Kaplan Mock 3 Am

Front 1

CFA manages equity accounts and recommends XYZ investments to any clients that ask about Fixed income. XYZ supplies her with equity research in return. She does not tell her equity clients, even though they are always pleased with XYS's performance, about this relationship. Why is she violating the Standard on referrals?

Back 1

The standards state she must disclose this relationship to her employer, prospects, and clients when appropriate - if these were clients that she wasnt going to refer to XYZ then she would need not disclose. But the key giveaway is "even though they are always pleased with XYZ's" performance, which indicates that they are clients who HAVE been referred to XYZ and therefore must be told of the relationship

Front 2

CFA was given a stock valuation model by a friend. She made adjustments where she saw fit and then presented it to her manager who commended her on a job well done and told her to incorporate it into their models. Why does this violate misrepresentation? Does she have to actively and verbally misrepresent something for it to be a violation.

Back 2

She presented material/work that was not her own without disclosing that it was created by another person.

No, even though she didn't claim that it was completely built by her, it still is a violation because presenting something without disclosure of its source is misrepresentation

Front 3

If a CFA tells his client that his equity accounts have returned on average 20% per year, but one of these accounts has a large non-discretionary allocation that has contributed a material amount to his performance, why is this a violation of performance presentation (and also potentially what?)

Back 3

Also misrepresentation

In performance presentation, you must make statements that are not only accurate but also fair and complete. While technically accurate, this is not fair or complete, and overstates his investment prowess. Therefore, it is a violation and likely a violation of misrepresentation.

Front 4

John issues a "buy" rating on a security, adds it to his recommended list, and sends it out to all his client. Why is not a violation of suitability?

Back 4

B/c sending out "recommended" investment lists, even if some securities aren't suitable for all clients, is NOT a violation of the standards.

Front 5

If working for an investment bank that also manages equity accounts, can a CFA also start working for a pension endowment managing a Fixed income account without permission from his employer under additional compensation arrangements? What would he have to do if he did need permission. Either way, what is he recommended to do but not required

Back 5

Since managing a FI account doesnt create a conflict of interest w his ibank/equity mgmt employer... he does not need permission.

If he did need it he'd have to obtain written permission. Recommended submit written report to employer giving full details of any additional compensation but NOT NECESSARY

Front 6

How does disclosure differ under independent practice and working for a third party?

Back 6

independent practice you MUST disclose all proposed details to employer before starting, and the employer MUST consent to the terms of this proposed practice

Third party only needs disclosure if it is a conflict of interest, in which case you must get WRITTEN consent

Front 7

$4,000 will grow to $6,520 in four years with monthly compounding, the effective annual interest rate is

How do you enter it into Fin calc

Back 7

EAY = (1+HPY)^(365/n)

=12.99%,

The Effective annual yield take the holding period yield and standardizes it to a yearly figure

Make sure N is yearly

Front 8

when calculating MAD what goes in the Denominator

Back 8

N

NOT N - 1

Front 9

How do you calculate Coefficient of Variation (using popualtion SD)

Back 9

Find the Mean

Find the standard deviation (since POP SD then use n NOT n - 1)

CV =SD/Mean

Front 10

No payoff if failure

20000 if success

Req r = 25%

What is PV of investment?

Back 10

Find the Cash flow

(Probability of success)(SuccessPayoff) + (Prob of failure)(FailurePayoff)

Discount that single cash flow back using 25%

Front 11

How do you calcualte Time weighted returns?

Back 11

Find the geometric mean of the HPY's for each period

Front 12

An investment has a mean return of 15% and a standard deviation of returns equal to 10%. If the distribution of returns is approximately normal, why is "The probability of obtaining a return between 5% and 25% is 95%" an INCORRECT statement

Back 12

1 SD around the mean contains 68% of the returns

Said another way there is a 68% chance of a return being within 1SD of mean which is 5%-25%

Front 13

n a recession, commodity prices and interest rates are likely to ________. An inflationary gap would likely cause interest rates to _______, An inflationary gap or stagflation conditions would likely result in _______ commodity prices.

