Try 1_CFA Offical Morning Test

C) parameter. Any descriptive measure of a population characteristic is called a parameter.

A descriptive measure of a population characteristic is best described as a: A) sample statistic. B) frequency distribution. C) parameter.

A) expense costs until technical feasibility has been established. Under IFRS, research and development costs are expensed until certain criteria are met, including that technical feasibility has been established and the company intends to use the developed product.

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: A) expense costs until technical feasibility has been established. B) capitalize costs directly related to the development. C) expense them as incurred.

A) inactively traded investment grade bond. Matrix pricing is most suited to pricing inactively traded bonds and newly underwritten bonds. A credit analyst is least likely to use matrix pricing to price an actively traded bond.

A credit analyst is least likely to use matrix pricing to estimate the required yield and price of a(n): A) inactively traded investment grade bond. B) actively traded speculative grade bond. C) newly underwritten bond.

B) yield to maturity on a zero-coupon bond maturing at the end of Year 2. A spot rate is defined as the yield to maturity on a zero-coupon bond maturing at the date of that cash flow.

A two-year spot rate of 5% is most likely the: A) coupon rate in Year 2 on a coupon-paying bond maturing at the end of Year 4. B) yield to maturity on a zero-coupon bond maturing at the end of Year 2. C) yield to maturity on a coupon-paying bond maturing at the end of Year 2.

C) specific composite presentations are accurate. GIPS verification does not ensure the accuracy of any specific composite presentations.

According to the GIPS standards a verification report confirms all of the following except whether: A) processes and procedures are designed to calculate and present compliant performance results. B) a firm has complied with all firm-wide composite construction requirements. C) specific composite presentations are accurate.

B) 10 years of GIPS-compliant performance. After a firm presents a minimum of five years of GIPS-compliant performance, the firm must present an additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant performance.

After a firm presents a minimum required number of years of GIPS- compliant performance, the firm must present an additional year of performance each year, building up to a minimum of: A) 15 years of GIPS-compliant performance. B) 10 years of GIPS-compliant performance. C) 5 years of GIPS-compliant performance.

C) yield curve is steep. The main factor causing any difference between the nominal spread and the Z-spread is the shape of the Treasury spot rate curve. The steeper the spot rate curve, the greater the difference.

All else being equal, the difference between the nominal spread and the Z-spread for a non-Treasury security will most likely be larger when the: A) yield curve is flat. B) security has a bullet maturity rather than an amortizing structure. C) yield curve is steep.

C) volatility of returns that is understated. The use of estimates tends to smooth the return series. As a consequence, the volatility of returns will be understated.

Alternative investments that rely on estimates rather than observable market prices for valuation purposes are most likely to report: A) returns that are understated. B) correlations of returns with the returns of traditional assets that are overstated. C) volatility of returns that is understated.

B) crowding out of private investments. Expansionary policy increases government borrowing, which may divert private sector investment from taking place (resulting in an effect known as crowding out). A rise in capital gain tax rates is a form of contractionary fiscal policy. Rises in government spending on social insurance and benefits is a form of automatic stabilizer and not due to discretionary fiscal expansion.

An expansionary fiscal policy is most likely associated with: A) an increase in capital gains tax rates. B) crowding out of private investments. C) an increase in government spending on social insurance and benefits.

C) a discount. The bond would sell below par or at a discount if the yield required by the market rises above the coupon rate. Because the bond initially was purchased at par, the coupon rate equals the yield required by the market. Subsequently, if yields rise above the coupon, the bond's market price would fall below par.

An investor purchases a 5% coupon bond maturing in 15 years for par value. Immediately after purchase, the yield required by the market increases. The investor would then most likely have to sell the bond at: A) par. B) a premium. C) a discount.

C) $0.8 million using the installment method. Because of the uncertainty about collection of the remaining payments, it would not be appropriate to use the accrual method. Under the installment method, the portion of the total profit that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash. Company A will recognize 2/10 × $4 million = $0.8 million. Although the cost recovery method could have been used in this situation, the reported profit would be $0.

At the start of the current year, Company A, which reports using US GAAP, sold a piece of land to Company B for $10 million. The land cost $6 million. Company B made a $2 million down payment with the remaining balance to be paid over the next five years. Over the course of the year, it has been determined that there is significant doubt about the ability and commitment of Company B to complete all payments. In the current year, Company A would most likely report a profit related to the sale of the land of: A) $4 million using the accrual method. B) $2 million using the cost recovery method. C) $0.8 million using the installment method.

