Mock Exam #2
As a monetary policy tool, quantitative easing (QE) will most likely help revive an ailing economy in which of the following environments? Deflationary trap Declining bank reserves and economic activity Liquidity trap
Declining bank reserves and economic activity
A decrease in average weekly initial claims for unemployment is most likely indicative of: an economic recovery beginning. the business cycle reaching its peak. an economic downturn beginning.
an economic recovery beginning.
Verification of compliance with the GIPS standards most likely requires: an independent third party to carry out the verification. an assurance that the composite presentations are accurate. verification for each specific composite under review.
an independent third party to carry out the verification.
It is least likely true that a swap may be viewed as a series of forward contracts where the prices of the implicit forward contracts embedded in the swap: are equal. sum to zero. are not equal.
are equal.
The best measure of the percentage of the outstanding mortgage balance prepaid in a given year is the: single monthly mortality rate. weighted average life. conditional prepayment rate.
conditional prepayment rate.
According to the industry life-cycle model, companies in a mature industry are most likely to experience: high barriers to entry. fierce competition. low dividend yields
high barriers to entry.. In the mature stage of the industry life-cycle model, brand loyalty and efficient cost structures will create barriers to entry. Fierce competition is a characteristic of the shakeout phase: Demand approaches market saturation levels because few new customers are left to enter the market. Because few growth opportunities are available in the mature phase, there is little need for capital investment, and thus greater amounts of earnings are paid out as dividends, increasing dividend yields.
A high level of expected inflation is most likely to lead to: a boom and bust cycle. high menu prices and costs. borrowers benefiting at the expense of lenders.
high menu prices and costs.
A disadvantage of a fund of hedge funds as compared to a large multi-strategy fund is: due diligence expertise. higher management fees. diversified exposure to various hedge fund strategies.
higher management fees.
Where local performance presentation regulations conflict with GIPS standards, GIPS-compliant firms should most likely comply with: local regulations and disclose conflicts. the GIPS standards. the higher standard only.
local regulations and disclose conflicts.
Which of the following statements best describes a feature of an option contract? In an option contract: both the long and the short can default. only the short can default. only the long can default.
only the short can default.
Which of the following is least likely an economic or financial implication of securitizations? They increase the amount of funds available to lend. They reduce the profitability of financial intermediaries. Investors can tailor interest rate and credit risk exposures.
They reduce the profitability of financial intermediaries.
Changing the estimates of the salvage value of capital assets is the least effective way to manage earnings during the life of an asset for companies whose method of depreciation is: straight-line. units-of-production. double-declining balance
double-declining balance
A company that prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) is attempting to produce lighter and longer-lasting batteries for portable electronic devices. The most appropriate accounting treatment for the related costs incurred in this project is to: capitalize costs directly related to the development. expense costs until technical feasibility has been established. expense them as incurred.
expense costs until technical feasibility has been established.
The least accurate statement about measures of dispersion for a distribution is that the: range provides no information about the shape of the data distribution. arithmetic average of the deviations around the mean will be equal to one. mean absolute deviation will be either less than or equal to the standard deviation.
the arithmetic average of the deviations around the mean will be equal to one.
Higher than expected inflation will most likely lead to an increase in: the real wealth of borrowers. investment. the information content of market prices for economic agents.
the real wealth of borrowers.
The distribution of all the distinct possible values for a statistic when calculated from samples of the same size randomly drawn from the same population is most accurately referred to as: a discrete uniform distribution. a multivariate normal distribution. the sampling distribution of a statistic.
the sampling distribution of a statistic.
In a country with a high level of income, as domestic income rises, it is most likely that an increase will occur in: the fiscal balance. private saving and investment. the trade balance.
private saving and investment. n a country with a high level of income, as domestic income rises, private saving and investment will increase.
An artists' cooperative sells its artwork on a consignment basis through a local art gallery. The cooperative should most likely recognize revenue when the art gallery: sells the artwork. remits payment for the artwork. receives the artwork.
sells the artwork.
A company's series B, 8% preferred stock has the following features: A par value of $50, and it pays quarterly dividends. Its current market value is $35. The shares are retractable (at par) with the retraction date set for three years from today. Similarly rated preferred issues have an estimated nominal required rate of return of 12%. Analysts expect a sustainable growth rate of 4% for the company's earnings. The intrinsic value estimate of a share of this preferred issue is closest to: $33.33. $45.02. $52.00.
$45.02.
