Grab Bag

A 3-year, 6% coupon, semiannual-pay note has a yield to maturity of 5.5%. If an investor holds this note to maturity and earns a 4.5% return on reinvested coupon income, his realized yield on the note is closest to: 5.46%. 5.57%. 5.68%.

A This question does not require calculations. Because the return on reinvested coupon interest is less than the note's yield to maturity, the investor's realized yield on the note must be less than the YTM. Only Choice A can be correct

In efficient financial markets, risk-free arbitrage opportunities: may persist in the long run. will not exist. may exist temporarily

C In efficient financial markets, risk-free arbitrage opportunities may exist temporarily, but their continuous exploitation will eliminate these arbitrage opportunities in the long run.

Compared to an operating lease, a capital lease will have what effects on operating income (earnings before interest and taxes) and net income in the first year? A) Both will be lower. B) Both will be higher. C) One will be lower and one will be higher.

C With an operating lease, the entire lease payment (rent expense) is subtracted from operating income. With a capital lease, only depreciation is subtracted from operating income, so operating income is higher with a capital lease. Net income in the first year is lower with a capital lease because the sum of depreciation (operating expense) and interest (non-operating expense) is greater than the lease payment.

Which of the following multiples is most useful when comparing companies with significant differences in capital structure? Price-to-cash flow ratio Price-to-book ratio EV/EBITDA

C The EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation, and amortization) approach is most useful when comparing companies with significant differences in capital structure. EBITDA is computed prior to payment to any of the company's financial stakeholders and is not affected by the amount of debt leverage.

Which of the following approaches will most likely reveal manipulation of financial reporting? Using EBITDA to adjust for non-recurring items. Comparing a company's methods and policies to those of its peers. Evaluating potential warning signals in isolation.

An investor should compare a company's policies with those of its peers to determine whether its approaches match or differ from industry norms; if a company is the only one in its industry following a particular approach, a red flag is raised

Which yield measure is the most appropriate for comparing a company's investments in short-term securities? Discount basis yield. Bond equivalent yield. Money market yield.

When evaluating the performance of its short-term securities investments, a company should compare them on a bond equivalent yield basis

ROA is lower than ROE when net income is positive and debt is present

Prior service costs arise when changes in the terms of a defined benefit pension plan increase the future benefits due to employees based on their prior employment with the company.

Declaration date -> ex-dividend date -> holder of record date -> payment date

delcaration date = the date the board of directors approves payment of the dividends ex dividend date = the first day a share of stock trades without the divided. the ex dividend date is also the cutoff date for receiving the dividend and occurs two business days before the holder of record date. if you buy the share on or after the ex dividend date, you will not receive the dividend holder of record date = the date on which the shareholders of record are designated to receive the dividend.

Duration and convexity are most likely to produce more accurate estimates of interest rate risk when the term structure of yield volatility is: flat. downward sloping. upward sloping.

flat. Duration and convexity assume the yield curve shifts in a parallel manner. A downward (upward) sloping term structure of yield volatility suggests shifts in the yield curve are likely to be non-parallel because short-term interest rates are more (less) volatile than long-term interest rates.

the sustainable growth rate in a DDM model or similar is

g = (retention rate) (ROE) retention rate = 1 - dividend payout ratio.

When the market is in equilibrium: all assets plot on the SML. all assets plot on the CML. investors own 100% of the market portfolio.

all assets plot on the SML. When the market is in equilibrium, expected returns equal required returns. Since this means that all assets are correctly priced, all assets plot on the SML. By definition, all stocks and portfolios other than the market portfolio fall below the CML. (Only the market portfolio is efficient

Which of the following is least likely an indicator of a firm's liquidity? Cash as a percentage of sales. Amount of credit sales. Inventory turnover.

amount of credit sales. No inferences about liquidity are warranted based on this measure. A firm may have higher credit sales than another simply because it has more sales overall. Cash as a proportion of sales and inventory turnover are indicators of liquidity

According to Markowitz, an investor's optimal portfolio is determined where the

investor's highest utility curve is tangent to the efficient frontier

Which of the following is NOT an assumption of capital market theory? The capital markets are in equilibrium. Investors can lend at the risk-free rate, but borrow at a higher rate. Interest rates never change from period to period.

investors can lend at the Rf rate but borrow at a higher rate. Capital market theory assumes that investors can borrow or lend at the risk-free rate. The other statements are basic assumptions of capital market theory

industry under capacity is a situation in which demand exceeds supply at current prices resulting in pricing power and higher return on capital.

oercapacity is when supply is greater than demand at current prices and will result in downward pressure on price and lower return on capital

The source of comparative advantage in the Heckscher-Ohlin model of trade is differences among countries in:

relative scarcity of labor and capital In the Heckscher-Ohlin model of trade, the source of comparative advantage is the relative scarcity of labor and capital in each country

restricted subsidiaries

restricted subsidiaries' cash flows are used to service the debt of the parents or holding company and make a parent company's debt rank pari passu with the subsidiary's debt.

minimum point on the ATC curve represents the lowest cost per unit, but it is not necessarily the profit maximizing point. it means the firm is maximizing profit per unit at that point.

the MC curve above AVC is the firm's SR supply curve in a perfectly competitive market.

MC intersects AVC and ATC at their minimum points. the intersection comes from below, which implies that when MC is less than ATC or AVC, ATC or AVC are decreasing. this also implies that when MC exceeds ATC or AVC, ATC or AVC are increasing.

the MC curve is considered to have a J shape due to the declining MC over lower production quantities and because the minimum points of that ATC and AVC curves are not the same.

Which of the following indexes is a price weighted index? The Nikkei Dow Index. The New York Stock Exchange Index. The Standard and Poor's Index.

the Nikkei dow. the other two are market weighted

A behavioral bias in which an investor assesses probabilities of outcomes depending on how similar they are to the current state is called: conservatism. representativeness. narrow framing.

B

Maersk Corp. issued bonds that are secured by its shipping containers. These bonds are most likely a type of: collateral trust bond. equipment trust certificate. mortgage-backed security.

Equipment trust certificates are bonds secured by specific types of equipment or physical assets, such as shipping containers.

BOOK VALUES SHOULD NOT BE USED WHEN COMPUTING TARGET CAPITAL STRUCUTRE / WACC

ONLY USE THE MARKET VALUE.

The nine major sections of the CFA Institute Global Investment Performance Standards are Fundamentals of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosures, Presentation and Reporting, Real Estate, Private Equity, and Wrap Fee/Separately Managed Account (SMA) Portfolios.

The central limit theorem holds for any distribution as long as the sample size is large (i.e., n > 30).

The most likely initial (short-run) effect of demand-pull inflation is an increase in: finished good prices. commodity prices. employee wages.

The effect of demand-pull inflation is an increase in the aggregate demand, which, in turn, leads to an increase (initially) in commodity prices.

What is the most likely reason why arbitrage will not completely eliminate all pricing discrepancies for derivatives? Transaction costs Differences in risk aversion Inaccurate forecasts

Transaction costs may render an arbitrage strategy unprofitable and can therefore prevent precise convergence of prices.

indexed-annuity bonds are

fully amortizing with the payments adjusted.

capital indexed bonds

indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds

inverse head and shoulders pattern

indicate the reversal of a downtrend. Inverse head and shoulders patterns typically occur after downtrends and indicate that the trend is going to reverse

price return

just multiply the returns together (1.04 x 1.03 x. 98 , etc) together and subtract one.

An active manager will most likely short a security with an expected Jensen's alpha that is: zero. positive. negative.

negative

complex capital structure

there are convertible bonds are anything that would make dilutive eps necessary

notice period

typically 30 to 90 days, is the amount of time a fund has after receiving notice of a redemption request to fulfill the redemption request

a security is under/over/equal valued if

underpriced if the required return is less than the holding period (or expected) return, is overpriced if the required return is greater the holding period (or expected) return, and is correctly priced if the required return equals the holding period (or expected) return

relative strength

when the ratio of the stock price to the market price increases over time

A bank borrows for 360 days and simultaneously lends the proceeds for 90 days. This transaction creates a synthetic forward rate agreement (FRA) closest to a: A) long position in a 90-day FRA on 270-day LIBOR. B) long position in a 90-day FRA on 360-day LIBOR. C) short position in a 360-day FRA on 90-day LIBOR.

A If a bank borrows for 360 days and simultaneously lends the proceeds for 90 days, it creates a synthetic long (borrower) position in a 90-day FRA on 270-day LIBOR. The bank has no net position for the first 90 days and a borrowing position at a fixed rate of interest for the subsequent 270 days.

A contrarian technical analyst is most likely to be bullish based on a: A) low put-call ratio. B) high volatility index. C) low mutual fund cash position.

B High levels of the VIX indicate that the outlook of investors is bearish. A contrarian interprets this as a bullish sign. Low mutual fund cash balances indicate that mutual fund managers are bullish, and, as a result, contrarians are bearish. A low put-call ratio indicates bullish investor sentiment, which a contrarian interprets as a bearish sign.

Which of the following statements about sampling and estimation is least accurate? A) Sampling error is the difference between the observed value of a statistic and the value it is intended to estimate. B) A simple random sample is a sample obtained in such a way that each element of the population has an equal probability of being selected. C) The central limit theorem states that the sample mean for a large sample size will have a distribution that is the same as the distribution of the underlying population.

C According to the central limit theorem, the sample mean for large sample sizes will be distributed normally regardless of the distribution of the underlying population.

For the year in which a firm increases its promised pension benefits per year of service for existing employees, net income will be: A) higher under IFRS than U.S. GAAP. B) higher under U.S. GAAP than IFRS. C) the same under IFRS and U.S. GAAP.

B The improved benefit for existing employees will be shown as past service costs. Because past service costs are included in their full amount as pension expense under IFRS, net income will be lower under IFRS. Under U.S. GAAP, past service costs are included in other comprehensive income and amortized to pension expense over time so the first year impact on net income is less than under IFRS.

Standard V(A) Diligence and Reasonable Basis states that if a consensus opinion has a reasonable basis, a member or candidate who disagrees with it does not have to dissociate from it but should document the difference of opinion.

Standard IV(A) Loyalty does not prohibit former employees from contacting clients of their previous firm so long as the contact information does not come from the records of the previous employer or violate a noncompete agreement.

A company takes a $10 million impairment charge on a depreciable asset in 20X3. The most likely effect will be to: A) increase reported net income in 20X4. B) decrease net income and taxes payable in 20X3. C) increase return on equity and operating cash flow in 20X4.

The impairment writedown in 20X3 will reduce depreciation expense in 20X4, which will increase 20X4 EBIT and net income. Operating cash flow and taxes payable are not affected because an impairment cannot be deducted from income for tax reporting purposes until the asset is sold or otherwise disposed of.

The law of diminishing marginal returns explains: A) the shape of the long-run average cost curve. B) the upward sloping portion of the short-run marginal cost curve. C) the upward sloping portion of the long-run marginal cost curve.

The law of diminishing returns states that at some point, as more of a resource is used in a production process, holding other inputs constant, output increases at a decreasing rate. This accounts for the upward slope of the SRMC curve beyond that point. Returns to scale determine the shape of the long-run cost curves.

Closely affiliated with The World Bank Group, the International Bank for Reconstruction and Development (IBRD) provides low or no-interest loans and grants to developing countries that have unfavourable credit or no access to international credit markets.

real GDP in 2013 = nominal GDP in 2013 x 100 / GDP deflator real GDP in 2013 = price in 2012 to quantity in 2013

GIPS GIPS require that, to claim compliance, firms must present GIPS-compliant performance information for a minimum of five years or since inception if in existence less than five years. Firms may not link noncompliant performance information for any periods after January 1, 2000.

recommended that a minimum of five years performance history be included. a requirement to present composite performance rather than individual account performance.

An investor wants to take advantage of the 5-year spot rate, currently at a level of 4.0%. Unfortunately, the investor just invested all of his funds in a 2-year bond with a yield of 3.2%. The investor contacts his broker, who tells him that in two years he can purchase a 3-year bond and end up with the same return currently offered on the 5-year bond. What 3-year forward rate beginning two years from now will allow the investor to earn a return equivalent to the 5-year spot rate? 3.5%. 5.6%. 4.5%.

(1.04^5 / 1.032^2)1/3 - 1 = 4.5%

investment grade is Baa3/BBB- or above

Ba1/BB+ or below = non investment grade

Which of the following is lowest in quality on the spectrum of GAAP conforming financial reports? Conservative accounting choices Earnings management Aggressive accounting choices

Earnings management represents deliberate actions to influence reported earnings and their interpretation. The distinction between earnings management and biased choices is subtle and, primarily, a matter of intent.

An analyst has gathered the following data for Webco, Inc: Retention = 40% ROE = 25% k = 14% Using the infinite period, or constant growth, dividend discount model, calculate the price of Webco's stock assuming that next years earnings will be $4.25.

g = (ROE)(RR) = (0.25)(0.4) = 10% V = D1 / (k - g) D1 = 4.25 (1 − 0.4) = 2.55 G = 0.10 K - g = 0.14 − 0.10 = 0.04 V = 2.55 / 0.04 = 63.75

An optimal risky portfolio has an expected return of 15% and standard deviation of 20%. The risk-free rate is currently 5%. A risk-seeking investor who is considering investing along the capital allocation line (CAL) would most likely: borrow 25% of her wealth at the risk-free rate and invest 125% in the optimal risky portfolio. invest 100% of her wealth in the optimal risky portfolio. lend 100% of her wealth at the risk-free rate.

A Risk-seeking investors, which are those who are willing to take higher risks for a higher expected return, will invest more than 100% in the optimal risky portfolio by borrowing at the risk-free rate. This portfolio lies to the right point of the optimal risky portfolio on the CAL.

Which of the following best describes a reason a company would acquire the use of equipment through an operating lease rather than by purchase? To take advantage of less costly financing To obtain preferential tax treatment for the lease payments compared with ownership To increase cash from operations

A Leases can provide less costly financing. Because of the tax and economic advantages enjoyed by lessors, they are often able and willing to offer attractive lease terms resulting in less costly financing to the lessees.

La Crosse Partners LLC has a franchise agreement with Arnolds Crispy Fry that expires in seven years, but is renewable at each expiration date for a nominal fee. If the franchise agreement is initially valued at $60,000: amortization expense in the sixth year will be zero. an accelerated amortization method is more appropriate than the straight-line method. amortization expense in the first year will be one-seventh of $60,000.

Because the franchise agreement is renewable for a nominal fee, it is treated as an intangible asset with an indefinite life and therefore not amortized but tested for impairment regularly.

Consider two countries, A and B. Country A, a closed country with a relative abundance of labor, 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: both capital and labor. capital. labor.

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

In extending the 3-factor model of Fama and French, the additional factor suggested by Carhart that is often used is: GDP growth. price momentum. market-to-book value.

C In addition to the three factors of the Fama and French model, market-to-book, firm size, and excess returns on the market, Carhart added a momentum factor based on prior relative price performance

The converged revenue recognition standards (issued by the International Accounting Standards Board and the Financial Accounting Standards Board in May 2014) are best described as differing from current US GAAP in that they: align the recognition of revenue with the customer's fulfillment of payment obligations. provide extensive additional guidance for specific industries and transactions. provide a principles-based approach applicable to many types of revenue-generating activities.

C The converged standards aim to take a principles-based approach that avoids the provision of specific rules and requirements characteristic of current US GAAP revenue recognition standards.

The relative strength index for a stock stands at 75. This reading is best described as an indication that the stock is oversold. neutral. overbought.

C The relative strength index (RSI) is a momentum oscillator and provides information on whether or not an asset is overbought or oversold. An RSI greater than 70 indicates that a stock is overbought; an RSI lower than 30 suggests that a stock is oversold

financial risk

Financial risk refers to the additional variability of EPS compared to EBIT. Financial risk increases with greater use of fixed cost financing (debt) in a company's capital structure. Financial risk, in the context of a firm's financing of its operations, results from taking on fixed financial obligations such as debt or operating leases. Common equity financing does not involve fixed obligations.

Last year, the average salary increase for poultry research assistants was 2.5%. Of the 10,000 poultry research assistants, 2,000 received raises in excess of this amount. The odds that a randomly selected poultry research assistant received a salary increase in excess of 2.5% are:

For event "E," the probability stated as odds is: P(E) / [1 - P(E)]. Here, the probability that a poultry research assistant received a salary increase in excess of 2.5% = 2,000 / 10,000 = 0.20, or 1/5 and the odds are (1/5) / [1 - (1/5)] = 1/4, or 1 to 4

In the most recent four years, an investment has produced annual returns of 4%, -1%, 6%, and 3%. The most appropriate estimate of the next year's return, based on these historical returns, is the:

Given a series of historical returns, the arithmetic mean is statistically the best estimator of the next year's return. For estimating a compound return over more than one year, the geometric mean of the historical returns is the most appropriate estimator.

If the domestic currency is trading at a forward premium, then relative to the interest rate of the domestic country, the interest rate in the foreign country is most likely: the same. higher. lower.

Higher The currency with the higher (lower) interest rate will always trade at a discount (premium) in the forward market. The lower interest rate in the domestic country will be offset by the appreciation of the domestic country's currency over the investment horizon.

According to the converged standards for revenue recognition issued in May 2014, a promise to transfer a distinct good or service is most accurately described as a:

In the converged accounting standards issued in May 2014, performance obligations within a contract are defined as promises to transfer distinct goods or services.

A company sells a non-refundable, two-year service contract for €420. Based on historical patterns, the company expects to incur 25% of service costs in the first year of the contract and the remainder in the second year. The amount of revenue the company recognizes in the first year is closest to: €210. €105. €420.

Service revenues are recognized by reference to the stage of completion of the service contract. Historical patterns provide evidence that 25% of the services performed under the contract are incurred during the contract's first year. As such, only 25% of the contract revenue would be recognized in the first year:

The earnings multiplier model, derived from the dividend discount model, expresses a stock's P/E ratio (P0/E1) as the : expected dividend payout ratio divided by the difference between the required return on equity and the expected dividend growth rate

Starting with the dividend discount model P0 = D1/(ke − g), and dividing both sides by E1 yields: P0/E1 = (D1/E1)/(ke − g) Thus, the P/E ratio is determined by: •The expected dividend payout ratio (D1/E1). •The required rate of return on the stock (ke). •The expected growth rate of dividends (g).

Which of the following is least likely to be a component of a developing country's equity premium? Annualized standard deviation of the sovereign bond market in terms of the developing country's currency Sovereign yield spread Annualized standard deviation of the developing country's equity index

The annualized standard deviation of the sovereign bond market in terms of the developing country's currency is not part of the equity premium calculation. country equity premium = sovereign yield spread x {std. equities / annualized st. dev of the sovereign bond market in terms of the DEVELOPED market currency}

Assume the following: • The real risk-free rate of return is 3%. • The expected inflation premium is 5%. • The market-determined interest rate of a security is 12%. The sum of the default risk premium, liquidity premium, and maturity premium for the security is closest to: 10%. 4%. 8%.

The market-determined interest rate is equal to the real risk-free rate of return plus an inflation premium plus risk premiums for default risk, liquidity, and maturity. In this case, 12 = 3 + 5 + X. Solving for X: X =4.

The three objectives of financial market regulation according to IOSCO are to (1) protect investors; (2) ensure the fairness, efficiency, and transparency of markets; and (3) reduce systemic risk. Because of the increasing globalization of securities markets, IOSCO seeks to attain uniform financial regulations across countries.

