Try 2_CFA Institute 2011 Mock

A bond has duration of 4.50 and convexity of -39.20. If interest rates increase by 0.5%, the percentage change in the bond's price will be closest to: A. -2.35%. B. -2.25%. C. -2.15%.

A. -2.35%. A is correct because when convexity is known the percentage change in a bond's price = (-duration × Δy × 100) + (C × (Δy)2 × 100) = (-4.50×0.005×100)+(-39.20×0.0052×100) = -2.35.

A company's $100 par value preferred stock with a dividend rate of 9.5% per year is currently priced at $103.26 per share. The company's earnings are expected to grow at an annual rate of 5% for the foreseeable future. The cost of the company's preferred stock is closest to: A. 9.2%. B. 9.5%. C. 9.7%.

A. 9.2%. rp = Dp / Pp (or Dividend / Price) = ($100 x 0.095) / $103.26 = 9.2%

A financial analyst utilizing his analytical expertise and up-to-date information buys a company's stock. His close friends, who lack information or expertise, imitate the financial analyst's action and buy the stock. Which of the following statements concerning this behavioral bias is most accurate? A. It improves market efficiency. B. It is identical to representativeness. C. It is inconsistent with rational behavior.

A. It improves market efficiency. This behavioral bias is an example of an information cascade wherein the transmission of information is from those participants who act first and whose decisions influence the decisions of others. The behavior of informed traders acting first and uninformed traders imitating the informed traders is consistent with rationality. The imitation trading by the uninformed traders helps the market incorporate relevant information and improves market efficiency.

According to the IFRS framework, which of the following is the least likely qualitative characteristic that makes financial information useful? A. Materiality. B. Comparability. C. Understandability.

A. Materiality. The four principal qualitative characteristics that make financial information useful are understandability, relevance, reliability and comparability. Materiality relates to the level of detail of the information needed to achieve relevance - whether the omission or misstatement of the information would impact the decision maker's decision.

Preeta Singh, a CFA Candidate, is an asset manager employed by a fund management company managing very large segregated pension funds. In her spare time outside of working hours, Singh likes to provide management-consulting services to small companies to help grow their businesses, focusing on strategic planning. Singh is paid for the consulting services and has also provided her employer information about these outside activities. Does Singh most likely violate the CFA Code of Ethics with regard to Duties to Employers? A. No. B. Yes, with regard to loyalty. C. Yes, with regard to additional compensation arrangements.

A. No. A is correct because Singh does not violate any Standard relating to Duties to Employers. She conducts unrelated non-competitive services to clients outside of business hours and thus does not deprive her employer of the advantage of her skills and abilities, nor is there any indication she divulges confidential information or otherwise causes harm to her employer. She has informed her employers about her outside activities.

A bond market analyst states, "The current term structure of interest rates is upward sloping which implies the market believes short-term interest rates will rise in the future." Which theory of the term structure of interest rates does the analyst most likely believe? A. Pure expectations theory. B. Liquidity preference theory. C. Market segmentation theory.

A. Pure expectations theory. A is correct because under the pure expectations theory the only reason the yield curve will be upward sloping is because market participants believe that short-term rates will rise in the future.

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 due to 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. What course of action is most appropriate for Bradovic to prevent any violation of the CFA Code or Standards? A. Quit his position with the firm. B. Upgrade the rating but note his objections in writing. C. Disassociate with the credit rating report, the bond issue and the client.

A. Quit his position with the firm. A is correct as the boss' 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 Standards. Bradovic's best course of action consequently is to resign, as the company's current practice of giving false credit ratings is likely to continue.

Leng Bo, CFA is a bond portfolio manager for individual investors. Last year, a client whose portfolio is limited to investment-grade bonds approved Bo's purchase of a below investment grade bond. Because yields in the high grade fixed income markets declined, Bo subsequently decides to enhance this client's portfolio by investing in several additional bonds with ratings one or two notches below investment grade. The investment strategy implemented by Bo most likely violated which of the following CFA Institute Standards of Professional Conduct? A. Suitability B. Communications with Clients C. Independence and Objectivity

A. Suitability A is correct because the client only approved the purchase of one below investment grade bond while the portfolio manager has purchased several additional bonds below investment grade without client approval in violation of Standard III (C).

Which of the following statements is most accurate? A. Treasury stock is non-voting and receives no dividends. B. Minority interest on the balance sheet represents a position the company owns in other companies. C. A classified balance sheet arises when in an auditor's opinion the financial statements materially depart from accounting standards and are not presented fairly.

A. Treasury stock is non-voting and receives no dividends. Treasury stock is non-voting and does not receive dividends.

Which of the following statements is most accurate regarding cash flow statements prepared under IFRS and U.S. GAAP? A. Under U.S. GAAP, bank overdrafts should be classified as a financing cash flow. B. Under IFRS, interest paid can be reported either as an operating or an investing cash flow. C. Both the direct and indirect formats of cash flow statements are allowed under IFRS and U.S. GAAP, but indirect is encouraged under IFRS only.