B) $15 million. U.S. GAAP requires that long term contracts whose outcomes can be reliably measured should be accounted for using the percentage-of-completion method, based on the stage of completion. Under the original assumptions, the company would have recognized $15 million of revenue.

At the start of the year a company that uses U.S. GAAP entered a contract to design and build a bridge with the following terms: Contract length 3 years Fixed contract price $40 million Estimated contract cost $32 million Costs incurred in first year $12 million The company was initially quite certain about its cost estimates and intended to recognize revenue based on them. However, unexpected problems during the first year have caused engineers to suggest that a more expensive design may be required, costing up to $8 million more. If the appropriate design cannot be determined before the company's financial statements are issued, the difference in the amount of revenue the company would recognize is closest to: A) $ 0. B) $15 million. C) $ 3 million.

C) €555. Under the double declining balance method, the depreciation rate is 2 × Straight line rate. The straight line rate is 33.3% (i.e., 1/3 years), so the double declining rate is 66.6%, or two-thirds depreciation rate per year. But the asset should not be depreciated below its assumed residual value in any year.

At the start of the year, a company acquired new equipment at a cost of €50,000, estimated to have a three-year life and a residual value of €5,000. If the company depreciates the asset using the double declining balance method, the depreciation expense that the company will report for the third year is closest to: A) €3,328. B) €3,705. C) €555.

A) yield to maturity. With a fixed-rate non-callable bond, the before-tax cost of debt is the bond's yield to maturity.

When computing the weighted average cost of capital (WACC) and assuming a fixed-rate non-callable bond is currently selling above par value, the before-tax cost of debt is closest to the: A) yield to maturity. B) current yield. C) coupon rate

B) someone other than buyers and sellers. An externality is a cost or benefit that affects someone other than the seller or the buyer of a good.

Externalities, in reference to a particular good, are most likely to affect: A) buyers. B) someone other than buyers and sellers. C) sellers.

B) stay the same. The bond is priced below its par value but will be worth exactly par value at maturity. Over time, assuming a stable discount rate, the value of the bond must rise so that it is equal to par at maturity. That is, the price is "pulled to par."

Consider a five-year option-free bond that is priced at a discount to par value. Assuming the discount rate does not change, one year from now the value of the bond will most likely: A) decrease. B) stay the same. C) increase.

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

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

B) various measures of risk. Historically, the GIPS standards focused primarily on returns. In the spirit of fair representation and full disclosure, and in order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to risk.

In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to: A) the unique characteristics of each asset class. B) various measures of risk. C) all aspects of performance measurement.

B) volatility of the underlying. The volatility of the underlying is captured in the binomial model by the difference between the up and down factors.

In the binomial model, the difference between the up and down factors best represents the: A) moneyness of an option. B) volatility of the underlying. C) pseudo probability.

B) 1.7. DOL = (Revenues - Variable operating costs) / (Revenues - Variable operating costs - Fixed operating costs)

Income Statement Millions ($) Revenues 9.8 Variable operating costs 7.2 Fixed operating costs 1.5 Operating income 1.1 Interest 0.6 Taxable income 0.5 Tax 0.2 Net income 0.3 The degree of operating leverage (DOL) is closest to: A) 2.4. B) 1.7. C) 1.1.

B) No, because the investment time frame does not match the investment horizon The client is the trust/trustees, not the beneficiary. Mawar followed Standard III(C)-Suitability by managing the trust assets in a way that would likely result in a stable source of income while keeping the risk profile low, thereby complying with the investment objectives of the trust.

Noor Mawar, CFA, manages a trust fund whose beneficiary is an orphaned 18-year-old student. The investment policy dictates that trust assets are expected to provide the student with a stable, low-risk source of income until she reaches the age of 30 years. Based on information from a blog, the student asks Mawar to invest in a new business venture that she expects will provide high returns over the next five years. Mawar ignores the request, instead securing conservative investments to provide sufficient income. Did Mawar most likely violate the CFA Institute Standards of Professional Conduct? A) No, because the client's objectives were met B) No, because the investment time frame does not match the investment horizon C) Yes

C) unique legal and tax considerations. Alternative investments are more likely characterized as having unique legal and tax considerations because of the broad range and complexity of the investments.