The required disclosures for long-lived assets under IFRS are more extensive than they are under U.S. GAAP. IFRS requires a reconciliation of beginning and ending carrying values for classes of long-lived tangible assets, while U.S. GAAP does not.

Which of the following statements regarding company takeover defenses is CORRECT? The firm's annual report contains pertinent details concerning takeover defenses. A firm's proxy is the most likely place to find information about present takeover defenses. Newly created anti-takeover provisions may or may not require stakeholder authorization/approval.

These provisions may or may not require such approval. In either case, the firm may have to, at a minimum, provide information to its shareholders about any amendments to existing takeover defenses. A firm's articles of organization are the most likely places to locate information about present takeover defenses.

When a security that was in an upward trend falls 1% below its trendline, a technical analyst will most likely determine that: the upward trend is ending. a downward trend is beginning. the trendline needs an adjustment

When a security's price drops through the trendline by a significant amount (at least 5% to 10%), this decline signals that the uptrend has ended and further decline may follow. Minor breakthroughs simply call for the trendline to be moderately adjusted over time. A security falling 1% below its trendline is considered a minor breakthrough.

interest indexed bonds

adjust coupon rate for inflation

For an investor to move further up the Capital Market Line than the market portfolio, the investor must

borrow and invest in the market portfolio.\ Portfolios that lie to the right of the market portfolio on the capital market line ("up" the capital market line) are created by borrowing funds to own more than 100% of the market portfolio (M). The statement, "diversify the portfolio even more" is incorrect because the market portfolio is fully diversified

The process of evaluating and selecting profitable long-term investments consistent with the firm's goal of shareholder wealth maximization is known as

capital budgeting. Capital budgeting refers to investments expected to produce benefits for a period of time greater than one year. In the process of capital budgeting, a manager is making decisions about a firm's earning assets, which provide the basis for the firm's profit and value

Which of the following factors is least likely to complicate the comparability of effective tax rates across firms? Volatility in the effective tax rate over the comparison period. Comparisons over relatively short time horizons. Changes in the statutory tax rate.

changes in statutory tax rate. Comparability decreases when the comparison period is relatively short (e.g. quarters vs. years), with the presence of volatility in the effective tax rate over the comparison period, and operations in different tax jurisdictions.

In the currency market, traders quote the: nominal exchange rate. real exchange rate. base currency rate.

nominal exchange rate

Recapitalization is when the company issues debt to fund a dividend distribution to equity holders (the fund). It is not an exit, in that the fund still controls the company, but often is a intermediate step toward an exit.

option premium = intrinsic value + time value

Assume the percentage increases in each of the following listed items: Percentage increase Real domestic exchange rate (USD/EUR) 5 Eurozone price level 2 U.S. price level 1.5 The predicted change in the nominal US spot exchange rate is closest to: 4.5%. 5.5%. -0.5%.

real = nominal x CPI foreign / CPI domestic 1.05 = nominal x [1.02 / 1.015] 1.05 = nominal x 1.004926 1.05 / 1.004926 = nomianl = 1. 045% - 1 = 4.5%

sources of short term funding in order of decreasing firm creditworthiness and increasing cost:

•Commercial paper. •Bank lines of credit. •Collateralized borrowing. •Nonbank financing. •Factoring.

One hedge fund strategy that involves simultaneously holding short and long positions in common stock is most likely: quantitative directional. distressed/restructuring. volatility.

A Quantitative directional is an equity strategy that uses technical analysis to identify over- and underpriced securities, buy the underpriced ones, and short the overpriced ones.

Holding all else equal, if the beta of a stock increases, the stock's price will: be unaffected. decrease. increase.

B When the beta of a stock increases, its required return will increase. This increases the discount rate investors use to estimate the present value of the stock's future cash flows, which decreases the value of the stock.

The absolute priority rule is most likely violated in a: bankruptcy liquidation. special purpose entity securitization. bankruptcy reorganization.

C When a company is reorganized, the strict absolute priority has not always been upheld by the courts.

Structural subordination means that a parent company's debt: A) has a higher priority of claims to a subsidiary's cash flows than the subsidiary's debt. B) ranks pari passu with a subsidiary's debt with respect to the subsidiary's cash flows. C) has a lower priority of claims to a subsidiary's cash flows than the subsidiary's debt.

C. Structural subordination means that cash flows from a subsidiary are used to pay the subsidiary's debt before they may be paid to the parent company to service its debt. As a result, parent company debt is effectively subordinate to the subsidiary's debt.

Which of the following statements about securities exchanges is NOT correct? Securities exchanges may be structured as call markets or continuous markets. In continuous markets, prices are set only by the auction process. In call markets, there is only one negotiated price set to clear the market for a given stock.

B In continuous markets, the price is set by either the auction process or by dealer bid-ask quotes

restricted payment covenant

protects lenders by limiting the amount of cash that may be paid to equity holders

An investor purchased 725 shares of stock at $40 per share and posted initial margin of 60%. He subsequently sold the shares at $50 per share. Based only on this information, the investor's holding period return is closest to:

50 - 40 / (40 x .6)

The six-month spot rate is 4.0% and the 1 year spot rate is 4.5%, both stated on a semiannual bond basis. The implied six-month rate six months from now, stated on a semiannual bond basis, is closest to: 5%. 4%. 6%.

6m6m/2 = [(1 + S2/2)^2 / (1 + S1/2)^1] - 1 = [(1.0225)^2/(1.02)^1] - 1 [1.0455 / 1.02] - 1 = 0.025 6m6m = 0.025 × 2 = 0.05 = 5%

A natural monopoly is most likely to exist when: A) economies of scale are great. B) average total cost increases as output increases. C) a single firm owns essentially all of a productive resource.

A

An investor has long exposure to the risk of the asset underlying an option when taking a: A) short position in a put option. B) short position in a call option. C) long position in a put option.

A By taking a short position in a put option, the investor has long exposure to the risk in the underlying asset. Because the value of a put option decreases when the price of the underlying asset increases, the value of a short position in a put increases when the price of the underlying increases. Both a short position in a call option and a long position in a put option increase in value when the price of the underlying asset decreases; that is, these option positions have short exposure to the risk of the underlying asset. THE RISK EXPOSURE IS WHAT YOU WANT THE ASSET TO DO.. in a short position in a put option you want the price of the underlying to go up which is a LONG EXPOSURE.

There are two major problems with historical simulation. The first is that it cannot account for events that do not occur in the sample. If a security began trading after 1987, for example, there would be no evidence of its behavior in a market crash. The other drawback is that the analyst cannot change the parameters of the distribution to examine how small changes might affect the asset's behavior.

A drawback of historical simulation is it: A) may not accurately reflect possible outcomes. B) depends on the accuracy of the random number generator. C) may not account for very rare events. C

Parametric tests, like the t-test, F-test, and chi-square tests, make assumptions regarding the distribution of the population from which samples are drawn. Nonparametric tests either do not consider a particular population parameter or have few assumptions about the sampled population. Nonparametric tests are used when the assumptions of parametric tests can't be supported or when the data are not suitable for parametric tests

A rank correlation test is best described as a nonparametric test

An equally weighted portfolio of a risky asset and a risk-free asset will exhibit: half the returns standard deviation of the risky asset. less than half the returns standard deviation of the risky asset. more than half the returns standard deviation of the risky asset.

A risk free asset has a standard deviation of returns equal to zero and a correlation of returns with any risky asset also equal to zero. As a result, the standard deviation of returns of a portfolio of a risky asset and a risk-free asset is equal to the weight of the risky asset multiplied by its standard deviation of returns. For an equally weighted portfolio, the weight of the risky asset is 0.5 and the portfolio standard deviation is 0.5 × the standard deviation of returns of the risky asset.

The change in polarity principle most likely helps analysts determine a new: resistance level after an upward breakthrough of the trendline. support level after a retracement to a lower high than a previous retracement. support level after a resistance level is breached.

A key tenet of support and resistance levels in technical analysis is the change in polarity principle, which states that once a support level is breached, it becomes a resistance level. The same holds true for resistance levels; once breached, they become support levels.

When a new project reduces the cash flows of an existing project of the same firm, it is best described as a(n): externality. opportunity cost. sunk cost.

A new project reducing the cash flows of an existing project is an externality called cannibalization.

Which of the following is the most likely effect of a subsidy in the market for corn? Marginal costs will be less than marginal benefit. The supply curve for corn will shift to the right. The equilibrium quantity of corn will decrease.

A subsidy causes a shift rightward in the supply curve (increase in supply at a given price level) by the amount of the subsidy. The equilibrium quantity will increase and the price paid by buyers will decrease. Marginal cost will exceed marginal benefit and a deadweight loss will result from overproduction.

The key advantages of derivatives markets are providing price information, reducing transactions costs, and shifting risks among market participants. Derivatives markets are highly efficient and arbitrage opportunities rarely exist or are quickly eliminated.

A trade sale involves selling a portfolio company to a competitor or another strategic buyer. An IPO involves selling all or some shares of a portfolio company to the public. A secondary sale involves selling a portfolio company to another private equity firm or a group of investors.

If an unsolicited trade is inconsistent with a client's IPS, a member or candidate should not execute the trade before discussing it with the client. According to Standard III(C) Suitability, if the trade will have only a minimal impact on the client's portfolio, the member or candidate should attempt to educate the client with regard to how it deviates from the IPS and then may follow her firm's policies for obtaining client approval for the trade. If the trade will have a material impact on the risk and return characteristics of the client's portfolio, the discussion should focus on changing the IPS.

According to Standard II(A) Material Nonpublic Information, how specific the information is, how different it is from public information, and its nature are key factors in determining whether a particular piece of information fits the definition of material. An additional factor is reliability, which is often a function of the source of the information. While the liquidity of a security may be a factor in determining the materiality of advance knowledge of a large buy or sell order, in most cases, it would not be a factor in determining materiality.

Bond indexes are more difficult to build and maintain than stock indexes for several reasons. Bonds in an index have to be replaced as they mature, so turnover is likely to be greater in a bond index than in a stock index. Many bonds lack the continuous trade data that exists for exchange-traded equities.

An industry in the growth stage is usually characterized by increasing profitability, decreasing prices, and a low degree of competition among competitors.

The market for radios consists of 100 consumers, each of whom has the demand function: QDradio = 4 − 0.4 Pradio + 0.0025 Income + 0.25 Pnewspaper − 0.005 Pbatteries At current average prices, a radio costs £10, a newspaper costs £1, and batteries cost £2. Average income is £1,000. The market demand curve for radios is most accurately described as:

Aggregating the individual demand functions into the market demand function we get: QDradio = 100(4 − 0.4 Pradio + 0.0025 Income + 0.25 Pnewspaper − 0.005 Pbatteries) QDradio = 400 − 40 Pradio + 0.25 Income + 25 Pnewspaper − 0.5 Pbatteries Substituting average values for all variables except price we get: QDradio = 400 − 40 Pradio + 0.25(1,000) + 25(1) − 0.5(2) QDradio = 400 − 40 Pradio + 250 + 25 − 1 QDradio = 674 − 40 Pradio 40 Pradio = 674 − QDradio Solving for price gives us the demand curve: Pradio = 16.85 − 0.025 QDradio

Which of the following is least accurate regarding the allocative efficiency associated with price discrimination? Price discrimination: leads to production where the sum of consumer surplus and producer surplus is greater than it would be otherwise. leads to a decrease in allocative efficiency. results in gains to the discriminating firm by selling to consumers with relatively inelastic demand.

Allocative efficiency occurs when the quantity produced maximizes the sum of consumer and producer surplus. That is, where marginal benefit equals marginal cost. Price discrimination reduces the allocative inefficiency that exists when prices are greater than marginal cost by increasing output toward the quantity where price equals marginal cost. Firms gain by selling to customers with inelastic demand while still providing goods to customers with more elastic demand. This may even cause production to take place at a level where it would not take place otherwise.

Which of the following is an example of an arbitrage opportunity? A put option on a share of stock has the same price as a call option on an identical share. A stock with the same price as another has a higher rate of return. A portfolio of two securities that will produce a certain return that is greater than the risk-free rate of interest.

An arbitrage opportunity exists when a combination of two securities will produce a certain payoff in the future that produces a return that is greater than the risk-free rate of interest. Borrowing at the riskless rate to purchase the position will produce a certain future amount greater than the amount required to repay the loan

an increase in the riskless rate of interest, other things equal, will: A) decrease call option values and decrease put option values. B) increase call option values and decrease put option values. C) decrease call option values and increase put option values.

An increase in the risk-free rate of interest will increase call option values and decrease put option values.

inventory management

An increase in inventory could indicate poor sales and an accumulation of obsolete items or could be the result of a conscious effort to have adequate supplies to avoid losses from not having items to satisfy customer orders (stock outs). Higher-than-average inventory turnover could indicate better inventory management or could indicate that a less than optimal inventory is being maintained by the company.

For a given set of underlying real estate properties, the type of real estate index that is most likely to have the lowest standard deviation is a(n): repeat sales index. appraisal index. REIT trading price index.

Appraisal index returns are based on estimates of property values. Because estimating values tends to introduce smoothing into returns data, appraisal index returns are likely to have lower standard deviations than index returns based on repeat sales or trading prices of REIT shares.

Consider two countries, A and B. Country A, a closed country with a relative abundance of labor, 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: labor. both capital and labor. capital.

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

The sampling distribution of a statistic is: always a standard normal distribution. the probability distribution consisting of all possible sample statistics computed from samples of the same size drawn from the same population. the same as the probability distribution of the underlying population.

B A sample statistic itself is a random variable, so it also has a probability distribution. For example, suppose we start with a sample of the prices of 200 stocks, and we calculate the sample mean of a random sample of 40 of those stocks. If we repeat this many times, we will have many different estimates of the sample mean. The distribution of these estimates of the mean is the sampling distribution of the mean. A statistic's sampling distribution is not necessarily normal or the same as that of the population.

According to best practices of corporate governance, which of the following committees will most likely have members from executive management? Audit Environmental health and safety Nominations

Assuming appropriate corporate governance measures, the audit, remuneration/compensation, and nominations committees should be composed entirely of independent board members. Other committees, such as environmental health and safety, may have members from executive management.

A yield curve for coupon bonds is composed of yields on bonds with similar: A) coupon rates. B) issuers. C) maturities.

B

Common stock prices are approximately lognormally distributed. Therefore, it is most likely that conventional (discrete) common stock prices are: leptokurtic. skewed to the right. skewed to the left.

B

A private equity firm sells a portfolio company to a buyer that is active in the same industry as the portfolio company. This transaction is best described as a(n): initial public offering. trade sale. secondary sale.

B A trade sale is the sale of a portfolio company to a strategic buyer, such as a company that is active in the same industry.

A portfolio engages in an investment strategy that relies on a particular element of the tax code to produce superior after-tax returns for high net worth individuals. Because of this strategy, the portfolio most likely faces a high level of: model risk. compliance risk. legal risk.

B Tax risk, the risk that the tax code could change, along with regulatory and accounting risks together form compliance risk. Legal risk is the risk of being sued or the risk that a court will not uphold an agreement. Model risk is the risk of using the wrong model for analysis or the risk of using the right model incorrectly.

The total probability rule is used when an analyst is interested in: a set of events. all potential outcomes. a single outcome.

B When the scenarios (conditioning events) are mutually exclusive and exhaustive, no possible outcomes are left out, thereby covering all potential outcomes.

Over the long term, in an increasing-cost industry, market prices will most likely: remain the same as a result of competitive forces. fall in response to technological advances. rise in response to higher resource costs over time.

C In an increasing-cost industry, as resource costs increase over time, market prices must increase to cover these higher costs.

An independent board member most likely can have a material business relationship with a: former employee of the firm. family member of a former executive. former customer of the firm.

Based on the criteria for board member independence, a material business relationship can exist with a former customer of the firm. Because the customer is not current, the customer cannot exert influence over the company's management.

In utility analysis, a consumer's optimal bundle of goods lies on an indifference curve that is: A) most preferred by the consumer. B) tangent to the consumer's budget line. C) contained within the consumer's opportunity set.

Based on utility analysis, the optimum bundle of goods lies on the consumer's highest attainable indifference curve, at the point where this indifference curve is tangent to the consumer's budget line. The point of tangency is the only point at which this indifference curve intersects the consumer's opportunity set of attainable bundles. The consumer would prefer bundles that lie on higher indifference curves, but those bundles are unaffordable given the consumer's budget constraint.

Company A owns 60% of Company B. Company A's consolidated income statement most likely includes 100% of Company A's revenues and expenses and what portion of Company B's?

Because Company A owns more than 50% of the shares in Company B it must present consolidated financial statements, which will include 100% of Company B's revenues and expenses.

transferring/shifting/preventing risk

Buying insurance transfers a risk to the insurance company. Shifting a risk is changing the distribution of outcomes, typically with a derivatives contract. Preventing a risk refers to taking steps such as strengthening security procedures.

Which type of triangle pattern most likely exhibits a horizontal trendline connecting the high prices? Symmetrical Triple top Ascending

C In an ascending triangle pattern, the trendline connecting the high prices is horizontal, as shown in Figure A.

Compared to a firm that appropriately expenses recurring maintenance costs, a firm that capitalizes these costs will have greater cash flow from: financing activities. investing activities. operating activities.

C When a firm capitalizes costs, it classifies the cash outflow as CFI rather than CFO. The result is higher CFO compared to expensing the same costs.

country implements policies that are expected to increase taxes by €100 million, increase government spending by €50 million, and reduce investments and private sector savings by €25 million each. As a result, the country's current account balance is most likely to: increase by €100 million. increase by €50 million. decrease by €50 million.

CA = Sp - I + (T - G - R) CA = Current Account balance Sp = Private sector savings I = Investments T = Taxes G = Government spending R = Transfers ∆CA = -25 - (-25) + (100 - 50 - 0) = 50

The component of the yield on a long-only commodity futures position that is independent of whether the contract is in contango or backwardation is the: A) roll yield. B) collateral yield. C) convenience yield.

Collateral yield depends on the yield on T-bills posted as collateral (margin). Roll yield, or the gains and losses that result from entering into a new, longer-dated futures contract as previous contracts expire or are closed out, depends on whether the contract is in contango (futures price greater than spot price) or backwardation (futures price less than spot price). Futures markets for commodities with high convenience yield tend to be in backwardation, while futures markets for commodities with little to no convenience yield tend to be in contango. ROLL YIELD IS POSITIVE FOR A MARKET IN BACKWARDATION AND NEGATIVE FOR A MARKET IN CONTANGO.

Sunk costs are not to be included in investment analysis. Opportunity costs and the project's impact on taxes are relevant variables in determining project cash flow for a capital investment.

Conditional VaR is the expected value of a loss, given that the loss exceeds a minimum amount. Value at risk is the minimum loss that will occur over a period with a specified probability.

in behavioral finance, which of the following statements best describes the bias of conservatism? Investors: focus on issues in isolation and respond to the issues based on how the issues are posed. assess new information and probabilities of outcomes based on similarity to the current state. tend to be slow to react to new information and continue to maintain their prior views or forecasts.

Conservatism is a behavioral bias in which investors tend to be slow to react to new information and continue to maintain their prior views or forecasts.