A. Under U.S. GAAP, bank overdrafts should be classified as a financing cash flow. Under U.S. GAAP, bank overdrafts are not considered part of cash and cash equivalents and are classified as financing cash flows

Joyce La Valle, CFA is a portfolio manager at a global bank. La Valle has been told she should use a specific vendor for equity investment research that has been approved by the bank's headquarters. Because La Valle is located in a different country than the bank's headquarters, she is uncomfortable with the validity of the research provided by this vendor when it applies to her country and would like to use a local vendor on whom she has already conducted due diligence. Which of the following actions concerning the research vendor should La Valle most likely take to avoid violating the CFA Institute Standards of Professional Conduct? A. Use the local research vendor. B. Use the bank-approved research vendor. C. Use both the local and the bank-approved research vendors.

A. Use the local research vendor. A is correct. When a member has reason to suspect that either secondary or third-party research or information comes from a source that lacks a sound basis, the member must not rely on that information as indicated by Standard V(A) Diligence and Reasonable Basis.

Use the following values from Student's t-distribution to establish a 95% confidence interval for the population mean given a sample size of 10, a sample mean of 6.25, and a sample standard deviation of 12. Assume that the population from which the sample is drawn is normally distributed and the population variance is not known. DOF 9 p = .05 -> 1.833 p = .025 -> 2.262 The 95% confidence interval is closest to: A. a lower bound of -2.33 and an upper bound of 14.83. B. a lower bound of -2.20 and an upper bound of 14.70. C. a lower bound of -0.71 and an upper bound of 13.20.

A. a lower bound of -2.33 and an upper bound of 14.83. With a sample size of 10, there are 9 degrees of freedom. The confidence interval concept is based on a two-tailed approach. For a 95% confidence interval, 2.5% of the distribution will be in each tail. Thus, the correct t-statistic to use is 2.262. The confidence interval is calculated as: mean +/- t * sd/sqrt(n) use t at 0.025 since 2 tail

Assume that two firms in a duopoly enter into a collusive agreement in an attempt to form a cartel and restrict output, raise prices, and increase profits. Given this, the most likely outcome according to the Nash equilibrium is that: A. both firms cheat. B. both firms comply. C. one firm cheats and the other firm complies.

A. both firms cheat. The Nash equilibrium of the prisoners' dilemma game is that both firms cheat.

A combination of interest rate calls is referred to as an interest rate: A. cap. B. floor. C. collar.

A. cap. A is correct because an interest rate call is an option in which the holder has the right to make a known interest payment and receive an unknown interest payment. The underlying is the unknown interest rate. If the unknown underlying rate turns out to be higher than the exercise rate at expiration, the option is exercised. Thus, the interest rate paid will not be higher than the exercise rate. A combination of interest rate calls is referred to as an interest rate cap or sometimes just a cap.

Tammi Holmberg is enrolled to take the Level I CFA examination. While taking the CFA examination, the candidate on Holmberg's immediate right takes a stretch break and a piece of paper from his pocket falls onto Holmberg's desk. Holmberg glances at the paper and realizes there is information written on the paper, which includes a formula Holmberg needs for the question she is working on. Holmberg had not memorized this formula and could not complete the question without this information. Holmberg pushes the paper off her desk and uses the formula to complete the question. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, Holmberg most likely: A. compromised her exam. B. was free to act on the information that fell on her desk. C. is responsible for notifying exam proctors of her neighbor's violation.

A. compromised her exam. A is correct because Holmberg's conduct compromised the validity of her exam and violated Standard VII (A). Her conduct was also a violation of the rules and regulations of the CFA Program, the Candidate pledge, and the CFA Institute Code and Standards.

To be recognized as a financial statement element under the IFRS Framework for the Preparation and Presentation of Financial Statements an element most appropriately needs to: A. have a cost or value that can be measured with reliability. B. normally be carried at historical cost, current cost or fair market value. C. provide certainty that any future economic benefit associated with the item will flow to or from the enterprise.

A. have a cost or value that can be measured with reliability. 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 that it is probable that they will.

Using the sample results given below, drawn as 25 paired observations from their underlying distributions, test if the mean returns of the two portfolios differ from each other at the 1% level of statistical significance. Assume the underlying distributions of returns for each portfolio are normal and that their population variances are not known. Portfolio 1; Portfolio 2; Difference Mean Return 17.00; 21.25; 4.25 Standard Deviation 15.50; 15.75; 6.25 t-statistic for 24 df and at the 1% level of statistical significance = 2.807 Based on the paired comparisons test of the two portfolios, the most appropriate conclusion is: A. reject the hypothesis that the mean difference equals zero as the computed test statistic exceeds 2.807. B. accept the hypothesis that the mean difference equals zero as the computed test statistic exceeds 2.807. C. accept the hypothesis that the mean difference equals zero as the computed test statistic is less than 2.807.

