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CFA Level 1 Mocks > Kaplan Mock 1 > Flashcards

Kaplan Mock 1 Flashcards

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1
Q

What is the requirement to send clients reports?

A

Brief communications are permitted (as brief as a list of recommended securities) as long as these recommendations are supported by appropriate background reports that can be made available to clients upon request.

Full Reports must be given upon request.

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2
Q

Non-Material Non-Public Information cannot be conveyed to?

A

Transactions specifically prohibits members and candidates from sharing non-public information, learned while performing their duties, with anyone who has an investment account for which the member is considered a beneficial owner (ie a family member such as a husband or wife)

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3
Q

Record Retention Responsibilities

A

The firm is generally responsible for record-keeping as required by Standard V(C) Record Retention.
Retaining records for at least 7 years is not required by the Standard but is recommended if no other regulation applies.
Records supporting investment actions and recommendations are the property of the firm.
A member cannot take these records or copies of them to a new employer without permission from the original employer.

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4
Q

Communication with Clients

A

you must disclose investments principles, identify relevant factors, and distinguish fact from opinion.

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5
Q

If you/your firm has material nonpublic information.

A

Restrict proprietary trading when in possession of material nonpublic information. Restricting client trades, however, could provide a signal to the market; the firm should continue to accept unsolicited transactions in the securities.

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6
Q

Soliciting former employer’s clients

A

In the absence of a no-compete agreement to the contrary, soliciting former clients is not necessarily a violation of the Standards

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7
Q

Reasonable and Adequate Basis

A

Recommendations must have a reasonable and adequate basis, supported by appropriate research and investigation

Quantitative rankings of securities are acceptable but the member must disclose to clients the basic process used to rank the securities.

You cannot rely on an opinion of another analyst even if they are national known.

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8
Q

If a Client calls and wants a trade on something that is not suitable to them based on their IPS you should first?

A

Discuss with the client whether this trade indicates a need to update the IPS.

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9
Q

Proxy Voting Policy

A

Must Vote in informed, responsible manner

Vote in best interests of client/beneficiary

Okay not to vote all proxies if costs-benefit analysis shows that voting all proxies does not benefit the client

Should disclose proxy voting policy to client (details not required)

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10
Q

Oversubscribed initial public offerings (IPOs)

A

This means when investors requested more shares than the issuer if offering.

The standards state that require that these members and candidates not accept shares.

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11
Q

Options/Warrants that have an average price that is lower than the exercise price.

A

not include these options/warrants because they are antidilutive.

You must always test options/warrants even if they cannot be exercised yet

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12
Q

Anti-Dilutive EPS

A

Convertible Bonds: Is Interest x (1 - tax rate) ÷ New Shares > Basic?

Convertible Preferred Shares: Is Preferred Divided ÷ New Shares > Basic?

Warrants/Options: Is the exercise price > Average Price?

You must always test options/warrants even if they cannot be exercised yet

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13
Q

Appreciation/Depreciation of Base Currency

A

Take the 2nd exchange rate and divided it by the 1st exchange rate, then subtract 1.

If the currencies are inverted use the 1/x key to revert them.

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14
Q

Input prices are “sticky.”

A

the Neo-Keynesian economists believe that the failure of input prices to adjust to restore equilibrium may prolong recessions, and government intervention to increase aggregate demand is appropriate.

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15
Q

Priori Probability

A

known in advance ahead of time based upon reasoning, without performing any experiments or making any estimates.

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16
Q

Determine whether monetary policy is expansionary or contractionary

A

Compare the central bank’s policy rate to the neutral interest rate.

The neutral interest rate is the sum of the real trend rate of GDP growth and the target inflation rate.

If the Policy rate < the Natural Interest Rate = Expansionary
IF the Policy Rate > the Natural Interest Rate = Contractionary

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17
Q

Construction Interest of an Asset

A

Will not be included as an interest expense, it might be part of COGS or as a depreciation expense later, but it cannot be an interest expense.

when they say asset its not only fixed asset it could be inventory.

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18
Q

Crowing Out Effect

A

Government borrowing competes with the private sector.