Back 13

Recession would cause CP and i to fall

inflationary cause i to rise

infaltionary or stagflation means higher commodity prices

Front 14

When given a demand function like QD = 300 - 14 Pgas + 2 Pbus and the price inputs, how do you find the cross price elasticity of D with respect to Pbus?

Back 14

First use P inputs to find a number for Q

Then Use the equation on the left

Coefficient of Price/ Coefficient of Q

* Pbus/Qd

Front 15

XYZ is at a three-month forward discount to the PQR means today the XYZ three-month interest rate is higher than the PQR three-month interest rate.. why

Back 15

xyz is the base currency since it comes first. PQR's forward is trading at a discount to XYZ spot, so i base is higher than i price

Front 16

Currency depreciation is more effective in imporving the trade deficit of a country when

Back 16

Import demand and/or export demand is more elastic

Front 17

When adjusting a LIFO company to compare it against FIFO what must be done

what parts of fin stmnts does this affect

Back 17

Add Lifo Reserve to Lifo inv to get fifo inv... this changes inv and therefore changes Assets

Subtract change in Lifo Reserve from Lifo Cogs to get Fifo cogs, which changes expenses, which changes NI, affecting taxes in the long run, and changing equity in the short run

Front 18

Required disclosures for long-lived assets under ______ are more extensive than they are under ______.

______ requires a reconciliation of beginning and ending carrying values for classes of long-lived tangible assets, while GAAP does not.

Back 18

Required disclosures for long-lived assets under IFRS are more extensive than they are under U.S. GAAP.

IFRS requires a reconciliation of beginning and ending carrying values for classes of long-lived tangible assets, while U.S. GAAP does not.

Front 19

Break down the Dupont analysis from 1 step to five step

Back 19

Dupont ... ROE =

NI/Equity

NI/Revenue * Revenue/Equity

NI/Revenue * Revenue/Assets * Assets/Equity

EBIT/Rev*EBT/EBIT*NI/EBT*Rev/Ass*Ass/Eq

Front 20

why is dividing NI by Equity from common size fin stmnts tricky?

Back 20

NI/Eq is actually (Netincome/Rev)/(Equity/assets)

need to break the precentages down into their underlying figures

Front 21

Define "prior service cost"

hint: has to do with pensions

Back 21

Prior service costs arise when changes in the terms of a defined benefit pension plan increase the future benefits due to employees based on their prior employment with the company.

Front 22

how do you depreciate an asset costing 14 Million with a first-year accelerated depreciation factor of 0.333?

Back 22

You mutiply 14 million by .333 to find the depreciation expense for the first year

Front 23

in an exchange of debt for equity. What sections of the cash flow statement would Maritza record this transaction? Why?

Back 23

Footnotes to Cash flow statement

Debt and equity are changing but there is no cash involved therefore CFF isnt affected

Front 24

________ _______ _________distinguish the fixed charge coverage ratio from the interest coverage ratio. The fixed charge coverage ratio is decreasing at the same time the interest coverage ratio is increasing, which means the company's ________ payments are _________.

Back 24

Operating lease payments distinguish the fixed charge coverage ratio from the interest coverage ratio. The fixed charge coverage ratio is decreasing at the same time the interest coverage ratio is increasing, which means the company's operating lease payments are increasing.

Front 25

What is the difference on cash flows under

Percentage of completion method

and

completed contract method

Back 25

No difference in cash flows

Front 26

A _____________________ in the audit statement that makes reference to (questions) the going concern assumption may be a signal of serious problems and call for close examination by the analyst.

Back 26

A specific explanatory paragraph that makes reference to (questions) the going concern assumption may be a signal of serious problems and call for close examination by the analyst.

Front 27

"The objective of an audit is to enable the auditor to provide an opinion on the numerical accuracy of the financial statements."

why is this wrong

Back 27

The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements. This is not the same as numerical accuracy. The auditor generally only provides reasonable assurance that there are no material errors in the financial statements, not an opinion about their numerical accuracy.

Front 28

Failing to record accrued wages for the period would have what affect on The balance sheet?