A. reject the hypothesis that the mean difference equals zero as the computed test statistic exceeds 2.807. (4.25 - 0) / (6.25 / sqrt(25)) = 3.4 > 2.807

Two parties agree to a forward contract on a non-dividend paying stock at a price of $103.00. At contract expiration the stock trades at $105.00. In a cash-settled forward contract, the: A. short pays the long $2.00. B. short pays the long $103.00. C. long pays the short $105.00.

A. short pays the long $2.00. A is correct because a cash-settled forward permits the long and short to pay the net cash value of the position on the delivery date. The long is due to receive a stock from the short with a market value of $105.00. Through the forward contract, the long agreed to purchase the stock at $103.00. Therefore, the short must pay the net cash value of $2.00 to the long.

A 10-year bond is issued on January 1, 2010. Its contract requires that its coupon rate change over time as shown in the following table: 01/01/2010-12/31/2011 2.0% 01/01/2012-12/31/2013 5.0% 01/01/2014-12/31/2015 7.5% 01/01/2016-12/31/2019 9.0% This security is best described as an example of a: A. step-up note. B. floating-rate bond. C. deferred coupon bond.

A. step-up note. A is correct because a step-up note has contractually mandated changes in its coupon rate.

Assume a company has the following portfolio of marketable securities which was acquired at the end of 2009: Original Cost in € as at the Year End, 2009; Fair Market value in € as at the Year End, 2010 Held for trading 12,000,000; 12,500,000 Available for sale 17,000,000; 16,000,000 If the company reports under IFRS instead of U.S. GAAP, its net income will most likely be: A. the same. B. €500,000 lower. C. €500,000 higher.

A. the same. Whether securities are classified as held for trading or available for sale, they are measured at their fair value on the balance sheet, but all gains/losses on held for trading securities are reported on the income statements. The unrealized gains/losses on available for sale securities are reported in equity. However, this treatment is the same for both IFRS and U.S. GAAP reporting.

One advantage of exchange traded funds relative to open-end mutual funds is: A. they trade throughout the day. B. they offer greater diversification. C. they have smaller bid-ask spreads.

A. they trade throughout the day. A is correct. Exchange traded funds trade throughout the trading day at market prices that are updated continuously, rather than only trading once a day at closing market prices, as do the traditional open-end mutual funds.

A company uses the percentage-of-completion method to recognize revenue from its long term construction contracts and estimates percent completion based on expenditures incurred as a percentage of total estimated expenditures. A three-year contract for €10 million was undertaken with a 30% gross profit anticipated. The project is now at the end of its second year, and the following end-of-year information is available: Year 1 Year 2 Costs incurred during year €3,117,500 €2,582,500 Estimated total costs 7,250,000 7,600,000 The gross profit recognized in year 2 is closest to: A. €617,500. B. €880,000. C. €960,000.

A. €617,500. Percent Completed = Costs Incurred/Total Costs Anticipated x 100 Gross Profit % = Complete x Anticipated Profit - Profit Already Recognized

During 2010, Company A sold a piece of land with a cost of $6 million to Company B for $10 million. Company B made a $2 million down payment with the remaining balance to be paid over the next 5 years. It has been determined that there is significant doubt about the ability and commitment of the buyer to complete all payments. Company A would most likely report a profit in 2010 of: A. $4 million using the accrual method. B. $0.8 million using the installment method. C. $2 million using the cost recovery method.

B. $0.8 million using the installment 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. For Company A 2/10 x 4 = $0.8 million. Note, cost recovery method could be used in this case, but the reported profit would be $0.

On January 1st of the year, an investor purchases $100,000 in par value of a new Treasury Inflation Protection Security (TIPS) issue that has a 2.5% coupon rate. The annual rate of inflation over the first six months of the year is 4.0% and the annual rate of inflation for the second six months of the year is 3.0%. The amount of coupon interest paid to the investor after the second six months of the year is closest to: A. $1,275. B. $1,294. C. $1,339.

B. $1,294. B is correct because the inflation-adjusted principal after the second six month period is $100,000 × (1.02) × (1.015) = $103,530 and $103,530 × (2.5%/2) = $1,294.

A level payment, fixed-rate, fully amortizing mortgage loan for $220,000 is obtained with a term of 15 years, a mortgage rate of 6.0% with monthly compounding, and a monthly payment of $1,856.49. Assuming that the borrower does not prepay or default, the principal that is repaid during the first 3 months is closest to: A. $660. B. $2,281. C. $3,667.

B. $2,281.

A twenty-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: A. 9.9%. B. 12.0%. C. 13.0%.

B. 12.0%. First, you need to determine the yield-to-maturity, which is the discount rate that sets the bond price to $1,105.94 and is equal to 7%. This can be done with a financial calculator: FV = -1,000, PV = 1,105.94, N = 20, PMT = -80, solve for I, which will equal 7%. The bond-yield-plus-risk-premium approach is calculated by adding a risk premium to the cost of debt (i.e. the yield-to-maturity for the debt) making the cost of equity 12.00% (= 7% +5%).