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19
Q

Primary factors influencing the price elasticity of demand for a product are

A
  1. product are the availability and closeness of substitute goods
  2. the proportion of income spent on the product
  3. the time since the price change.
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20
Q

Adjusting LIFO F/S to a FIFO Basis

A

LIFO Firms must report a LIFO reserve, which is at the cumulative difference between inventory and what it would have been using FIFO

FIFO Inventory = LIFO Inventory + LIFO Reserve
FIFO Cost of Sales – Change in LIFO Reserve

Some Analysis adjust the for the tax advantages of LIFO in an increasing price environment:
FIFO (R/E) = LIFO R/E + LIFO Reserve x (1 – Tax Rate)
FIFO Cash = LIFO Cash – LIFO Reserve x (1 – Tax Rate)

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21
Q

If Average Costs is used instead of LIFO

A

Average Cost will replace LIFO questions when compared to FIFO in questions.

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22
Q

If a public company reports a non-GAAP (non-IFRS) income measure, a reconciliation of that measure with the most comparable measure under the applicable accounting standards is required by:

A

both U.S. GAAP and IFRS require reconciliation with the comparable GAAP/IFRS measure.

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23
Q

Disinflation

A

Inflation rate = Percentage change of the price level.

The price level can be increasing but the inflation rate is decrease which is known as disinflation.

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24
Q

arbitrage-free one-year forward rate

( U.S. dollar (USD) and the Swiss franc (CHF) is 1.34 USD/CHF. The 1-year riskless interest rate in the United States is 3%, and the 1-year interest rate in Switzerland is 5%. The arbitrage-free 1-year USD/CHF forward rate is closest to:)

A

spot rate × (1 + i price currency) / (1 + i base currency)

Forward (d/f) = Spot (d/f) x (1 + domestic rate “d”) / (1 + foreign rate “f”)

1.34 × (1.03 / 1.05) = 1.3145 USD/CHF.

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25
Q

Income-Savings “IS” Curve

A

Goods Market Equilibrium
Fundamental Relationship (S – I) = (G – T) + (X –M)
Decrease in real interest rate increases investment (I)
Savings (S) must increase for S – I to remain the same
Savings will increase with higher real income

Downward Sloping Curve

IS curve shows relationship for real variables; not affected by change in the price level.

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26
Q

Liquidity-Money Curve:

A

Money Market Equilibrium
An LM curve is constructed holding real money supply M/P constant
Higher Real interest rates decrease the demand to hold money, so we must have higher income to maintain equilibrium

Upward Sloping Curve

Increase in P decreases the real money supply (M/P) and Shift the LM curve to M/P
Decrease in P increases the real money supply (M/P) and Shift the LM curve down to M/P

LM Curves for different level of the real money supply

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27
Q

Standard Deviations

A

1 Standard Deviations (10% or 5%) = 1.645
2 Standard Deviations (5% or 2.5%) = 1.96
3 Standard Deviations (1% or 0.5%) = 2.58

There are difference for 2 tails and 1 tail

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28
Q

Base Year with a Accounting Ratio

A

If they give you a base year with an account ratio find the current ratio 1st then, multiple by the base year

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29
Q

Fiscal Money Multiplier

A

Government Purchases: are fully spent and will have a larger multiplier
Taxes: affect spending and saving

Since the government purchases multiplier is greater than the tax multiplier, an increase in government spending will increase aggregate demand more than an equal-sized tax increase will reduce aggregate demand.

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30
Q

Economies and Diseconomies of Scale affect

A

Long-run average total cost curve.

The long-run average total cost curve indicates economies of scale in any output range where it slopes down and diseconomies of scale in any output range where it slopes up. Short-run cost curves are drawn assuming a constant scale of production. All costs are variable in the long run, so there is no long-run average fixed cost curve.

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31
Q

Hypothesis Test to Compare 2 Populations Means

A

If observations are independent: Difference-in-means tests

If observations are not independent: Paired Comparisons (mean differences) test

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32
Q

Bond Equivalent Yield

A

All short-term securities need to be converted to their Bond-Equivalent Yield (Discount ÷ Price) x (365 ÷ Days)

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33
Q

Growth Rate

A

Retention Ratio x ROE

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34
Q

Measuring Leverage for Expected Earnings

A

You need Total Leverage (DTL) = DOL x DFL

%Δ in Earnings = DTL x %Δ in Sales
Expected Earnings = Estimated Earnings x (1 + %Δ in Earnings )

35
Q

Life Insurance company typically has

A

Low risk tolerance
Long investment horizon
High liquidity needs

36
Q

Endowment fund.

