QBank Missed Questions

Which of the following statements most accurately describes the general features of financial statements under IFRS?

(A.) All of the required financial statements are prepared using accrual accounting. (B.) Assets may not be offset against liabilities unless specifically permitted or required by a standard. (C.) Prior-period information may only be presented when specifically permitted or required by a standard. ***One of the general requirements stated in IAS No. 1 is that firms not offset assets against liabilities unless a specific standard permits or requires it. The statement of cash flows is not prepared using accrual accounting. IAS No. 1 states that firms should present comparative information for prior periods unless a specific standard states otherwise

Capital allocation pitfalls

- Basing investment decisions on changes in EPS in short term - Considering effects of not spending entire capital budget available for current period

Depreciation of a country's currency will be more effective in reducing its trade deficit if its:

- exports are primarily luxury goods *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 low inventory turnover ratio in a period of declining revenue growth is most likely an indication that a firm may have:

-obsolete inventory Low inventory turnover and declining revenue growth may be signs that a firm has obsolete or slow-moving inventory. High turnover and low revenue growth may indicate too little inventory, while high turnover and high revenue growth may indicate efficient inventory management.

An analyst has data on institutional salespeople at an investment banking firm showing how they ranked in total monthly commissions, from first to eighth. To determine whether a high rank in one month indicates a high probability of achieving a high rank in subsequent months, the analyst should use a:

A Spearman rank correlation test is appropriate in this scenario. This is a nonparametric test.

Which of the following most likely describes a loss that consumers suffer under an unregulated monopoly compared to a competitive market?

A) Monopolies produce less goods than a competitive market would. B) Costs of production are higher with monopolies. C) Monopolists charge the maximum price. **A reduction in output and increase in price under monopoly decrease consumer surplus and welfare compared to perfect competition. A natural monopoly may have lower costs than several competitive suppliers. Monopolists charge the profit maximizing price, not the "maximum price."

To choose the weights for a firm's weighted average cost of capital (WACC), an analyst would most prefer to use the

A) firm's current debt and equity weights based on market value. B) firm's stated target capital structure even if recent fund raising has diverged slightly from the target weights. C) average debt and equity weights based on market value of the firm's competitors.

Which of the following is most likely to create an incentive for senior managers to act in the best interests of shareholders?

A) one-tier board structure B) threat of hostile takeover C) cash bonus for meeting short-term performance targets

The capital structure theory that implies an optimal capital structure employing both debt and equity is:

A) pecking order theory B) static trade-off theory C) Modigliani and Miller with Taxes **static trade off: assumes increasing debt proportions will initially reduce WACC (bc of tax savings), but that at some level of debt financing, increasing expected costs of financial distress will outweigh tax savings. M&M with taxes: implies optimal cap. structure of 100% debt pecking order: does not imply optimal cap. structure

Which of the following pooled investments is likely to require the smallest minimum investment amount?

A) wrap fee account B) market neutral fund C) closed-end mutual fund *closed-end mutual fund shares can be purchased for market-determined prices. hedge funds (which include market neutral funds) and wrap fee (separately managed) accounts typically require substantially minimum investment amounts.

Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate will be:

An increase in tax rates will increase future deferred tax liability, and the impact of the increase in liability will be reflected in the income statement of the year in which the tax rate change is affected.

non-investment grade

Ba1/BB+ or lower

investment grade

Baa3/BBB- or higher

Which of the following statements about securities exchanges is most accurate?

Call markets are markets in which the stock is only traded at specific times. *Continuous markets - trades occur at any time market is open *Setting one negotiated price is a method used in major continuous markets to set the opening price

How does the cost of holding the underlying asset affect option values?

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

Open market sales of securities by a country's central bank will most likely result in:

Central bank sales of securities reduce excess reserves in the banking system, causing interbank lending rates and other short-term interest rates to increase. If the monetary policy transmission mechanism operates normally, long-term interest rates should also increase, the domestic currency should appreciate, and economic growth and inflation should decrease.