A firm is considering a project that would require an initial investment of THB270 million (Thai baht). The project will help increase the firm's after-tax net cash flows by THB30 million per year in perpetuity, and it is found to have a negative NPV of THB20 million. The IRR (%) of the project is closest to: 11.1%. 10.3%. 12.0%.
11.1% 0 = -270 + (30/IRR)
A 20-year $1,000 fixed-rate non-callable bond with 8% annual coupons currently sells for $1,105.94. Assuming a 30% marginal tax rate and an additional risk premium for equity relative to debt of 5%, the cost of equity using the bond-yield-plus-risk-premium approach is closest to: 9.9% 12.0% 13.0%
12.0%
A company issued $2,000,000 of bonds with a 20-year maturity at 96. Seven years later, the company called the bonds at 103 when the unamortized discount was $39,000. In the year the bonds were called, the company would most likely report a loss of: $99,000. $138,000. $60,000.
99,000
Overloading distribution channels ("channel stuffing") would understate: inventories. accounts receivable. revenues.
A is correct. "Channel stuffing," or inducing customers to buy more than usual, will produce an overstatement of revenues, which may be corrected in future periods if product is returned. Returned product in future periods would tend to understate inventories in the current period.
Quantitative easing addresses the monetary policy challenges most likely caused by: expected periods of deflation. actions of bond market vigilantes. inflationary demand shocks or supply shocks.
A is correct. In a deflationary environment, reducing rates below zero may become ineffective and result in a liquidity trap. The next step to deter deflation is quantitative easing.
For which of the following inventory valuation methods is the gross profit margin least likely to be the same under both a perpetual inventory system and a periodic inventory system? LIFO Specific identification FIFO
A is correct. The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods, but not always under LIFO.
Which of the following statements about peer groups is most accurate? A peer group is constructed through a process: that starts with an existing commercially classified system that is then narrowed. that locates a group of companies whose valuation is influenced by diverse factors. where management should refrain from participating to maintain objectivity in the process.
A is correct. The process consists of initially examining commercial classification systems and then refining it to the companies operating in the chosen industry.
Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors, a mid-sized mutual fund firm investing in domestic securities. She has watched the hedge fund boom and on numerous occasions suggested that her firm create such a fund. Senior management has refused to commit resources to hedge funds. Attracted by potential higher fees associated with hedge funds, Grabbo and several other employees begin development of their own hedge fund to invest in international securities. Grabbo and her colleagues are careful to work on the fund development only on their own time. Because Atlantic management thinks hedge funds are a fad, she does not inform her supervisor about the hedge fund creation. According to the Standards of Practice Handbook, Grabbo should most likely address which of the Standards immediately? Disclosure of Conflicts Priority of Transactions Additional Compensation Arrangements
Additional Compensation Arrangements
Which of the following statements concerning a security market index is most accurate? Estimated market prices of constituent securities are not used to calculate the index value. The divisor will be adjusted to prevent changes not related to prices of constituent securities. At inception, the total return version of an index will be greater than the price version of an index.
At inception, the total return version of an index will be greater than the price version of an index.
Participating preference shares are least likely to entitle the shareholders to participate in: additional distribution of the company's assets upon liquidation. corporate decisions through voting rights. additional dividends if the company's profits exceed a predetermined level.
B is correct. Participating preference shares do not entitle the shareholders to participate in corporate decisions through voting rights. But they do entitle them to (1) an additional dividend if the company's profits exceed a prespecified level and (2) additional distribution of the company's assets upon liquidation, above the par.
An index provider launches a new index that will include value stocks in a specific country. This index will most likely be a: large-capitalization index. style index. fundamentally weighted index.
B is correct. Style indexes represent a group of securities classified according to market capitalization, value, and growth or a combination of these characteristics. Therefore, the new index will most likely be a style index with a value classification.
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 seeks to issue less senior debt because it violates the debt incurrence test of an existing debt covenant. The cost of additional funds from various sources rises as higher levels of financing are achieved. The company deviates from its target capital structure because of the economies of scale associated with flotation costs and market conditions.
B is correct. 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.
Which of the following long-term debt information is presented both on the balance sheet and in the notes to the financial statements? Maturity dates Current maturities of long-term debt Effective interest rate
B is correct. The portion of long-term debt due in the next twelve months is shown as a current liability on the balance sheet. The amount of scheduled debt repayments for the next five years, including an adjustment for long term debt currently coming due, is also shown in the notes to the financial statements.
