C

To maintain his objectivity, Keith should pay his own hotel bill. Because the itinerary required charter flights due to a lack of commercial transportation, A ＆ K Limited can appropriately provide them.

B

Standard Ⅱ (C) Prohibition against Plagiarism. By using material prepared by another without acknowledging and identifying the developer of the model, Charlie had committed plagiarism.

C

Standard Ⅲ (A) Obligation to Inform Employer of Code and Standards. The standard indicates that Sheria must inform her employer in writing, though her direct supervisor, that she is obligated to comply with the Code and Standards and is subject to disciplinary sanctions if she violates the Code and Standards.

C

Standard Ⅲ(E) Responsibilities of Supervisors. If Edison clearly cannot discharge supervisory responsibilities because of an inadequate compliance system, he should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow him to adequately exercise such responsibility.

C

Standard Ⅳ (B) Prohibition Against Misrepresentation of Services. Stephen appropriately stated the firm's available services. Stephen should avoid misrepresentations involving (1) the services that he or his firm is capable of performing, (2) his qualifications or the qualification of his firm, (3) his academic or professional credentials, and (4) unwarranted assurances or guarantees about any investment, unless warranted.

C

Standard Ⅳ (B) Priority of Transactions. Give clients and employers priority over your personal interest. Personal transactions include: 1. trades for your own account. 2, trades for your family's account 3, trades for accounts in which you have a beneficial interest.

C

Standard Ⅳ (B): Disclosure of Conflicts to Clients and Prospects. Catherine must disclose (1) special relationships-directorships and consultancies, (2) underwriting and financial relationships, (3) broker dealer market making activities, and (4) material beneficial ownership. The fact that her next-door neighbor works for Toy's limited is not a conflict requiring disclosure to clients and prospects.

C

Standard Ⅴ (A) Prohibition against Use of Material Nonpublic Information. The union president has material nonpublic information. Grodon received material nonpublic information in confidence. Therefore, he is not permitted to breach that confidence by trading in securities to which such information relates. Parker should make a reasonable effort to achieve public dissemination of material nonpublic information disclosed in breach of duty.

B

Standard Ⅴ (B) Portfolio Investment Recommendations and Actions. Billy failed to distinguish between facts and opinions. He should have said The earnings K&K Corp.'s earnings are estimated to be" $10.05 per share next fiscal year.

C

Under ERISA, fiduciaries must act solely in the interest of, and for the exclusive purpose of benefiting, the plan participants and beneficiaries.

B

Daniel must give priority to transactions for clients and employers over transactions for his children.

A

To avoid violating the standards, members cannot trade until the member's clients and employers have had an adequate opportunity to act on the recommendation.

C

Although Terence has passed Level Ⅲ, he has not yet received his charter and cannot use the CFA designation. The description provided in the cover letter properly describes his situation.

C

Standard Preservation of Confidentiality:
   Members shall preserve the confidentiality of information communicated by clients, prospects, or employers concerning matters within the scope of the client-member, prospect-member, or employer-member relationship unless the member receives information concerning illegal activities on the part of the client, prospect, or employer.

C

Standard Disclosure of Conflicts to Clients and Prospects: Members shall disclose to their clients and prospects all matters, including beneficial ownership of securities or other investments, that reasonably could be expected to impair the member's ability to make unbiased and objective recommendations.

A

GIPS Objectives:
   To obtain worldwide acceptance of a standard for performance and presentation.
   To ensure accurate and consistent investment performance data for reporting, record keeping, marketing, and presentation.
   To promote fair, global competition among investment films for all markets without creating barriers to entry for new firms.
   To foster the notion of industry self-regulation on a global basis.

C

For periods beginning after January 1, 2001, valuation must be at least monthly.

C

Alternative Assets is not among the eight major provisions or sections of the Global Investment Performance Standards, which include: Fundamental of Compliance, Input Data, Calculation Methodology, Composite Construction, Disclosure, presentation and Reporting, Real Estate, and private Equity.