The approach to estimating duration that relies on using historical relationships between benchmark yield changes and bond price changes is:

Empirical duration is estimated by using historical data between benchmark yield changes and bond price changes. Analytical duration approaches based on mathematical analysis include Macaulay, modified, and effective durations.

Which of the following statements about U.S. Treasury Inflation Protection Securities (TIPS) is most accurate?

For U.S. Treasury TIPS, the coupon rate is set at a fixed rate determined via auction. 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 or the initial par value).

eight major topics of the Global Investment Performance Standards (GIPS)

Fundamentals of Compliance Input Data and Calculation Methodology Composite and Pooled Fund Maintenance Composite Time-Weighted Return Report Composite Money-Weighted Return Report Pooled Fund Time-Weighted Return Report Pooled Fund Money-Weighted Return Report GIPS Advertising Guidelines

Which provision of an alternative investment partnership's incentive fees is designed to prevent investors from paying multiple incentive fees for the same performance?

High water mark.

Mike Bowers observes that during one year the return on the S&P 500 index is 20%. Recalculating the return on an equally weighted basis, Bowers estimates that the index return is 15%. The difference in the two calculations of return is best explained by:

Mike Bowers observes that during one year the return on the S&P 500 index is 20%. Recalculating the return on an equally weighted basis, Bowers estimates that the index return is 15%. The difference in the two calculations of return is best explained by:

Expansionary monetary policy

Monetary policy is said to be expansionary if the central bank's policy rate is less than the neutral interest rate, which is the sum of the long-term trend rate of real economic growth and the central bank's target inflation rate.

Which of the following is most accurate regarding the relationship between operational efficiency and informational efficiency?

Operational efficiency contributes to informational efficiency.

Normal Corp. has a current ratio above 1 and a quick ratio less than 1. Which of the following actions will increase the current ratio and decrease the quick ratio? Normal Corp.:

Paying off accounts payable from cash lowers current assets and current liabilities by the same amount. Because the current ratio started off above 1, the current ratio will increase. Because the quick ratio started off less than 1, it will decrease further. The other choices are incorrect. Buying fixed assets on credit decreases both ratios because the denominator increases, with no change to the numerator. Using cash to purchase inventory would result in no change in the current ratio but would decrease the quick ratio by decreasing the numerator.

A company reports the following unusual events: - Loss on discontinued operations. - Restructuring and severance costs applicable to asset sales. - Plant shutdown costs. Which of these items would most likely be considered nonrecurring and included in operating income?

Restructuring and severance costs applicable to asset sales and plant shutdown costs.

Which of the following is least likely a source of bias in CPI data?

Sample selection **The three sources of bias associated with CPI data are: new goods, quality changes, and substitution

Which of the following statements about the security market line (SML) and capital market line (CML) is most accurate?

The SML uses beta, but the CML uses standard deviation as the risk measure. **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.

With respect a dividend payment, which of the following dates occurs first?

The ex-dividend date.

Which of the following statements about business risk and financial risk is least accurate?

The greater a company's business risk, the higher its optimal debt ratio.

If all other factors remain unchanged, which of the following would most likely reduce a company's price/earnings ratio?

The required rate of return increases, and the dividend payout ratio decreases.

Under which of the following conditions does a forward contract have a positive value to the short party at expiration?

The spot price of the underlying asset is less than the forward price.

Which of the following statements about the normal distribution is least accurate? The normal distribution:

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

Listed debt securities owned by a company, for which the company intends to collect interest payments and sell the securities, must be carried at fair value with gains and losses reported as other comprehensive income under:

U.S. GAAP only. **Under IFRS, firms may make an irrevocable choice to carry any financial asset at fair value through profit and loss. Under U.S. GAAP, such debt securities are classified as "available for sale," and carried at fair value with gains and losses reported as other comprehensive income.

