 3 standard deviations

68.3%, 95.5% & 99.7%

In the absence of regulatory guidance or firm policies, CFA Institute recommends maintaining records for at least ?

7 years

Security market indexes are: constructed and managed like a portfolio of securities. simple interchangeable tools for measuring the returns of different asset classes. valued on a regular basis using the actual market prices of the constituent securities.

A

Directed Brokerage

A client directing a manager to use the client's brokerage to purchase goods or services for the client, member must seek best prices.

Describe a lien

A legal claim against assets that are usually used as collateral to satisfy a debt.

Judgment Sampling

A nonprobability sampling method in which participants are selected according to an experienced individual's belief that they will meet the requirements of the study

Exogenous Risk

A sudden or unanticipated risk that impacts either a country's cooperative stance, the ability of non-state actors to globalize, or both. Examples include sudden uprisings, invasions, or the aftermath of natural disasters.

Indenture

Also referred to as trust deed, is the legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders.

What is a recessionary gap ?

Amount below potential gdp.

What is one way to deal with analyst differences ?

An analyst can dissociate or remove their name from their final report.

Regret Aversion Bias

An emotional bias in which people tend to avoid making decisions that will result in action out of fear that the decision will turn out poorly.

Does an insurance company or a bank have a higher need for liquidity ?

Bank

Why does the inflation rate mostly lag the business cycle ?

Because it is generally pro-cyclical with a lag of a year or more.

Why does the 11th edition of the Standards of Professional Conduct require communication with clients regarding the risks and limitations of recommendations being made to clients ?

Because of the constant development of new and exotic financial instruments and strategies.

Why does price exceed value for a forward at initiation ?

Because the value begins at zero while the prices is positive. It is not until changes in prices, interest rates, etc. that you see a change in value (long/short).

Collateral Trust Bonds

Bonds backed by financial assets.

Margin Call Price

Borrowing per Share/(1 - Maintenance Requirement)

Bar Chart

Categorical Data

Requires members and candidates to give priority to investment transactions for clients and employers versus those in which a member or candidate is the beneficial owner. The requirement is not waived by an employer's approval (STATE THE STANDARD).

Conflicts of Interdest Standard

What is a caveat to voting proxies in relation to the duty of loyalty ?

Cost-benefit analysis of voting all the proxies for the client.

Slope of a Linear Regression

Covariance of (X,Y)/Variance(X)

% Change in Operating Income

DOL x % change in sales

What is a covered bond ?

Debt obligation backed by a segregated pool of assets called a "cover pool." When the assets that are included in the cover pool become non-performing the issuer must replace them with performing assets.

Market Value

Defined as current replacement cost, cannot be higher than net realizable value.

What is the policy behind offering different service levels ?

Different service levels should be disclosed to clients and prospective clients and should be available to everyone (i.e., different service levels should not be offered selectively).

Domestic Savings, Fiscal Balance, and Trade Balance

Domestic Savings = Private Investment + Government Spending + Trade Balance Private Investment = Gross Fixed Investment + Change in Inventories Government Spending = Government Spending + Government Fixed Investment - Tax on Households - Transfer Payments to Consumers Tax on Households = Personal Income - Personal Disposable Income

YTM change and Price

Duration x Change in Yield

Must not deprive their employer of their skills and abilities as related to their employment (STATE THE STANDARD).

Duties to Employers

Funds from operations (FFO)

EBITDA - Net Inerest Expense - Current Tax Expense

What provides the company the most financial flexibility to finance working capital ?

Equity and long term debt

Abnormal waste, storage of finished goods, and administrative overhead are ?

Expensed

Breakeven Quantity of Sales Includes ///

Financing Costs

Simulated performance in a presentation must be accompanied by ?

Full disclosure as to the source of the performance data.

Which of the following return calculating methods is best for evaluating the annualized returns of a buy-and-hold strategy of an investor who has made annual deposits to an account for each of the last five years? Geometric mean return. Arithmetic mean return. Money-weighted return.

Geometric Mean Return

Degree of Operating Leverage

Gross Profit or Contribution Margin divided by Operating Income

What is the second step when constructing an index ?

Identyfing the investment universe. The target market determines the investment universe and the securities available for inclusion in the index.

In which case is it ok to discriminate in terms of service levels by clients ?

If clients are willing to pay for premium services.

In which case might a member be able to accept something that might reasonably create a conflict of interest with the employer ?

If written consent from all parties has been received.

Members must promote the ?

Integrity and viability of the global capital markets for the ultimate benefit of society.

What are the two most noteworthy observations about the lognormal distriubiton ?

It is bounded yb zero and is skewed to the right.

Thematic Risks

Known risks that evolve and expand over a period of time. Climate change, pattern migration, the rise of populist forces, and the ongoing threat of terrorism fall into this category.

Ricardian Model of Trade

Labor is the only input and the benefit of technology is reflected in labor productivity.

How can you replicate a long call ?

Long put, long asset, short bond.