Inherent risks in an investment are most appropriately evaluated in which step of the financial statement analysis framework? Develop and communicate conclusions/recommendations Articulate the purpose and context of analysis Process data

Discussion and presentation of inherent risks in an investment is appropriate in the develop and communicate conclusions/recommendations step.

A swap that involves the exchange of a fixed payment for a floating payment can be interpreted as a series of forward contracts with different expiration dates. These implied forward contracts will most likely have: different prices due to differences in the price of the underlying at expiration. identical prices. different prices due to differences in the cost of carry.

Due to differences in the cost of carry, implied forward contracts will have different prices. The differences in the cost of carry stem from the timing differences of the payments.

A change in which of the following best describes a macroeconomic influence on industry growth? The cost of debt Personal spending habits Population size

External factors affecting an industry's growth include macroeconomic, technological, demographic, governmental, and social influences. A change in interest rates, or the cost of debt, is an example of a macroeconomic influence on industry growth, profitability, and risk.

An investor wants to estimate the market capitalization of a company located in India and has gathered the following data: Values (INR millions) Market value of debt 10.0 Market value of preferred stock 5.0 Cash and short-term investments 4.5 Earnings before interest, taxes, depreciation, and amortization (EBITDA) 15.0 Assuming an enterprise value multiple of 3.2×, the company's market capitalization (in INR millions) is closest to: 28.5. 37.5. 33.0.

Enterprise value (EV) = EBITDA × EV multiple = 15 × 3.2 = 48. Market capitalization = EV - Market value (MV) of debt - MV of preferred stock + Cash and short-term investments = 48 - 10 - 5 + 4.5 = 37.5.

In the semistrong form of market efficiency, fundamental analysis most likely requires the analyst to: use trading rules for detecting the price movements that lead to new equilibrium prices. extrapolate historical data to estimate future values and make investment decisions. do a superior job of estimating the relevant variables and predicting earnings surprises.

Fundamental analysis facilitates a semistrong efficient market by disseminating value-relevant information. Fundamental analysis can be profitable in terms of generating abnormal returns if the analyst creates a comparative advantage with respect to this information. Such an advantage can be achieved by doing a superior job of estimating the relevant variables and predicting earnings surprises.

If a commodity's convenience yield is close to zero, the futures market for that commodity is most likely: in contango. in backwardation. at fair value.

Futures price ≈ Spot price (1 + risk-free rate) + storage costs − convenience yield. If the convenience yield is close to zero, it is likely that the futures price exceeds the spot price, i.e., the market for the commodity is in contango.

Extraordinary items are unusual and infrequent, reported below the line separate from income from continuing operations on the income statement, and would include such items as: foreign government confiscation, earthquake damages, losses from volcanic eruptions, etc.

IFRS Does NOT allow this

Under International Financial Reporting Standards (IFRS), reported operating cash flows are most likely to be increased by the classification choice made for: impairment losses on fixed assets. dividends paid. interest expense.

IFRS allows the classification of interest expense as either an operating or a financing cash flow. When interest expense is shown as a financing cash flow, reported operating cash flows are higher.

Distribution X has a mean of 10 and a standard deviation of 20. Distribution Y is identical to Distribution X in all respects except that each observation in Distribution Y is three times the value of a corresponding observation in Distribution X. The mean and standard deviation of Distribution Y are closest to: Mean Standard deviation A) 30 20 B) 10 60 C) 30 60

If the observations in Distribution Y are three times the observations in Distribution X, the mean and standard deviation of Distribution Y are three times the mean and standard deviation of Distribution X. The standard deviation of a data set measured in feet, for example, will be 3 times the standard deviation of the data set measured in yards (since 1 yard = 3 feet).

Prior to maturity, a zero-coupon bond's price may be different than its constant-yield price trajectory and the bondholder may realize a capital gain or loss by selling the bond. For a zero-coupon bond that is held to maturity, the increase from the purchase price to face value at maturity is interest income.

If the partner had asked about the safety-first ratio, he would have been asking Bellow to select the investment with the minimal probability that the return falls below 5.70%

Explain uses of trend, support, and resistance lines, and change in polarity.

In an uptrend, prices are reaching higher highs and higher lows. An uptrend line is drawn below the prices on a chart by connecting the increasing lows with a straight line. In a downtrend, prices are reaching lower lows and lower highs. A downtrend line is drawn above the prices on a chart by connecting the decreasing highs with a straight line. Support and resistance are price levels or ranges at which buying or selling pressure is expected to limit price movement. Commonly identified support and resistance levels include trendlines and previous high and low prices. The change in polarity principle is the idea that breached resistance levels become support levels and breached support levels become resistance levels.

Under U.S. GAAP, a change to LIFO from another inventory cost method is an exception to the requirement of retrospective application of changes in an accounting principle. Instead of restating prior years' data, the firm uses the carrying value of inventory at the time of the change as the first LIFO layer. U.S. GAAP requires a company that is changing its inventory cost assumption to explain, in its financial statement disclosures, why the new method is preferable to the old method.

In the IFRS framework, the two assumptions that underlie the preparation of financial statements are the accrual basis and the going concern assumption.

When analyzing a head and shoulders pattern that represents the reversal of an upward trend, the highest trading volume is most likely on the upward side of the: right shoulder. head. left shoulder.

In the classic head and shoulders pattern, the left shoulder shows a strong rally on strong volume, followed by a reversal back to the price level where it started. The head is a more pronounced version of the left shoulder but on lower volume. The right shoulder is a mirror image of the left shoulder, also on lower volume.

Which of the following is least likely to increase a bond's yield spread to the benchmark yield curve? Credit rating downgrade. Decrease in liquidity. Increase in expected inflation.

Interest rates on the benchmark yield curve are composed of expected inflation and the real risk-free rate. Spreads to the benchmark yield curve include premiums for credit risk and lack of liquidity.

According to Standard IV(B) Additional Compensation Arrangements, members and candidates must obtain written permission from their employer before accepting an offer of compensation (for the performance of work done for their employer) in addition to what they receive from their employer and that is contingent on future performance.

It is not a violation of the Standards to present a recommended list of securities, some of which may not be suitable for some clients. It is permitted to present investment recommendations in capsule form as long as clients are informed that more information about the securities is available on request.

Which of the following products provides protection from inflation? Linkers Floaters Consols

Linkers, also known as inflation-linked bonds, adjust coupon payments, principal payments, or both to protect investors from inflation risk.

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: held for use until disposal with depreciation continuing to be taken. held for use until disposal with no deprecation taken. held for sale with no depreciation taken.

Long-lived assets that will be disposed of other than by sale, such as in 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 investment will most likely expose investors to the greatest level of extension risk? Shorter-term tranches in a collateralized mortgage obligation structure Planned amortization class tranches in a collateralized mortgage obligation structure Commercial mortgage-backed securities with a balloon payment

Many commercial loans backing commercial mortgage-backed securities (CMBS) are balloon loans that require significant repayment of principal at maturity. The risk that the borrower will not be able to make the balloon payment is called balloon risk. The lender may decide to extend the loan over a period of time called the workout period. Because the term of the loan can be extended, balloon risk is a type of extension risk.

Under imperfect competition, maximum profit is best described as occurring at the output level at which: total revenue equals total costs. marginal revenue equals marginal cost. the difference between total revenue and total costs is greatest.

Maximum profit occurs at the output level at which the difference between total revenue and total costs is greatest.

The completed-contract method must be used under U.S. GAAP since Thunderbird cannot reliably estimate the project's cost. Under the completed-contract method, no revenue is recognized until the project is complete. Under IFRS, when total cost cannot be reliably estimated, revenue is recognized to the extent that recovering contract costs is probable. Since Thunderbird incurred $50 million of cost in 2007, $50 million of revenue is recognized.

No profit is recognized until the completion of the project; however, expected losses are recognized. Project 2 has an expected loss of $20,000.

cash conversion cycle = AR + Inv - AP this is also Called the NET OPERATING CYCLE

OPERATING CYCLE = AR turn + inv turn

A mortgage-backed security has a pass-through rate of 4.3%. The average interest rate on its underlying pool of mortgages is 4.5%. The difference between these rates is most likely due to: issuance and servicing costs. slower-than-expected prepayments. faster-than-expected prepayments

Pass-through (i.e., coupon) rates on an MBS are less than the average interest rate on its underlying pool of mortgages because some of the cash flows from the mortgages are used to pay issuance costs and fees to the servicer of the mortgages.

reconstitution =

Reconstitution refers to changing the securities that make up an index. Reconstitution of an index is required if one of its constituent securities goes out of existence (for example, a maturing bond or an expiring futures contract) or no longer meets the requirements to be included in the index.

Which of the following techniques is most likely to provide a company with the opportunity to inflate earnings? Reductions in the useful lives of fixed assets Last-in, first-out (LIFO) liquidation Increases to tax asset valuation allowances

The LIFO liquidation of low-cost inventory layers results in the transfer of low inventory costs to the income statement as costs of goods sold. With reduced costs of goods sold, reported earnings are higher.

The SML and CML both intersect the vertical axis at the risk-free rate. The SML describes the risk/return tradeoff for individual securities or portfolios, whereas the CML describes the risk/return tradeoff of various combinations of the market portfolio and a riskless asset.

The Sharpe ratio measures excess return per unit of total risk. The Treynor measure and Jenson's alpha are calculated with beta, not standard deviation, and are appropriate for analyzing portfolios based on systematic risk.

TIPS

The coupon rate is set at a fixed rate determined via auction. This is called the real rate. The principal that serves as the basis of the coupon payment and the maturity value is adjusted semiannually. Because of the possibility of deflation, the adjusted principal value may be less than par (however, at maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value).

market weighted vs. price weighted index

The denominator of a price-weighted index must be adjusted to reflect stock splits and changes in the sample over time. A market value-weighted series assumes you make a proportionate market value investment in each company in the index

Assume economic activity is accelerating, inflation is increasing modestly, and unemployment is low. The economy is most likely in which phase of the business cycle? Late expansion Early expansion Peak

The late expansion phase is characterized by acceleration of growth rate, decreasing of unemployment rate, and increasing of inflation rate.

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

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.

The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of: costs incurred in year 3 to total billings. costs incurred in year 3 to total estimated costs. total costs incurred to total estimated cost.

The percentage of completion method recognizes revenues in proportion to the proportion of expenses incurred. Using only the current year's costs produces an incorrect result if the estimated total cost has changed. Revenue recognized in any given year is costs to date divided by total estimated costs, times total estimated revenue for the project, minus revenue that has already been recognized

Distinguish between value and price of forward and futures contracts.

The price of a forward or futures contract is the forward price that is specified in the contract. The value of a forward or futures contract is zero at initiation. Its value may increase or decrease during its life, with gains or losses in the value of a long position just opposite to gains or losses in the value of a short position. The value of a forward or futures contract is typically zero at initiation, and at expiration is the difference between the spot price and the contract price.

The slope of the security market line is best derived from the: beta of the security. risk-free rate of return. market risk premium.

The security market line is a graphical representation of the CAPM with beta on the x-axis and expected return on the y-axis. The slope of the line is given by the market risk premium, the difference between the equity market return and the risk-free rate of interest.

GIPS require that, to claim compliance, firms must present GIPS-compliant performance information for a minimum of five years or since inception if in existence less than five years. Firms may not link noncompliant performance information for any periods after January 1, 2000.

The standard normal distribution has a mean of 0 and a standard deviation of 1.

The value effect occurs when value stocks, which are generally referred to as stocks that have below-average price-to-earnings and market-to-book ratios, as well as above-average dividend yields, outperform growth stocks consistently and for long periods.

The value effect—that is, stocks with below-average price-to-earnings and market-to-book ratios and above-average dividend yields have consistently outperformed growth stocks over long periods—is a cross-sectional anomaly.

Mutual funds that hold high cash positions are most likely viewed by technical analysts as being: bearish. neutral. bullish.

When mutual funds hold high cash positions, the cash represents buying power that will move prices higher when the funds are used to add positions to the portfolio. Therefore, technical analysts view mutual funds that hold high cash positions as a bullish indicator.

A developing country that maintains a fixed value for its currency relative to the US dollar is experiencing a decline in its economic activity, and its inflation rate falls below the level of inflation in the United States. The most likely result of the developing country's actions to maintain the fixed exchange rate target is that its: foreign exchange reserves will decrease. short-term interest rates will fall. money supply will contract

With a decline in economic activity and domestic inflation, the currency of the developing country would start to rise against the dollar. To protect the exchange rate target, the developing country's monetary authority will purchase foreign exchange reserves and sell its own currency. This will increase the domestic money supply, decrease short-term interest rates and increase foreign exchange reserves.

When computing the yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the: A) prevailing yield to maturity at the time interest payments are received. B) coupon rate. C) yield to maturity at the time of the investment.

YTM at time of investment. The reinvestment assumption states that reinvestment must occur at the YTM in order for an investor to earn the YTM. The assumption also states that payments are received in a prompt and timely fashion resulting in immediate reinvestment of those funds.

Given that the one-year spot rate is 5.76% and the 1.5-year spot rate is 6.11%, assuming semiannual compounding what is the six-month forward rate starting one year from now?

[ (1 + .0611/ 2 ) ^ 3 ] / [ (1 + .0576 / 2) ^ 2 ) ^2 = .034059 x 2 = 6.81% 1) since there is semi annual compounding, each interval of 6 months is one period so 1.5 year = raise to the third exponent. 2) remember to divide the rate by two bc of the six month 3) also remember to multiply by 2 at the end bc of the semi annual

horizontal common-size statements

can be used to identify structural changes in a firm's operating results and financial condition over time. Horizontal common-size data present each item as a percentage of its value in a base year.

change of control put

protects lenders by requiring the borrower to buy nack its debt in the even of an acquisition.

lockup period

is a minimum length of time before an investor may redeem shares or make withdrawals.

spot rate for a maturity of N periods

is the geometric mean of forward rates over the N periods. The same relation can be used to solve for a forward rate given spot rates for two different periods.

A large, creditworthy manufacturing firm would most likely get short-term financing by: entering into an agreement for a committed line of credit. issuing commercial paper. factoring its receivables.

issuing commercial paper Large, creditworthy firms can get the lowest cost of financing by issuing commercial paper. Selling receivables to a factor is a higher cost source of funds used by firms with poor credit quality. A committed line of credit requires payment of a fee and represents bank borrowing, which would be attractive to a firm that did not have the size or creditworthiness to issue commercial paper.

biggest factors affecting business risk

demand variability, sales price variability, input price variability, ability to adjust output prices, and operating leverage. Debt levels affect financial risk, not business (operating) risk. Business risk refers to the uncertainty about operating earnings (EBIT) and results from variability in sales and expenses. Business risk is magnified by operating leverage.

If the probability of a Type I error decreases, then the probability of: incorrectly rejecting the null increases. a Type II error increases. incorrectly accepting the null decreases.

If P(Type I error) decreases, then P(Type II error) increases. A null hypothesis is never accepted. We can only fail to reject the null.

monte carlo simulation

Monte Carlo simulations can be set up with inputs that have any distribution and any desired range of possible values. However, a limitation of the technique is that its output can only be as accurate as the assumptions an analyst makes about the range and distribution of the inputs.

Carrying costs of holding the underlying asset increase the value of call options and decrease the value of put options.

Open interest is the total number of contracts (long/short position pairs) outstanding. The number of contracts that change hands in a given period is volume, not open interest.

In a descending price or Dutch auction, the government will sell bonds to the bidders who bid the lowest yields (highest prices) until all the bonds are sold. Bidder 1 receives 200 bonds at a yield of 5.25%, Bidder 2 receives 100 bonds at a yield of 5.30%, and Bidder 3 receives the remaining 200 bonds at a yield of 5.40%.

Reducing the numerator and denominator by the same amount will increase a ratio that is greater than one and decrease a ratio that is less than one.

in using matrix pricing to estimate the required yield spread on a new corporate bond issue, the benchmark rate used is most likely to be the: yield to maturity on a corporate bond with similar credit risk and time to maturity. coupon rate on a government bond with a similar time to maturity. yield to maturity on a government bond with a similar time to maturity.

The benchmark rate is the yield to maturity on a government bond with the same, or similar, time to maturity.

expected loss = default risk x loss severity

loss severity = percent of value lost if borrower defaults recovery rate = 1- expected loss %

The spot rate for Japanese yen per UK pound is 138.78. If the UK interest rate is 1.75% and the Japanese interest rate is 1.25%, the 6-month no-arbitrage forward rate is closest to:

138.44 138.78 x (1 + .0125 / 2) / (1 + .0175 / 2)

Which of the following events will most likely result in a decrease in a valuation allowance for a deferred tax asset under U.S. GAAP? A(n): extension in the tax loss carry-forward period decrease in interest rates reduction in tax rates

A

If a government increases its spending on domestically produced goods by an amount that is financed by an equivalent increase in taxes, the aggregate demand will most likely: remain unchanged. decrease. increase.

A Aggregate demand rises when the government increases spending by the same amount as it raises taxes since the marginal propensity to spend out of disposable income is less than 1, and hence for every dollar less in disposable income, spending only falls by $c (where c is the marginal propensity to consume). Aggregate spending will fall less than the tax rise by a factor c. This additional output will, in turn, lead to further increases in income and output through the multiplier effect.

Principal payments associated with credit card receivable-backed securities are: distributed to investors after the lockout period. distributed to investors as a balloon payment. reinvested after the lockout period

A Credit card receivable-backed securities are non-amortizing loans. They have a lockout period during which the only cash flows paid to investors are based on finance charges and fees. When the lockout period is over, principal payments are distributed to investors. In contrast, principal is received monthly in automobile loan-backed securities.

Knowledge about the degree of risk aversion of investors is most likely needed for: the pricing of assets, but not for the pricing of derivatives. the pricing of derivatives, but not for the pricing of assets. both the pricing of assets and of derivatives

A Derivatives pricing makes use of the fact that arbitrage opportunities guarantee that a risk-free portfolio that combines the underlying with a derivative must earn the risk-free rate. As such, no knowledge about the degree of risk aversion of investors is needed. In contrast, the pricing of assets requires knowledge of the degree of risk aversion in order to adequately assess risk premia.

Compared to its net asset value (NAV) calculated in accordance with accounting standards, a hedge fund's trading NAV: will be lower because of adjustments for illiquid positions. is likely to be higher because of upward bias in model-based security values. may be higher or lower, reflecting gains or losses on securities designated for short-term trading.

A If a fund calculates a trading NAV, it will adjust market prices downward for securities in which it holds positions that are large relative to trading volume or total value outstanding and thus are less liquid.

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? Increase. Decrease. No effect.

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

Which statement best describes the risk to senior tranche investors in a collateralized debt obligation (CDO)? In default, the manager will not earn a return sufficient to payoff investors. Leverage inherent in the CDO transaction results in higher risk. There are no triggers that require the payoff of the principal to investors.

A In the case of defaults in collateral, there is a risk that the CDO manager will not earn a sufficient return to pay off the investors in the senior and mezzanine tranches. This will result in losses to these classes of bondholders.