For a company which owns a majority of the equity of a subsidiary, whether to create a deferred tax liability for undistributed profits from the subsidiary depends on an "indefinite reversal criterion" under:

U.S. GAAP, but not IFRS. **Undistributed profits from a subsidiary do not require the creation of a deferred tax liability under U.S. GAAP if the subsidiary meets the indefinite reversal criterion. For IFRS, there are circumstances where a DTL is not created but the test for this treatment is not called or equivalent to the indefinite reversal criterion detailed in U.S. GAAP.

Which of the following statements regarding the impact of financial leverage on a company's net income and return on equity (ROE) is most accurate?

Using financial leverage increases the volatility of ROE for a level of volatility in operating income.

A firm has undertaken a contract with an estimated total cost of $200 million at a price of $220 million. At the end of the first reporting period, the firm has devoted resources of $70 million to the project. The customer has been billed for $80 million and made payments of $60 million. As a result of these transactions, the firm should report revenue from this project of:

Using the percentage of total costs incurred to date as an estimate of the portion of the performance obligations completed, revenue should be (70/200) × $220 million = $77 million.

portfolio duration...

WA of component securities, using full prices

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 long position in a 90-day FRA on 270-day LIBOR.

Based on her forecast for the economy, a portfolio manager increases her investments in high-quality bonds and decreases her investments in commodities. The portfolio manager most likely expects the economy to experience:

a recessionary gap. in a recession, commodity prices and interest rates are likely to decrease. decreasing interest rates should increase the prices of high-quality bonds. *an inflationary gap or stagflation would likely result in increasing commodity prices

A repurchase agreement is most accurately described as:

a source of short-term funding for a bondholder.

An alternative investment partnership with a 2-and-20 fee structure has increased in value each period and earned a return of 8% net of management fees in 20x7. Under which of the following provisions would incentive fees for 20x7 be the highest?

a) 5% hard hurdle rate and a high water mark provision b) 6% soft hurdle rate and a high water mark provision c) 7% hard hurdle rate and no high water mark provision

the right to exercise an option prior to expiration is most likely to have value for:

a) a deep in-the-money call option on an asset with no cash flows b) an at-the-money put option on an asset with positive cash flows c) an at-the-money call option on an asset with positive cash flows **may be valuable to exercise a call option before expiration when underlying asset makes cash distributions (pays dividend or interest payments). the cash distribution will decrease the price of the underlying asset, decrease the call value on the date of an interest payment or ex-dividend date.

which type of index is least likely to require frequent reconstitution of constituent securites

a) equity index b) commodity index c) fixed income index

A bond pays a quarterly coupon of 8% minus one-half of annual 90-day LIBOR. This bond is most accurately classified as a:

a) leveraged instrument b) participation instrument c) yield enhancement instrument *Inverse floater = leveraged instrument

Measures of downside risk such as the Sortino ratio are most likely to be more appropriate than standard deviation for measuring risk of a:

a) macro strategy fund b) real estate investment trust c) commodity exchange-traded fund **downside risk measures may be more appropriate than SD for estimating risk of hedge funds. SD is typically appropriate for publicly traded securities such as REITs and ETFs

a long-only commodity investment is most likely to

a) perform poorly in inflationary periods b) have a high correlation with equity returns c) be implemented by using derivatives **among motivations for investing in commodities are that they can serve as an inflation hedge and returns have low correlation with equity

The problem of investment managers taking offsetting active positions is most likely addressed by employing:

a) risk budgeting b) tactical asset allocation c) core satellite approach

With a soft lockup period of two years, investors in a hedge fund are:

able to get redemptions during the first two years, but only if they pay additional fees.

industry rotation

adjusting industry weights in a portfolio based on current stage of business cycle

If there is an increase in the quantity of money at full employment, the long-run effects will most likely be:

an increase in the price level and no effect on real GDP. **An increase in the quantity of money at full employment will reduce interest rates in the short run, which would increase short-run aggregate demand above full employment. This causes wage demands to increase, which in turn reduces short-run aggregate supply. In the long run, real GDP reverts to its full-employment level with an increase in price level equal to the percentage increase in the quantity of money.

For a domestic investor purchasing bonds in a foreign market and currency:

appreciation of both the asset and the foreign currency benefits the domestic investor.

