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CFA Exam Review Level I
Custom Assessment Results
7/25/2022
Question 1
(L1FR-PQ2733-1410)
Net income = $1,120,000
Depreciation expense for the year = $27,000
Decrease in inventory = $13,800
Increase in taxes payable = $1,500
Issuance of common stock = $60,000
Dividends paid = $32,300
Purchase of land = $28,300
Investment in associate = $58,000
Purchase of held-for-trading securities = $7,200
Sale of available-for-sale securities = $84,700
Assume the company uses U.S. GAAP to prepare its financial statements.
The company’s cash flow from financing activities is closest to:
$60,000
$92,300
r
Assessment Results
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Your Answer
$27,700
Return To Test Bank
Return to Syllabus
 You Answered Correctly!
CFF = Issuance of common stock – Dividends paid
CFF = 60,000 – 32,300 = $27,700
Question 2
(L1PM-PQ06017-2107)
Elizabeth Triplehorn owns 60% of her portfolio in shares of ABC Company inherited from her
grandfather. While she did not particularly care for her grandfather and would sell them if
something obviously better came along, she is reluctant to do the additional mental work
required to make a decision about selling the shares. Triplehorn most likely exhibits:
Your Answer
framing bias.
Correct
status quo bias.
loss aversion bias.
 You Answered Incorrectly.
Incorrect. Although individuals may prefer to do nothing in order to avoid a loss (loss
aversion) or because they are attached to a position for sentimental reasons
(endowment), failure to do something beneficial in the absence of gain/loss framing may
be a sign of status quo bias.
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Question 3
(L1FR-PQ3106-1410)
ABC Company uses the straight-line method of depreciation on its financial statements to write
off a piece of equipment that it purchased for $10,000. The asset has an estimated salvage value
of zero and a useful life of 4 years. On the tax return it writes off the asset over 2 years with zero
salvage value. The company is taxed at 30%.
The difference between the amount of depreciation recognized on the income statement and
on the tax return will result in a:
Permanent difference.
Correct
Deferred tax liability.
Your Answer
Deferred tax asset.
 You Answered Incorrectly.
Higher depreciation expense is being recognized on the tax return and this difference in
expense recognition across the income statement and the tax return is expected to reverse
in the future. Therefore, a deferred tax liability will be created.
Question 4
(L1DR-ITEMSET-PQ5411-1501)
Use the following information to answer the next 3 questions:
Consider a $100 million CDO with the following structure:
Tranche
Par Value Coupon Rate
Senior
80,000,000 LIBOR + 70 basis points
Mezzanine 10,000,000 6-year Treasury rate + 110 basis points
Equity
10,000,000 —
The collateral backing the CDO consists of corporate bonds that mature in 6 years. The coupon
rate for these bonds is the 6-year Treasury rate plus 270 basis points. The 6-year Treasury rate at
the time of CDO issuance is given as 4%.
The asset manager enters into an agreement with a counterparty, in which she agrees to pay
the counterparty a fixed rate equal to the 6-year Treasury rate plus 70 basis points and receives
LIBOR in return.
i.
The notional principal of the interest rate swap will most likely equal:
$10 million.
Correct
$80 million.
Your Answer
$100 million.
 You Answered Incorrectly.
The notional principal on the swap will be $80 million, because the floating-rate exposure
of the asset manager is limited to the par value of the senior tranche.
ii.
The amount available each year for the equity tranche is closest to:
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$530,000
Your Answer
$1,870,000
$5,160,000
 You Answered Correctly!