An analyst observes that the historic geometric returns are 9% for equities, 3% for treasury bills, and 2% for inflation. The real rate of return and risk premium for equities are closest to: A. 5.8% and 3.7%. B. 6.9% and 3.8%. C. 6.9% and 5.8%.

B. 6.9% and 3.8%. (1 + 0.09)/(1 + 0.02) - 1 = 6.9% (1 + 0.069)/(1 + 0.03) - 1 = 3.8%

Stian Klun, CFA is preparing a brochure to advertise his firm. The brochure includes the following disclosures: "I am a CFA so I am a member of the CFA Institute which I believe constitutes the most elite group of professionals within the investment management business. In order to become a CFA charterholder I had to complete a comprehensive program of study in the investment management field." Klun is least likely to have violated the CFA Institute Standards of Professional Conduct related to referencing the: A. CFA Institute. B. CFA Program. C. CFA Designation.

B. CFA Program. B is correct as the CFA program has been properly referenced while the CFA Institute and CFA Designation have been improperly referenced in violation of Standard VII (B). CFA should be an adjective rather than a noun.

Hezi Cohen, a CFA candidate, is a heavy user of social networking sites on the Internet. His favorite site only allows a limited number of characters for each entry so he has learned to abbreviate everything, including CFA trademarks. Cohen also enjoys professional networking sites and contributes regularly to blogs that discuss the broad topical areas covered within the CFA Exam Program. In addition, he posts to these blogs pieces he has written in his area of expertise: retirement planning. By claiming to be an expert on retirement planning, he believes his stature within the investment community increases and he can gain more clients. Which Internet activity can Cohen most likely continue to be in compliance with the CFA Standards of Professional Conduct? A. Use of abbreviations. B. Claiming retirement planning expertise. C. Blogging about broad topical areas within the CFA Exam Program.

B. Claiming retirement planning expertise. B is correct because the CFA Standards do not prevent a person from claiming to be an expert in their area of specialty as long it is not a misrepresentation and/or an exaggeration of their skill and expertise.

Which of the following statements is most accurate regarding cash flow ratios? A. Interest coverage ratio is calculated as operating cash flow over interest payments. B. Debt payment ratio measures the firm's ability to pay debts with operating cash flows. C. Reinvestment ratio measures the firm's ability to acquire assets with investing cash flows.

B. Debt payment ratio measures the firm's ability to pay debts with operating cash flows. Debt payment ratio (CFO ÷ Cash paid for long-term debt repayment) shows the firm's ability to pay debts with operating cash flows.

Capital provided for companies beginning operation but before commercial manufacturing and sales have occurred best describes which stage in venture capital investing? A. Seed-stage B. Early-stage C. Later-stage

B. Early-stage B is correct. Early-stage financing is capital provided for companies moving into operation and before commercial manufacturing and sales have occurred.

When an investigator wants to test whether a particular parameter is larger than a specific value, the null and alternative hypothesis are best defined as: A. H0: θ = θ0 versus Ha: θ ≠ θ0 B. H0: θ ≤ θ0 versus Ha: θ > θ0 C. H0: θ ≥ θ0 versus Ha: θ < θ0

B. H0: θ ≤ θ0 versus Ha: θ > θ0 A positive "hoped for" condition means that we will only reject the null (and accept the alternative) if the evidence indicates that the population parameter is greater than θ0. Thus, H0: θ ≤ θ0 versus Ha: θ > θ0 is the correct statement of the null and alternative hypotheses.

Which of these statements is most likely correct for an option? A. Market price equals intrinsic value less time value. B. Intrinsic value equals market price less time value. C. Time value equals intrinsic value less market price.

B. Intrinsic value equals market price less time value. B is correct, the market price of an option equals its intrinsic value plus its time value.

In estimating the value of inactively traded securities of a closely held corporation, which of the following is applied to the market value of a publicly traded comparable company? A. Control premium. B. Marketability discount. C. Minority interest discount.

B. Marketability discount. B is correct because to estimate a marketability discount for a closely held company, the analyst identifies a publicly traded comparable company with a liquid market. The comparable's market value of equity is the base to which the marketability discount is applied.

While at a bar in the financial district after work, Ellen Miffitt, CFA overhears several employees of a competitor discuss how they will manipulate down the price of a thinly traded micro cap stock's price over the next few days. Miffitt's clients have large positions of this stock so when she arrives at work the next day she immediately sells all of these holdings. Because she has determined that the micro cap stock was suitable for all of her accounts at its previously higher price, Miffitt buys back her client's original exposure at the end of the week at the new, lower price. Which CFA Institute Standards of Professional Conduct did Miffitt least likely violate? A. Market Manipulation B. Preservation of Confidentiality C. Material Non Public Information

B. Preservation of Confidentiality B is correct as Miffitt has not violated the confidentiality Standard which involves information about former, current, and prospective clients.