C

Since we are taking the view of the minimum amount required inducing investors to lend funds to the bank, this is best described as a required rate of return. Based upon the numerical information, the rate must be 3.0+1.5=4.5%.

B

Using a financial calculator: N=10×4 =40; I/Y=12/4=3; PMT=-500; FV=0; CPT PV =11557.

C

The standard error of the sample mean is equal to the population standard deviation divided by the square root of the number of observations in the sample:$ 4800000/436=$800000.

A

The NPV is calculated using the opportunity cost, discount rate, expected cash flows, and timing of the expected cash flows from the project. The project's IRR is not used to calculate the NPV.

C

Chebyshev's inequality states that 1-1/k²=1-1/(2.5²)=84%, 900×84%=756.

B

100000/1000000=10%, Safety-first ratio=(15%-10%)/20%=0.25.

B

a/m=1.8, a=1.8×m=1.8×15%=27%, Sharpe ratio=(m-r_f)/a=(15%-5%)/27%=0.370.

B

Skewness affects the location of the mean, median, and mode of a distribution as summarized in the following bulleted list.
   For a positively skewed distribution, the mode is less than the median, which is less than the mean. The mean is affected by outliers; in a positively skewed distribution, there are large, positive outliers which will tend to "pull" the mean upward, or more positive.
   For a negatively skewed distribution, the mean is less than the median, which is less than the mode. In this case, there are large, negative outliers which tend to "pull" the mean downward (to the left).

B

(x-10)/40×1/2=0.5, x=13.16.

C

Define, calculate, and interpret 1) a range and mean absolute deviation, and 2) a sample and a population variance and standard deviation. The arithmetic sum of the deviations around the mean will always equal zero.

C

The random variable has a finite number of specified outcomes, and each outcome is equally likely; such a statement makes a complete description of the discrete uniform random variable.

B

Given that sales are normally distributed, the mean is centered in the interval mean=($ 250000+ $ 580000)/2 =$ 415000.
   An interval including 99% of the observations extends three standard deviations either side of the mean. The standard deviation of daily sales=($ 415000-$ 250000)/3=$ 55000.

C

First put your calculator in the BGN.
   N=15 ; I/Y=8 ; PMT=100000; CPT PV=924423.70.
   Alternatively, do not set your calculator to BGN, simply multiply the ordinary annuity (end of the period payments) answer by I + I/Y. You get the annuity due answer and you don't run the risk of forgetting to reset your calculator back to the end of the period setting.

B

The lognormal distribution is bounded by zero and thus skewed to the right.

A

The only item listed in the question that monopolistic competition and perfect competition do not have in common is the use of advertising to differentiate their products. Extensive advertising is a key feature of monopolistic competition.

C

In an oligopolistic industry, the decisions of a firm often influence the demand, price and profit of rivals. Thus, the welfare of each seller is dependent on the policies follow by major rivals.

C

A short-run decrease in output will cause a firm's average fixed costs to increase because its fixed costs are spread over a smaller number of units. In terms of cost curves, average fixed cost never slopes upward, so a decrease in output never reduces average fixed costs. The average variable cost, average total cost, and marginal cost curves all have upward sloping components along which a lower level of output would result in a lower cost.

B

The crowding-out model suggests that budget deficits are associated with higher real interest rates, a decline in private investment, an inflow of capital from abroad, appreciation of the domestic currency, and a decline in net exports.

C

A black market is generally inefficient because: Contracts are not as enforceable. The risk of prosecution increases the prices required by suppliers. Quality control deteriorates, which leads to more defective products.

C

For a process to have the lowest production cost (be economically efficient  it must be techno logically efficient. A process is technologically efficient if there is no other process that can produce the same output with less of at least one input and no more of the other inputs. A process that uses no less of any input and more of at least one input cannot be the lowest cost process and is, by definition, not technologically efficient.

A

Selling government securities and raising reserve requirements would both serve to decrease the supply of money, which would be inconsistent with implementing a more expansionary monetary policy.

A

10.0/116.3×$3.2 billion =$2.7515 billion.
   ($2.7515 billion -$2.6 billion)/$ 2.6 billion=5.83%.