An option's intrinsic value is equal to the amount the option is: in the money, and the time value is the market value minus the intrinsic value. out of the money, and the time value is the market value minus the intrinsic value. in the money, and the time value is the intrinsic value minus the market value

A Intrinsic value is the amount the option is in the money. In effect it is the value that would be realized if the option were at expiration. Prior to expiration, the option's market value will normally exceed its intrinsic value. The difference between market value and intrinsic value is called time value

To project the assets and liabilities of a pension plan using a number of different assumptions, the most appropriate method to employ is: Monte Carlo simulation because it can evaluate the effect of changes in assumptions. historical simulation because risk not represented in the time period observed can be integrated in the simulation. Monte Carlo simulation because it is can provide more insights into cause and effect relationships than analytical methods.

A Monte Carlo simulation is better suited to hypothetical "what if" analysis than historical simulation. To model a pension plan's status under a number of different hypothetical assumptions affecting the assets and liabilities, Monte Carlo simulation is the most appropriate method

Which of the following statements regarding secondary markets is least accurate? Secondary markets are important because they provide: regulators with information about market participants. firms with greater access to external capital. investors with liquidity.

A Secondary markets are important because they provide liquidity and continuous information to investors. The liquidity of the secondary markets adds value to both the investor and firm because more investors are willing to buy issues in the primary market, when they know these issues will later become liquid in the secondary market. Therefore, the secondary market makes it easier for firms to raise external capital.

Jack Steyn, CFA, recently became the head of the trading desk at a large investment management firm that specializes in domestic equities. While reviewing the firm's trading operations, he notices clients give discretion to the manager to select brokers on the basis of their overall services to the management firm. Despite the client directive, Steyn would most likely violate Standard III(A): Loyalty, Prudence, and Care if he pays soft commissions for which of the following services from the brokers? Database services for offshore investments Investment conference attendance Equity research reports

A Standard III(A): Loyalty, Prudence, and Care stipulates that the client owns the brokerage. Therefore, members and candidates are required to use client brokerage only to the benefit of the clients (soft commissions policy). Because the firm specializes in domestic equities, an offshore investment database service would not benefit the clients.

Which of the following statements about the capital market line (CML) is least accurate? The market portfolio lies on the CML and has only unsystematic risk. Investors choose a portfolio on the CML by varying their weightings of the risk-free asset and the market portfolio. The CML will not be a linear relationship if investors' borrowing and lending rates are not equal

A The first part of this statement is true - the market portfolio does lie on the CML. However, the market portfolio is well diversified and thus has no unsystematic risk. The risk that remains is market risk, or nondiversifiable, or systematic risk. The CML measures standard deviation (or total risk) against returns. The CML will "kink" if the borrowing rate and lending rate are not equal. Investors choose a portfolio on the CML by lending or borrowing at the risk-free rate to vary the weighting of their investments in the risk-free asset and the market portfolio

Charles Mbuwanga, a Level III CFA candidate, is the business development manager for Sokoza Investment Group, an investment management firm with high-net-worth retail clients throughout Africa. Sokoza introduced listed Kenyan REITs (real estate investment trusts) to its line of investment products based on new regulations introduced in Kenya to diversify its product offering to clients. The product introduction comes after months of researching Kenyan property correlations with other property markets and asset classes in Africa. Sokoza assigns Mbuwanga as part of the sales team that will introduce this product to its clients across Africa. Mbuwanga subsequently determines most of Sokoza's clients' portfolios would benefit from having a small Kenyan property exposure to help diversify their investment portfolios. By promoting the Kenyan REITs for Sokoza's client portfolios as planned, Mbuwanga would least likely violate which of the following standards? Independence and Objectivity Suitability Knowledge of the Law

A There is no indication Mbuwanga's recommendation is based on any compensation package based on sales targets. If he had a sales target as part of his responsibility to promote the new product, it could be conceived that his independence and objectivity would be in question. Mbuwanga does, however, seem to be in violation of Standard III(C): Suitability because although research with regard to correlation was undertaken, an analysis based on each individual client's return and risk objectives was not done. He may also be in violation of Standard I(A): Knowledge of the Law because he would need to determine whether the Kenyan REIT product is allowable in each of the countries where his clients reside.

When a tax on a good or service is imposed on the producers of the good or service, the: supply will decrease, but the incidence of the tax falls on both buyers and sellers. supply will decrease, but the incidence of the tax falls on the sellers only. demand will decrease, but the incidence of the tax falls on both buyers and sellers.

A When a tax is imposed on the producers of a good or service, they will reduce supply at any given level or market price, because they receive the market price minus the tax. However, the incidence of the tax, meaning how its cost is shared, falls on both the buyers and the sellers, depending upon the relative elasticities of supply and demand.

Which of the following statements about a security market index is most accurate? An index may reflect dividends paid by its constituent securities. If an index increases by 5% in one year, the market return for the year is 5%. An index must use actual prices from market transactions.

A A An index that is designed to measure total return will include dividends in its calculation. Some security market indices use estimated prices when actual prices are not available. The percent change in a security market index is the return on a portfolio of its constituent securities. Whether this represents an estimate of the market return depends on the nature and purpose of the index (for example, a security market index may be designed to represent a particular industry or asset class).

A swap that involves the exchange of a fixed payment for a floating payment can be interpreted as a series of forward contracts with different expiration dates. These implied forward contracts will most likely have: different prices due to differences in the cost of carry. different prices due to differences in the price of the underlying at expiration. identical prices.

A Due to differences in the cost of carry, implied forward contracts will have different prices. The differences in the cost of carry stem from the timing differences of the payments

By themselves, financial ratios are least likely to be sufficient in determining a company's: creditworthiness. current financial condition. past performance.

A Financial ratios alone are not sufficient to determine the creditworthiness of a company. Other factors must also be considered, such as examining the entire operation of the company, meeting with management, touring company facilities, and so forth.

Which scenario is most likely to result in a competitive return to a CDO equity holder? The collateral earns a higher yield than the bond classes. The senior bond class experiences early principal repayment. The debt funding costs are higher than the CDO return.

A The benefit of the return on collateral in excess of what is paid out to the bond classes accrues to the equity holders and to the CDO manager.

In valuing underlying hedge fund positions the most conservative approach is most likely one that uses: the average of the bid and ask prices the most recent market prices. bid prices for longs and ask prices for shorts.

A conservative and theoretically accurate approach is to use bid prices for longs and ask prices for shorts as these are the prices at which the positions could be closed.

The value of a long position in a forward contract at expiration is defined as spot price of the underlying minus forward price agreed in the contract.

A quota does not cause the supply curve to shift. The equilibrium quantity will decrease to the quota amount. Marginal cost will be less than marginal benefit, leading to a deadweight loss from underproduction

Interpret interest rates as required rates of return, discount rates, or opportunity costs

An interest rate can be interpreted as the rate of return required in equilibrium for a particular investment, the discount rate for calculating the present value of future cash flows, or as the opportunity cost of consuming now, rather than saving and investing.

Are the following ratios best classified as profitability ratios? Ratio #1 - Cash plus short-term marketable investments plus receivables divided by average daily cash expenditures. Ratio #2 - Earnings before interest and taxes divided by average total assets. A) Both of the ratios are profitability ratios. B) Only one of the ratios is a profitability ratio. C) Neither of the ratios is a profitability ratio

B (Cash + short-term marketable investments + receivables) divided by average daily cash expenditures is known as the defensive interval ratio. The defensive interval ratio is a liquidity ratio that measures the firm's ability to pay cash expenditures in the absence of external cash flows, but does not directly measure profitability. EBIT / average total assets is one variation of the return on assets ratio. Return on assets is a profitability ratio that measures the efficiency of managing assets and generating profits.

If a forward contract requires no cash outlay at initiation, it is most likely true that at initiation: price is equal to value. price exceeds value. value exceeds price.

B At initiation, value is equal to zero. Price is a positive number which states the amount that must be paid when the purchase takes place.

Ken Miller, CFA, wants to compare the returns on government agency bonds to the returns on corporate bonds. Peg Egan, CFA, wants to compare the returns on high yield bonds in developed markets to the returns on investment grade bonds in emerging markets. Which of these analysts is most likely able to use bond indexes for their analysis? A) Only one of these analysts. B) Both of these analysts. C) Neither of these analysts.

B Because of the wide universe of bonds that trade in financial markets, indexes are available (or can be constructed) based on virtually any feature or classification of bonds.

According to capital market theory, which of the following represents the risky portfolio that should be held by all investors who desire to hold risky assets? Any point on the efficient frontier and to the left of the point of tangency between the CML and the efficient frontier. The point of tangency between the capital market line (CML) and the efficient frontier. Any point on the efficient frontier and to the right of the point of tangency between the CML and the efficient frontier.

B Capital market theory suggests that all investors should invest in the same portfolio of risky assets, and this portfolio is located at the point of tangency of the CML and the efficient frontier of risky assets. Any point below the CML is suboptimal, and points above the CML are not feasible.

Which of the following companies would most likely be considered to have the lowest financial reporting quality, other things equal? A company that provides high quality, decision-useful information under GAAP but delays its reports. A company that reports the results from two different segments as a combined entity. A company that reports significant profits due to a favorable exchange rate movement.

B Combining the results from two segments is an example of biased reporting, which falls in the middle of the quality spectrum. It is difficult to interpret the profitability of each segment when their results are combined

Which of the following is least likely a primary reason a company would raise capital through the issuance of equity securities? To: finance the purchase of long-lived assets directly satisfy stock compensation plans maximize the wealth of shareholders

B In general, a company will utilize share buybacks to satisfy stock compensation plans.

The process of looking for inflection points in one market that may signal a trend change in a related market is best described as: capital market cycle analysis. relative strength analysis. momentum analysis.

B In intermarket analysis, technicians often use relative strength analysis to look for inflection points in one market as a warning sign to start looking for a change in trend in a related market.

In the short run, the average product of labor: is increasing when the total product of labor is increasing. is at a maximum where it intersects the marginal product of labor curve. is upward-sloping if the firm is experiencing diminishing marginal returns to labor.

B In the short run, the average product of labor curve is first increasing and then decreasing as diminishing marginal returns to that factor take effect. In the short run, the marginal product of labor is first increasing and then decreasing when diminishing marginal returns take effect. The marginal product of labor curve will be above the average product of labor curve initially, and, at some point, will intersect the average product curve at its maximum. When the total product of labor begins to increase at a decreasing rate, the average product of labor will be decreasing

Three years ago, Ranchero Corporation purchased equipment for a process used in production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the equipment was greater than its book value. No impairment losses have been recognized on the equipment. Assuming Ranchero follows International Financial Reporting Standards, what is the impact on its total asset turnover ratio and return on equity of reporting the value of the equipment on the balance sheet at fair value? Both will increase. Both will decrease. Only one will increase.

B Increasing the value of the equipment on the balance sheet will increase assets and thus decrease the total asset turnover ratio (higher denominator). Increasing the value of the equipment will also increase equity, otherwise, the balance sheet equation would not balance. Increasing equity will result in lower ROE (higher denominator). The increase in the value of the equipment is not recognized in the income statement unless it is reversing a previously recognized write-down.

uring periods of rising prices and stable or growing inventories, the most informative inventory accounting method for income statement purposes is: A) FIFO because it allocates historical prices to cost of good sold (COGS) and provides a better measure of current income. B) LIFO because it allocates current prices to cost of good sold (COGS) and provides a better measure of current income. C) weighted average because it allocates average prices to cost of good sold (COGS) and provides a better measure of current income.

B LIFO is the most informative inventory accounting method for income statement purposes in periods of rising prices and stable or growing inventories. It allocates the most recent purchase prices to COGS, and thus provides a better measure of current income and future profitability.

An advantage to the lessee in a leasing agreement is most likely: economies of scale in servicing assets. lower financing costs than purchasing the asset. tax benefits associated with interest expense.

B Leases can provide less costly financing for the lessee, since they usually require little, if any, down payment and often are at lower fixed interest rates than those incurred if the assets were purchased.

Partial equilibrium analysis is least likely to include the effect of: consumer tastes on demand. price of a good on demand for a complement. consumer income on demand.

B Partial equilibrium analysis does not consider the effect of changes in the equilibrium price of a good on the markets for other goods. For example, under partial equilibrium analysis, the effect of a change in the price of a good on the demand for a complement, and the resulting change in the equilibrium price of the complement, are not considered. The demand function for a good assumes the price of a complement is fixed. A general equilibrium analysis would include this secondary effect of a change in the price of a good on the equilibrium price of a complement. Consumer income and preferences are included in the demand function for a good under partial equilibrium analysis.

Replication is most likely used to: reduce portfolio risk. exploit pricing differentials. increase leverage.

B Replication is the process of creating an asset or portfolio from another asset, portfolio and/or derivative. It is used to exploit pricing differentials.

Which of the following situations is the LEAST likely reason why the marginal cost of capital schedule for a company rises as additional funds are raised? The company deviates from its target capital structure because of the economies of scale associated with flotation costs and market conditions. The cost of additional funds from various sources rises as higher levels of financing are achieved. The company seeks to issue less senior debt because it violates the debt incurrence test of an existing debt covenant.

B The WACC does not necessarily increase as more funds are being raised. Higher amounts of funding would not change the WACC if everything were in proportion to the old target capital structure - it is the changes in relative proportions of sources of funding that could make a difference because of interest deductibility and financial risk.

According to the concept of money neutrality, over the long term, the money supply is least likely to affect: inflation expectations. the real rate of interest. inflation.

B The concept of money neutrality implies that an increase in the money supply will leave real variables like output and employment unaffected. The real rate of interest will be unaffected by money supply changes but inflation and inflation expectations will be affected.

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

B 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.

The most likely result of increasing the estimated useful life of a depreciable asset is that: asset turnover will increase. net profit margin will increase. return on assets will decrease.

B The longer the estimated useful life of an asset, the lower the annual depreciation expense charged to operations. Lower depreciation expense results in higher net income, profit margins, and contributions to shareholder's equity.

The type of equity security that gives its owners the right to vote the shares of, and receive dividends from, a foreign company is best described as a: global depository receipt. sponsored depository receipt. fully-owned depository receipt.

B The owner of a sponsored DR share has the same voting rights and receives the same dividends as the owner of a common share of the firm. With an unsponsored DR, the depository bank retains the voting rights. A global depository receipt may be sponsored or unsponsored.

Which of the following conditions is not required for the realized horizon yield to equal the original yield to maturity on an option-free, fixed-coupon bond? The coupon payments are reinvested at the same interest rate as the original yield to maturity. The bond is held to maturity. The bond is sold at a price on the constant-yield price trajectory.

B The realized horizon yield will equal the original yield to maturity if the coupon payments are reinvested at the original yield to maturity and the bond is sold at a price on the constant-yield price trajectory. The latter condition ensures that the investor does not have any capital gains or losses when the bond is sold.

Which of the following is least likely to affect the growth of the economy? The workforce attending an average of 20 hours of training per year An increase in the labor force that is offset by a decrease in the average hours worked per worker, making the total hours worked unchanged When capital depreciation exceeds gross investment within the economy

B The total hours worked remained unchanged, and accordingly, the growth of the economy will not change.

As a forward contract approaches its expiration date, its value: increases to the forward contract price. depends on the price of the underlying asset. approaches zero

B The value of a forward contract is zero at initiation, and during its life its value depends on changes in the spot price of the underlying asset. At expiration its value is based on the difference between the spot price of the underlying asset and the price specified in the forward contract.

An entry made to record an accrual, such as bad debt expense, that is not yet reflected in the accounting system is best described as a(n): trial balance entry. adjusting entry. ledger entry

B Adjusting entries are a type of journal entries typically made at the end of the accounting period to record such items as accruals that are not yet reflected in the accounting system.

Meshack Bradovic, CFA, was recently hired as a credit analyst at a credit rating agency whose major clients include publicly listed companies on the local stock exchange. One of the clients is currently preparing to issue a new bond to finance a major factory project. Analysts are speculating that without the new factory, the company will not survive the onslaught of competition from increasing imports; therefore, the company is counting on an upgraded credit rating to enhance the subscription level of the issue. Bradovic's research suggests the creditworthiness of the company has severely deteriorated over the last year because of negative operating cash flows. Without conducting extensive research, Bradovic's boss puts pressure on him to upgrade the credit rating to an investment-grade rating. Bradovic reports this pressure to the firm's compliance department, where he is encouraged to follow his boss's advice. What course of action is most appropriate for Bradovic to prevent any violation of the CFA Standards of Professional Conduct? Disassociate with the credit rating report, the bond issue, and the client. Quit his position with the firm. Upgrade the rating but note his objections in writing.

B Bradovic's boss's insistence that all credit ratings be given an investment-grade rating, irrespective of the analysis undertaken, indicates a systemic disregard for due diligence, reasonable basis, and true representation. This shows a total disregard for the CFA Institute Standards of Professional Conduct, in particular Standard V(A)-Diligence and Reasonable Basis. Bradovic's best course of action consequently is to resign because the company's current practice of giving false credit ratings is likely to continue.

David Bravoria, CFA, is an independent financial adviser for a high-net-worth client with whom he had not had contact in more than two years. During a recent, brief telephone conversation, the client states he wants to increase his risk exposure. Bravoria subsequently recommends and invests in several high-risk venture capital funds on behalf of the client. Bravoria continues, as he has done in the past, to send to his client monthly, detailed itemized investment statements. Did Bravoria most likely violate any CFA Institute Standards of Professional Conduct? No Yes, with regard to purchasing venture capital funds Yes, with regard to investment statements

B Bravoria violated Standard III(A)-Loyalty, Prudence, and Care because he had not updated his client's profile in more than two years and thus should not have made further investments, particularly in high-risk investments, until he had updated the client's risk and return objectives, financial constraints, and financial position. Bravoria provided his client with investment statements more frequently than that what is required (i.e., quarterly) so was not in violation of providing regular account information.

To finance a proposed project, Youngham Corporation would need to issue £25 million in common equity. Youngham would receive £23 million in net proceeds from the equity issuance. When analyzing the project, analysts at Youngham should: not consider the flotation cost because it is a sunk cost. add the £2 million flotation cost to the project's initial cash outflow. increase the cost of equity capital to account for the 8% flotation cost

B The recommended method is to treat flotation costs as a cash outflow at project initiation rather than as a component of the cost of equity.

For a portfolio consisting of two assets and the correlation coefficient between these two assets is +1.0, it is most likely that portfolio risk is: greater than the weighted average of the risk of the two assets in the portfolio. equal to the weighted average of the risk of the two assets in the portfolio. less than the weighted average of the risk of the two assets in the portfolio.

B With a correlation coefficient of +1.0, no diversification benefits are obtained and the portfolio risk is equal to the weighted average of the risk of the two assets in the portfolio.

Explain why forward and futures prices differ

Because gains and losses on futures contracts are settled daily, prices of forwards and futures that have the same terms may be different if interest rates are correlated with futures prices. Futures are more valuable than forwards when interest rates and futures prices are positively correlated and less valuable when they are negatively correlated. If interest rates are constant or uncorrelated with futures prices, the prices of futures and forwards are the same

A credit rating agency uses "scale and diversification" as one of its metrics to assess credit risk. Which of the following would most likely be included in that category? Cost structure Purchasing power with suppliers Operating cash flow less dividends

Borrowers can better withstand adverse events when they have more purchasing power with suppliers. Purchasing power reflects the organization's scale.

Which of the following types of mutual funds most likely places the highest pressure on the portfolio manager to manage liquidity? A no-load closed-end fund A load closed-end fund A no-load open-end fund

C A no-load open-end fund accepts new investment money and issues additional shares at a value equal to the net asset value of the fund at the time of investment. This structure makes it easy to grow in size but creates pressure on the portfolio manager to manage the cash inflows and outflows. Redemptions may create the need to liquidate assets that the portfolio manager might not want to sell at the time or to hold cash to meet redemptions. As a no-load fund, it charges no fee for investing in the fund or for redemption.