The uncertainty about a firm's expected operating income is most appropriately referred to as:

business risk

Declaration and payment of a dividend during the most recent accounting period would be shown on a company's statements of:`

cash flows and changes in equity **declaration of a dividend = decrease in equity; payment of dividend will be shown on CF statement, but neither affects income or comprehensive income

contingent convertible bonds

convert automatically to common stock if a specified event occurs

In choosing asset classes for establishing strategic portfolio allocation across assets, the manager would most prefer that:

correlations of asset returns within an asset class are significantly greater than correlations of asset class returns. **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.

EV is most accurate interpreted as the

cost to take over a firm

synthetic CDOs backed by a portfolio of

credit default swaps

The sensitivity of a derivative's value to the price of the underlying asset is measured by the derivative's:

delta **Delta measures the sensitivity of a derivative's value to the price of its underlying asset. Gamma measures the sensitivity of delta to the price of the underlying asset. Beta measures the market risk of a security

P/E

dividend payout ratio / (k-g)

A natural monopoly is most likely to exist when:

economies of scale are great

to receive the next dividend, an investor must buy a stock before its...

ex-dividend date, which is one or two business days before the holder-of-record date

Which of the following indicators of a firm's liquidity position is least desirable?

high cash conversion cycle *cash conversion cycle = amount of time it takes for a firm to turn firm's cash investments in inventory back into cash

A company is most likely to have a high proportion of equity in its capital structure if the company exhibits:

high operating risk. **Companies with a high degree of operating risk tend to have highly variable operating cash flows, making them less able to service debt compared to companies with less operating risk. Stable cash flows and high proportions of liquid assets typically enable companies to service a higher proportion of debt in their capital structures.

an investor in a sponsored DR:

holdings the voting rights for the DR share

bearing unsystematic risk should provide no additional expected return

if diversification is cost-free **unsystematic risk can be diversified away at no cost

time value of a put option on an asset that provides no cash flows would most likely be increased by...

increase in asset's price volatility **increase in volatility will increase value of a put option but will not change its intrinsic value --> so the time value increases

A company takes a $10 million impairment charge on a depreciable asset in 20X3. The most likely effect will be to:

increase reported net income 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 least likely result of import quotas and voluntary export restraints is:

increased revenue for the government. **Import quotas and voluntary export restraints, unlike tariffs, do not necessarily generate tax revenue. The other choices describe effects that result from tariffs, quotas, and VERs.

For an asset-backed security (ABS), a special purpose entity:

is used to separate assets used as collateral from those of the company seeking financing through an ABS.

A firm is most likely to have pricing power if:

its product is differentiated.

An American-style call option is most likely to be more valuable than an otherwise equivalent European-style call option if:

its underlying asset is a semiannual-pay bond.

The ratio of operating cash flow to net income is most likely to indicate low quality of earnings when it is:

less than one. **Operating cash flow that is less than net income (ratio less than one) or declining over time may indicate low-quality earnings from aggressive accounting or accounting irregularities. A ratio of operating cash flow to net income that is highly variable, but consistently greater than one, is not necessarily indicative of low-quality earnings.

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:

less than the bond's yield to maturity at the time of purchase. **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.

With respect to the Standard on material nonpublic information, materiality is least likely to be affected by:

liquidity of the subject security.

Assume most hedge funds have a 2-and-20 fee structure and most funds of funds have a 1-and-10 fee structure. Over a long investment horizon, compared to net returns from investing directly in hedge funds, net returns from investing in funds of funds are most likely to be:

lower

diversification ratio

lower = more diversified

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:

more frequently traded bonds rated BB+.

Which form of the efficient markets hypothesis (EMH) implies that an investor can achieve positive abnormal returns on average by using technical analysis?

none **An investor cannot achieve positive abnormal returns on average by using technical analysis if prices fully reflect all available security market (price and volume) information. The weak form of the EMH assumes prices reflect this information, and the semistrong and strong forms assume prices reflect additional (non-market) information as well.