Common-size financial statements are most likely an output of which step in the financial analysis framework? A. Collect data B. Process data C. Analyze/interpret data

B. Process data Preparing common-size financial statements is part of the Process data step.

Ken Kawasaki, CFA shares a building with a number of other professionals who are also involved in the investment management business. Kawasaki makes arrangements with several of these professionals, including accountants and lawyers, to refer clients to each other. There is an expectation that an informal score is kept so that the referrals will equal out over time, so there are no cash payments. Kawasaki never mentions this arrangement to clients or prospective clients. Does Kawasaki's agreement with the other building occupants most likely violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, related to referral fees. C. Yes, related to communication with clients.

B. Yes, related to referral fees. B is correct because Standard VI(C) requires disclosure of any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. Even without cash changing hands the arrangement provides for a quid pro quo referral of clients and should be disclosed.

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 if the CFA Charterholder undertaking the IPS review should be a licensed financial advisor. A separate regulatory body grants the license to those giving investment advice to clients. The regulator states they do not require the CFA Charterholder to hold a financial advisor's license, despite financial-related advice being given to the pension funds during any IPS review. Chandarana therefore, starts his new business to undertake IPS reviews without obtaining a financial advisors license. 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 Code and Standards? A. No. B. Yes, with regard to Professionalism. C. Yes, with regard to Duties to Employer.

B. Yes, with regard to Professionalism. B is correct because the CFA Code of Ethics requires Chandarana to uphold the rules governing financial advisors. However, he failed to do so because he did not obtain a financial advisors license. The CFA Standards of Professional Conduct (I(A) - Professionalism - 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 advisors to be licensed.

Relative to an investor with a steeper indifference curve, the optimal portfolio for an investor with a flatter indifference curve will most likely have: A. a lower level of risk and return. B. a higher level of risk and return. C. the same level of risk and return.

B. a higher level of risk and return. B is correct because a less risk-averse investor's highest utility, given the low slope of his indifference curve, is likely to touch the capital allocation line at a point which would represent a portfolio with higher risk and more expected return.

The type of efficiency that exists in an economy that uses resources in such a way that they are most valuable is best described as: A. operational. B. allocational. C. informational.

B. allocational. Economies that use resources in such a way that they are most valuable are allocationally efficient.

Assume the U.S. Federal Reserve system (the Fed) has decided to lower interest rates in the economy. To carry out this policy, the Fed will most likely: A. sell securities. B. buy securities. C. increase required reserve ratios.

B. buy securities. When the Fed purchases securities, the Fed increases the reserves held by the banking system. These increased reserves lead to a reduction in the federal funds rate and, ultimately, to a reduction in other interest rates in the economy.

If a nonfinancial company securitizes its accounts receivables for less than their book value, the most likely effect on the financial statements is to increase: A. net income. B. cash from operations. C. cash from financing activities.

B. cash from operations. The securitization of accounts receivables for less than book value would result in a loss on the income statement, but an increase in the cash from operations, reflecting the proceeds received.

The use of financial ratio analysis is most likely limited in which of the following situations? When: A. providing a means of evaluating management's ability. B. comparing companies using different accounting methods. C. providing insights into microeconomic relationships within a company that help analysts project earnings and free cash flow.

B. comparing companies using different accounting methods. Financial ratio analysis is limited by the use of alternative accounting methods. Accounting methods play an important role in the interpretation of financial ratios. The lack of consistency across companies makes comparability difficult to analyze and limits the usefulness of ratio analysis.

In generating an estimate of a population parameter, a larger sample size is most likely to improve the estimator's: A. efficiency. B. consistency. C. unbiasedness.

B. consistency. Unbiasedness and efficiency are properties of an estimator's sampling distribution that hold for any size sample. A consistent estimator is one for which the probability of estimates close to the value of the population parameter increases as sample size increases.

A company which prepares its financial statements using IFRS wrote down its inventory value by €20,000 in 2009. In 2010, prices increased and the same inventory was worth €30,000 more than its value at the end of 2009. Which of the following statements is most accurate? In 2010, the company's cost of sales: A. was unaffected. B. decreased by €20,000. C. decreased by €30,000.

B. decreased by €20,000. Under IFRS, the recovery of previous write-down is limited to the amount of the original write-down (€20,000) and is reported as a decrease in the cost of sales.

Colin Gifford, CFA is finalizing a monthly newsletter to his clients, who are primarily individual investors. Many of the clients' accounts hold the common stock of Capricorn Technologies. In the newsletter, Gifford writes, "Based upon the next six months earnings of $1.50 per share and a 10% increase in the dividend, the price of Capricorn's stock will be $22 per share by the end of the year." Regarding his stock analysis, the least appropriate action Gifford should take to avoid violating any CFA Institute Standards of Professional Conduct would be to: A. separate fact from opinion. B. include earnings estimates. C. identify limitations of the analysis.

B. include earnings estimates. B is correct because while pro forma analysis may be standard industry practice, it is not required by the Standards. Earnings estimates are opinions and must be clearly identified as such.

Assuming no short selling, diversification benefit is most likely to occur when the correlations among the securities contained in the portfolio are: A. equal to positive one. B. less than positive one. C. greater than positive one.

