Cfai Mock Am

Front 1

In the event of a discrepancy between the official GIPS standards and the local language translation, the official governing language is

Back 1

Although the GIPS standards may be translated into many languages, if a discrepancy arises, the English version of the GIPS standards is the official governing version.

Front 2

When is crediting the source not required under Misrepresentation?

Back 2

When using projections, statistics, and tables from recognized financial and statistical reporting services

Front 3

When using models or research developed by other members of your firm, when is it okay to omit their names?

Back 3

When those members are no longer with the firm, and as long you YOU DO NOT REPRESENT THE WORK AS YOUR ALONE

Front 4

CFA, is an MD fora large U.S.-based mutual fund organization. CFA has been under pressure recently to increase revenues. To get a deal signed, Mancini recently approved flexible terms for Chinese's client agreement. To allow for time zone differences, the agreement permits the hedge fund to trade in all of SVF's mutual funds six hours after the close of U.S. markets, which is prohibited by U.S. regulators. How did CFA violate nonpublic material information

Back 4

Fair Dealing - clients must be treated fairly and impartially

Non-public material info - you are causing other to act on non-public information (because the time zone head start means that they are able to trade ahead of US investors to enrich themselves on info that the market cannot act on)

Front 5

CFA John works with Bob on writing a research report on XYZ firm. Bob does thorough research, but before the report is finished he is moved to a different project. John uses his and bobs research to write the report, but removed bobs name from the final report because he didn't agree with and therefore changed bobs conclusion in the final report. Why did he not violate misrepresentation?

Back 5

RESEARCH REPORT***

There does not need to be a consensus of opinion for research reports. If a analysts conclusion is not aligned with the final report, this can be solved by removing their name. As long as there is no explicit language where a CFA removes a name then makes claims that this is their work alone

Front 6

Why does trading for your personal account without properly going through your employers pre clearance policy constitute a violation? and of what standard?

Back 6

Priority of transaction.

This standard has recommendations regarding basic procedures that address/prevent conflicts of interest created by personal investing

You MUST abide by your employers compliance procedures

Front 7

CFA, PM for XYZ investment manager, plans to manage the portfolios of several family members in exchange for a percentage of profits. Because his family members account require substantial attention, they have requested that he provide the service outside of his employment with XYZ. He notifies his employer in writing of his prospective outside employment and 2 weeks later starts managing the portfolios.. why does this violate disclosure of conflicts?

Back 7

Key phrase is "accounts Require substantial attention" which is highly relevant information that the employer would need to judge the impact of a conflict

Just notifying his employer is not enough, you need to see in the question that he explicitly communicates the relevant communication necessary for the employer to judge the impact of the conflict

Front 8

Who maintains oversight and responsibility for the CFA Institute Professional Conduct Program (PCP)?

Back 8

The CFA Institute Board of Governors maintains oversight and responsibility for the PCP. All CFA Institute members and candidates enrolled in the CFA Program must comply with the CFA Institute Code of Ethics and Standards of Professional Conduct, and any alleged violation of the Code and Standards is investigated by the PCP.

Front 9

If the stated annual interest rate is 9% and the frequency of compounding is daily, the effective annual rate (EAR) is closest to:

Back 9

EAR = (1 + periodic interest rate)m – 1 = [1 + (0.09 / 365)]365 – 1 = 0.094162, rounded to 9.42%.

Front 10

Monte Carlo simulation provides a _______________ of possible________________________. The central ________ and the ________ of the ________ of solutions give important clues to decision makers regarding expected results and risk.

Back 10

Monte Carlo simulation provides a distribution of possible solutions to complex functions. The central tendency and the variance of the distribution of solutions give important clues to decision makers regarding expected results and risk. Specify the parameters of the probability distribution for multiple risk factors, then in conjunction with a pricing model, have computer run through 10000s of valuations of the security based on random values of the risk factors. Allows "What if" questions to be answered. Not an analytical method, but a statistical one.

Front 11

Use a 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. Pop is normal and variance is not known

Back 11

–2.33 to 14.83.

With a 95% confidence interval, there is 2.5% in each tail, therefore you should use the p=0.025 column because the p in a students t distribution represents the portion within each tail

Front 12

The probability of Event A is 40%. The probability of Event B is 60%. The joint probability of AB is 40%. The probability (P) that A or B occurs, or both occur, is closest to:

Back 12

P(A or B) = P(A) + P(B) – P(AB)

= 0.40 + 0.60 – 0.40 = 0.60 or 60

Front 13

In a company's production function, regarding both labor costs and capital costs, What is what is fixed/variable in the short/long run

Back 13

In the short run, labor costs are variable but capital is fixed (Cannot get more capital on a short notice but can hire more worker to increase output)

In long run both are variable (Can hire more workers and can build more productive capacity i.e. more factories)

Front 14

Is the supply of Land Elastic or inelastic? (perfectly or non perfectly?)

Back 14

Supply of land is perfectly inelastic because of it's limited availability.

Front 15

What is the wealth effect?