Interest received by the asset manager on the collateral:
$100, 000, 000 × (0. 04 + 0. 027) = $6, 700, 000
Interest paid to the senior CDO tranche:
$80, 000, 000 × (LIBOR + 70 bps)
Interest paid to the mezzanine tranche:
$10, 000, 000 × (0. 04 + 0. 011) = $510, 000
Interest paid by the asset manager on the interest rate swap as the fixed-rate payer:
$80, 000, 000 × (0. 04 + 0. 007) = $3, 760, 000
Interest received by the asset manager on the interest rate swap as the floating-rate
receiver:
$80, 000, 000 × (LIBOR)
Netting the interest payments coming in and going out:
= $6, 700, 000 + ($80, 000, 000 × LIBOR) − [$80, 000, 000 × (LIBOR + 70 bps) + $510, 000
= $6, 700, 000 + $80, 000, 000 × (LIBOR) − [$4, 270, 000 + $80, 000, 000 × (LIBOR + 70 bp
= $6, 700, 000 + $80, 000, 000 × (LIBOR) − $4, 270, 000 − $80, 000, 000 × (LIBOR) − $80,
= $2, 430, 000 − $80, 000, 000 × 70bps = $1, 870, 000
iii.
Given that asset management fees and other charges amount to $200,000 annually, the annual
return on the equity tranche is closest to:
3.3%
Your Answer
6.7%
Correct
16.7%
 You Answered Incorrectly.
$1, 870, 000 − $200, 000
= 16. 7%
$10, 000, 000
Question 5
(L1R47TB-AC033-1605)
An equity analyst aggregates the following data for an equal-weighted index composed of three
securities Alpha, Beta, and Gamma:
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Beginning of the Period
Price ($)
End of the Period
Price ($)
Total Dividends
($)
Alpha
10.00
12.00
0.75
Beta
20.00
19.00
1.00
Gamma
30.00
30.00
2.00
Investment
The price return for the index is closest to:
1.70%
Your Answer
5.00%
11.40%
 You Answered Correctly!
The price return is the sum of the weighted returns of each security. The return of Alpha is
20% [(12 – 10)/10]; of Beta is −5% [(19 – 20)/20]; and of Gamma is 0% [(30 – 30)/30]. The
price return index assigns a weight of 1/3 to each asset; therefore, the price return is
1/3 x (20% + (−5%) + 0%) = 5. 00%
Question 6
(L1R02TB-AC089-1512)
Rita Ross serves as a member of the CFA Institute Council of Examiners and participates in a
preview of the CFA exam to be administered the following month. She is also a university
professor with several students planning to sit for the upcoming exam. One of her students is
having difficulty memorizing a complex formula, which unbeknownst to the student, will not
appear on the exam. Ross advises the candidate that a perfect score is not required to pass and
that her time would be better spent on other areas of the curriculum. Did Ross violate the
Standards of Professional Conduct with her advice?
Your Answer
No.
Yes, because she gave an unfair advantage to her student.
Yes, because she is privy to the contents of the upcoming exam.
 You Answered Correctly!
The advice that Ross gave to her student was not particular to the content of the exam
and, therefore, did not endanger its integrity.
Question 7
(L1R36TB-BW016-1612)
Calcite Development Corporation is a small corporation that has about 35,000 shareholders,
each holding an average of seven shares each. The shares are selling for $12.30. The company's
return on equity is stable at around 4.5%. Net income of Calcite was expected to be $1,100,000.
It also pays out 20% of its net income to its shareholders. As the company's analyst, you are
asked to determine the cost of equity. What is Calcite's cost of equity?
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8.48%
Correct
10.90%
Your Answer
9.77%
 You Answered Incorrectly.
The third choice is incorrect.
Find the company's sustainable growth rate:
g = ROE × retention rate
g = 4.5% × 80% = 3.6%
Find the cost of equity:
Dividend per share = 1,100,000 × 20%/(7 × 35,000) = 220,000/245,000 = 0.898 per share
k = (0.898/12.3) + 0.036 = 10.9%
Question 8
(L1FR-PQ2418-1410)
Which of the following is the most accurate definition of assets?
They are tangible resources controlled by the enterprise from which future economic benefits
are expected to flow to the enterprise.
Your Answer
They are resources controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise.
They are resources controlled by the enterprise from which it has earned economic benefits.
 You Answered Correctly!