A

High risk tolerance
Long investment horizon
Low liquidity needs

37
Q

Defined benefit pension plan.

A

High risk tolerance
Long investment horizon
Low liquidity needs

38
Q

How Does the Tax Rate Affect WACC

A

If the WACC has Debt
A Lower Tax Rate would increase the WACC
Higher Tax Rate would reduce the WACC

39
Q

Absolute Risk Return Objective

A

Compared to a benchmark. Stated as a probability

Example:
greater than or equal to the risk-free rate.
above the return on the S&P 500 index with a 90% probability.

40
Q

Relative Risk Return Objective

A

Specifics minimum% or money return, or maximum%, or money loss. Stated as a probability

Example: 5% or more each year with a 95% probability.

41
Q

Operating Cycle

A

days of inventory + days of receivables.

42
Q

Net Operating Cycle or Cash Conversion Cycle

A

days of inventory + days of receivables – days of payables

43
Q

More Strict Credit Terms

A

Will mean Less Days in Receivables

44
Q

Minimum Variance Frontier

A

The set of portfolios with the least risk for each possible value of expected returns

45
Q

Efficient Frontier

A

Set of portfolios with the highest expected return for each possible level of portfolio risk, based on a universe of risky assets.

46
Q

Type of Board that most supportive of shareholder interests

A

Once Class of Stock

Two-Tier Board

47
Q

Staggered board of directors

A

Only a portion of members are to be up for reelection each year.

48
Q

One-Tier Board

A

May include internal and external directors

49
Q

Two-Tier Board

A

Consists of

  1. Management Board (internal directors)
  2. Supervisory Board (external directors)

A two-tier board has a supervisory board that does not include company executives and a management board of company executives. The independence of the members of the supervisory board is supportive of actions in the shareholders’ best interests.

50
Q

Type of Board that least supportive of shareholder interests

A

Staggered board of directors.
Take Over Defenses
Dual Class Structure of Stock

51
Q

Which should be included in Investment Projects incremental cash flows in capital budgeting

A

Include the Δ in working capital in Cash Flows
Depreciation Affects Taxes uses, after-tax cash flows
Opportunity Costs from rental income or the use of land or a building should be included in cash flows if the form permits alternative use

What is not is interest costs reflected in the discount rate

52
Q

Correct way to account for flotation costs when performing NPV analysis

A

Increase the initial cost of the project by the amount of the flotation costs

53
Q

Higher Valuation of a Company in an Industry

A

High Capacity Utilization
High Herfindahl-Hirschman index
Market Shares have been stable

54
Q

Price Estimates of a Bond

A

Relationship between bond price and yield is actually convex, causing the estimated price change to always be low if duration alone was used.

55
Q

Identified market pricing anomaly

A

Shares purchased in the open market when IPO shares begin trading have actually underperformed in the long run on a risk-adjusted basis. They over-perform in the short-run (why hedge funds want in the beginning and out after the days is over)

The January and earnings surprise effects are among the market anomalies that have been identified.

Shares of firms that have reported positive earnings surprises have had positive abnormal returns on average over the period after the earnings announcement.

56
Q

Macaulay Duration

A

IS the time horizon at which reinvestment risk and market price risk offset.
Shorter Holding Periods: More Market Price Risk
Longer Holding Periods: More Reinvestment Risk

Holding Period < Macaulay: Price Decrease has more of an effect
Holding Period > Macaulay: Reinvestment has more of an effect

57
Q

Credit-linked note

A

A credit-linked note combines a bond with the sale of a credit default swap on a different bond. Pays less than face value if credit event occurs for reference security.

58
Q

Capital Protected Instrument

A

Guaranteed minimum value at maturity

Potential upside gains based on return of other asset

59
Q

REIT Valuation Approach

A

Asset Based Valuation = NAV ÷ Number of Shares
Estimated NAV as value of real estate minus total liabilities

Income Based Valuation = Income or Cash Flow ÷ Capitalization Rate

Measure cash flow as funds from operations (FFO) or Adjusted Funds from Operations (AFFO)

FFO = Net Income adjusted for depreciation, gain/losses on asset sales

AFFO = FFO – Capital Expenditures similar to FCFF

60
Q

Bonds Capital Gains Calculation

A

Using the calculator:
USE the amount of time leftover to the price that the bond is sold at
DO NOT USE when the bond is purchased.