With respect to the portfolio management process, the execution step most likely includes: developing the investment policy statement. portfolio monitoring. asset allocation.

C Asset allocation is part of the execution step of the portfolio management process. The execution step also includes security analysis and portfolio construction.

Under the IFRS Framework for the Preparation and Presentation of Financial Statements, it is most appropriate to recognize a financial statement element in the financial statements if it: provides certainty that any future economic benefit associated with the item will flow to or from the enterprise. is normally carried at historical cost, current cost, or fair market value. has a cost or value that can be measured with reliability.

C For recognition in the financial statements, an element must have a cost or value that can be measured with reliability. Certainty is not a requirement for economic benefits associated with an item to flow to or from the enterprise; all that is required is the probability that they will

Which of the following is least likely an underlying assumption of technical analysis? Supply and demand for a stock is driven by rational and irrational behavior. Prices are determined by supply and demand. Markets are efficient and all known information is reflected in prices.

C For technical analysis to succeed, markets must have some inefficiency in order for trends to develop

Which of the following is least likely a primary reason a company would raise capital through the issuance of equity securities? To: maximize the wealth of shareholders finance the purchase of long-lived assets directly satisfy stock compensation plans

C In general, a company will utilize share buybacks to satisfy stock compensation plans.

Praful Chandarana, CFA, is starting a new business to offer investment consulting services to pension fund trustees in response to a new regulation that requires all pension fund investment policy statements (IPS) to be reviewed and approved by an independent CFA charterholder. Prior to starting the new business, he meets with the pension fund regulator to clarify whether the CFA charterholder undertaking the IPS review should be a licensed financial adviser by the capital markets regulator. The capital markets regulator requires and grants licenses to those giving investment advice to clients. The pension regulator states they do not require the CFA charterholder to hold a financial adviser's license, despite financial-related advice being given to the pension funds during any IPS review. Chandarana thus starts his new business to undertake IPS reviews without obtaining a financial adviser's license from the capital markets regulator. Subsequently, when clients of his former employer contact him, he informs them of his new company and the services he offers. Does Chandarana most likely violate the CFA Institute Standards of Professional Conduct? No Yes, with regard to Duties to Employer Yes, with regard to Professionalism

C The CFA Institute Code of Ethics and Standards of Professional Conduct requires Chandarana to uphold the rules governing financial advisers. However, he failed to do so because he did not obtain a financial adviser's license. Although the regulator gave Chandarana an exemption when offering IPS reviews, offering his planning services to retail clients without holding a financial adviser's license is a violation of the local law. Standard I(A)-Knowledge of the Law states that when rules or regulations are in conflict, members must comply with the more strict law—in this case, the requirement for financial advisers to be licensed. Chandarana is not restricted from speaking with clients of his old employer by Duties to Employer, Standard IV(A)-Loyalty.

Which of the following statements is least accurate with regard to the efficiency of monopolistic competition? Consumers benefit from brand name promotion and advertising. The expense of advertising and promotion may not be justified by their benefit to consumers. Monopolistic competition is at least as efficient as perfect competition.

C The efficiency of monopolistic competition is unclear. Consumers may make better purchasing decisions due to the information content of brand name promotion and advertising. However, there are those that argue that the increased cost of advertising and sales is not justified by the benefits of these activities and represent inefficient use of resources.

Permanent differences between taxable and pretax income: are not addressed specifically in the financial statements. can be deferred in some cases. are considered as changes in the effective tax rate.

C The permanent differences are never deferred but are considered increases or decreases in the effective tax rate. The financial statements include an effective tax rate reconciliation that addresses permanent differences between pretax and taxable income. If the only difference between the taxable and pretax incomes were a permanent difference, then tax expense would simply be taxes payable.

The time value of an option is most accurately described as: increasing as the option approaches its expiration date. equal to the entire premium for an out-of-the-money option. the amount by which the intrinsic value exceeds the option premium

C The price (or premium) of an option is its intrinsic value plus its time value. An out-of-the-money option has an intrinsic value of zero, so its entire premium consists of time value. Time value is zero at an option's expiration date. Time value is the amount by which an option's premium exceeds its intrinsic value.

For a finance lease, the amount recorded initially by the lessee as a liability will most likely: equal the total of the minimum lease payments. be less than the fair value of the leased asset. equal the present value of the minimum lease payments at the beginning of the lease

C With a finance lease, both an asset and liability are reported on the lessee's balance sheet, with lease payments divided between interest and principal components. The future payments on principal and interest must be discounted to present value at the beginning of the lease

Accruals are best described as requiring an accounting entry: only when a good or service has been provided. when an expense has been incurred. when the earliest event in a transaction occurs.

C Accruals require an accounting entry when the earliest event occurs (paying or receiving cash, providing a good or service, or incurring an expense) and one or more offsetting entries as the exchange is completed.

Which of the following is least likely one of the criteria under U.S. GAAP for classifying a lease as a finance lease? The: A) lease contains a bargain purchase option. B) term of the lease is 75% or more of the estimated economic life of the leased property. C) lessor retains ownership of the property at the end of the lease term.

C If the lease transfers ownership of the property to the lessee at the end of the lease term, the lessee will classify the lease as a finance lease.

A high yield bond fund states that through active management, the fund's return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark for this fund, the index chosen is: appropriate. inappropriate, because the index return does not reflect active management. inappropriate, because the index does not reflect the actual bonds in which the fund invests.

C Security market indexes may be used as benchmarks for the performance of active managers, but the index chosen should represent the universe of securities from which the manager is choosing. Here, an index of high yield bonds would be a more appropriate benchmark

On a graph of risk, measured by standard deviation and expected return, the efficient frontier represents: all portfolios plotted in the northeast quadrant that maximize return. the group of portfolios that have extreme values and therefore are "efficient" in their allocation. the set of portfolios that dominate all others as to risk and return.

C The efficient set is the set of portfolios that dominate all other portfolios as to risk and return. That is, they have highest expected return at each level of risk.

Which of the following statements about portfolio management is most accurate? A) As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches negative one. B) The security market line (SML) measures systematic and unsystematic risk versus expected return; the CML measures total risk. C) Combining the capital market line (CML) (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from the decision of what to invest in.

Combining the CML (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from what to invest in and is called the separation theorem. The investment selection process is thus simplified from stock picking to efficient portfolio construction through diversification. The other statements are false. As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches positive one. (Remember that the market portfolio has no unsystematic risk). The SML measures systematic risk, or beta risk.

Describe the elements that should be covered in a thorough company analysis.

Company analysis should include an overview of the firm, industry characteristics, and analysis of product demand, product costs, the pricing environment, the firm's financial ratios, and projected financial statements and firm valuation. The analysis should describe the company's competitive strategy. Companies can employ a cost leadership (low-cost) strategy or a product or service differentiation strategy. A cost leadership firm seeks to have the lowest costs of production in its industry, offer the lowest prices, and generate enough volume to make a superior return. A differentiating firm's products and services should be distinctive in terms of type, quality, or delivery.

Under U.S. GAAP, deferred tax assets and liabilities are classified as current or noncurrent, based on the underlying asset or liability. Under IFRS, deferred tax items are classified as noncurrent.

Current deferred tax liability, current deferred tax asset, noncurrent deferred tax liability and noncurrent deferred tax asset are each disclosed separately

Under IFRS, dividends received are least likely classified as which type of cash flow on the cash flow statement? Operating Financing Investing

Dividends received can be classified as either an operating or investing activity under IFRS but not as financing.

Consider a random variable X that follows a continuous uniform distribution: 7 ≤ X ≤ 20. Which of the following statements is least accurate? F(21) = 0.00. F(10) = 0.23. F(12 ≤ X ≤ 16) = 0.307.

F(21) = 0 F(21) = 1.00 The probability density function for a continuous uniform distribution is calculated as follows: F(X) = (X - a) / (b - a), where a and b are the lower and upper endpoints, respectively. (If the given X is greater than the upper limit, the probability is 1.0.) Shortcut: If you know the properties of this function, you do not need to do any calculations to check the other choices. The other choices are true. •F(10) = (10 - 7) / (20 - 7) = 3 / 13 = 0.23 •F(12 ≤ X ≤ 16) = F(16) - F(12) = [(16 - 7) / (20 - 7)] − [(12 - 7) / (20 - 7)] = 0.692 − 0.385 = 0.307

Credit risk, market risk, and liquidity risk are examples of financial risk. Solvency risk and tax risk are classified as non-financial risks

Financial risks are those that arise from exposure to financial markets, including credit risk, liquidity risk, and market risk. Non-financial risks are the risks from the operation of the organization and from sources external to the organization. Individuals face mortality and longevity risk, in addition to financial risks. Interactions among risks are frequent and can be especially significant during periods of stress in financial markets.

Residential mortgage-backed securities issued in the US by government-sponsored enterprises are guaranteed by: the government-sponsored enterprise. the full faith and credit of the government. external credit enhancements

For residential mortgage-backed securities (RMBS) issued by a GSE (government-sponsored enterprise), such as Fannie Mae and Freddie Mac, credit risk is reduced by the guarantee of the GSE itself.

Compare Monte Carlo simulation and historical simulation.

Historical simulation uses randomly selected past changes in risk factors to generate a distribution of possible security values, in contrast to Monte Carlo simulation, which uses randomly generated values. A limitation of historical simulation is that it cannot consider the effects of significant events that did not occur in the sample period.

Which of the following is least likely one of the general requirements for financial statements under IFRS? No offsetting of income against expenses unless a standard permits or requires it. Statements should be prepared under a going concern assumption. Statements should be prepared at least quarterly

IFRS require reporting at least annually. The other two choices are requirements included in IAS No. 1.

During a period of rising inventory costs, a company decides to change its inventory method from FIFO to the weighted average cost method. Under the weighted average method which of the following financial metrics will most likely be higher than under FIFO? Current ratio Number of days in inventory Debt-to-equity ratio

If all else is held constant, in a period of rising costs the ending inventory will be lower under the weighted average cost method and the cost of goods sold will be higher (compared to FIFO), resulting in lower net income and retained earnings. There will be no impact on the debt level, current or long-term. Therefore, the debt-to-equity ratio (Total debt/Total shareholder's equity) will increase because of the decrease in retained earnings (and lower shareholders' equity).

bond-yield plus method to determine cost of equity

If the bonds are trading at $98, the required yield is 8.11%, and the market value of the issue is $3.92 million. To calculate this rate using a financial calculator (and figuring the rate assuming a $100 face value for each bond), N = 4; PMT = 7.5 = (0.075 × 100); FV = 100; PV = -98; CPT → I/Y = 8.11. By adding the equity risk factor of 4%, we compute the cost of equity as 12.11%.

A country is experiencing a core inflation rate of 7% during a recessionary period of real GDP growth. If the central bank has a single mandate to achieve price stability and uses inflation targeting with an acceptable range of zero to 4%, its monetary policy response is most likely to decrease: the foreign exchange value of the country's currency. GDP growth in the short run. short-term interest rates.

If the central bank has a price stability mandate, it will most likely respond to the above-target inflation rate by decreasing the money supply, even though GDP growth is in a recessionary phase. Decreasing the money supply will result in higher short-term interest rates and appreciation of the currency, but will likely cause GDP growth to decrease further in the short run.

leading/lagging/coincident indicators.

Leading indicators have turning points that tend to precede those of the business cycle. Coincident indicators have turning points that tend to coincide with those of the business cycle. Lagging indicators have turning points that tend to occur after those of the business cycle. A limitation of using economic indicators to predict business cycles is that their relationships with the business cycle are inexact and can vary over time.

With respect to the relationship between output and costs in the short run, a decline in the marginal cost per unit most likely occurs at what level of production? Profit-maximizing output High output Low output

Marginal cost per unit, in the short run, decreases at low levels of output as a result of economies from greater specialization. At higher levels of output, however, it eventually increases because of the law of diminishing returns.

Compared to issuing a bond at par value, and holding all else equal, when a company issues a bond at a premium, its effect on the debt/equity ratio will be: A) no effect on the ratio over the life of the bond. B) an increasing trend in the ratio over the life of the bond. C) a decreasing trend in the ratio over the life of the bond.

Net book value of debt decreases over the life of the bond because the premium amortizes. Stockholders' equity increases over the life of the bond because interest expense decreases each period. This results in a decreasing trend in the debt/equity ratio over the life of the bond, compared to the trend if a bond had been issued at par value.

Describe the steps in the portfolio management process

Planning: Determine client needs and circumstances, including the client's return objectives, risk tolerance, constraints, and preferences. Create, and then periodically review and update, an investment policy statement (IPS) that spells out these needs and circumstances. Execution: Construct the client portfolio by determining suitable allocations to various asset classes based on the IPS and on expectations about macroeconomic variables such as inflation, interest rates, and GDP growth (top-down analysis). Identify attractively priced securities within an asset class for client portfolios based on valuation estimates from security analysts (bottom-up analysis). Feedback: Monitor and rebalance the portfolio to adjust asset class allocations and securities holdings in response to market performance. Measure and report performance relative to the performance benchmark specified in the IPS.

Convert forward quotations expressed on a points basis or in percentage terms into an outright forward quotation

Points in a foreign currency quotation are in units of the last digit of the quotation. For example, a forward quote of +25.3 when the USD/EUR spot exchange rate is 1.4158 means that the forward exchange rate is 1.4158 + 0.00253 = 1.41833 USD/EUR. For a forward exchange rate quote given as a percentage, the percentage (change in the spot rate) is calculated as forward / spot - 1. A forward exchange rate quote of +1.787%, when the spot USD/EUR exchange rate is 1.4158, means that the forward exchange rate is 1.4158 (1 + 0.01787) = 1.4411 USD/EUR

IF GIVEN PRE TAX CASH FLOWS REMEMBER TO MULTIPLE THEM BY 1 - T TO FIND THE CORRECT CF TO TYPE INTO CALCULATOR

REMEMBER NPV AND CAPITAL BUDGETING IS AFTER TAX

Assume that the nominal spot exchange rate (USD/EUR) increases by 7.5%, the eurozone price level decreases by 4%, and the U.S. price level increases by 2.5%. The change in the real exchange rate (%) is closest to: 14.8%. -6.3%. 0.7%.

Real exchange rate = Nominal spot exchange rate × CPI of the foreign country / CPI of the domestic country 1.075 x [.96 / 1.025 ] = 1.007 = .7%

Mailaka Securities (MS) advertises in its marketing material the use of a "bottom up" investment style. Recently, MS senior management decided to switch to a "top down" approach, citing the fact that it is less labor intensive. All other aspects of the research process are to remain the same. The head of research at MS, Mara Cherogony, CFA, is instructed to supervise the implementation of the new procedures, notify clients of the changes, and revise the text of marketing materials when new material is produced. Which of the following CFA Institute Standards of Professional Conduct pertaining to Investment Analysis, Recommendations, and Actions is Cherogony least likely in danger of violating? Diligence and Reasonable Basis Supervisory Responsibility Communication with Clients

Research can still be considered diligent and having a reasonable basis if done using a "top down" research methodology as opposed to a "bottom up" methodology. By not communicating to prospective clients the change in the investment process through the delay in the creation of new marketing material, however, Cherogony violates Standard V(B)-Communication with Clients and Prospective Clients, which requires members and candidates to disclose to clients and prospective clients the basic format and general principles of the investment processes they use to analyze investments, select securities, and construct portfolios, and they must promptly disclose any changes that might materially affect those processes. As a supervisor, Cherogony is responsible for ensuring compliance with the Standards of Professional Conduct.

In an unstable equilibrium, both demand and supply are negatively sloped but the slope of the demand curve is steeper than that of the supply curve. In such a scenario, if the market price P is higher than the equilibrium price P*, the market mechanism will most likely dictate that price will: rise. move to equilibrium. fall.

Rise A security's expected Jensen's alpha is the difference between an active manager's estimate of a security's expected return and the CAPM expected return. A security that is expected to have a negative alpha will plot below the SML (i.e., the security is overvalued and should be sold or sold short).

Proceeds for repaying securitized bonds most likely come from the: cash flows of the project the bond is financing. claims-paying ability of the operating entity. cash flows of the underlying financial assets.

Securitized bonds typically rely on the cash flows generated by one or more underlying financial assets as the primary source of the contractual payments to bondholders rather than on the claims-paying ability of the operating entity.

Sato Kashingaki, CFA, is a financial adviser who practices in multiple jurisdictions. In his resident country, Country A, he is not required by law to hold a financial adviser's license, but he is required to uphold a fiduciary duty to his clients. In Country B, authorities require him to hold a financial adviser's license, but he is not expected to uphold a fiduciary duty to his clients. In Country C, authorities require both a financial adviser's license and an asset management license, in addition to upholding a fiduciary responsibility toward clients. In which of the three countries does Kashingaki have the duty to adhere to the CFA Standards of Professional Conduct over local laws? Country A. Country C. Country B.

Standard I(A)-Knowledge of the Law requires CFA members and candidates to comply with the more strict law, rule, or regulation in the event of conflicts of any applicable laws, rules, and regulations (including the CFA Institute Code of Ethics and Standards of Professional Conduct). Country B does not require a financial adviser to uphold a fiduciary duty (as is required by Country A and C)—in other words, to put the client's interest before their own. Therefore, the CFA Institute Code of Ethics and Standards of Professional Conduct (Duties to Clients) would be applicable because it is the stricter of the two. B

In a period of rising prices, LIFO results in higher COGS, lower inventory balances, and lower gross profit, as compared to FIFO. In a falling price environment, these effects are the opposite. Working capital (current assets minus current liabilities)V is higher under FIFO in a rising price environment because inventories are higher

The IASB Conceptual Framework for Financial Reporting describes the two fundamental qualitative characteristics of financial statements as relevance and faithful representation. The Conceptual Framework lists timeliness, comparability, verifiability, and understandability as characteristics that enhance relevance and faithful representation.

At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in the future on goods already sold. For tax purposes, warranty expense is not deductible until the work is actually performed. The firm believes that the warranty work will be required over the next two years. The tax base of the warranty liability at the end of 20X8 is: $26,000. zero. $13,000.

The carrying value of the warranty liability is $26,000 (the same amount is recorded as a liability on the balance sheet and as an expense on the income statement). The tax base is equal to the carrying value less any amounts deductible in the future. Therefore, the tax base is $0 ($26,000 − $26,000) since the warranty expense will be deductible when the work is performed next year.

which of the following statements about U.S. Treasury Inflation Protection Securities (TIPS) is most accurate? A) Adjustments to principal values are made annually. B) The coupon rate is fixed for the life of the issue. C) The inflation-adjusted principal value cannot be less than par.

The coupon rate is set at a fixed rate determined via auction. This is called the real rate. The principal that serves as the basis of the coupon payment and the maturity value is adjusted semiannually. Because of the possibility of deflation, the adjusted principal value may be less than par (however, at maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value).