If the central bank buys securities from banks in its open-market operations when the economy is already in long-run equilibrium, which of the following is most likely to occur? The aggregate demand curve will shift to the left. The long-run supply curve will be unaffected, but the price level will rise. Both the long- and the short-run aggregate supply curves will shift to the right.
B is correct. When the central bank buys securities from banks in an open-market operation, it pays for them with a corresponding increase in bank reserves. This increases the amount of deposits banks can accept from their customers—that is, the money supply. An expansionary monetary policy will cause the aggregate demand curve to shift to the right. The short-run supply curve will also shift to the right because input prices do not initially adjust upward. In time, prices will increase, causing the short-run aggregate supply curve to steepen and eventually return to the long-run natural level of output—but at higher prices.
Quasi-governmental bonds are most likely: issued by a national government in a foreign currency. issued by a governmental body below the national level. repaid from cash flows generated by the issuer or from the project being financed.
C is correct. Quasi-governmental bonds are issued by entities created by national governments that are not governmental bodies. They do not generally have taxing authority and, therefore, must repay debt from cash flows they generate through fees for their services (e.g., servicing and insuring home mortgages) or cash flows generated by the projects they undertake (e.g., a toll highway or bridge).
Which organization will most likely aid a country that is experiencing an economically detrimental current account deficit? The World Bank The World Trade Organization The International Monetary Fund
C is correct. The International Monetary Fund has the ability to lend foreign currencies to a country with an extreme current account deficit.
Which of the following multiples is most useful when comparing companies with significant differences in capital structure? EV/EBITDA Price-to-book ratio Price-to-cash flow ratio
EV/EBITDA
Elliott Johnson, CFA, a portfolio manager at Childress Investment Management, a mid-size asset management firm, actively uses social media to discuss his firm's outlook on the market and the stocks its analysts cover. He frequently posts on the firm's Facebook page, his personal Twitter account, and the firm's password-protected website. Which of the following would most likely result in Johnson violating CFA Institute Standard III(B): Fair Dealing? His tweet, "I'll be recommending approval for this acquisition to the Investment Committee!" His post on the firm's website listing companies reporting earnings over the next week, including consensus expectations versus the firm's analysts' expectations His post on Facebook following the quarterly reporting period to the firm's clients giving the firm's expectation regarding economic growth for the next 12 months
His tweet, "I'll be recommending approval for this acquisition to the Investment Committee!" It is allll about protecting clients
Which of the following statements concerning an investment firm's historical record is most likely correct according to the GIPS standards? If the composite has been in existence for fewer than five years, the firm must show its entire performance history since inception. The goal is to present five years of GIPS compliant performance results. As long as a prospective client receives a compliant presentation at any time a firm meets its requirements.
If the composite has been in existence for fewer than five years, the firm must show its entire performance history since inception. the goal is to present 10 years of results not 5 C is wrong because it is every 12 months
Which of the following is most likely a secondary source of liquidity? Bank line of credit Inventory liquidation Trade credit
Inventory liquidation
Which is least likely an example of a principal-agency conflict? Management agreeing to a takeover by a third party at a premium Management entering a related-party transaction with a key supplier Impact on minority shareholders of a company adopting straight voting
Management agreeing to a takeover by a third party at a premium
Which characteristic is a firm least likely to exhibit if it faces a downward sloping demand curve for its product(s), many competitors, and zero economic profits in the long run? No pricing power Low barriers to entry Differentiated product
No pricing power
Which of the following is not part of the nine major sections of the GIPS standards? Performance Fees Disclosure Input Data
Performance Fees
Which of the following least likely reflects the two primary principles of the CFA Institute Rules of Procedure for Proceedings Related to Professional Conduct? Confidentiality of proceedings Public disclosure of disciplinary sanctions Fair process to the member and candidate
Public disclosure of disciplinary sanctions
A university endowment fund is mandated to hold some of its value in alternative investments. Which of the following would most likely be included in the fund's alternative investments portfolio? Real estate securities Exchange-traded funds Convertible preferred shares
Real estate securities
Which is most likely considered a "pull" on liquidity? Increased difficulty in collecting receivables Obsolete inventory Reduction in a line of credit
Reduction in a line of credit bc now you have to pay down the line more due to the reduction
Which of the following factors will most likely drive the repo margin lower? Lower quality of the collateral Shorter supply of the collateral Lower credit quality of the counterparty
Shorter supply of the collateral
Which of the following best allows a board of directors to act in the interest of the company and shareholders? Independent board members are selected from outside the industry. Internal directors provide monitoring of the firm's management. The board has the authority to select and terminate senior management
The board has the authority to select and terminate senior management
Which of the following is the least appropriate method for an external analyst to use to estimate a company's target capital structure for determining the weighted average cost of capital (WACC)? Using the company's current capital structure at book value weights Using averages of comparable companies' capital structure Using statements made by the company's management regarding capital structure policy
Using the company's current capital structure at book value weights
The effective convexity of a bond is a measurement of the effect of a change in: horizon yield. the yield to maturity. a benchmark yield curve.
a benchmark yield curve.
