CFA LEVEL 1 TEST QUESTIONS

Q:1-Which of the following is not an essential characteristic of a liability?

Mark one answer:
A liability embodies a present obligation to be settled by a probable future transfer or use of assets.
The obligated company has little or no discretion to avoid the future sacrifice.
The obligation is legally enforceable.
The transaction or event obligating the company has already happened.

Q:2-Which of the following dividends are not reported as current liabilities when declared?
Mark one answer:
cash dividends.
stock dividends.
property dividends.
scrip dividends.

Q:3-Which of the following is an example of a nonlegal liability?

Mark one answer:
employee bonuses.
accounts payable.
notes payable.
sales tax payable.

Q:4-Which of the following is not considered inventory?

Mark one answer:
Material used to make products for resale.
Finished goods awaiting shipment to customers.
Equipment used to manufacture products for resale.
All of these items are considered inventory.

Q:5-Which of the following loss contingencies is not usually accrued?

Mark one answer:
general business risks.
product warranty obligations.
premium offer obligations.
All of the above.

Q:6-The modified cash basis of accounting for warranty costs:

Mark one answer:
 is seldom used for financial reporting.
is based on the matching concept.
is conceptually unsound.
requires warranty expense and warranty obligation to be estimated and recorded in the period of the sale.

Q:7-Trade accounts payable:

Mark one answer:
should, theoretically, be recorded net of any cash discount.
are examples of liabilities that must be estimated and accrued.
do not include purchases on an open- charge basis.
are normally long-term liabilities.

Q:8-Liquidity:
Mark one answer:
refers to an entity’s ability to use its financial resources to adapt to change.
describes the nearness to cash of a company’s assets and liabilities.
involves the potential to create new current and long-term debt.
involves the potential to restructure existing debt.

Q:9-An example of an item which is not a liability is:

Mark one answer:
dividends payable in stock.
advances from customers on contracts.
accrued estimated warranty costs.
the portion of long-term debt due within one year.

Q:10-The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth
in the:
Mark one answer:
bond indenture.
bond debenture.
registered bond.
bond coupon.

Q:11-An economy that experiences the law of increasing costs and shifts resources from automobile production
to computer production in order to increase computer output by fixed increments must:
Mark one answer:
be inefficient.
 be shrinking, be growing.
operate beyond its production possibilities curve in the impossibilities region.
give up increasing amounts of automobiles.

Q:12-An innovation is a change in the way that a good is produced such that:
Mark one answer:
economic growth decreases.
the amount of labor used increases.
the same amount of resources can produce a larger output.
computers are used in production.

Q:13-Production efficiency is achieved when:

Mark one answer:
the ability is gained to produce goods and services that are desired beyond the PPF boundary.
producing one more unit of one good cannot occur without producing less of some other good.
producing inside the production possibilities frontier.
all goods and services desired by consumers can be produced in the economy.

Q:14-Why do people trade with each other instead of living on what they themselves produce?
Mark one answer:
So you can take advantage of others and maybe get something for nothing.
Because that is what everybody else does.
To be able to amass large amounts of money like scoorage.
By engaging in trade people can raise their standard of living.

Q:15-The production possibilities frontier shows:

Mark one answer:
Attainable combinations of two products that may be produced with available resources.
the various products that can be produced now and in the future.
what an equitable distribution of products among citizens would be.
None of these.

Q:16-Which of the following is assumed when setting up a production possibilities frontier?

Mark one answer:
Technology is fixed.
Only two products are produced.
 Resources supplies are fixed.
All of these assumed when seeting up a production possibilities forever.

Q:17-Which of the following terms means the highest valued alternative given up when a person chooses to
engage in an activity?
Mark one answer:
Dollar Cost.
opportunity cost.
Accounting Cost.
none of these.

Q:18-Which of the following best describes the principle of opportunity cost?

Mark one answer:
In a market economy taking advantage of profitable opportunities involves some money cost.
The Cost of production varies depending on the opportunity for technological application.
The economic cost of using a factor of production is the alternative use of that factor that is given up.
Taking advantage of investment opportunities involves costs.

Q:19-if the production possibilities frontier is graphed as a straight line what does this mean?
Mark one answer:
Nothing there is no significance of a straight line production possibilities frontier.
It is easy to efficiently produce output.
Opportunity costs are constant as production shifts from one produc to the other.
Opportunity costs are increasing as production ahifts from one product to the other.

Q:20-Which of the following is not a non-tariff barrier?

Mark one answer:
A quota on apparel.
A tax equal to 12% of value on imported oil.
A voluntary export restraint on cars.
A regulation requiring government agencies to favor domestically producers.