What is the policy behind disclosure of conflicts ?

Make full and fair disclosure of all matters that could reasonable be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer.

What is the key distinction between commercial mortgage-backed securities and residential mortgage-backed securities ?

Many commerical loans backing CMBS are balloon loans that require a substantial principal repayment at maturity of the loan. CMBSs generally do not have amortizing principal as RMBSs do, and they do offer call protection.

What is the policy behind referral fees ?

Members and cadidates must disclose to their employer, clients, and prospective clients, as appropriate, any compensation, consideration, or benefit received from or paid to others for the recommedation of producst or services.

How should candidates balance employer and client interests ?

Members and candidates must act for teh benefit of their clients and place their clients' interests before their employer's or their own interests.

Are affirmative or negative covenants more costly ?

Negative Covenants Are

Both GAAP and IFRS allow agricultural inventories to be valued at ?

Net Realizable Value

Histogram

Numerical Data

Degree of Financial Leverage

Operating Income/(Operating Incoem - Interest Expense)

Do preferred or common shares usually pay higher dividends ?

Preferred shares do

A firm in an oligopoly market most likely faces a kinked demand curve because competitors do not match ?

Price Increases

Prior to accepting bonuses or gifts from clients, members should ?

Prior to accepting, when possible, disclose to their employers such benefits offered by clients as soon as reasonably possible.

Required Rate of Return

Real Risk Free Rate + Inflation Premium + Default Risk Premium + LIquidity Premium + Maturity Premium

Assumptions of CAPM

Risk Aversion, Utility Maximizing investors, Frictionless markets, one period horizon, homogeneous expectations, divisible assets, competitive markets

Sample Standard Error

Sample Standard Deviation / Root Square N

What criteria is used to determine a peer group ?

Should consist of companies with similar business activities whose economic activity depends on similar drivers of demand and similar factors related to cost structure and access to financial capital.

Who is responsible for overlooking incentive structure to make sure it leads to ethical profit seeking ?

Supervisors and firms

In technical analysis what is defined as the low price range in which buying activity is sufficient to stop a decline in price ?

Support

Distinguishing between fact and opinion in the presentation of investment analysis and recommendations (STATE THE STANDARD).

The Investment Analysis, Recommendations, and Actions Standard

Representativeness Bias

The Tendency to classify new information based on past experiences and classifications. Can lead to base rate neglect by focusing on a specific class that leads to a higher or better outcome.

Define Duration

The change in the price of a portfolio of bonds if the yields for all maturities change by the same amount; that is, it assumes the slope of the yield curve stays the same.

Explain the capital allocation line

The combination of the risk free asset and a risky asset.

Describe the recovery phase of a business cycle

The economy is going through the "trough" of the cycle, where actual output is at its lowest level relative to potential output. Economic activity, including consumer and business spending, is below potential but is starting to increase, closing the negative output gap.

What is a policy behind a departing employee going into compeition with an employer ?

The employee can make arrangements or preparations to go into a competitive business before terminating the relationship with his or her employer as long as such preparations do not breach the employee's duty of loyalty.

What is the first decision when constructing an index ?

The first decision in index construction is identifying the target market, market segment, or asset class that the index is intended to represent.

In relation to "soft dollars" what does it take to violate the duty of loyalty to a client ?

The payment of a higher brokerage fee without a corresponding benefit.

Soft Dollars

The practice of using client brokerage funds to purchase research services.

Define Data Curation

The process of ensuring data quality and accuracy through a data cleansing exercise. This process consists of reviewing all data to detect and uncover data errors, bad or inaccurate data, and making adjustments for missing data when appropriate.

What is the tenor of the bond ?

The time remaining until the bond's maturity date.

What is the policy behind disseminating investment recommendations ?

The timing should be approximately the same for all clients (fairly). There may be multiple mediums and one on one talk can be had after it has been disseminated.

How are restructuring charges treated under IFRS & GAAP ?

They are seperated from operating activities under IFRS while kept under GAAP.

What are the three broad classifications of infrastructure assets ?

Transportation assets, information and communication technology assets, and utility and energy assets.

To access impairment of a patent under GAAP carrying value is compared to ?

Undiscounted expected future cash flows

Levered Beta

Unlevered Beta * (1+[(1-Tax Rate)*(Debt/Equity)])

Execution Step

• Asset allocation • Security analysis • Portfolio construction

Feedback Step

• Portfolio monitoring and rebalancing • Performance measurement and reporting

Planning Step

• Understanding the client's needs • Preparation of an investment policy statement (IPS)

Verfiication assures

Whether the firm's policies and procedures related to pooled fund maintenance have been implemented on a firm-wide basis (does not ensure the accuracy of any specific composite presentation).

Equipment Trust Certificates

bonds secured with factory and equipment as collateral

Free Cash Flow to the Firm

net income + noncash charges + [interest expense * (1-tax rate)] - fixed capital investment - working capital investment

Payables Turnover

purchases / average trade payables