C

The supply curve for a firm under perfect competition is its marginal cost curve above average variable cost. As long as price exceeds AVC, the firm will produce up to the quantity where MC =Price, which is also MR in this case.

C

Unanticipated increases in inflation decrease the value of a fixed-payment mortgage held by a bank, and benefit borrowers because their future payments will have less real value; that is, borrowers will give up less in real goods in order to make their payments.
   If inflation decreases unexpectedly instead, real wage rates are higher than employers expected to pay, and employees have unexpected gains at the expense of their employers.

C

The demand pull inflation process originates with an increase in aggregate demand from either expansion of the money supply or an increase in the federal deficit when the economy is already at its full-employment level. Persistent increase in the price level (inflation)will only result if policy makers repeatedly attempt to increase real GDP above the full-employment level through monetary or fiscal expansion, although cost push inflation originates with an increase in the price of an important productive resource, it only results in inflation if the monetary authorities repeatedly increase the money supply to counteract the (short-term) reductions in real GDP that result form further increases in the price of the productive input.

A

Both restrictions hurt domestic customers since they might cause higher price.

A

A sale on credit would increase accounts receivable and revenue by the selling amount, increase cost of goods sold by the cost, and decrease inventory by the cost. Asset and expense accounts are decreased with credits and increased with debits.

B

A classified balance sheet has accounts grouped by type and presents subtotals for these groups of assets.

B

The percentage of completion method recognizes revenues in proportion to the proportion of expenses incurred.

C

The subscriptions earned is the sum of $ 45000 ($ 60000×75% ), $ 7500 [($ 30000/2)× 0.51 and $3000 ($36000 divided by 3 years =$12000×3/12).

B

Under the installment sales method, revenue is recognized when the cash is received. Because Able Builders receives $ 30 million in cash (invoices were paid in cash in year they were submitted) $ 30 million in revenue is recognized. Note that the installment sales method would also result in the highest gross profit in 2003. Since costs are 75 percent of sales (60/80), costs of $ 22.5 million would be recognized resulting in a gross profit of $ 7.5 million. Under the cost recovery method, revenues are recognized only to the extent of costs incurred until all costs are collected, so revenues recognized through the end of 1999 would be ($12+$22=) $ 34 million. In 2003, not all COGS have been collected, so revenue of $21 million would be recognized to equal the costs incurred for that year. Gross profit would be $ 0. Under the completed contract method, no revenue is recognized in 2003 because all $ 80 million of revenue is recognized in 2004.

B

During the first year, the revenue was 700000/1300000×2000000=1076923
   The total revenue for both years=$ 2000000
   The second year revenue was 2000000-1076923=$ 923077
   The second year income=revenues-costs=923077-1000000=-$ 76923

C

Using the indirect method, CFO is net income increased by 2005 depreciation ($1000000) and decreased by the gain recognized on the sale of the plane [$10000000 sale price-($15000000 original cost-$ 10000000  accumulated  depreciation  including 2005)=$5000000]. $12000000+$1000000-$ 5000000=$ 8000000.

B

Investing cash of $ 2 million was used to purchase the cargo plane. Proceeds from the sale of the plane were a source of $12 million of investing cash. Net CFI is $12 million-$ 2 million=$10 million. The interest payment is included in cash from operations (CFO) and the dividend payment in cash from financing (CFF). Redemption of the bonds is a use of cash from financing (CFF).

C

The percentage-of-completion method is appropriate in this case because payment is assured when dealing with the U.S. government, and cost and price estimates are assumed reliable due to the ongoing and routine nature of the contract.

A

The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected. The percentage-of-completion method is used when ultimate payment is assured and revenue is earned as costs are incurred. Profit is recognized corresponding to the percentage of costs incurred to the total estimated.