Assets are defined as resources controlled by an enterprise as a result of past events, and
from which future economic benefits are expected to flow to the enterprise.
Question 9
(L1R03TB-BW051-1612)
Which of the following statement(s) regarding Standard IV(A) are false?
Statement 1: Members are not allowed to enter into an independent business while still
employed.
Statement 2: A departing employee is not allowed to make arrangements or preparations
to go into a competitive business before terminating the relationship with his or her
employer.
Statement 3: The simple knowledge of the names and existence of former clients is
generally not confidential information.
Correct
Statements 1 and 2
Your Answer
Statements 1 and 3
Statements 2 and 3
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 You Answered Incorrectly.
The second choice is incorrect. Only Statements 1 and 2 are false.
Question 10
(L1FR-PQ3238-1410)
Star Traders issues an 8% annual coupon bond with a par value of $100,000 which will be
redeemed after 4 years. Market interest rates at the time of issuance are 9%.
The increase in liability over Year 2 is closest to:
$708
Correct
$772
Your Answer
$842
 You Answered Incorrectly.
Beginning
Interest
Year liability ($)
expense ($)
Coupon
payment ($)
Change in
liability ($)
0
Closing
liability ($)
96,760.28
1
96,760.28
8,708.43
8,000.00
708.43
97,468.71
2
97,468.71
8,772.18
8,000.00
772.18
98,240.89
3
98,240.89
8,841.68
8,000.00
841.68
99,082.57
4
99,082.57
8,917.43
8,000.00
917.43
100,000.00
Question 11
(L1FI-PQ5313-1410)
Which of the following yield measures is most likely based on actual coupon payment dates?
Street convention yield.
Correct
True yield.
Your Answer
Interest yield.
 You Answered Incorrectly.
The street convention yield assumes that all payments are made on scheduled dates
regardless of whether they fall on weekends or holidays.
The true yield uses actual payment dates to compute the IRR of the bond’s cash flows.
The interest yield is another name for the current yield, which is calculated by dividing the
bond’s annual cash coupon payment by its current price.
Question 12
(L1FR-TBYI15-1507)
A consolidated income statement of Hillock Holding and Subsidiaries for the period January 1
to December 31 is presented below.
$ Million
Sales revenue
$75,120
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$ Million
Cost of sales
17,250
Gross profit
57,870
Distribution expenses
1,250
Administrative expenses
2,451
Other operating income
500
Other operating expenses
1,119
Operating profit
53,550
Finance costs
1,750
Profit before tax
51,800
Income tax income/expense
Current
20,720
Deferred
10,000
Profit attributable to shareholders of Hillock group
21,080
Hillock groups owns a 76% share in Jammy Properties, and hence the income statement
includes the profits of Jammy Properties for the period. Based solely on the information, which
of the following statements is most likely true?
Hillock has incorrectly computed its deferred tax expense for the year.
Your Answer
Hillock is likely to overstate return on equity in its financial statements.
Hillock will not be able to meet its short-term obligations.
 You Answered Correctly!
Hillock has to deduct profits of Jammy Properties attributable to its minority
shareholders. Since, Hillock group has not accounted for minority interest in its subsidiary,
it is likely to report higher earnings, and consequently higher return on equity.
Question 13
(L1R02LA-BP021_2106)
As an investor’s return target increases, the number of observations used for a target downside
deviation calculation in a notably large sample will most likely:
Correct
increase.
decrease.
Your Answer
remain unchanged.
 You Answered Incorrectly.
The third choice is incorrect. Target downside deviation (also known as target semideviation) measures the dispersion of returns below the investor’s target:


STarget = 
⎷
n
(Xi − B)
2
∑
for
all X <B
n − 1
i
In this formulation, B is the target (i.e., return target) and n is the number of observations.
From this it is easy to see that increasing B will result in more observations below the
target. It is possible that the same number of observations could be below the target after
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a slight increase, but the large sample size makes it more likely that the number of
observations below the target will increase.
