Sample Questions

1. Ethical and Professional Standards

 Amit Berani, CFA, is an analyst and plans to visit a company that he is analyzing in order to prepare a research report. Standard I(B) Independence and Objectivity

1. Requires Berani to pay for his transportation costs and not to accept any gifts or compensation for writing the report, but allows him to accept accommodations and meals that are not lavish.
2. Requires Berani not to accept any compensation for writing a research report, but allows him to accept company paid transportation, lodging and meals.
3. Allows Berani to accept transportation, lodging, expenses and compensation for writing a research report, but requires that he disclose such an arrangement in his report.

 2. Quantitative Methods

 An investor wants to receive $10,000 annually for 10 years with the first payment five years from today. If the investor can earn a 14% annual return, the amount that she will have to invest today is closest to:

1. $27,091
2. $30,884
3. $52,161

 3. Economics

 At the equilibrium levels of output and price in a competitive industry without taxes:

1. Consumer and producer surplus are equal.
2. Both consumer and producer surplus are maximized
3. The sum of producer and consumer surplus is maximized

 4. Financial Reporting & Analysis

 A company takes a $10 million impairment charge on a depreciable asset in 20x3. The most likely effect will be to:

1. Increase reported net income in 20x4.
2. Decrease net income and taxes payable in 20x3.
3. Increase return on equity and operating cash flow in 20x4.

 5. Corporate Finance

 Dhara Ramani, CFA, manages the short term cash position for Young Company. Ramani can invest in one of three securities that will mature in 180 days: A treasury bill period at 97.5% of par, commercial paper with a bond-equivalent yield of 5.10%, and a 6-month certificate of deposit that will return 2.5% over the 180-day holding period. Ramani should purchase the:

1. Treasury bill
2. Commercial paper
3. Certificate of deposit

6. Equity Investments

 The required rate of return used in the dividend discount model is least likely to be affected by a change in the:

1. Expected rate of inflation.
2. Real risk-free rate of return.
3. Growth rate of earning and dividends.

 7. Fixed Income

 An investor has a 1-year, semiannual, 10% coupon bond which is priced at $1,025. If the 6-month spot rate on a bond-equivalent basis is 8%, the 1-year theoretical spot rate as BEY is:

1. 6.4%
2. 7.3%
3. 8.0%

 8. Alternative Investment

 Karan Jain is analyzing a real estate investment with the following characteristics:

1.  
   • Purchase price is $2.5 million.
   • Down payment is $5,00,000, financing at 10%, with 20 annual end-of-year payment.
   • Gross annual rents are $3,00,000
   • Depriciation is $60,000 a year.
   • Maintenance and taxes are $35,000 per year.

If Jain is in a 35% marginal income tax bracket, the first year after-tax cash flow is closet to:

1. -$19,000
2. $5,000
3. $28,000

 9. Portfolio Management

 An investor gathers the following information about two stocks:

	Scenario 1	Scenario 2	Scenario 3
Probability	0.5	0.3	0.2
Rate of return on:
Security 1	25%	10%	-25%
Security 2	1%	-5%	35%

If the investor plans to invest $60,000 in security 1 and $40,000 in security 2, the expected return on the two-asset portfolio is closet to:

1. 5.8%
2. 8.7%
3. 12.2%

 10. Derivatives

 A portfolio manager holds a long position on a forward contract on $20 million face value 80-day T-bills priced at 1.85% on a discount basis. At settlement, 80-day T-bills are priced at 1.95% on a discount basis. If the contract settles in cash, the amount the portfolio manager will pay or receive at settlement is closet to:

1. Pay $4,500
2. Receive $4,500
3. Pay $20,000

      

Answer of the above questions with explanation

 1. Answer: C

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

 2. Answer: B

The problem involves determining the present value of an annuity followed by finding the present value of a lump sum. Enter PMT = 10,000, N = 10, I = 14. Compute PV = 52, 161.16. that is the present value of the 10 years annuity, four years from today. Next, we need to discount that back to present for four years to find the amount of the investment today. Enter PV = -52,161.16, N = 4, I = 14, PMT = 0. Compute PV = 30,883.59.

 3. Answer: C

At Competitive equilibrium, the sum of consumer and producer srplus is at its maximum level. Neither consumer not producer surplus is necessarily at a maximum as the equilibrium output and price. Which surplus is larger or smaller depends on the elasticities of supply and supply.

 4. Answer: A

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.

 5. Answer: A

To compare those short term securities, state the return on each as a bond equivalent yield. For the commercial paper, the BEY is given at 5.10%. The BEY for the certificate of deposit is 2.5% x 365 / 180 = 5.07%. For the treasury bill the BEY is ((100 - 97.5) / 97.5) x 365 / 180 = 5.20%. Ramani should purchase the Treasury bill.

 6. Answer: C

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

 7. Answer: B

A BEY of 8% is equivalent to a 6 month discount rate of 8 / 2 = 4%

1,025 = 50 / 1.04 + 1,050 / (I + r)²

1,025 - 48.08 = 1,050 / (I + r)²

(I + r)² = 1,050 / 976.92 = 1.0748

r = (1.0748)^0.50 - 1

r = 0.0367 or 7.34% on a bond equivalent bond.

 8. Answer: C

Loan payments (N = 20, I = 10%, FV = 0, PV = 2 million) are $2,34,919.

First year interest is 10% x $2 million = $2,00,000.

First year principal payment is $2,34,919 - $2,00,000 = $34,919.

After  tax cash flow is (3,00,000 - 2,00,000 - 60,000 - 35,000) (1 - 0.35) - 34,919 + 60,000 = 28,331.

 9. Answer: C

With positives transactions costs, there will be rate of return on both side of the SMI, for which the cost of trading will be greater than the expected gains from trading. This means there is a band of expected returns for each level of systematic risk that is consistent with efficient pricing, once transactions cost are considered.

 10. Answer: A

The forward contract price is (1 - (0.0185 x 80 / 360)) x $2,00,00,000 = $1,99,17,777.78.

The market price at settlement is (1 - (0.0195 x 80 / 360)) x $2,00,00,000 = $1,99,13,333.33.

The long will pay $1,99,17,777.78 - $1,99,13,333.33 = $4,444.45.

Alternatively, 0.001(80 / 360) x $2,00,00,000 = $4,444.44.