Q:21-A bond is priced such that it has a 9% yield to maturity. However, inflation is expected to be 2% per year
over the remaining life of the bond. What is the real return for this investment?
Mark one answer:
4.50%
6.86%
 7.00%
9.00%

Q:22-A bond issued by the Federal Home Loan Bank or the Federal Home Loan Mortgage Corporation are
examples of what type of bond?
Mark one answer:
Treasury bond
Corporate bond
Municipal bond
Agency bond

Q:23-The Treasury Department sells a zero-coupon bond that will mature in two years. The bond has a face
value of $10,000, and sold at auction for $9,400. What is the annual return for an investor buying the bond?
Mark one answer:
3.00%
3.14%
6.38%
7.00%

Q:24-A bond is trading on the secondary market and will mature in 10 years. The bond has a face value of $1,000
that will be paid at maturity. Further, the bond pays an annual coupon at 9% of face value. What should the
trading price be for the bond if investors seek a 12% on their investment?
Mark one answer:
$1,192.53
$830.49
$827.95
$508.52

Q:25-Which type of bond has the highest daily trading volume in our economy?
Mark one answer:
Treasury bonds
Agency bonds
Corporate bonds
Municipal bonds

Q:26-A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and pays
an annual coupon at 9% of face value. The face value of the bond is $1,000. What is the yield to maturity for this
bond?
Mark one answer:
8.86%
9.00%
 9.23%
9.40%

Q:27-A bond currently trades at $980 on the secondary market. The bond has 10 years until maturity and pays a
semi-annual coupon at 9% APR of face value. The face value of the bond is $1,000. What is the yield to maturity
for this bond?
Mark one answer:
9.00%
9.18%
9.25%
9.31%

Q:28-A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and pays
an annual coupon at 9% of face value. The face value of the bond is $1,000. What is the coupon yield for this
bond?
Mark one answer:
8.86%
9.00%
9.23%
9.40%

Q:29-A $1,000 par value bond makes two coupon payments per year of $60 each. What is the bonds yield to
maturity if the bond currently trades at $1,200 and will mature in two years?
Mark one answer:
1.78%
3.48%
6.00%
6.43%

Q:30-A one-year Treasury security currently returns a 4.50% yield to maturity. A two-year Treasury security
offers a 4.80% yield to maturity. If the expectations hypothesis is true, what is the expected return on a one-year
security next year?
Mark one answer:
4.80%
4.90%
5.00%
5.10%

Q:1-WeOweEveryone, Inc. has a 12 year bond outstanding that has 9.5% coupon rate. If the
appropriate discount rate for such a bond is 7%, what the the appropriate price for the semi-
annual coupon paying bond?
Mark one answer:
$1,200.73
$1,198.57
 $1,000.00
$762.77

Q:2-Astro Investors is interested in purchasing the bonds of the Jetson Company. Jetson’s
bonds are currently priced at $1,100.00 and have 14.5 years to maturity. If the bonds
have a 6% coupon rate what is the yield-to-maturity of these semi-annual coupon paying
bonds?
Mark one answer:
5.00%
5.02%
2.51%
2.50%

Q:3-You find that the yield on a 4-year bond is 10% while that of a 2-year bond is 8%.
What should be the yield on a 2-year bond beginning two years from now as predicted by
the expectations theory?
Mark one answer:
2.00%
12.04%
25.25%
none of the above

Q:4-You find that the yield on a 6-year bond is 12% while that of a 4-year bond is 9%.
What should be the yield on a 2-year bond beginning four years from now as predicted by
the expectations theory?
Mark one answer:
3.00%
18.25%
39.83%
none of the above

Q:5-If you were trying to describe the effect on the yield curve that certain investors
have a definite preference for the maturity of the bonds that they invest in, then you
would be referring to:
Mark one answer:
the expectations theory.
the liquidity preference theory.
the preferred habitat theory.
none of the above.
Q:6-Fence Place Diary Company (FPD) has a 15-year maturity bond outstanding that is
currently convertible into 50 shares of FPD common stock. FPD common stock currently
sells for $25 a share and the coupon rate (semi-annual coupons) for the bond is 5%. If the
yield on a similarly rated convertible bond (on The New York Calendar Corp.) is 5%, then
what should be the correct price of the FPD convertible bond?
Mark one answer:
$750.00
$1,000
$1,250
either A or B

Q:7-You own a bond that pays a 12% annualized semi-annual coupon rate. The bond has
10 years to maturity. If the discount rate suddenly moves from 14% to 16%, then what is
the dollar increase (decrease) in value for the bond?
Mark one answer:
($90.42)
($89.01)
$89.01
$90.42

Q:8-You own a bond that pays a 12% annualized semi-annual coupon rate and has 10
years to maturity. If the discount rate increases from 14% to 16% during the next two
years of the bonds life, then what is the dollar increase (decrease) in value for the bond
during the two year period?
Mark one answer:
($69.42)
($71.09)
$69.42
$71.09

Q:9-Tom Corp. has decided to do things differently with respect to their corporate bond
issue. They have a bond outstanding that makes quarterly coupon payments instead of
semi-annually. The stated coupon rate on the bond is 10% and the yield to maturity on
the 5-year bond is 12%. What is the price of the bond?
Mark one answer:
$927.90
$926.40
$925.61
none of the above
Q:10-A bond pays an annual coupon rate of 7% with a face value of $1,000. The bond is
scheduled to mature in two years and currently trades at $920.00. What is the coupon
yield of the bond currently?
Mark one answer:
7.00%
7.61%
14.00%
15.22%