Back 28

Liabilities would be lower than the should be.

Expenses would also be lower, which means NI and equity would be higher than they should be

Front 29

Lessor Accounting

Lessor is a dealer or manufacturer

AND PV Lease Payments is greater than Carrying value of asset

What kind of lease is this and when is gross profit recognized

who is it for

Back 29

Sales Lease and Gross profit is recognized at lease inception

For companies for whom providing leases is not their main business function, therefore they can be more aggressive in recognizing profit

Front 30

Lessor Accounting

Lessor is NOT a dealer or manufacturer

AND

PV Lease Payments is equal to Carrying value of asset

What kind of lease is this and when is gross profit recognized

who is it for

Back 30

Direct financing lease and gross profit is not recognized at lese inception

Front 31

accounts receivable aging schedule is best used to identify trends in how well the firm is doing at collecting receivables and converting them to cash.

Back 31

accounts receivable ______ ___________ is best used to identify trends in how well the firm is doing at collecting receivables and converting them to cash.

Front 32

Is it normal to be able to compare a company's receivables management to those of the average for its industry or for a group of peer companies.

Back 32

Information is typically not available to compare the aging of receivables between companies, among groups of companies, or within an industry. Receivables turnover can be calculated from the balance sheet.

Front 33

Assuming the tax treatment of the two alternatives is the same, a share repurchase vs a cash dividend payment of an equal amount has what effect on shareholder wealth

Back 33

It will have no effect on Shareholder wealth

Front 34

if Repurchase price > original BVPS, what is the effect on post BVPS

Back 34

BVPS is lower

Front 35

When will borrowing funds to repurchase shares cause EPS to go down

Back 35

When the (after tax) cost of capital on borrowed funds is higher that the Earnings/Price, than EPS goes down

Front 36

Beta is the slope on what line?

Back 36

Beta, a measure of systematic risk, can be estimated as the slope coefficient from a regression based on the market model, Ri = α + βi (Rmkt - Rf ). This regression line is the security's characteristic line.

Front 37

what are the characteristics of assets classes that a PM wants to see

Back 37

Asset Classes have similar performance characteristics, high correlation of returns within asset class, low correlation of returns wiht other asset classes

Front 38

X and Y have same Risk/return assumptions

X has Portfolio of 30% RF and 70% MP

Y has levered portfolio 130%

why is this statement wrong

"X is risk averse but Y is not"

Back 38

Just because you are levered doesnt mean you cant be risk averse. X is MORE risk averse than Y, has a steeper indifference curve, and requires more return per unit of risk. But "IS NOT" is too absolute, and hurts its credibility

Front 39

What does High industry concentration and Low industry capacity mean

Back 39

High industry concentration refers to an industry that has a small number of firms,

Low industry capacity refers to a situation where demand is greater than supply at current prices, which allows companies to maintain high prices and profits.

Front 40

Formula for P/E

and G

Back 40

Front 41

Sales of newly issued securities take place in the ____________. Is Registration of shares sold in private placements of securities required?. The ___________market refers to the markets in which previously issued securities are traded.

Back 41

Sales of newly issued securities take place in the primary market. Registration of shares sold in private placements of securities is not required. The secondary market refers to the markets in which previously issued securities are traded.

Front 42

What kind of company makes a good candidate for an asset based valuation?

Back 42

High Tangible assets to Non tangible assets

Front 43

What is the most evident contributor to the Bid-Ask spread of bonds?

Back 43

Liquidity

Front 44

Government bond trades typically settle in _______ days while corporate bond trades typically settle in ________ days

Government and corporate bonds trade primarily in __________ markets.

Back 44

Government bond trades typically settle in one day (T + 1) while corporate bond trades typically settle in two or three days (T+ 2 or T + 3). Government and corporate bonds trade primarily in dealer markets.

Front 45

What is the relationship of Macauley Duration, Modified Duration, and Yield To maturity?

Back 45

(Macauley Duration/Modified Duration) -1

= YTM @ time of purchase

Front 46

What is the relationship between Macauley Duration, Investment Horizon, and YTM?