Suppose the term structure of interest rates makes an instantaneous parallel upward shift of 100 basis points. Which of the following securities experiences the largest change in value? A five-year: A) zero-coupon bond. B) floating rate bond. C) coupon bond with a coupon rate of 5%

The duration of a zero-coupon bond is equal to its time to maturity since the only cash flows made is the principal payment at maturity of the bond. Therefore, it has the highest interest rate sensitivity among the four securities. A floating rate bond is incorrect because the duration, which is the interest rate sensitivity, is equal to the time until the next coupon is paid. So this bond has a very low interest rate sensitivity. A coupon bond with a coupon rate of 5% is incorrect because the duration of a coupon paying bond is lower than a zero-coupon bond since cash flows are made before maturity of the bond. Therefore, its interest rate sensitivity is lower.

Which date in the chronology of a dividend payment is most likely determined by a security exchange? Holder-of-record date Ex-dividend date Declaration date

The ex-dividend date is normally determined by the security exchange on which the shares are listed. The corporation determines the holder-of-record date and declaration date.

What is the earliest day on which an investor can currently purchase Amex, Inc., if the investor wants to avoid receiving a dividend and thereby avoid paying tax on the distribution, if the date of record is Thursday, October 31? A) Thursday, October 24. B) Tuesday, October 29. C) Monday, October 28.

The ex-dividend date is now two business days prior to the date of record. Counting back two business days identifies Tuesday, October 29 as the date when the shares can be purchased without the dividend.

The one-year spot rate is 6% and the one-year forward rates starting in one, two and three years respectively are 6.5%, 6.8% and 7%. What is the four-year spot rate?

The four-year spot rate is computed as follows: Four-year spot rate = [(1 + 0.06)(1 + 0.065)(1 + 0.068)(1 + 0.07) ]1/4 - 1 = 6.57%

Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued interest since the last coupon of $33.50. Ignoring transaction costs, how much will the seller receive at the settlement date?

The full price is equal to the flat or clean price plus interest accrued from the last coupon date. Here, the flat price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50. Thus, the full price = 1,047.50 + 33.50 = 1,081.00

Assuming its trading partner does not retaliate, which of the following conditions must hold in order for a large country to increase its national welfare by imposing a tariff? The deadweight loss must be smaller than the benefit of its improving terms of trade. It must auction the import licenses for a fee to offset the decline in the consumer surplus. It must have a comparative advantage in the production of the imported good.

The large country is able to cause the foreign exporter to reduce price in order to retain market share. In the large country, domestic producers gain from higher volume and the government gains from collecting the tariff. The sum of these two gains must exceed the deadweight loss to domestic consumers to achieve a national welfare gain. The change in terms of trade causes income redistribution from the foreign exporter to the domestic producer.

the initial margin : Becky Kirk contacted her broker and placed an order to purchase 1,000 shares of Bricko Corp. stock at a price of $60 per share. Kirk wishes to buy on margin. Assuming the margin requirement is 40%, how much money does Kirk have to pay up front to make the purchase?

The margin requirement represents the amount of money an investor must put down on the purchase. So Kirk must put $24,000 down ($60,000 x .40 = $24,000) and can borrow the balance

Which of the following is least likely to be disclosed in the financial statements of a bond issuer? The market rate of interest on the balance sheet date. The amount of debt that matures in each of the next five years. Collateral pledged as security in the event of default.

The market rate on the balance sheet date is not typically disclosed. The amount of principal scheduled to be repaid over the next five years and collateral pledged (if any) are generally included in the footnotes to the financial statements.

Effect of share buybacks depending on BVPS

The share buyback is $10 million / $50 per share = 200,000 shares. Remaining shares: 50 million − 200,000 = 49.8 million shares. Solar Automotive Industries' current BVPS = $500 million / 50 million = $10. Book value after repurchase: $500 million − $10 million = $490 million. BVPS = $490 million / 49.8 million = $9.84. BVPS decreased by $0.16. Book value per share (BVPS) decreased because the share price is greater than the original BVPS. If the share prices were less than the original BVPS, then the BVPS after the repurchase would have increased

If quantity supplied = -28 + 7 × price, the slope of the supply curve is: 4. -7. 1/7.

The supply curve for the good is determined by inverting the given supply function, which results in: price = 1/7 × quantity supplied + 4. The slope of this curve is 1/7.

The value of a total return index: can be calculated by multiplying the beginning value by the geometrically linked series of periodic total returns. may increase at either a faster or slower rate than the value of a price return index with the same constituent securities and weights. is determined by the price changes of the securities that constitute the index.

The value of a total return index can be calculated by multiplying the beginning value by the geometrically linked series of index total returns. The value of a total return index includes both the price changes of the securities that constitute the index and any cash flows from the securities (dividends, interest, and other distributions). A total return index cannot increase at a slower rate (or decrease at a faster rate) than an otherwise identical price return index because cash flows from the securities cannot be negative.

As the number of compounding periods increases, what is the effect on the EAR? EAR

There is an upper limit to the EAR as the frequency of compounding increases. In the limit, with continuous compounding the EAR = eAPR -1. Hence, the EAR increases at a decreasing rate

A U.S. company that complies with U.S. GAAP would like to exclude some items in determining non-GAAP financial measures, other than EBIT and EBITDA. Which of the following items may be excluded? For liquidity measures, litigation costs requiring cash settlement For performance measures, items tagged as infrequent that occurred within the past two years Impairment charges for long-lived assets

To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding asset impairment charges either for long-lived assets, goodwill or other intangible assets.

Income tax expense. Expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities.

Under IFRS, firms with impaired assets must disclose the amounts of impairment losses and reversals by asset class, the circumstances that caused the impairment losses or reversals, and where the losses or reversals are recognized on the income statement.

Which of the following statements about balance sheets is most accurate? For balance sheets prepared under: IFRS, a commercial real estate company should use a liquidity based presentation. IFRS, a classified balance sheet must present current assets before non-current assets. US GAAP, intangibles must be valued at historical cost.

Under US GAAP, intangibles must be valued at historical cost, whereas under IFRS they can be valued at cost or revaluation.

An issuer of a callable bond must compensate the bondholder when the issue is sold by offering a higher coupon rate or accepting a lower price than if the call feature was not included. Convexity will typically be much less than for an option-free bond, and reinvestment risk is greater for callable bonds.

Under the elasticities approach, a currency depreciation will lead to a greater reduction in a trade deficit when export demand and/or import demand are more elastic. The demand for luxury goods is relatively elastic, while the demand for goods without good substitutes or for goods that represent only a small portion of consumer expenditures is relatively inelastic.

A company sells a product with a three-year warranty included in the price. According to IFRS, which of the following is the most appropriate accounting treatment for the warranty? Fully recognizing the revenue and estimated warranty expense at the time of the sale and updating the expense as indicated by experience over the life of the warranty. Deferring all of the revenue and recognizing it over the life of the warranty period. Fully recognizing the revenue at the time of the sale but waiting until the actual warranty costs are incurred to recognize the expense.

Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties, and to update the expense as indicated by experience over the life of the warranty. Waiting until actual costs are incurred will not match the expense with the associated revenue.

Assume that a stock paid a dividend of $1.50 last year. Next year, an investor believes that the dividend will be 20% higher and that the stock will be selling for $50 at year-end. Assume a beta of 2.0, a risk-free rate of 6%, and an expected market return of 15%. What is the value of the stock? $45.00. $41.77. $40.32.

Using the Capital Asset Pricing Model, we can determine the discount rate equal to 0.06 + 2(0.15 - 0.06) = 0.24. The dividends next year are expected to be $1.50 × 1.2 = $1.80. The present value of the future stock price and the future dividend are determined by discounting the expected cash flows at the discount rate of 24%: (50 + 1.8) / 1.24 = $41.77.

Of the following explanations, which is least likely to be a valid explanation for divergence between statistical significance and economic significance? Data errors. Adjustment for risk. Transactions costs.

While data errors would certainly come to bear on the analysis, in their presence we would not be able to assert either statistical or economic significance. In other words, data errors are not a valid explanation. The others are all mitigating factors that can cause statistically significant results to be less than economically significant

If the margin balance in a futures account with a long position goes below the maintenance margin amount: A) a margin deposit equal to the maintenance margin is required within two business days. B) a deposit is required which will bring the account to the maintenance margin level. C) a deposit is required to return the account margin to the initial margin level.

a deposit is required to return the account margin to the initial margin level.

zero coupon bond will always be priced

below par.

ill Phillips is developing a Monte Carlo simulation to value a complex and thinly traded security. Phillips wants to model one input variable to have negative skewness and a second input variable to have positive excess kurtosis. In a Monte Carlo simulation, Phillips can appropriately use: A) only one of these variables. B) neither of these variables. C) both of these variables.

both of these variables. one of the advantages of Monte Carlo simulation is that an analyst can specify any distribution for inputs. the purpose of the monte carlo simulation is to construct distributions using complex combinations of hypothesized parameters. it is used to approximate solutions to complex problems.

Which of the following reasons is least likely a valid limitation of ratio analysis? Determining the target or comparison value for a ratio is difficult. It is difficult to find comparable industry ratios. Calculation of ratios involves a large degree of subjectivity.

calculation of ratios involves a large degree of subjectivity. There is not a great deal of subjectivity involved in calculating ratios. The mechanical formulas for the calculations are fairly standard and objective for the activity, liquidity, solvency, and profitability ratios, for instance. On the other hand, determining the target or comparison value for a ratio is difficult as it requires some range of acceptable values and that introduces an element of subjectivity. Conclusions cannot be made from viewing one set of ratios as all ratios must be viewed relative to one another in order to make meaningful conclusions. It can be difficult to find comparable industry ratios, especially when analyzing companies that operate in multiple industries.

Scott Andrews, CFA, is a stockbroker selling an oversubscribed stock issue. Which of the following best describes Andrews' actions regarding this sale? Andrews: can only offer this security to clients for which it is appropriate on a first come first serve basis. can offer this security on a prorated basis to all clients for which the security is appropriate. cannot offer an oversubscribed issue of stock to any clients.

can offer this security on a prorated basis to all clients for which the security is appropriate Standard III(B), Fair Dealing, applies. When new issues or secondary offerings are available or are being offered by the firm or if the firm is part of a selling syndicate, all clients for whom the security is appropriate are to be offered a chance to take part in the issue. If the issue is oversubscribed, then the issue is to be prorated to all subscribers.

An investor holds $100,000 (par value) worth of TIPS currently trading at par. The coupon rate of 4% is paid semiannually, and the annual inflation rate is 2.5%. What coupon payment will the investor receive at the end of the first six months?

coupon = 100k x (1.0125) = 101,250 x (.04/2) = 2,025

The after-tax cost of preferred stock is always: A) equal to the before-tax cost of preferred stock. B) higher than the cost of common shares. C) less than the before-tax cost of preferred stock.

equal to the before tax cost of preferred stock. The after-tax cost of preferred stock is equal to the before-tax cost of preferred stock, because preferred stock dividends are not tax deductible. The cost of preferred shares is usually higher than the cost of debt, but less than the cost of common shares.

adjustable rate preferreds are an appropriate security for short term investment of

excess cash balances. other preferred shares a not.

Which of the following statements about the importance of risk and return in the investment objective is least accurate? The investor's risk tolerance is likely to determine what level of return will be feasible. The return objective may be stated in dollar amounts even if the risk objective is stated in percentages. Expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return.

expressing investment goals in terms of risk is more appropriate than expressing goals in terms of return. Expressing investment goals in terms of risk is not more appropriate than expressing goals in terms of return. The investment objectives should be stated in terms of both risk and return. Risk tolerance will likely help determine what level of expected return is feasible.

The effective annual yield for an investment is 10%. What is the yield for this investment on a bond-equivalent basis?

first, the annual yield must be converted to a semiannual yield. The result is then doubled to obtain the bond-equivalent yield. Semiannual yield = 1.10.5 − 1 = 0.0488088. The bond-equivalent yield = 2 × 0.0488088 = 0.097618.

Which one of the following statements about correlation is NOT correct? A) If the correlation coefficient were 0, a zero variance portfolio could be constructed. B) If the correlation coefficient were -1, a zero variance portfolio could be constructed. C) Potential benefits from diversification arise when correlation is less than +1.

if the correlation coefficient were 0, a zero variance portfolio could be constructed. A correlation coefficient of zero means that there is no relationship between the stock's returns. The other statements are true.

Critical corporate governance issue is ensuring that the board and its members have the requisite experience needed to properly govern the firm for the shareholders' benefit. When considering board member qualifications, investors and shareholders should consider whether board members can act with care and competence as a result of their experience with all of the following EXCEPT: technologies, products, services which the firm offers. the competitive landscape the firm faces. legal issues.

legal issues Knowledge of the firm's competitive landscape is likely beyond what a board member should have intimate knowledge about. The other items are all issues a board member should be knowledgeable about. Other issues board members should have experience with include financial operations, accounting and auditing topics, and business risks the firm faces.

An analyst wants to determine whether the monthly returns on two stocks over the last year were the same or not. What test should she use if she is willing to assume that the returns are normally distributed? A difference in means test with pooled variances from the two samples. A paired comparisons test because the samples are not independent. A difference in means test only if the variances of monthly returns are equal for the two stocks.

paired comparisons test must be used. The difference in means test requires that the samples be independent. Portfolio theory teaches us that returns on two stocks over the same time period are unlikely to be independent since both have some systematic risk.

IRR problems

the IRR exceeds the cost of capital, that merely indicates that the project is acceptable-this is not a problem associated with IRR. Non-normal cash flow patterns such as cash outflows during the project's life can result in multiple IRRs, leaving open the question as to which one is valid. A higher IRR will only be realized if the project's cash flows can be reinvested at the IRR, and the true profitability of a project also depends on project size, not just IRR.

Which is most likely considered a "pull" on liquidity? Increased difficulty in collecting receivables Reduction in a line of credit Obsolete inventory

A "pull" on liquidity occurs when disbursements are made too quickly (e.g., current liabilities are paid instead of being held or when credit availability is reduced or limited). A "drag" on liquidity occurs when receipts lag (i.e., non-cash current assets do not convert to cash quickly). Consequently, a reduction in a credit line is a "pull" on liquidity.

how to tell if a bond is liquid/illiquid based on bid ask spread.

A bond is quoted at 96.25 bid and 96.75 ask. Based only on this information, this bond is most likely: relatively illiquid. The spread between the bid and ask prices is one-half percent of par, which most likely reflects an illiquid market for this bond. Bonds with liquid secondary markets typically have bid-ask spreads of approximately 10 to 12 basis points.

caps and floors on floating rate notes.

A cap limits the upside potential of the coupon rate paid on the floating rate bond and is therefore a disadvantage to the bondholder. A floor limits the downside potential of the coupon rate and is therefore a disadvantage to the bond issuer.

tender offers

A company may repurchase stock by making a tender offer to repurchase a specific number of shares at a price that is at a premium to the current market price. They would not be willing to tender their shares for less than the prevailing market price, so Statement 2 is incorrect.

An approximate t-test is used to test the differences between means of two populations when the unknown population variances cannot be assumed to be equal.

A t-test is best used in a test of the difference between two population means when we can assume they are normally distributed and that the unknown variances are equal

If a paired comparison test of mean differences supports rejecting the null hypothesis, then the: independence of the samples is statistically significant. standard error of the mean differences is low relative to the sample mean difference. difference in means is not statistically significant.

According to the test statistic , the lower the standard error in the denominator, the higher the value of the t-statistic. The t-statistic calculation includes the sample mean difference in the numerator. Therefore, a lower standard error (denominator) relative to the sample mean difference (numerator) results in a higher t-statistic value.

One of the underlying assumptions of technical analysis is that supply and demand is driven by: rational behavior only. both rational and irrational behavior. rational behavior during calm markets and irrational behavior during volatile markets.

B Successful technical analysis assumes both rational and irrational behavior during all market conditions.

Which of the following is a limitation to fully efficient markets? A) Information is always quickly disseminated and fully embedded in a security's prices. B) The gains to be earned by information trading can be less than the transaction costs the trading would entail. C) There are no limitations to fully efficient markets because the trading actions of fundamental and technical analysts are continuously keeping prices at their intrinsic value.

B Market prices that are not precisely efficient can persist if the gains to be made by information trading are less than the transaction costs such trading would entail.

Which of the following pairs of risks are most closely related? Liquidity risk and operational risk Model risk and tail risk Credit risk and solvency risk

B Model risk is the risk of using the wrong model to analyze an investment or the risk of using the right model for the analysis but using it incorrectly. Tail risk, although it involves unlikely but substantial losses, typically results from using inappropriate modeling assumptions such as assuming that returns are normally distributed. Credit risk involves the risk of a borrower not repaying you, whereas solvency risk is the risk of you running out of the money needed to pay your obligations. Liquidity risk is the risk that the future transaction price for an investment will be different than expected, whereas operational risk includes a wide range of potential problems occurring within an organization's personnel and systems.

Which of the following is most likely to be an explanation of the power of a test? The power of a test is the probability of: a Type I error. rejecting the null when it is false. not accepting the alternative when it is false.

B The power of a test is the probability of correctly rejecting the null — that is, the probability of rejecting the null when it is false.

A new technology that reduces employee illness will most likely decrease: demand-pull inflation. cost-push inflation. cost-pull inflation.

By reducing employee illness, the new technology will increase the output per hour per worker, which will decrease the unit labor cost. As the unit labor cost decreases, cost-push inflation decreases. The technology does not affect demand and accordingly should not affect demand-pull inflation.

An analyst observes that stock markets usually demonstrate return distributions concentrated to the right with a higher frequency of negative deviation from the mean. This feature is most likely known as: positive skewness. kurtosis. negative skewness.

C The negatively skewed investment characteristic is usually related to the stock returns whose distribution is concentrated to the right.

Regarding the technical points affecting the short sales of a stock, which of the following statements is most accurate? Stocks can only be shorted in a down market. The lender must deposit margin to guarantee the eventual return of the stock. The short seller must pay all dividends due to the lender of the shorted stock.

C The short seller must pay any dividends on the stock to the owner of the borrowed shares. The short seller must also deposit margin money to guarantee the eventual repurchase of the security.

Total cash flows to investors in an ABS issue are: less than the total interest and principal payments from the underlying asset pool. equal to the total interest and principal payments from the underlying asset pool. equal to the total interest and principal payments from the underlying asset pool if only one class of ABS has been issued from the trust.

Cash flows from the underlying asset pool are used to pay fees to the servicer as well as payments to the ABS investors. Thus payments to investors are less than the total cash flows from the pool of assets.

For which of the examples given would common-size income statements generally provide the greatest insight? A time-series analysis of a rapidly expanding single company A liquidity analysis of two companies within the same industry A comparison of similarly sized companies from different industries

Common-size income statements facilitate comparison across time periods (time-series analysis) because the standardization of each line item removes the effect of size. They would be particularly useful in neutralizing the size effect for a company experiencing rapid growth. For example, efficiencies gained from increased volume may be more readily apparent. Common-size income statements would be less useful for similarly sized companies from different industries because the size effect is less important in the comparison.

During the lockout period for a non-amortizing asset backed security, the principal payment of €100 million on a €1 billion face value issue will result in the security having a total face value of: €1.1 billion. €0.9 billion. €1.0 billion.