Record retention

recommends maintaining records supporting investment recommendations and actions and records of investment-related communications with clients for at least seven years; can be maintained in electronic or hard copy format

A U.S. GAAP reporting company holds a number of marketable securities as investments. For the most recent period, the company reports that the market value of its securities held for trading decreased by $2 million and the market value of its securities available for sale increased in value by $3 million. Together, these changes in value will:

reduce net income by $2 million and increase shareholders' equity by $1 million. **Unrealized gains and losses on securities held for trading are included in net income. Unrealized gains and losses on securities available for sale are not reported in net income but are included in comprehensive income. Net income will show a $2 million loss from the securities held for trading. Shareholders' equity will reflect this loss as well as the $3 million unrealized gain from securities available for sale, for a net increase of $1 million.

Derivatives markets are most likely to:

reduce transactions costs.

The type of technical analysis chart most likely to be useful for intermarket analysis is a:

relative strength chart **Relative strength charts display the price of an asset relative to the price of another asset or benchmark over time. This type of chart is useful for demonstrating whether one asset class or market has outperformed or underperformed another. Candlestick charts and volume charts are generally used to analyze a single asset or market over time.

A hypothesis test of whether an independent variable explains a significant amount of the variation in the dependent variable is most appropriately constructed using a hypothesized value of a regression line's:

slope coefficient. **A test of whether an independent variable explains a significant amount of the variation in the dependent variable uses the null hypothesis that the slope coefficient is equal to zero. Rejecting the null hypothesis indicates the slope coefficient is statistically significant.

contango

spot price is lower than futures price

Which of the following is most appropriately termed an emotional bias?

status quo bias

Siegel, Inc., has issued bonds maturing in 15 years but callable at any time after the first 8 years. The bonds have a coupon rate of 6%, and are currently trading at $992 per $1,000 par value. If interest rates decline over the next few years:

the price of the bond will increase, but likely by less than a comparable bond with no embedded option.

A perfectly elastic aggregate supply curve represents:

the production decisions of firms only in the very short run. **The very short run aggregate supply curve is perfectly elastic because firms can adjust output by increasing or decreasing labor hours and capacity use without affecting input prices. The short-run aggregate supply curve is upward sloping. The long-run aggregate supply curve is perfectly inelastic and represents potential GDP, the full-employment output level of an economy.

Bear Company produces gravel-hauling equipment. The company recently began producing the Mauler, a new line of equipment. Prior to beginning production of the Mauler, the company spent $10 million in research and development costs. Bear expects the Mauler line to generate positive cash flows beginning in the fourth year. However, Bear is forecasting a one-time expense in year 5 to comply with new government emission standards. The company will use an empty building it already owns to produce the Mauler. When analyzing the project cash flows for the Mauler, Bear should least appropriately include:

the research and development cost. **R+D = sunk cost. opportunity cost of capital of the empty building in its next-best use should be considered.

A security's beta is best estimated by the slope of:

the security's characteristic line. **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.

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 three-year and five-year spot rates.

The most appropriate method to estimate a company's cost of debt capital is to use:

the yield to maturity on bonds of other companies with the same credit rating as the company's bonds.

One year ago, the currency of Xyland (XYZ) was at a three-month forward premium to the currency of Piqua (PQR). Today, the XYZ is at a three-month forward discount to the PQR. Assuming the interest rate forward parity relationship holds, this change implies that:

today the XYZ three-month interest rate is higher than the PQR three-month interest rate. **Interest rate parity requires that the currency with the higher interest rate will sell at a discount in the forward market.

grey market

trading in bonds that have not yet been issued

a characteristic that distinguishes derivatives from ETFs is that derivatives...

transform the performance of their underlying assets

In an informationally efficient capital market, a portfolio manager who follows an active investment strategy is most likely to:

underperform a passive index strategy on average over time

With regard to the implications of stock market efficiency for technical analysis and fundamental analysis, if market prices are:

weak-form efficient, technical analysis that depends only on past trading data should be of limited or no value.