Relative to traditional investments, alternative investments are best characterized as having: A) higher correlations with other asset classes. B) greater liquidity. C) unique legal and tax considerations.

B) the same. When using the FIFO inventory method, the ending inventory, the cost of goods sold, and the gross margin are the same under either the perpetual or periodic methods. The use of a perpetual or periodic system makes a difference under weighted average and LIFO.

Selected information from a company that uses the FIFO inventory method is provided: Event Units $/Unit Total ($) Opening inventory 1,000 7.50 7,500 First purchase 250 7.60 1,900 Sales 550 12.00 6,600 Second purchase 300 7.70 2,310 Sales 600 12.00 7,200 Ending inventory 400 If the company used a perpetual system versus a periodic inventory system, the gross margin would most likely be: A) higher. B) the same. C) lower.

B) Renegotiating current debt contracts to lower interest payments Renegotiating debt contracts is a secondary source of liquidity because it may affect the company's operating and/or financial positions.

Which action is most likely considered a secondary source of liquidity? A) Increasing the availability of bank lines of credit B) Renegotiating current debt contracts to lower interest payments C) Increasing the efficiency of cash flow management

C) 0.75. Find the comparable firm's beta: (10.4% - 2.0%)/7.0% = 1.20. Unleverage the comparable firm's beta: βL,comparable/[1 + (1 - Tax rate) × Debt-to-equity ratio] = 1.20/[1 + (1 - 40%) × 1.0] = 0.75.

The following information is available for a firm: Market risk premium 7.0% Risk-free rate 2.0% Comparable firm return 10.4% Comparable firm debt-to-equity ratio 1.0 Comparable firm tax rate 40.0% The firm's unleveraged beta is closest to: A) 1.05. B) 1.20. C) 0.75.

A) 2.86. DTL = Revenue - Variable cost/Net income = £800,000 - £400,000/£140,000 = 2.86.

The following information is available for a firm: Revenue £800,000 Variable cost 400,000 Fixed cost 200,000 Operating income 200,000 Interest 60,000 Net income 140,000 The firm's degree of total leverage (DTL) is closest to: A) 2.86. B) 1.43. C) 2.00.

C) X and Y are substitutes. The cross-price elasticity is positive, indicating that as the price of Y increases, more of X is demanded, thus making X and Y substitutes.

The market demand function for item X is a function of its price, household income, and the price of item Y. Own-price elasticity of demand for X -0.8 Income elasticity of demand for X 1.5 Cross-price elasticity of demand for X with respect to the price of Y 0.4 Given the above elasticity coefficients for the two items, which of the following statements is most accurate? A) Item X is an inferior good. B) Demand for X is elastic. C) X and Y are substitutes.

B) of minority shareholders in subsidiaries that have been consolidated. Non-controlling interests found in the equity section represent the equity interests of minority shareholders in non-wholly-owned subsidiaries that have been consolidated.

The non-controlling or minority interests found in the equity section of the balance sheet are best described as the equity interests: A) held by the corporation in other entities which it does not control, but has significant influence. B) of minority shareholders in subsidiaries that have been consolidated. C) of minority shareholders of the corporation who have significant influence, but not control.

B) is less than the price of contract 2. The forward price is the spot price compounded at the risk-free rate over the life of the contract. Since Contract 2 has the longer life, compounding will lead to a larger value.

There are two forward contracts, contract 1 and contract 2, on the same underlying. The underlying makes no cash payments, does not yield any nonfinancial benefits, and does not incur any storage costs. Contract 1 expires in one year while contract 2 expires in two years. It is most likely that the price of contract 1: A) exceeds the price of contract 2. B) is less than the price of contract 2. C) is equal to the price of contract 2.

A) Disclosure of Conflicts According to Standard VI(A) Disclosure of Conflicts, Grabbo should disclose to her employer her hedge fund development because this activity could possibly interfere with her responsibilities at Atlantic. In setting up a hedge fund, Grabbo was not acting for the benefit of her employer. She should have informed Atlantic she wanted to organize the hedge fund and come to some mutual agreement on how this process would occur.

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 her firm creates 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 one of the Codes and Standards immediately? A) Disclosure of Conflicts B) Additional Compensation Arrangements C) Priority of Transactions

B) long the put, long the asset and short the bond. According to put-call parity, a long call is equal to long put, long asset, short bond.

Using put-call parity, a long call can best be replicated by going: A) short the put, long the asset and short the bond. B) long the put, long the asset and short the bond. C) long the put, short the asset and long the bond.