What is the effect on annualized HPY relative to YTM at time of issuance

Back 46

If your investment horizon is shorter than the Macauley Duration, than an Increase in YTM(market rates) will decrease the value of your investment more than it increases the value of your reinvestment income

if Less than Macauley then Rise in YTM

will Decrease Bonds Price More than than increase reinvesment income ... b/c this is BAD then

= HPY will be less than YTM

Front 47

If benchmark yields increase, does this suggests macroeconomic factors were favorable or unfavorable for bond prices overall?

Back 47

Increase in BM yields mean unfavorable macroeconomic factors for bond prices overall

Front 48

A decrease in a bonds spread to its bench mark suggest favorable or unfavorable MICROeconomic factors?

Back 48

A decrease in the spread indicates favorable micro factors... could indicate that on a micro level that risk is less so people require less yield compensation reltive to bench

Front 49

While an investor in a fixed-coupon bond can usually eliminate _____________ risk by holding a bond until maturity, the same is not true for _____________ risk.

Why?

Back 49

While an investor in a fixed-coupon bond can usually eliminate interest rate risk by holding a bond until maturity, the same is not true for reinvestment risk.

As a bonds approaches maturity, its price(which may have been affected by changes in market rate) approaches Par value, and if capital is returned at par then the yield is the YTM it was orignally issued at

Front 50

Lower Coupon bonds Have Higher interest rate risk and lower Reinvestment risk

Why?

Back 50

Compared to a bond with a Higher coupon, a change in interest rate proportionally is much larger to a small coupon bond. Therefore it is subject to higher interest rate risk

However, a lower coupon will have less capital that is subject to being invested at a different interest rate, so it has less reinvestment rate risk.

Front 51

What should you think when seeing spot rate?

Back 51

The are rates that emanate from today and are the time period given is a length of spot not when it occurs

Front 52

Cash flow yield is used to calculate duration based on the _____ ________ ________- until a bond portfolio's cash flows are scheduled to be received.

Back 52

Cash flow yield is used to calculate duration based on the weighted average time until a bond portfolio's cash flows are scheduled to be received.

Front 53

Portfolio duration as a weighted average of the individual bonds' durations is calculated assuming ________ ________ in the yield curve

Back 53

Portfolio duration as a weighted average of the individual bonds' durations is calculated assuming parallel shifts in the yield curve

Front 54

Carrying costs of holding the underlying asset ________ the value of call options and _________the value of put options.

Why?

Back 54

Carrying costs of holding the underlying asset increase the value of call options and decrease the value of put options.

If you have a call option and all of a sudden the cost to hold the underlying asset skyrockets, you have something that is as good as owning the asset, but without the costs associated with holding it. That call option just also rocket up in value

Front 55

The total number of contracts (long/short position pairs) outstanding in a futures market. (what is)

Back 55

What is Open interest in a futures market is the is the ....

Front 56

What does the payoff diagram look like for a protective put

Back 56

Unlimited Upside (with a little less potential)

Limited downdide

Front 57

Collateral yield depends on .....

Back 57

the yield on T-bills posted as collateral (margin)

Front 58

contango (futures price _________ than spot price) or backwardation (futures price _______ than spot price)

Back 58

contango (futures price greater than spot price) or backwardation (futures price less than spot price)

Front 59

Futures markets for commodities with high convenience yield tend to be in (backwardation or cotango) and with Little to no Conveneince yield tend to be in (backwardation or cotango)

Back 59

Futures markets for commodities with high convenience yield tend to be in (backwardation) and those with Little to no Convenience yield tend to be in Cotango

Front 60

what are roll yields and what do they depend on

Back 60

They are the gains or losses that result from rolling over expiring futures contracts into new ones

Front 61

Private equity firm that wants to receive money from a portfolio company without giving up control of the portfolio company is most likely to engage in a Recapitalization... why?

Is this a step towards or away from an exit?

Back 61

The PE firm will make the company issue debt to pay out a dividend to the shareholders (PE firm)

A step towards an exit