Capital gains or losses are based on the carrying value from a bond’s constant yield price trajectory.

61
Q

Share Value using P/E Ratios

A

P/E ratio x EPS = Share Price (value)

62
Q

Binomial Pricing Model

A

Uses risk neutral probabilities for up and down moves, so the expected payoff is discounted at the risk-free rate.

This means it does include a risk premium

63
Q

Contingent convertible bonds

A

Are convertible upon a triggering event occurring.

64
Q

LBO

A

Debt-Funded Acquisition of Public Company:
Acquire target Firm, increase value through restricting, cost reduction, better management

What They Want:
Inefficient Operations:
Predictive Cash Flow
Strong Profit Growth: This is the least attractive of the 3

65
Q

Cash Flows on a Forward Contract

A

Higher cash flows reduce the net cost of carry and reduce the forward price, other things equal.

Lower cash flows increase the net cost of carry and increase the forward price, other things equal.

66
Q

Roll Yield

A

Gain/Loss as future contracts approach their expiration dates
Positive for long in Backwardation, negative in contango
Opposite for short positions

67
Q

Convenience yield

A

Non-monetary benefits form holding the underlying asset may exist for some commodities

68
Q

Collateral Yield

A

Interest on T-Bills posted as margin

This is the same for both long and short positions

69
Q

3y1y

A

1-year forward rate three years from now

3y1y = [(1 + S4)^4 ÷ (1 + S3)^3] − 1

3-year spot rate and the 4-year spot rate.

70
Q

Angel investors

A

Are more likely to be individuals than venture capital funds. The angel stage is the first block of funding in the formative stage, usually before a venture capital fund has become involved

71
Q

Quoted Margin

A

Determines the Coupon payment ( PMT) for a Floating Rate Bond

Example 90-Day LIBOR – 75 BPS

72
Q

Required Rate or Discounted Margin

A

Determines the Market Rate (I/Y) for a Floating Rate Bond

73
Q

Industry Life Cycle

A

Embryonic: Slow growth sales, High prices, most start-up firms fail

Growth: Strong sales growth, declining prices, increasing profitability, new entrants

Shakeout: Slowing sales growth, decreasing profitability, intense competition, cost cutting

Mature: Slow sales growth, stable prices, consolidation, high barriers to entry

Decline: Decreasing sales, low prices, overcapacity firms exit or merge

74
Q

Sponsored Depository Receipts.

A

The investor has the right to vote the shares held by the depository institution. Foreign firm issues receipts using a depository bank.

75
Q

Unsponsored Depository Receipts.

A

The investor does not have the right to vote. Bank buys shares of foreign firm, issues receipts in domestic market

76
Q

Price Volatility of a bond

A

Is dependent on the yield volatility

Downward sloping if short-term yields are more volatile than long-term rates

77
Q

Repo Margin

A

Difference between the amount the lender of funds (buyer of the underlying bond) pays for it and its market price or value.

78
Q

Collateralized Debt Obligations (CDOs)

A

Cash flows to service CDOs are generated by the CDO manager’s buying and selling of debt obligations in the CDO asset portfolio.

Most likely to rely on active management of portfolio assets to generate their promised cash flows. There is an Collateral Manager who buys and sells financial assets to be able to give out interest and principal payments.

79
Q

Can a Portfolio Manger still add value in a semistrong-form efficient market?

A 
Yes they can by:
Quantifying return requirements, risk tolerance
Allocate assets 
Construct efficient portfolios 
Monitor and evaluate 
Rebalance portfolios
80
Q

Short-Term Funds of Banks

A 
Retail Deposits
Certificates of Deposits 
Borrow Excess Reserves from Central Bank
Loan form Other Banks 
Repurchase Agreements

A Banker acceptance is not a a short-term fund for banks

81
Q

Type of Orders

A

Limit Buy: If Price goes down to P
Limit Sell: If Price goes up to P
Stop Buy: If Price goes up to P
Stop Sell: If Price goes down to P

82
Q

Par Yield Curve

A

Is constructed from coupon rates that would cause Hypothetical bonds at each maturity be priced at par derived from spot rate curve.

83
Q

Yield spread for a Bond

A

Sum of its credit risk premium and a liquidity premium.

CFA Level 1 Mocks (3 decks)

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