C) unreliable. The debt-rating approach is used when the market prices for debt are unreliable or nonexistent.

Using the debt-rating approach to find the cost of debt is most appropriate when market prices for a company's debt are: A) stable. B) below par value. C) unreliable.

B) Specific identification Specific identification best matches the physical flow of the inventory items because it tracks the actual units that are sold.

Which of the following inventory valuation methods best matches the actual historical cost of the inventory items sold to their physical flow? A) FIFO B) Specific identification C) LIFO

C) Equity capital Factors of production include land, labor (skilled and unskilled), capital, and materials. Capital in this context refers to physical capital.

Which of the following is least likely to be considered a factor of production? A) Unskilled labor B) Prefabricated components C) Equity capital

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

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

A) Leptokurtotic A distribution that is more peaked than normal is called leptokurtotic.

Which of the following most accurately describes a distribution that is more peaked than normal? A) Leptokurtotic B) Mesokurtotic C) Platykurtotic

B) Subtract the mean of X from X, and then divide that result by the standard deviation of X. There are two steps in standardizing a random variable X: Subtract the mean of X from X, and then divide that result by the standard deviation of X. This is represented by the following formula: Z = (X - μ)/σ.

Which of the following most accurately describes how to standardize a random variable X? A) Divide X by the difference between the standard deviation of X and the standard deviation of the standard normal distribution. B) Subtract the mean of X from X, and then divide that result by the standard deviation of X. C) Subtract the mean of X from X, and then divide that result by the standard deviation of the standard normal distribution.

A) Treynor ratio The Treynor ratio measures the return premium of a portfolio versus the risk-free asset relative to the portfolio's beta, which is a measure of systematic risk.

Which of the following performance measures most likely relies on systematic risk as opposed to total risk when calculating a risk-adjusted return? A) Treynor ratio B) M-squared C) Sharpe ratio

A) lists all account balances at a particular point in time. A trial balance is a document that lists account balances at a particular point in time.

Which of the following statements best describes a trial balance? A trial balance is a document or computer file that: A) lists all account balances at a particular point in time. B) contains all business transactions recorded in the order in which they occur. C) shows all business transactions by account.

A) An HHI of 0.05 would be analogous to having the market shared equally by 20 firms. If there are M firms in the industry with equal market shares, the HHI equals 1/M. With 20 firms having equal shares, the HHI = 1/20 = 0.05.

Which of the following statements concerning the Herfindahl-Hirschman Index (HHI) is most accurate? A) An HHI of 0.05 would be analogous to having the market shared equally by 20 firms. B) The HHI is a useful measure of potential barriers to entry. C) The HHI is usually unaffected by mergers among the top market incumbents.

B) Standard-setting bodies have authority because they are recognized by regulatory authorities. Without the recognition of the standards by the regulatory authorities, such as the US SEC, the private sector standard-setting bodies, such as US Financial Accounting Standards Board, would have no authority.

Which of the following statements is most accurate with respect to the jurisdiction underlying financial reporting? A) The requirement to prepare financial reports in accordance with specified accounting standards is the responsibility of standard-setting bodies. B) Standard-setting bodies have authority because they are recognized by regulatory authorities. C) Regulatory authorities are typically private sector, self-regulated organizations.

B) Accrued expenses arise when a company incurs expenses that have not yet been paid as of the end of the accounting period. The statement about accrued expenses is correct. A valuation adjustment for an asset converts its historical cost to current market value; accrued revenue arises when revenue has been earned but not yet received.

Which of the following statements is most accurate? A) Accrued revenue arises when a company receives cash prior to earning the revenue. B) Accrued expenses arise when a company incurs expenses that have not yet been paid as of the end of the accounting period. C) A valuation adjustment for an asset converts its historical cost to its depreciated value.

C) can be calculated from the forward curve, and the forward curve can be calculated from the spot curve. The forward and spot curves are interconnected to each other. The spot curve can be calculated from the forward curve, and the forward curve can be calculated from the spot curve. Either curve can be used to value fixed-rate bonds.

Which of the following statements is most likely correct regarding the spot and forward curves. The spot curve: A) can be calculated from the forward curve, but the forward curve cannot be calculated from the spot curve. B) cannot be calculated from the forward curve, but the forward curve can be calculated from the spot curve. C) can be calculated from the forward curve, and the forward curve can be calculated from the spot curve.