Back 15

The “wealth effect” refers to the premise that consumers tend to spend more when there is a bull market in widely-held assets like real estate or stocks, because rising asset prices make them feel wealthy

Front 16

In order to reduce a trade deficit, the government of a country experiencing full employment moves to depreciate its currency. As a result, if the country's domestic spending declines relative to income, the most likely mechanism that causes this to occur is the wealth effect. Explain?

Back 16

A depreciation in the currency means the purchasing power of all domestic currency denominated assets goes down. The value of many assets falls, and consumers feel less wealthy. They respond by spending less, reducing consumption relative to income.

Front 17

An expansionary fiscal policy is most likely associated with crowding out of private investments.

It is not associated with an increase in capital gains tax rates.

or

an increase in government spending on social insurance and benefits.

Explain

Back 17

An expansionary fiscal policy is financed by borrowing in the private debt markets, which raises interest rates and make borrowing the opportunity cost for private business investment too high ("crowding out effect"

Increase in taxes is a contractionary fiscal policy

An increase in government spending on social insurance and benefits is an auto stabilizer not causes by expansionary fiscal policy

Front 18

Stagflation has what effect on prices and unemployment?

What brings it about?

Back 18

Stagflation is often characterized by High Prices and High Unemployment

Declines in short run aggregate supply

Front 19

Financial statement/ratio impact of Capital/Finance lease accounting from the lessee perspective:

Higher:

Lower:

Same:

Back 19

Higher: Assets, Liabilities, CFO, debt/equity

Lower: Net Income(early years), CFF, current ratio, working capital, asset turnover, ROA, ROE

Same: Total Cash Flow

Front 20

What is a finance lease?

What does the lessee do at inception of a finance lease?

What does the lessee do Over the course of the finance lease?

Back 20

Purchase of an asset that is financed with debt and must be capitalized.

At inception lessee adds a lease asset and lease liability to B/S.

Over lease term, lessee recognizes depreciation expense on the asset and interest expense on the liability.

Same treatment as if asset was purchased w borrowed funds.

Front 21

What are the four quantitative tests to determine if a lease must be held by the lessee as a finance (capital) lease

Back 21

1. Transfer of title at end of lease term

2. Bargain-purchase option exists

3. The Lease term is for more than 75% of the assets useful life

4. The PV of lease payments is 90% of the assets fair value

Front 22

How does a LESSOR treat an operating lease?

Back 22

Lease payments are recorded as income and the lease asset is depreciated on the balance sheet

Front 23

A XYZ Jet delivers 20 jets to an airline under long-term leases. The lease terms are for 15 years with annual payments of $5 million per plane; the first payment is due on delivery. The lessor classifies the leases as finance leases and prepares its financial statements according to US GAAP. The company usually sells these jets for $45 million each, with production cost averaging $40 million per jet. In the year in which the leases are signed, if an interest rate of 7% is used to determine the present value of the lease payments on the deal, the gross profit on this transaction will be closest to:

Back 23

174.5M

Front 24

What what has higher net income in the early years for a lessor

For A lessor, what type of lease has the highest Net Income at inception?

Back 24

A LESSOR under direct financing (and sales) has higher NI in the early years than operating. Over the life of the lease though, Net Income is the same under operating and finance lease.

A sales type lease, recognizing gross profit at inception, has higher NI than Direct financing or operating.

Front 25

Why does a finance lease reduce liquidity for the lessor compared to normal selling of an asset?

Back 25

Both selling and leasing equally reduce inventory from Assets

Selling adds a Accounts receivable to Assets

A finance lease adds a Lease receivable to the balance sheet instead, which is a non-current asset. Less current assets means less liquidity.

Front 26

What is the depreciation expense for 2015

What do you impair the value down to?

Back 26

$256 (Higher of Fair Market Value or PV of Future Cash Flows)

Front 27

IFRS Framework what are the acroymns for IFRS Framework

Objective Fair presentation: OFFC

Fundamental Principles: FGFACM

Enhancing Characteristics: EVUTC

Back 27

Objective Fair presentation: OFFC - Oh For Flipping Christ!

Financial Position, Financial performance, Cash Flows

Fundamental Principles: FGFAMC -

Forgot Grandmas Favorite Chevy Auto Mobile

Going concern, Fair presentation, Accrual, Materiality, Consistency

Enhancing Characteristics: EVUTC

Every Virgo Ultimately Takes Cuckolds

Verifiability, Understandibility, Timeliness, comparability

Front 28

Do you include the convertible preferred shares dividend in the calculation of Basic EPS?

Back 28

YES you must subtract the preferred dividend from the Net Income for Basic EPS

Front 29

At the end of the year, a company reported an impairment loss on its manufacturing plant, reducing its carrying amount by 10%. The impairment loss is least likely to cause the company's CFO's to decline... why?

Back 29

Impairment loss is a non-cash charge and does not affect CFO

Front 30

A Europe-based telecommunications provider follows International Financial Reporting Standards (IFRS) and capitalizes new product development costs. During 2014, it spent €25 million on new product development and reported an amortization expense related to a prior year's new product development of €10 million. The company's cash flow from operations was €290 million. If adjusted to USGAAP what would the CFO be? Why?