Question 14
(L1R54TB-AC013-1605)
A zero-coupon bond with a periodicity of 12, four-year maturity, and price of 75 to a par of 100
has an annual yield-to-maturity closest to:
Your Answer
6.97%.
Correct
7.21%.
7.46%.
 You Answered Incorrectly.
Yield-to-maturity is the discount rate equating the present value of expected cash flows
through maturity to the bond price; that is, the internal rate of return on the bond's cash
flows:
V
P =
T
(1+Y T M )
75 =
12×4
100
(1+Y T M )
48
12×4
∴ P eriodicY T M = √
100
75
− 1 = 0.0060114
Stated annual YTM = 0.0060114 × 12 = 0.07214
Question 15
(L1FR-PQ3516_2104)
Projects that involve new products and services will most likely:
Your Answer
involve more people in the decision-making process as compared to those involved in
regulatory projects.
be among easier capital budgeting decisions.
involve less uncertainty than expansion projects.
 You Answered Correctly!
Projects that involve new products and services involve more uncertainty than expansion
projects.
These decisions are complex and involve more people in the decision-making process.
Question 16
(L1QM-PQ0910-2107)
The probability that a baseball player will swing his bat on any given pitch equals 0.35. He faces
20 pitches in each batting practice session.
How many times is the player expected to swing the bat at any given batting practice?
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6
Your Answer
7
8
 You Answered Correctly!
E(X) = (n)(p) = (20)(0.35) = 7
Question 17
(L1R01TB-AC005-1512)
Mika Shane, CFA, is an analyst with Zeta Consulting. In preparing an analysis for a prospective
merger between Mega Trucking and Big Haul Trucking, Shane purchases several reports
prepared by other analysts. The reports contain a variety of statistics summarized in line and
bar charts. Using the same data, Shane converts them to pie and point charts, renames the
charts for her purposes, and modifies the labels used for the data. According to the Standards of
Professional Conduct, is Shane required to cite the source of each chart?
Your Answer
Yes.
No, because she purchased the reports and now owns the data.
No, because she modified the charts from their original layouts.
 You Answered Correctly!
Shane must cite the source so that the reader can make an informed judgment as to their
credibility. Furthermore, simply making cosmetic changes to the charts would not imply
that the underlying data was collected and summarized by Shane.
Question 18
(L1R01TB-AC007-1512)
According to the Conflicts of Interest Standard, members must:
Your Answer
Avoid any conduct that creates a real or potential conflict of interest.
Correct
Disclose any compensation received for recommending products or services.
Decline to accept referral fees from parties other than their employer.
 You Answered Incorrectly.
Conflicts of interest are a common dilemma for investment professionals. The Standards
of Professional Conduct provide guidance on handling them. First, members should
anticipate the sources of conflicts and avoid them. Second, if it is unavoidable, you should
disclose the conflict to the affected clients in enough detail that they might make an
informed decision as to whether it might prove to disadvantage them. The Standards do
not categorically prohibit gifting, bonuses, or referral fees. They do, however, require
formal disclosures to employers and clients.
Question 19
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(L1R17TB-AC028_2017)
According to the quantity theory of money:
Your Answer
real output is inversely proportional to the money supply.
money neutrality holds if the price level stays constant.
Correct
the velocity of money is approximately constant.
 You Answered Incorrectly.
The stability of the velocity of money is one of the assumptions in the quantity theory of
money, where:
M × V = P × Y
Question 20
(L1R54TB-AC010-1605)
Bond B has a 6.0 percent coupon, while Bond C has a 7.0 percent coupon. Both bonds mature in
10 years and pay annual coupon payments. Due to a severe recession, the required rate of
return decreased 100 basis points for each bond. Relative to Bond C price change, the price
change for Bond B price change will most likely be:
equal.
Correct
greater.
Your Answer
smaller.
 You Answered Incorrectly.
As a general rule, for two bonds with the same maturity, the lower coupon bond will
experience greater price change than the higher coupon bond when the market discount
rate changes by the same amount for each.
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