During the lockout period any principal received is reinvested to acquire additional loans with a principal equal to the total principal received from the cash flow keeping the face value of the issue at €1 billion.

hich of the following most accurately describes the basis for construction of nearly all bond market indices? Model prices Market prices Dealer prices

Firms (dealers) are assigned to specific securities and are responsible for creating liquid markets for those securities by purchasing and selling them from their inventory. In addition, many securities do not trade frequently and, as a result, are relatively illiquid. As a result, index providers must contact dealers to obtain current prices on constituent securities to update the index, or they must estimate the prices of constituent securities using the prices of traded fixed-income securities with similar characteristics.

Which of the following attributes is least likely to be a requirement for the existence of riskless arbitrage? The underlying security: is relatively liquid. can be sold short. is a financial asset.

For riskless arbitrage to exist, the underlying security that can be arbitraged may be either a financial or a non-financial security.

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

In a CBS, the monetary authority has an obligation to maintain 100% foreign currency reserves against the monetary base. It therefore 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.

In a highly efficient market, unexpected positive news on a stock is announced to the public. After this announcement, the difference between the market value and the intrinsic value of the stock will most likely: decrease. increase. remain zero.

In a highly efficient market, (1) market value reflects new information quickly and rationally and (2) an asset's market value equals its intrinsic value. Therefore, after the announcement, the difference between a stock's market value and its intrinsic value will remain equal to zero because both market and intrinsic values adjust, to reflect the unexpected news by the same amount and at the same time.

During 2007, Topeka Corporation entered into the following transactions: Transaction #1 - Interest on a certificate of deposit owned by Topeka was credited to Topeka's investment account. Transaction #2 - Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20. Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007?

Only one should be recognized Interest earned on the CD is recognized as interest income. The gain on the sale of treasury stock is not reported on the income statement but is reflected on the statement of changes in stockholders' equity and on the balance sheet. The sale proceeds simply increase equity and increase cash.

Remember that investors are attracted to positive skewness because the mean return is greater than the median return.

Operating cycle = days of inventory + days of receivables, and is the number of days that it takes to turn raw materials into cash from sales.

Structural subordination means that a parent company's debt:

Structural subordination means that cash flows from a subsidiary are used to pay the subsidiary's debt before they may be paid to the parent company to service its debt. As a result, parent company debt is effectively subordinate to the subsidiary's debt.

Which of the following statements is least accurate? The IASB is monitored by a board that includes the U.S. SEC. IFRS Foundation trustees appoint members of the IASB. IFRS Foundation trustees oversee the policy decisions of the FASB.

The Financial Accounting Foundation, not the IFRS, oversees FASB.

To compare the returns over the past three years on a mutual fund to the returns on a certificate of deposit with annual compounding over the same period, an analyst is least likely to use the mutual fund's annual: geometric mean return. arithmetic mean return. time-weighted return.

The arithmetic mean will overstate the average annual compound return of the mutual fund. The average annual compound rate of return is calculated as the geometric mean return over the period. The annual time-weighted return is a geometric mean return.

If MRSXY= 0.6 and PX/PY= 0.7, where MRSXY is the marginal rate of substitution of X for Y, and PX and PY are the price per unit of goods X and Y, respectively, the consumer will most likely prefer purchasing: a small additional amount of Y in place of X. only Y, because it is preferred to X. a large additional amount of Y in place of X.

The consumer maximizes utility when MRSXY equals PX/PY. MRSXY is the rate at which the consumer is willing to give up Y for additional X, while the price ratio, PX/PY, is the rate at which the consumer must give up Y to gain additional X. With the values as stated, the price to consume more X exceeds the consumer's willingness to pay. So, moving toward the consumer's equilibrium would require spending a little more on good Y and a little less on good X.

Use the following information on Brown Partners, Inc. to compute the current stock price. Dividend just paid = $6.10 Expected dividend growth rate = 4% Expected stock price in one year = $60 Risk-free rate = 3% Equity risk premium = 12%

The current stock price is equal to (D1 + P1) / (1 + ke). D1 equals $6.10(1.04) = $6.34. The equity discount rate is 3% + 12% = 15%. Therefore the current stock price is ($6.34 + $60)/(1.15) = $57.70

An analyst observes that stock markets usually demonstrate return distributions concentrated to the right with a higher frequency of negative deviation from the mean. This feature is most likely known as: positive skewness. negative skewness. kurtosis.

The negatively skewed investment characteristic is usually related to the stock returns whose distribution is concentrated to the right.

An analyst observes that stock markets usually demonstrate return distributions concentrated to the right with a higher frequency of negative deviation from the mean. This feature is most likely known as: positive skewness. kurtosis. negative skewness.

The negatively skewed investment characteristic is usually related to the stock returns whose distribution is concentrated to the right.

Which one of the following statements best describes the components of the required interest rate on a security?

The real risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security.

best describes the components of the required interest rate on a security

The real risk-free rate, the expected inflation rate, the default risk premium, a liquidity premium and a premium to reflect the risk associated with the maturity of the security. The required interest rate on a security is made up of the nominal rate which is in turn made up of the real risk-free rate plus the expected inflation rate. It should also contain a liquidity premium as well as a premium related to the maturity of the security

When using duration and convexity to estimate the effect on a bond's value of changes in its credit spread, an analyst should most appropriately use: the same method used when estimating the effect of changes in yield.

We can use duration and convexity to estimate the price effect of changes in spread in the same way we use them to estimate the price effect of changes in yield: Percent change in bond value = -duration(change in yield or spread) + (1/2)(convexity)(squared change in yield or spread) No adjustment for credit risk is needed and an analyst should use modified or effective duration.

when reclassifying a property from owner-occupied to investment property and using the fair value model for valuation of investment property, IFRS specifies that the firm should treat the event as a revaluation, recognizing a gain only if it reverses a previously recognized losss For investment properties, when using the fair value model of valuing assets (as opposed to the revaluation model, which is not allowed by IFRS for investment properties), all increases and decreases affect net income.

When MR = MC = P, economic profit equals TR - TC For long-lived assets classified as investment property, IFRS allows either the cost model or the fair value model. The revaluation model is permitted for long-lived assets that are not classified as investment property. U.S. GAAP only permits the cost model for valuation of long-lived assets and does not identify investment property as a specific subset of long-lived assets

When demand for a good is inelastic, a higher price will: lead to an increase in total expenditures for the good. have no impact on the demand for the good. fail to reduce the quantity demanded for the good.

When demand is relatively inelastic, consumers do not reduce their quantity demanded very much when the price increases. That is, a given percentage increase in price results in a smaller percentage reduction in quantity demanded. Thus, total expenditures on the good increase. "Fail to reduce the quantity demanded for the good" is inaccurate because that would only be true if demand was perfectly inelastic.

Many analysts prefer to use Monte Carlo simulation rather than historical simulation because: it is much easier to generate the required variables. past distributions cannot address changes in correlations or events that have not happened before. computers can manipulate theoretical data much more quickly than historical data.

While the past is often a good predictor of the future, simulations based on past distributions are limited to reflecting changes and events that actually occurred. Monte Carlo simulation can be used to model based on parameters that are not limited to past experience.

What is the most likely effect on yield spreads when demand for bonds is high and supply of bonds is low? Yield spreads are likely to narrow. The effect on yield spreads will depend on whether supply or demand is the stronger influence. Yield spreads are likely to widen.

Yield spreads are likely to narrow Credit spreads tend to narrow in times of high demand for bonds and widen in times of low demand for bonds. Credit spreads tend to widen under excess supply conditions, such as large issuance in a short period of time, and narrow when supply is low

Which one of the following is least likely to be an example of a Eurobond? A U.K.-based company issuing Japanese yen-denominated bonds to investors domiciled in Japan An Australian company issuing U.S. dollar-denominated bonds to investors domiciled in Japan A Japanese company issuing euro-denominated bonds to investors domiciled in the United Kingdom

a It is an example of a foreign bond-that is, a bond issued by a foreign company in the domestic market of the country in whose currency the bond is denominated.

There are a lot of issues to consider in determining board independence. What would be the best definition of true "independence"? Independence, as it relates to board members, refers to: the degree to which these persons are not biased or otherwise controlled by firm management or the outside audit group. the degree to which these persons are not biased or otherwise controlled by firm management or other groups which may have some degree of control over management. avoidance of material conflicts of interest

the degree to which these persons are not biased or otherwise controlled by firm management or other groups which may have some degree of control over management

Which of the following statements is most accurate regarding commodity indexes? A) Commodity indexes are based on spot prices, while most investors purchase futures contracts. B) Weighting methodology varies among index providers and leads to differences in index risk and returns. C) The return to commodity indexes consists of two major components: the risk-free rate of return and the roll yield.

weighting methodology varies among index providers and leads to differences in index risk and returns. Weighting methodology is a major issue for commodity indexes. Several different methodologies are used, including equal weighting and global production values. Differences in weighting cause differing exposures for the indexes and lead to different risk and return profiles. Commodity indexes represent futures contracts on commodities, not the actual spot prices of commodities. Commodity index returns come from three sources: the risk-free rate of return, changes in futures prices, and the roll yield.

When members and candidates report performance data, according to the Code and Standards, it is: A) permissible to leave details out in a brief presentation. B) recommended that a minimum of five years performance history be included. C) a requirement to present composite performance rather than individual account performance.

A

An analyst has examined the annual total returns on an index over the last 30 years and found them to be approximately normal with a mean of 8.7% and standard deviation of 12.8%. Based on these estimates, the probability that the average annual total return over the next four years will exceed 21.5% is closest to: A) 2.5%. B) 5.0%. C) 16.0%.

For a mean of 4 observations the standard error is 12.8%/√4 = 6.4%. 21.5% is (21.5 - 8.7)/6.4 = 2 standard errors above the mean. The probability of being more than two standard errors above the mean is approximately 2.5% based on a standard normal distribution. NOTE WE ARE FINDING A MEAN HERE, NOT A SINGLE VALUE SO WE HAVE TO USE THE STANDARD ERROR

A stock's price currently is $100. An analyst forecasts the following for the stock: The normalized trailing price earnings (P/E) ratio will be 12× . The stock is expected to pay a $5 dividend this coming year on projected earnings of $10 per share. If the analyst were to buy and hold the stock for the year, the projected rate of return based on these forecasts is closest to:

P = EPS x P/E = 10 x 12 = 120 return = $5 dividend + (120-100) / 100 = 25%

Commercial mortgage-backed securities (CMBS) loans typically have greater call protection than agency MBS loans because: A) commercial mortgages may have yield maintenance charges. B) smaller-sized mortgages typically are not refinanced if interest rates fall. C) CMBS typically receive higher credit ratings from credit agencies than residential MBS.

A Any type of call protection structured into the loan itself (in this case, yield maintenance charges) increases the overall call protection of the CMBS. Agency MBS do not provide call protection at the individual loan level.

Jenny Pickler, a Level II CFA Candidate, writes an economic forecast containing several interest rate projections. Her firm's investment committee reviews Pickler's report and changes several of the interest rates Pickler had forecast. To comply with CFA Institute Standards, Pickler: does not need to take any further action. should ask that her name be removed from the report. must independently review the data supporting the investment committee's changes.

A According to Standard V(A) Diligence and Reasonable Basis, group consensus is not required in the course of preparation of analytical reports. Pickler would only need to have her name removed from the report if she believed the investment committee did not have a reasonable and adequate basis for their changes.

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

A 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.

Campbell Hill, CFA, has recently accepted the position of Chief Compliance Officer at an investment management firm. Hill distributes a memo stating that effective immediately (1) material supporting all company research reports will be kept in the company database in electronic form for 10 years, and hard copies of the same material will be maintained for one year only, and (2) hard copy records of all trade confirmations sent to clients must be kept on file for five years, the period mandated by local regulations. With respect to record retention: A) neither of Hill's policies violates the Standards. B) Hill's policies regarding both research reports and trade confirmations violate the Standards. C) Hill's policy regarding research reports does not violate the Standards, but the policy regarding trade confirmations does.

A In the absence of regulatory requirements, Standard V(C) Record Retention recommends maintaining records supporting investment recommendations and actions and records of investment-related communications with clients for at least seven years. Here, there is regulatory guidance, and seven years is a recommendation, not a requirement, in any case. Records can be maintained in electronic or hard copy format.

Sarah Evens has been studying the effects of takeover defenses on shareholder value. Evens is evaluating various uses of golden parachutes, poison pills, and greenmail, all of which can affect share value. Good corporate governance requires a careful review of a firm's takeover defenses. When conducting this review, Evens should most likely consider which of the following a negative factor? A) In a hostile bidder situation, the board would be willing to pay cash to such a bidder to preserve the company's independence. B) Shareholders have voted down an amendment to the bylaws that would have provided a poison pill. C) A change of control issue would not trigger the interest of a local government.

A Investors should take steps to discourage the use of the corporate funds to pay "greenmail."

Marie Marshall, CFA, charges clients a management fee and commissions on securities transactions. Marshall receives an annual bonus based on the overall success of the firm and a quarterly bonus based on the trading volume in her clients' accounts. If Marshall does not tell clients about her compensation package, she is violating the Standard concerning: A) disclosure of conflicts. B) communication with clients. C) additional compensation arrangements.

A Marshall has an obligation to disclose that she receives special compensation based on the amount of client trading volume. Standard VI(A) Disclosure of Conflicts requires members to disclose to clients and prospects all matters that could potentially impair the member's ability to make investment decisions that are (and to give investment advice that is) objective and unbiased. The Standard on communications with clients addresses issues that involve clearly communicating investment recommendations and analysis. The Standard on additional compensation arrangements is concerned with accepting benefits that may create a conflict between a member's interests and her employer's interests.

Fred Reilly, CFA, is an investment advisor. Roger Harrison, a long-term client of Reilly, decides to move his accounts to a new firm. In his review of Harrison's account history, Reilly discovers some transfers of funds from the account of Harrison's company that Reilly suspects were illegal. Which of the following actions is most appropriate for Reilly to take under the Standards? A) Discuss his suspicions with outside counsel. B) Inform Harrison's company of the suspected illegal activities because Harrison is no longer a client. C) Do nothing because he must maintain the confidentiality of client information even after the client has left the firm.

A Of the choices given, seeking the advice of outside counsel about what actions Reilly may be required to take is the most appropriate. Under Standard III(E) Preservation of Confidentiality, members and candidates should maintain the confidentiality of information received in the course of their professional service relating to both current and former clients. In the case of illegal activity, however, Reilly may have a legal obligation to report the activity or, on the other hand, may have a legal obligation to maintain the client's confidentiality even if he suspects illegal activity.

Ron's Organic Markets has limited access to borrowed funds and must choose among ten independent projects with returns greater than their cost of capital. All the projects under consideration have the same required investment of $2 million, and Ron's has $10 million available for capital investments this year. Which of the following selection criteria is least likely to identify the five projects that will produce the greatest expected increase in the value of the firm? Choose the five projects with: A) the highest IRRs. B) the greatest total NPV. C) the largest sum of profitability indexes.

A Since the net present value of the five projects is the expected increase in firm value from undertaking the projects, maximizing the NPV of the projects chosen will result in the selection of the optimal group of five projects. Since the profitability index is the ratio of the present value of the expected after-tax cash flows to the initial outlay, choosing the five projects with the greatest profitability indexes will identify the five projects with the greatest total present values and the projects with the greatest total net present values.

Fred Dean, CFA, has just taken a job as trader for LPC. One of his first assignments is to execute the purchase of a block of East Street Industries. While working with East Street on an assignment for his previous employer, he learned that East Street's sales have weakened and will likely be significantly below the LPC analyst's estimate, but no public announcement of this has been made. Which of the following actions would be the most appropriate for Dean to take according to the Standards? A) Contact East Street's management and urge them to make the information public and make the trade if they refuse. B) Request that the firm place East Street's stock on a restricted list and decline to make any trades of the company's stock. C) Post the information about the drop in sales on an internet bulletin board to achieve public dissemination and inform his supervisor of the posting.

A Standard II(A) Material Nonpublic Information requires that members and candidates who possess material nonpublic information not act or cause others to act on the information. Refusing the trade would violate this Standard because it would be acting or causing others to act on the nonpublic information. Dean should seek to have East Street make the information public. If East Street does not do so, Dean must act as he would have acted if he did not possess the information. Refusing to make the trade he was instructed to make would be "acting" on the information in this case. The obligation here is to the integrity of financial markets.

Alberto Cosini is the top-rated, sell-side analyst in the biotechnology industry. His recommendations significantly affect prices of industry stocks regularly. Yesterday Cosini changed his rating on Biopharm from "hold" to "buy," and Cosini's firm emailed the change to its clients although no public disclosure has yet been made. If Peter Allen, CFA, who heard about Cosini's rating change for Biopharm from his brother, purchases Biopharm in his personal account, Allen will most likely: A) not violate the Standards. B) violate the Standard concerning diligence and reasonable basis. C) violate the Standard concerning material nonpublic information.

A There is no requirement that a firm publicly release ratings changes by its analysts. Individuals outside the firm acting on this information after it is released to clients are not in violation of the Standard concerning nonpublic information. Purchases in a member's personal account are not subject to the requirements of the Standard concerning diligence and reasonable basis, so there is no violation indicated here.

In the short run, will an increase in the money supply increase the price level and real output? A) Both will increase in the short run. B) Neither will increase in the short run. C) Only one will increase in the short run.

A In the short run, an increase in the money supply will increase aggregate demand. The new short-run equilibrium will be at a higher price level and a greater level of real output (GDP).

if interest rate are constant, or even uncorrelated with futures prices, THE PRICES OF FUTURES AND FORWARDS ARE THE SAME

A POSITIVE CORRELATION BETWEEN INTEREST RATES AND FUTURES PRICES MEANS THAT (FOR A LONG POSITION)DEAIL SETTLEMENT PROVIDES FUNDS WHEN RATES ARE HIGH AND THEY CAN EARN MORE INTEREST AND REQUIRES FUNDS WHEN RATES ARE LOW . BECAUSE OF THIS, FUTURES PRICES WILL BE HIGHER THAN FOWARD PRICES WHEN INTEREST RATES AND FUTURES PRICES ARE POSITIVELY CORRELATED AND THEY WILL BE LOWER THAN FORWARD PRICES WHEN INTEREST RATES AND FUTURES PRICES ARE NEGATIVELY CORRELATED.

An investor buys an option-free bond that has a Macaulay duration of 15.0 and a modified duration of 14.5. If the rate of return on reinvested coupon income is 4.0% and the bond is sold after three years, the investor's annualized holding period return is most likely to be: A) equal to the bond's yield to maturity at the time of purchase. B) less than the bond's yield to maturity at the time of purchase. C) greater than the bond's yield to maturity at the time of purchase.

B Based on the relationship between Macaulay and modified duration, the bond's yield to maturity at the time of purchase is (15.0 / 14.5) - 1 = 3.45%. If the rate of return on reinvested coupon income is greater than 3.45%, the yield to maturity increased after the investor bought the bond. Over an investment horizon shorter than the Macaulay duration, an increase in YTM decreases the bond's market price by more than it increases reinvestment income. Therefore, the investor's annualized holding period return is less than the yield to maturity at issuance.

A company that capitalizes costs instead of expensing them will have: A) higher income variability and higher cash flows from operations. B) lower cash flows from investing and lower income variability. C) lower cash flows from operations and higher profitability in early years.

B Capitalizing costs tends to smooth earnings and reduces investment cash flows. It will also increase cash flows from operations and increase profitability in the early years.