B

This is a discount bond since the market interest rate exceeds the coupon rate. The initial liability is equal to the proceeds received when the bond was issued. We can find this amount from the following calculation: FV=50000000; N=10; I=3.5; PMT=1500000; CPT→PV= $ 47920848.67. Round to $ 47920849. The interest expense in the first 6-month period is the initial proceeds multiplied by the semiannual market interest rate of 3.5%. We get: $47920849 ×3.5% =$1677230. Since the total coupon payment is $ 50000000×3.0% = $1500000 the closing liability for the first period is change in liability=$1677230-$ 1500000=$ 177230 plus the initial proceeds, or: $47920849+$177230=$ 48098079. The interest expense in the second 6-month period is the opening liability for the period (the closing liability for the first period) multiplied by the semiannual market interest rate of 3.5%. We get: $ 48098079×3.5% =$1683433. Proceeding in the same way as in the first two periods we should find that the interest expense for the third 6-month period is $1689853. Adding up these three interest expenses gives the cumulative interest expense to the end of the third 6-month period. We get: $1677230+$1683433+$1690853=$5050516.
   Professor's Note: The answer can be identified without calculation. Since the market rate was higher than the coupon rate at issuance, the initial liability must be less than face value. Since bonds were issued at a discount, the cumulative interest expense will be greater than the coupon interest (0.03×3×50 million). Only answer B satisfies both requirements.

C

Ending inventory equals 20+10+35+20-60=25 of last units purchased in inventory. (20 units)($65/unit)+(5 units)($55/unit)=$1300+$275=$1575

B

During periods of rising prices, FIFO based current ratios will be larger than LIFO based current ratios because the more expensive units (last purchases) are assigned to ending inventory, resulting in greater current assets.

A

Ending LIFO Reserve=(LIFO COGS-FIFO COGS)+Beginning LIFO Reserve=(6100-4300)+2300 =$4100.

B

In future years, less depreciation expense is recognized on the written-down asset resulting in higher net income and return on assets since ROA=NI/Total Assets.

C

SFAS 143 makes it clear that any future expenditure that is required for environmental remediation be recorded as a liability according to the present value of its expected cost at time of acquisition.

A

Income tax expense is defined as expense resulting from current period pretax income. It includes taxes payable and deferred income tax expense. Income tax paid is the actual cash flow for income taxes, including payments or refunds for other years and may differ from income tax expense. Taxes payable are the amount of taxes due the government.

B

Cash flow from operations (CFO) is systematically  "overstated" when a zero-coupon bond is issued because the interest on a zero-coupon bond is not actually paid until maturity. The amortization of the bond discount is charged to financing cash flow when, in fact, it should be charged against CFO.

C

In early years, capitalized income ＜ operating income.
   In later years, capitalized income ＞ operating income.
   But income will increase over the entire period.

C

To be true, the profit is recognized as interest revenue over the life of the lease. The sales type lease allows the lessor to recognize profits at the lease inception.

A

The three components of the fraud triangles are incentive or pressure, opportunity, and attitudes or rationalization.

A

The firm's average days of receivables should be close to the industry average. A significantly lower average days receivables outstanding, compared to its peers, is an indication that the firm's credit policy may be too strict and that sales are being lost to peers because of this. We can not assume that stricter credit controls than the average for the industry are "better." We cannot conclude that credit sales are less, they may be more, but just made on stricter terms.
   The average days of receivables are only one component of the cash conversion cycle.

A

To determine the NPV, enter the following:
   PV of $ 3000 in year 1=$ 2727, PV of $ 2000 in year 2=$1653, PV of $ 2000 in year 3=$1503. NPV=($2727+$1653+$1503)-$5000=883.
   You know the NPV is positive, so the IRR must be greater than 10%. You only have two choices, 15% and 20%. Pick one and solve the NPV. If it is not close to zero, then you guessed wrong; select the other one. [3000/(1+0.2)¹+2000/(1+0.2)²+2000/(1+0.2)³]-5000=46. This result is closer to zero (approximation) than the $ 436 result at 15%.
   Therefore, the approximate IRR is 20%.