B. less than positive one. Diversification benefit requires correlations less than positive one.

Wang Dazong, CFA, is a sole proprietor investment advisor. Dazong believes in putting his money at risk along with his clients and trades the same securities as his clients. In order to ensure fair treatment of all accounts, he rotates trade allocations so that each account has an equal likelihood of receiving a fill on their orders. This allocation procedure also applies to Dazong's own account. According to the CFA Institute Code of Ethics and Standards of Professional Conduct, the allocation procedure used by Dazong: A. complies with the Standards. B. requires revision to ensure client trades take precedence. C. should be disclosed and written approval received from clients.

B. requires revision to ensure client trades take precedence. B is correct because Standard VI (B) requires client transactions to be given precedence over transactions made on behalf of the members or candidate's firm or personal transactions. Because the advisor trades alongside his clients and allocates trades on a rotating basis, there are times when the advisor's trades will receive priority over his clients in violation of the Code and Standards. A member or candidate having the same investment positions or being co-invested with clients does not always create a conflict. Some clients in certain investment situations require members or candidates to have aligned interests. Personal investment positions or transactions of members or candidates or their firms should never, however, adversely affect client investments.

When interest rates fall, the price of a callable bond will: A. fall less than an option-free bond. B. rise less than an option-free bond. C. rise more than an option-free bond.

B. rise less than an option-free bond. B is correct because when interest rates fall, the price of the embedded call option increases. Since, price of a callable bond = price of option-free bond - price of embedded call option, the price of the callable bond will not increase as much as an option-free bond since the price of the call option is increasing. As interest rates fall, the bond is more likely to be called, limiting the upside price increase potential.

If the price of a U.S. Treasury security is higher than its arbitrage-free value, a dealer can generate an arbitrage profit by: A. shorting the U.S. Treasury security and calling it from the issuer. B. shorting the U.S. Treasury security and reconstituting it from strips. C. buying the U.S. Treasury security, stripping it and selling the strips.

B. shorting the U.S. Treasury security and reconstituting it from strips. B is correct because strips can be purchased to create a synthetic U.S. Treasury security to cover the short at a price lower than the price at which the U.S. Treasury security was shorted, generating a profit.

A European call option on a non-dividend paying stock with a strike price of $25.00 expires in 3 months. The underlying stock currently trades at $29.00. The risk-free rate is 5.00%. The lower bound for the European call is closest to: A. $0.00. B. $4.00. C. $4.30.

C. $4.30. C is correct because the lower bound on a European call price is either zero or the underlying price minus the present value of the exercise price, whichever is greater. c0 ≥ Max[ 0, S0 - X / ( 1 + r )T] Max[0, 29 - 25/(1.05)^(3/12)] = 4.30

The annual cost of trade credit assuming a 365-day year for terms 3/10 net 40 is closest to: A. 32.0%. B. 43.3%. C. 44.9%.

C. 44.9%. (1 + discount / (1 - discount)) ^ (365/# days beyond discount per) - 1 (1 + 3%/.97%) ^ (365 / (40 - 10)) - 1

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

C. 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 concerning market structure and Herfindahl-Hirschman Index (HHI) is most accurate? A. HHI is a useful measure of potential barriers to entry. B. Low control over prices is characteristic of oligopolies. C. An HHI value of 60 indicates that a market is highly competitive.

C. An HHI value of 60 indicates that a market is highly competitive. HHI values below 100 indicate the market is highly competitive.

Which of the following is the least appropriate accounting treatment for marketable securities under IAS No. 39? Category; Measurement Method; Realized Gains & Losses Reported In A. Trading; Fair Value; Income Statement B. Held to maturity; Amortized Cost; Income Statement C. Available for sale; Fair Value; Equity

C. Available for sale; Fair Value; Equity All categories treat realized gains or losses in the same way - they are reported on the income statement. It is the unrealized gains and losses that are included in other comprehensive income (in equity) for available for sale securities carried at market value.

Which of the following least likely forms the basic structure for enforcement of the CFA Institute Professional Conduct Program? A. Bylaws B. Rules of Procedure C. Board of Governors

C. Board of Governors C is correct. Although the Board of Governors maintains oversight and responsibility for the Professional Conduct Program, the Institute's Bylaws and Rules of Procedure form the basic structure for enforcement of the Code and Standards.

Teresa Staal, CFA is an investment officer in a bank trust department. She manages money for celebrities and public figures, including an influential local politician. She receives a request from the politician's political party headquarters to disclose his stock holdings. The request indicates local law requires the disclosure. What steps should Staal most likely take to ensure she does not violate any CFA Institute Standards of Professional Conduct? A. Provide the information and inform her client. B. Send the requested documents and inform her supervisor. C. Check with her firm's compliance department to determine her legal responsibilities.

C. Check with her firm's compliance department to determine her legal responsibilities. C is correct. In order to avoid violating Standard III (E) Staal should determine if applicable securities regulations require disclosing the records before she provides the confidential information concerning her client's investments.