Back 30

Research and development costs are expensed under USGAAP (not capitalized, That $25 Million spent would not be capitalized and instead expensed in the period incurred hitting the CFO and reducing it by $25 Million. The amortization expense is not a Operations Cash Flow and therefore would not affect CFO.

€290 million – €25 million = €265 million.

Front 31

Depreciation expense for 2014 is $362. This amount includes capitalized interest of $143.Interest is allocated and capitalized to construction in progress by applying the firm’s cost of borrowing rate to qualifying assets. Interest capitalized in 2014 is $170. ignoring the effects of income taxes, the expensing of previously capitalized interest most likely causes the company's cash flow from operations to be:..

Why?

Back 31

Capitalizating Interest expense in previous years would Increase CFO and Decrease CFI in that previous year, but the expensing of previously capitalized expenses is a non-cash charge and has affect on CASH FLOW of CFO

Front 32

In 2013, a software company recorded unearned revenue related to a software license that it will recognize as revenue during 2014. Ignoring income taxes, the recognition of the software revenue in 2014 will most likely result in 2014 cash from operations being unaffected. Why?

Back 32

Recording unearned revenue means that you received payment (Cash) for a service you have not performed (Or earned) The period you record unearned revenue is the period when Cash Flow from Operation is increased. Recognizing the revenue does not mean cash is exchanged. "Ignoring income taxes" very important because there could be a difference in taxes which would affect CFO

Front 33

The non-controlling or minority interests found in the equity section of the balance sheet are best described as the equity interests:

Back 33

of minority shareholders in subsidiaries that have been consolidated.

Non-controlling interests found in the equity section represent the equity interests of minority shareholders in non-wholly-owned subsidiaries that have been consolidated.

Front 34

Actual costs incurred were £150,000 and £51,000 in Years 1 and 2, respectively. The company recognizes revenue using the percentage-of-completion method based on expenses incurred. The revenue the company will recognize in Year 2 is closest to:

Back 34

For percentage of completion method, you calculate the revenue recognized each year using actual costs as a percentage of estimated cost remaining applied to potential revenue remaining after accounting for previous years actual costs and revenue recognized.

(150/300)* 500 = 250 rev recognized in yr 1

(51/150) * 250 = 85 rev recognized in yr 2

Front 35

What are the two hints to remember the two components of DTL?

Back 35

DOL you add fixed costs on top and DFL you subtract interest expense on bottom

=2.86

DTL also can be

(Revenue - VC)/NI

Front 36

Determine the NPM and Financial Leverage

Back 36

Determine the NPM 0.045

and Financial Leverage = 1.5

Front 37

Information-motivated traders are most likely to differ from pure investors in that they expect to earn excess return

Back 37

Information driven traders expect to make money from market risk of securities, but also because they try to use information to identify mis-priced securities, which should give them returns in excess of normal investors who simply hope to passively ride markets upwards.

"Unlike pure investors, they expect to earn a return on their information in addition to the normal return expected for bearing risk. Excess returns are generated when the market recognizes and corrects the valuation error on such a security."

Front 38

Quote vs Order vs brokered markets

Back 38

Quote - Investors trade with dealers

Order - Rules driven to match buyers and sellers

Brokered - infrequently traded and expensive has brokers finding counterparties

Front 39

Calculate the weighting of X for

Market Cap weighted

Price Weighted

Back 39

Price: 24.4%

Mkt Cap: 18.2%

Front 40

Trailing price-to-earnings multiple: 10x

• Last year's EPS: $5.00

• Forecasted EPS growth rate: 10%

If the analyst estimates that the security is undervalued by $4, the estimated intrinsic value is closest to:

Back 40

54

P0/E0 = 10

E0 = 5

P0=50 ... estimated that stock is undervalued by 4 means the estimated intrinsic value is $54

Front 41

f the implied volatility for options on a broad-based equity market index goes up, then it is most likely that the general level of uncertainty in the underlying market has gone up. Why?

Back 41

Derivative markets are useful for their information discovery... volatility in a derivative market reveals info on the risk of the underlying market...

Front 42

A derivative can best be described as a financial instrument that does what to performance?

Back 42

Transforms the performance of the underlying

Front 43

The underlying in a forward rate agreement is most likely a(n)

Back 43

interest rate

Front 44

In the binomial model, the difference between the up and down factors best represents the

Back 44

The volatility of the underlying is captured in the binomial model by the difference between the up and down factors.

Front 45

Can you derive the spot curve from the forward curve and vice verse? Which one can be used to valued fixed rate bonds?

Back 45

Yes they can be derived from each other

They both can be

Front 46

Investors look at many key due diligence factors when investing in hedge funds. Which of the following factors is most likely the biggest challenge to fully assess?

Back 46

Investment Strategy and process

hedge funds are not required to disclose anything and are very secretive of strategies that they could consider proprietary

Front 47

Alternative investments that rely on estimates tend to do what to returns? as a result, what will be understated

Back 47

The use of estimates tends to smooth the return series. As a consequence, the volatility of returns will be understated.

Front 48

What is the beta of the market portfolio plotted on the SML?

Back 48

1