A

K_s=0.10+0.05×1.2=0.16 or 16%
   K_d=Solve for I: N=40, PMT=50, FV=1000, PV=-849.54, CPT I=12%
   WACC=0.4×12×(1-0.4)+0.6×16=2.88+9.6=12.48

C

DeWalt should disagree with Webb's first statement. Cash flows are based on opportunity costs. Any cash flows that the firm gives up because a project is undertaken should be charged to the project. DeWalt should agree with Webb's second statement. The impact of taxes must be considered when analyzing capital budgeting projects.

C

Independent projects are projects for which the cash flows are independent from one another and can be evaluated based on each project's individual profitability. Since Woisehke is accepting both projects, the projects must be independent. If the projects were mutually exclusive, only one of the two projects could be accepted. The opportunity to invest in Bubble is a result of project sequencing, which means that investing in a project today creates the opportunity to decide to invest in a related project in the future.

A

	0	1	2	3	4	5
Project A	-$12000	$4000	$5000	$6000
Project B	-$20000	$3000	$3000	$3000	$5000	$8000

   Project A: CF₀=12000; CF₁=4000; CF₂=5000; CF₃=6000; CPT→IRR=11.22%
   Project B: same process. IRR=10.5%

A

Apart from the first alternative, the remaining statements are not necessarily true. We know that the NPV of Project X=0 at a 14% discount rate and that the NPV of Project Y is ＞ 0. First, there is no well-defined relationship between the required rate of return and ordinary payback. Second, while the last statement could be true, we cant say this for sure because we don't know what the crossover rate between the two projects is based on the information given. If Project Y is absolutely smaller, its NPV may be small compared to that of Project X.

B

3×0.1×(1-0.4)+0.2×0.11+0.5×0.18=0.13.

A

Good corporate governance practices dictate that the board act independently of management, so support of management decisions cannot be taken as an indicator of good corporate governance practices. If management is taking actions that are not in shareholders' best interests, good corporate governance dictates that an independent board will go against management and protect shareholders' interests.

C

An increase in days of receivables outstanding, other things equal, will lengthen both the operating and cash conversion cycles, indicating poorer working capital management. An increase in days of payables outstanding, other things equal, would decrease the cash conversion cycle. An increase in (total) asset turnover would result from improved working capital management, since a given level of sales could then be supported with less total assets.

A

A securities market is defined as efficient if the cost of a transaction is minimal. This attribute is typically referred to as internal efficiency.

A

P/E ratio=Dividend Payout/(k_e-g)
   Dividend Payout=(1-retention rate)=1-0.40=0.60
   G=(retention rate)×ROE =0.40×0.11=0.044, or4.4%
   P/E=0.60/(0.125-0.044)=7.41
   P₀=P/E×EPS=7.41×$2.75=$20.378, or approximately $20.40.
   Since the market value is greater than the estimated value, the stock is overpriced.

A

Liquidity risk is the likelihood that an investor will be unable to sell the security quickly without offering it at a significantly lower price. Credit or default risk is the possibility that the issuer will fail to meet its obligations under the indenture such as timely payment of interest and principal.

B

Company A is a growth company, but its stock is overpriced and therefore speculative. Company B is a cyclical company, but its stock is a defensive stock.

C

The principal is adjusted for inflation, not the coupon rate. However, the coupon payment adjusts as the principal adjusts.

C

Payout increases from 50% to 55% , cost of equity increases from 10% to 11% , and dividend growth rate stays at 5% , the P/E will change from 10 to 9.16:
   P/E=Dividend Payout/(k-g).
   P/E₀=0.50/(0.10-0.05)=10.
   P/E₁=0.55/(0.11-0.50)=9.16.

C

If an anomaly exists and is exploitable, the lack of capital is not a likely explanation for its persistence. The other statements all reflect valid rationales for why mispricing can persist.

B

In-kind redemption is related to ETF.