Sergio Morales, CFA believes he has found evidence his supervisor is engaged in fraudulent activity concerning a client's account. When Morales confronts his supervisor, he is told the client is fully aware of the issue. Later that day, Morales contacts the client and upon disclosing his evidence, is told he should mind his own business. Concerned his job is at risk, Morales provides his evidence, along with copies of the client's most recent account statements, to a government whistle blower program. Morales is least likely to have violated which of the following CFA Institute Standards of Professional Conduct? A. Duties to Clients B. Duties to Employers C. Communication with Clients

C. Communication with Clients C is correct because this Standard has not been violated. Even though he talked to the client, the communication did not relate to the investment process. He has violated his duties to clients by disclosing confidential information to the government whistle blower program. He has also violated a duty to his employer as contradicting employer instructions are not permitted unless the member is acting to protect the integrity of capital markets and the interests of clients.

What type of risk does the bid-ask spread most closely measure? A. Default risk B. Inflation risk C. Liquidity risk

C. Liquidity risk C is correct because the size of the spread between the bid price and the ask price is the primary measure of liquidity of the issue. Liquidity risk is the risk that the investor will have to sell a bond below its indicated value. The wider the bid-ask spread, the greater the liquidity risk.

Noor Hussein, CFA, runs a financial advisory business, specializing in retirement planning and investments. One of her clients asks her to advise the firm's pension fund trustees on available investments in the market including Islamic products. On the day prior to the meeting, Hussein spends an hour familiarizing herself with Islamic investment products and getting updates on local market conditions. The next day she recommends Islamic investment products to the trustees based on her research and her expertise in retirement planning and investments. The trustees subsequently incorporate Islamic products into their investment allocation. Did Hussein's basis for the recommendation most likely comply with the CFA Code of Ethics? A. Yes. B. No, with regard to Misconduct. C. No, with regard to Diligence and Reasonable Basis.

C. No, with regard to Diligence and Reasonable Basis. C is correct because Hussein did not likely act with competence and diligence as required by the CFA Institute Code of Ethics [Standard V(A)]. An hour of preparation with regard to Islamic investment products would not likely be considered sufficient to give investment advice to pension plan trustees.

The primary motivation for creating a collateralized mortgage obligation (CMO) is best described as the desire to redistribute which risk of investment in residential mortgages? A. Default risk. B. Liquidity risk. C. Prepayment risk.

C. Prepayment risk. C is correct because the motivation for creating a CMO is to distribute prepayment risk among different classes of bonds.

Under IFRS, which of the following financial statement elements most accurately represents inflows of economic resources to a company? A. Assets. B. Equity. C. Revenues.

C. Revenues. The financial statement elements under International Financial Reporting Standards (IFRS) are: Assets, Liabilities, Owners' Equity, Revenue, and Expenses. Revenues are inflows of economic resources. Assets are economic resources, but not inflows.

At the beginning of the year a company purchased a fixed asset for $500,000 with no expected residual value. The company depreciates similar assets on a straight-line basis over 10 years, while the tax authorities allow declining balance depreciation at the rate of 15% per year. In both cases the company takes a full year's depreciation in the first year and the tax rate is 40%. Which of the following statements concerning this asset at the end of the year is most accurate? A. The tax base is $500,000. B. The deferred tax asset is $10,000. C. The temporary difference is $25,000.

C. The temporary difference is $25,000. The temporary difference is the difference between the net book value of the asset for accounting purposes [500,000 - (500,000/10)] = $450,000 and the net book value for taxes, [500,000 - 0.15(500,000) = $425,000]. 450,000 - 425,000 = $25,000.

Joan Tasha, CFA, a supervisor at Olympia Advisors (OA), wrote and implemented compliance policies at her firm. A long time OA employee, Derek Longtree, recently changed the asset allocation of a client, which is inconsistent with her financial needs and objectives and with OA's policies. Until now Longtree has never violated OA's policies. Tasha discusses the issue with Longtree but takes no further action. Do Tasha's actions concerning Longtree most likely violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because she failed to detect Longtree's actions. C. Yes, because she did not take steps to ensure that the violation will not be repeated.

C. Yes, because she did not take steps to ensure that the violation will not be repeated. C is correct.. Once a supervisor learns that an employee has violated or may have violated the law or the Code and Standards, the supervisor must promptly initiate an investigation to ascertain the extent of the wrongdoing. Relying on an employee's statements about the extent of the violation or assurances that the wrongdoing will not recur is not enough. Reporting the misconduct up the chain of command and warning the employee to cease the activity are also not enough. Pending the outcome of the investigation, a supervisor should take steps to ensure that the violation will not be repeated, such as placing limits on the employee's activities or increasing the monitoring of the employee's activities.

David Bravoria, CFA, is an independent financial advisor for a high net worth client with whom he had not had contact in over 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 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 Standards? A. No. B. Yes, with regard to investment statements. C. Yes, with regard to purchasing venture capital funds.