Analysts reviewing Amber, Inc.'s and Bold, Inc.'s long-term contracting activities observe that Amber's contracts are being accounted for under the percentage-of-completion method while Bold's are being accounted for under the completed contract method. This difference is least likely to affect the two companies': A) income statements. B) statements of cash flows. C) assets on the balance sheets.

B Cash flows are no different under the percentage-of-completion method compared with the completed-contract method. Income statement and balance sheet accounts will differ between the two firms.

Which of the following events is most likely to increase short-run aggregate supply (shift the curve to the right)? Inflation that results in an increase in goods prices. High unemployment puts downward pressure on money wages. An increase in government spending intended to increase real output.

B Falling money wages would cause businesses to increase (profit-maximizing) output levels at each price level for final goods and services. Changes in the price level of goods and services are represented by a movement along a short-run aggregate supply curve, not a shift in the curve. A rise in resource prices will decrease aggregate supply. An increase in government spending will shift the aggregate demand curve but not the aggregate supply curve

Which of the following is least likely a problem associated with the internal rate of return (IRR) method of choosing investment projects? A) Using IRR to rank mutually exclusive projects assumes reinvestment of cash flows at the IRR. B) For independent projects, the IRR and NPV can lead to different investment decisions. C) If the project has an unconventional cash flow pattern, the result can be multiple IRRs.

B IRR and NPV lead to the same decision when choosing independent projects but may lead to different decisions when choosing between projects.

The price of milk in a country increases from €1.00 per liter to €1.10 per liter, and the quantity supplied does not change. This suggests the elasticity of the short-run supply of milk in this country is equal to: A) infinity, and supply is perfectly elastic. B) zero, and supply is perfectly inelastic. C) infinity, and supply is perfectly inelastic

B If quantity supplied does not respond to a change in price, supply is perfectly inelastic. For perfectly inelastic supply, elasticity equals zero. PERFECTLY INELASTIC DEMAND/SUPPLY = 0 PERFECTLY ELASTIC DEMAND/SUPPLY = INFINITY

Based on the aggregate demand/aggregate supply model: an inflationary or recessionary gap may exist in the long run. actual real GDP is equal to potential real GDP in the long run. no upward or downward pressure on the price level is present at short-run equilibrium.

B In the short run, real GDP can be less than its full-employment level (a recessionary gap that causes downward pressure on prices) or more than its full-employment level (an inflationary gap that causes upward pressure on prices). In long-run macroeconomic equilibrium, actual real GDP is equal to potential real GDP and there is no upward or downward pressure on the price level.

An analyst needs to estimate the value of an illiquid 7% BB+ rated bond that has eight years to maturity. Using matrix pricing, the analyst should most appropriately base an estimate for this bond on yields of: A) on-the-run eight-year government bonds. B) more frequently traded bonds rated BB+. C) other BB+ rated bonds with similar liquidity to this bond.

B Matrix pricing for untraded or infrequently traded bonds should be based on yields of more frequently traded bonds with similar credit ratings.

Which of the following pooled investment shares is least likely to trade at a price different from its NAV? A) Exchange-traded fund shares. B) Open-end mutual fund shares. C) Closed-end mutual fund shares.

B Shares of open-end mutual funds trade at NAV. The others may deviate from NAV.

A company that prepares its financial statements in accordance with IFRS incurred and capitalized €2 million of development costs during the year. These costs were fully deductible immediately for tax purposes, but the company is depreciating them over two years for financial reporting purposes. The company has a long history of profitability, which is expected to continue. Which is the most appropriate way for an analyst to incorporate the differential tax treatment in his analysis? He should include it in: liabilities when calculating the company's current ratio. liabilities when calculating the company's debt-to-equity ratio. equity when calculating the company's return-on-equity ratio.

B The different treatment for tax purposes and financial reporting purposes is a temporary difference and would create a deferred tax liability. Deferred tax liabilities should be classified as debt if they are expected to reverse with subsequent tax payments. The long history of profitability implies the company will likely be paying taxes in the following years, and hence an analyst could reasonably expect the temporary difference to reverse. Under IFRS, all deferred tax liabilities are non-current.

The required rate of return used in the dividend discount model is least likely to be affected by a change in the: A) expected rate of inflation. B) real risk-free rate of return. C) growth rate of earnings and dividends.

C The expected growth rate in dividends is an input into the dividend discount model, but the real risk-free rate, the expected inflation rate, and the risk premium are the components of the required rate of return.

Xanos Corporation faced a 50% marginal tax rate last year and showed the following financial and tax reporting information: Deferred tax asset of $1,000. Deferred tax liability of $5,000. Based only on this information and the news that the tax rate will decline to 40%, Xanos Corporation's: A) deferred tax asset will be reduced by $400 and deferred tax liability will be reduced by $2,000. B) deferred tax liability will be reduced by $1,000 and income tax expense will be reduced by $800. C) deferred tax asset will be reduced by $200 and income tax expense will be reduced by $1,000.

B There is a 20% reduction in the tax rate [(40% - 50%) / 50% = -0.2]. Hence, the deferred tax asset will be $800 = $1,000(1 - 0.2), the deferred tax liability will be $4,000 = $5,000(1 - 0.2), and the income tax expense will fall by the net amount of the decline in the asset and liability balances ($1,000 - $200 = $800).

Consider a market where quantity supplied = 1,500 - 3 × price, and quantity demanded = 2,000 - 5 × price. With respect to equilibrium price and quantity, there is: no market equilibrium. a stable market equilibrium. an unstable market equilibrium.

B There is a market equilibrium at a price of 250, where QS = 750 and QD = 750. Although the supply curve is downward sloping, the equilibrium is stable because the supply curve intersects the demand curve from above-the slope of the supply curve (−1/3) is steeper than the slope of the demand curve (−1/5).

Demand for gasoline (in hundreds of liters) at a particular station, as a function of the price of gasoline and the price of bus travel, is QD = 300 - 14 Pgas + 2 Pbus. If the price of gasoline per liter (Pgas) is 1.50 euros, and the price of a standardized unit of bus travel (Pbus) is 12 euros, the cross price elasticity of gasoline demand with respect to the price of bus travel is closest to: A) 0.01. B) 0.08. C) 2.00.

B To calculate the cross price elasticity of the quantity demanded of gasoline with respect to the price of bus travel, we must first calculate the quantity of gas demanded: 300 - 14(1.5) + 2(12) = 303 The cross elasticity is: slope of bus (2) x ( price of bus (12) / 303) = .0792

A firm in a perfectly competitive market will tend to expand its output as long as: A) its marginal revenue is positive. B) the market price is greater than the marginal cost. C) its marginal revenue is greater than the market price.

B Under perfect competition, each firm faces a flat demand curve. This means the price is constant and the marginal revenue line is flat. A company will continue to produce as long as MR > MC, so the competitive company will produce as long as P > MC. It will stop when MC = MR = P.

Consider two currencies, the WSC and the BDR. The spot WSC/BDR exchange rate is 2.875, the 180-day riskless WSC rate is 1.5%, and the 180-day riskless BDR rate is 3.0%. The 180-day forward exchange rate that will prevent arbitrage profits is closest to: A) 2.833 WSC/BDR. B) 2.854 WSC/BDR. C) 2.918 WSC/BDR.

B Arbitrage-free forward = 2.875 WSC/BDR × [(1 + 0.015 / 2) / (1 + 0.03 / 2)] = 2.8538 WSC/BDR. STILL MUST BE DIVIDED BY TWO BECAUSE INTEREST RATES ARE QUOTED AS ANNUAL RATES

Compared to corporate bonds, secondary market trading in government bonds is most likely to feature: A) brokered markets. B) earlier trade settlement. C) narrower bid-ask spreads.

B Government bond trades typically settle in one day (T + 1) while corporate bond trades typically settle in two or three days (T+ 2 or T + 3). Government and corporate bonds trade primarily in dealer markets. Bid-ask spreads depend on an issue's liquidity and may be wider for an illiquid government issue than for a liquid corporate issue.

A company issued bonds in 2012 that mature in 2022. The measurement basis that will most likely be used on the 2012 balance sheet for the bonds is: amortized cost. historical cost. market value. Incorrect.

Bonds payable issued by a company are financial liabilities that are usually measured at amortized cost.

Denise Chavez, CFA, is the senior energy analyst for a major brokerage firm. Chavez is also a social and environmental activist, and is opposed to coal-fired power plants. She has been arrested twice for trespassing during organized pickets at some of these power plants. Chavez has recently accepted a volunteer position as Board member of Greensleeves, a foundation that lobbies governments on environmental issues. The position will involve significant volunteer hours, including some travel. Are Chavez's activities consistent with CFA Institute Standards? Chavez violated the Standards by being arrested, but the volunteer Board position is not a violation. The environmental activism is not a violation, but the Standards prohibit Chavez from accepting the Board position. The activism and subsequent arrests are not a violation, but Chavez must disclose the Board position to her employer.

C Although Chavez was arrested, Standard I(D) Misconduct is not intended to cover acts of "civil disobedience." Standard IV(A) Loyalty, Chavez has a duty of loyalty to her employer. While she will not be compensated for the Greensleeves' Board position, the duties may be time-consuming and should be discussed with her employer in advance.

At the equilibrium levels of output and price in a competitive industry without taxes: A) consumer and producer surplus are equal. B) both consumer and producer surplus are maximized. C) the sum of producer and consumer surplus is maximized.

C At competitive equilibrium, the sum of consumer and producer surplus is at its maximum level. Neither consumer nor producer surplus is necessarily at a maximum at the equilibrium output and price. Which surplus is larger or smaller depends on the elasticities of supply and demand.

A security's systematic risk is best estimated by the slope of the: A) capital market line. B) security market line. C) security's characteristic line.

C Beta, a measure of systematic risk, can be estimated as the slope coefficient from a regression based on the market model, Ri = α + βi (Rmkt - Rf ). This regression line is the security's characteristic line. SLOPE OF THE SML IS THE MARKET RISK PREMIUM SLOPE OF CML IS THE SHARPE RATIO FOR ANY PORTFOLIO ALONG THE CML

Which of the following statements about short sales is least accurate? A) Proceeds from short sales cannot be withdrawn from the account. B) The short seller must pay the lender of the stock any dividends paid by the company. C) The short seller is required to replace the borrowed securities within six months of a short sale.

C Explanation There is no maximum time for which a security can be borrowed. It must be returned whenever the lender requires it to be.

An analyst obtains a market quote for the two-year forward rate two years from now. To derive the next point on a theoretical annual forward rate curve, the analyst can use the: A) two-year and five-year spot rates. B) three-year and four-year spot rates. C) three-year and five-year spot rates.

C Given the two-year forward rate two years from now, the next point on an annual forward rate curve is the two-year forward rate three years from now, 3y2y. This rate can be derived from the three-year and five-year spot rates as follows: (1 + S5)5 = (1 + S3)3(1 + 3y2y)2.

Which of the following statements on the economic implications of trade restrictions is most accurate? A) Quota rents are the amounts received by the domestic government when it charges for import licenses. B) In the importing country, import quotas, tariffs, and voluntary export restraints all decrease producer surplus. C) In the case of a quota, if the domestic government collects the full value of the import licenses, the result is the same as that of a tariff.

C If the domestic government collects the full value of the import license, a quota can have the same economic result as a tariff. Quota rents are the gains to those foreign exporters who receive import licenses under a quota if the domestic government does not charge for the import licenses. With respect to the importing country, import quotas, tariffs, and voluntary export restraints all decrease consumer surplus and increase producer surplus.

Chuck Hill, CFA, the financial manager of Niseron Corp., has just learned that Niseron's quarterly net income will fall well short of consensus analyst expectations. Hill decides that he should immediately notify analysts covering Niseron of this negative development. He calls two particular analysts first who have followed Niseron stock for several years and have alerted Hill to import ant developments at competing firms. Failing to notify these analysts might damage Hill's ability to monitor his competition, to the detriment of his own shareholders. Under CFA Institute's Code and Standards, Hill should most appropriately: notify no analysts until he is ready to issue the final numbers for the quarter. notify the two analysts first because their information adds value for Niseron's shareholders. issue a press release regarding Niseron's earnings prior to calling analysts.

C Issuing a press release is the best way to achieve fair public dissemination. Notifying any specific analysts first is a violation of Standard III(B) Fair Dealing, regardless of any help they may have provided in the past.

A fixed-income portfolio manager is estimating portfolio duration based on the weighted average of the durations of each bond in the portfolio. The manager should calculate duration using: A) parallel shifts of the benchmark yield curve. B) equal-sized increases and decreases in a benchmark bond's yield. C) equal-sized increases and decreases in the portfolio's cash flow yield.

C Portfolio duration as a weighted average of the individual bonds' durations is calculated assuming parallel shifts in the yield curve. Cash flow yield is used to calculate duration based on the weighted average time until a bond portfolio's cash flows are scheduled to be received. cash flow yield is not often used in practice because it is inconsistent with duration capturing the relationship between ytm and price. this approach will not work for a portfolio that contains bonds with embedded options because the future cash flows are not known with certainty and depend on interest rate movements.

Judy Dudley, CFA, is an analyst and plans to visit a company that she is analyzing in order to prepare a research report. The Standard related to independence and objectivity: A) requires Dudley to pay for her own transportation costs and not to accept any gifts or compensation for writing the report, but allows her to accept accommodations and meals that are not lavish. B) requires Dudley not to accept any compensation for writing a research report, but allows her to accept company paid transportation, lodging, and meals. C) allows Dudley to accept transportation, lodging, expenses, and compensation for writing a research report, but requires that she disclose such an arrangement in her report.

C Standard I(B) Independence and Objectivity allows investor-paid research but requires that members and candidates limit the type of compensation they accept for writing a research report so that it is not dependent on the conclusions of the research report. Best practice is for analysts to only accept a flat fee for such company-paid research reports. Such research should also include complete disclosure of the nature of the compensation received for writing such a report so that investors will not be misled as to the relationship between the analyst and the company. Paying for one's own transportation and lodging when the analyst is not employed by the subject firm is a recommended procedure for complying with Standard I(B), but it is not a requirement.

A five-year corporate bond and its benchmark government bond had the following yields over a one-month period: Beginning of Month End of Month Corporate bond yield 6.75% 7.00% Government bond yield 4.25% 4.75% Over this month, the price of the corporate bond most likely experienced: A) unfavorable macroeconomic and microeconomic factors. B) favorable macroeconomic factors and unfavorable microeconomic factors. C) unfavorable macroeconomic factors and favorable microeconomic factors.

C The benchmark yield increased, which suggests macroeconomic factors were unfavorable for bond prices overall. The corporate bond's spread to its benchmark decreased from 250 basis points to 225 basis points, which suggests microeconomic factors were favorable for the bond's price.

Which of the following portfolios will have the lowest diversification ratio? A portfolio of: A) 30 equally-weighted stocks with companies from the same industry. B) 20 equally-weighted stocks with companies from different industries. C) 30 equally-weighted stocks with companies from different industries. Explanation

C The diversification ratio of a portfolio equals its standard deviation of returns divided by the average standard deviation of the individual securities in the portfolio. Therefore, a more diversified portfolio will have a lower diversification ratio than a less diversified portfolio. A portfolio containing the highest number of securities from different industries will be the most diversified and will have the lowest diversification ratio. A portfolio of stocks from the same industry is likely to have a higher diversification ratio (reflecting less diversification) than a portfolio of stocks from different industries.

Which of the following is least likely a benefit of fund of funds (FOF) investing? A) FOFs may permit access to otherwise unavailable hedge funds. B) FOFs allow investors to diversify the risks of holding a single hedge fund. C) The fee is generally quite reasonable since the investor only pays the manager of the FOF.

C The fee may actually be substantial since, in addition to paying the manager of the FOF, a fee must be paid to each hedge fund within the FOF.

A firm's optimal capital budget can be found by moving along its investment opportunity schedule until: it exhausts its capital budget. average project return is equal to average cost of capital. the next project's return is less than the marginal cost of capital.

C The firm would not want to exhaust its capital budget on "bad" projects, (i.e., projects with IRR < cost of capital [NPV < 0]). They should continue to invest as long as the project's return is greater than the marginal cost of capital of the firm. When the project's IRR = cost of capital, the NPV = 0. This project will only make the firm larger; it will add nothing to the stock price. The investment opportunity schedule plots expected project returns from highest to lowest IRR.

In choosing asset classes for establishing strategic portfolio allocation across assets, the manager would most prefer that: A) asset classes are only those with tradable liquid assets. B) the asset classes span the broadest universe of investable assets. C) correlations of asset returns within an asset class are significantly greater than correlations of asset class returns.

C The important points in the determination of asset classes are that assets included in a class have similar performance characteristics and a relatively high correlation of returns between assets, and that returns of asset classes have relatively low correlations to realize the benefits of diversification across asset classes. Some asset classes, such as real estate and hedge funds, may be illiquid. The asset classes in the strategic allocation should be mutually exclusive and cover the universe of investable assets available to the fund manager(s) based on the client's objectives and constraints, not the broadest possible universe of asset classes.

An investor most concerned with reinvestment risk would be least likely to: A) prefer a noncallable bond to a callable bond. B) prefer a lower coupon bond to a higher coupon bond. C) eliminate reinvestment risk by holding a coupon bond until maturity.

C The key term here is coupon bond. While an investor in a fixed-coupon bond can usually eliminate interest rate risk by holding a bond until maturity, the same is not true for reinvestment risk. The receipt of periodic coupon payments exposes the investor to reinvestment risk. A noncallable bond reduces reinvestment risk by reducing the risk of repayment. Thus, an investor most concerned with reinvestment risk would prefer a noncallable bond to a callable bond. Since lower coupon bonds have lower reinvestment risk, this same investor would prefer a lower coupon bond to a higher coupon bond.

The type of share voting most likely to result in significant minority shareholders having an approximately proportional representation on the board of directors is: A) statutory voting. B) weighted voting. C) cumulative voting.

C Under cumulative voting, shareholders receive one vote per share for each board position election but can vote them for any board candidate or spread them over multiple candidates. This allows, for example, a holder of 20% of the shares to elect one of five board members. Under statutory voting, a minority shareholder could not elect any board members based only on their share voting rights. statutory voting = each share held is assign one vote in the election of the board

Paul James, CFA, a retail stock broker, notices that one client in particular, Chet Young, Ph.D., is especially adept at picking stocks. James decides to replicate Young's trades in his own account after he enters them. By doing so, James: A) is not in violation of any Standards. B) is in violation of the Standard on priority of transactions because he is front running the client's account. C) is in violation of the Standard on misconduct because he has misappropriated confidential client information.

James is not in violation of the Standards. To comply with Standard VI(B) Priority of Transactions, members and candidates must give transactions for clients and employers priority over their personal transactions. In this instance, James did not adversely affect the client's interest because the client's trades were executed before James copied them. He has not acted fraudulently or deceitfully and, thus, has not violated Standard I(D) Misconduct.

A financial advisor makes the following statements about dividends: (1) With respect to dividends, an investor should be indifferent between purchasing a stock before or after the payment date because on the payment date the value of the shares will fall by approximately the amount of the dividend; (2) The holder-of-record date occurs two business days before the ex-dividend date. Are the advisor's statements accurate? A) Both of these statements are accurate. B) Neither of these statements is accurate. C) Only one of these statements is accurate.

Neither statement is accurate. The stock should decline in value by the amount of the dividend on the ex-dividend date, not the payment date. The holder-of-record date occurs two business days after the ex-dividend date.