Under US GAAP, for reporting periods after 15 December 2015, unusual or infrequent items are shown on the income statement separately: below continuing operations. below discontinued operations. as part of continuing operations.
as part of continuing operations.
In valuing underlying hedge fund positions, the most conservative approach is most likely one that uses: the average of the bid and ask prices. bid prices for longs and ask prices for shorts. the most recent market prices.
bid prices for longs and ask prices for shorts.
If trading partners are to benefit from allowing the free movement of factors of production among their members, the trading partners most likely need to form a: customs union. free trade area. common market.
common market.
If the price of a commodity futures contract is below the spot price, it is most likely that the: cost of carry exceeds the convenience yield. roll yield is negative. convenience yield exceeds storage costs.
convenience yield exceeds storage costs.
A new technology that reduces employee illness will most likely decrease: demand-pull inflation. cost-push inflation. cost-pull inflation.
cost-push inflation.
Oliver Opdyke, CFA, works for an independent research organization that does not manage any client money. In the course of his analysis of Red Ribbon Mining he hears rumors that the president of Red Ribbon, Richard Leisberg, has recently been diagnosed with late stage Alzheimer's disease, a fact not publicly known. The final stage of Alzheimer's is when individuals lose the ability to respond to their environment, the ability to speak, and, ultimately, the ability to control movement. Leisberg is the charismatic founder of Red Ribbon, and under his leadership the company grew to become one of the largest in the industry. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the most appropriate action for Opdyke is to: immediately publish a sell recommendation for Red Ribbon Mining. confirm the president's diagnosis before publishing his research report. encourage Red Ribbon Mining management to disclose the president's medical condition
encourage Red Ribbon Mining management to disclose the president's medical condition
The type of residential mortgage least likely to contain a "balloon" payment is a(n): interest-only mortgage. fully amortizing mortgage. partially amortizing mortgage
fully amortizing mortgage.
A country in fiscal balance with a trade surplus will most likely: sell assets to foreigners to reduce the imbalance. increase the imbalance by lending to foreign countries. have an excess of domestic saving relative to investment spending.
have an excess of domestic saving relative to investment spending.
A company that is required to raise equity capital to continue to operate as a going concern is most likely doing so to: improve capital adequacy ratios. fund capital expansion projects. purchase long-lived assets
improve capital adequacy ratios.
A company has decided to switch to using accelerated depreciation from straight-line depreciation. Holding other factors constant, the degree of total leverage (DTL) will most likely: increase. not change. decrease.
increase.
The majority of private equity activity involves: derivative positions. leveraged buyouts. investing in mortgaged-backed securities.
leveraged buyouts.
Consider two bonds that are identical except for their coupon rates. The bond that will have the highest interest rate risk most likely has the: lowest coupon rate. coupon rate closest to its market yield. highest coupon rate.
lowest coupon rate.
Forward rate agreements are most likely used to hedge an exposure in the: foreign exchange market. money market. equity market.
money market.
The direct capitalization approach to real estate valuation most likely applies a capitalization rate to the annual: net operating income. net operating income minus income taxes. net operating income minus depreciation.
net operating income.
Information about the coupon rates on the various long-term fixed-rate debt issues of a company can most likely be found in the: notes to the financial statements. non-current liabilities section of the balance sheet. Management Discussion and Analysis (MD&A)
notes to the financial statements.
In primary bond markets, the method of allowing certain authorized issuers to offer additional bonds to the general public by preparing a single, all-encompassing offering circular is most likely known as a(n): private placement. shelf registration. underwritten offering.
shelf registration.
According to the industry life-cycle model, an industry in the shakeout stage is best characterized as experiencing: little or no growth and industry consolidation. slowing growth and intense competition. relatively high barriers to entry and periodic price wars.
slowing growth and intense competition.
In the binomial model, the difference between the up and down factors best represents the: volatility of the underlying. moneyness of an option. pseudo probability
volatility of the underlying.