C. Yes, with regard to purchasing venture capital funds. C is correct because Bravoria violated Standard III - Duties to Clients in not exercising Loyalty, Prudence and Care. Bravoria had not updated his client's profile in over two years thus should not have made further investments, particularly in high risk investments until such time as he updated the client's risk and return objectives, financial constraints and financial position. Bravoria provided his client with investment statements more frequently than that which is required; i.e. quarterly so was not in violation of regular account information.

A portfolio with equal parts invested in a risk-free asset and a risky portfolio will most likely lie on: A. the efficient frontier. B. the security market line. C. a capital allocation line.

C. a capital allocation line. C is correct. A capital allocation line shows possible combinations of a risky portfolio and the risk-free asset.

A fund that calculates net asset value by subtracting liabilities from assets and dividing the result by a fixed number of shares is most likely: A. a hedge fund. B. an open-end mutual fund. C. a closed-end mutual fund.

C. a closed-end mutual fund. C is correct. Closed-end mutual funds calculate NAV as follows: NAV = (Assets - Liabilities)/Number of shares Outstanding

An investor fears that economic conditions will worsen and the market prices of her portfolio of investment-grade corporate bonds will decrease more than her portfolio of government bonds. The investor's fear is best described as a fear of: A. default risk. B. downgrade risk. C. credit spread risk.

C. credit spread risk. C is correct because the when the market is willing to pay less for investing in risky bonds, the spreads on those bonds widens relative to default-free bonds. Thus the investor is concerned about credit spread risk.

A company, which prepares its financial statements in accordance with IFRS is in the process of developing a more efficient production process for one of its primary products. The most appropriate accounting treatment for those costs incurred in the project is to: A. expense them as incurred. B. capitalize costs directly related to the development. C. expense costs until technical feasibility has been established.

C. 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 it.

One is most likely to reject the null hypothesis when the p-value of the test statistic: A. is negative. B. exceeds a specified level of significance. C. falls below a specified level of significance.

C. falls below a specified level of significance. If the p-value is less than our specified level of significance, we reject the null hypothesis.

A key difference between a wrap account and a mutual fund is that wrap accounts: A. have a lower required minimum investment. B. can not be tailored to the tax needs of a client. C. have assets that are owned directly by the individual.

C. have assets that are owned directly by the individual. C is correct. The key difference between a wrap account and a mutual fund is that in a wrap account the assets are owned directly by the individual.

A company which 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: A. liabilities when calculating the company's current ratio. B. equity when calculating the company's return on equity ratio. C. liabilities when calculating the company's debt-to-equity ratio.

C. liabilities when calculating the company's debt-to-equity ratio. 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 and therefore do not affect the current ratio.

An investor in exchange traded funds (ETFs) is most likely to benefit from its: A. end of day pricing. B. lack of tracking error risk. C. lower capital gains tax liability relative to mutual funds.

C. lower capital gains tax liability relative to mutual funds. C is correct because the capital gain distribution is lower for ETFs than for mutual funds as sales of the underlying securities are not necessary to accommodate inflows/outflows as securities are transferred in kind to investors.

Assume that at current production and consumption levels, a product exhibits price elasticity of demand equal to 1.20 and elasticity of supply equal to 1.45. The true economic consequences of taxes imposed on the seller of such a product are most likely borne: A. by the seller. B. by the buyer. C. partly by the buyer and partly by the seller.

C. partly by the buyer and partly by the seller. As the good exhibits neither perfectly elastic nor perfectly inelastic demand or supply (see pp. 27-28), the incidence of taxation will be shared by buyers and sellers regardless of whether the tax is placed on buyers or on sellers.

A dealer quotes a forward rate agreement (FRA) expiring in 30 days, for which the underlying is 90-day LIBOR, at 4.5%. An investor shorts the contract and the dealer goes long for a notional principal of $15 million. At the expiration of the FRA the rate on 90-day LIBOR is 4.0%. The investor is most likely to: A. pay the dealer $6,229. B. pay the dealer $18,564. C. receive from the dealer $18,564.

C. receive from the dealer $18,564. C is correct because the party which is short the FRA will benefit from a rate decrease with payment based on the following calculation:

A Canadian printing company which prepares its financial statements according to IFRS has experienced a decline in the demand for its products. The following information relates to the company's printing equipment as of 31 December 2010. Carrying value of equipment (net book value) 500,000 Undiscounted expected future cash flows 550,000 Present value of expected future cash flows 450,000 Fair Value 480,000 Costs to sell 50,000 Value in use 440,000 The impairment loss (in C$) is closest to: A. 0. B. 60,000. C. 70,000.

Under IFRS, an asset is considered to be impaired when its carrying amount exceeds its recoverable amount (the higher of fair value less cost to sell or value in use). Fair value less costs to sell: 480,000 - 50,000 = 430,000 Value in use = 440,000 Recoverable amount (higher value) = 440,000 Impairment loss under IFRS = Carrying value - recoverable amount = 500,000 - 440,000 = 60,000