B

When a stock's beta equals 1, the required return is equal to the market return, or 10.0%.
   Thus, 1%=0.10. Next, we need to calculate the dividends for years 1 and 2.
   D₁=D₀×(1+g)=2.50×1.10=2.75
   D₂=D₁×(1+g)=2.75×1.10=3.03
   Then, we use the one-year holding period DDM to calculate the present value of the expected stock cash flows (assuming the one-year hold),
   P₀=[D₁/(1+k_e)+[P₁/(1+k_e)]=[$2.75/(1.10)]+[$25.0/(1.10)]=$25.22.
   Finally, we use the multi-period DDM to calculate the return for the stock if held for two years.
   P₀₁=[D₁(1+k_e)]+[D₂/(1+k_e)²]+[P₂/(1+k_e)²]=[$2.75/(1.10)]+[$3.03/ (1.10)²]+[$30.0/(1.10)²]=$29.80.
   Note: since the growth rate in dividends, g, was equal to k_e, the present value of next year's dividend is equal to last year's dividend (for periods 1 and 2). Thus, a quick calculation would be 2.5×2+$30.00/(1.10)²=29.80.

B

Value of preferred stock: $ 7.00/0.12=$ 58.33.
   Value of common stock: $3.15/0.10=$31.50.

C

In the investment process, the most important decision is asset allocation.

A

The payment at the fourth (final) settlement date will be based on the realized LIBOR at the third quarter, 3.8%. The net payment by the floating rate payer will be: (0.038+0.015- 0.045)×90/360×10000000 =$20000.

C

B

Earning quality will be taken into consideration in P/CF measure.

B

Floating-rate securities are subject to interest rate risk because their coupon rates are not reset continuously. The longer the time until the security's next reset date, the greater its potential price fluctuation away from par value (to a discount or premium). A floor on the floating rate or a decrease in the yield premium for credit risk, however, would be likely to cause the security to trade at a premium, rather than a discount.

A

The full price is clean price plus accrued interest.

C

The top-down decision process is characterized by first examining the macro-economic environment, industry environment, and then individual companies.

B

The OAS is a measure of the yield spread over Treasury spot rates without the option.

B

Refunding from a new debt issue at a higher interest rate is not prohibited, however their purchase cannot be funded by the simultaneous issuance of lower coupon bonds.

C

Survivorship bias is not a limitation in achieving market efficiency. It is a source of unreliability of a market anomaly.

A

Customarily, when a bond is called on the first permissible call date, the call price represents a premium above the par value. If the bonds are not called entirely or not called at all, the call price declines over time according to a schedule. For example, a call schedule may specify that a 20-year bond issue can be called after 5 years at a price of 110. The call price declines by a dollar a year until it reaches 100 in the fifteenth year, after which the bonds can be called at par.

A

If bonds are identical except for the coupon rate, the one with the lowest coupon will exhibit the most price volatility. This is because a bond's price is determined by discounting the cash flows. A lower-coupon bond pays more of its cash flows later (more of the cash flow is comprised of principal at maturity) than a higher-coupon bond does. Longer-term cash flows are discounted more heavily in the present value calculation.

A

An option-free bond's price sensitivity (interest rate risk) is greater when both the coupon rate and level of market interest rates are low; price sensitivity is negatively correlated with both factors.

C

A callable bond is made up of a straight bond and a written call option. An increase in volatility increases the value of the call option and decreases the value of the callable bond. On the other hand, a putable bond is made up of an option-free (or straight) bond and a long put option. An increase in volatility increases the value of the put option and therefore increases the value of the putable bond.

C

86450-10×250×(1000.2-998.4)=$81950.

B

For the examination, remember the following relationships:

Type of Bond	Market Yield to Coupon	Price to Par
Premium	Market Yield＜Coupon	Price＞Par
Par	Market Yield=Coupon	Price=Par
Discount	Market Yield＞Coupon	Price＜Par

C

Government sponsored enterprises issue securities directly in the marketplace but federally related institutions generally do not.

B

Compute the after-tax yield of a taxable security and the tax-equivalent yield of a tax-exempt security. The indifference point would be the tax rate that satisfies the equation: 6.0%×(1- T)=4.5%. Solving for T, the marginal tax rate =25%.

A

The writer of put loss=$ 60-premiun $ 5=$ 55.
   The writer of call gets a maximum gain of $ 8.

C

A long call and short put on interest rates is equivalent to a long position in a forward rate agreement. Both gain when forward rates increase and decline in value when interest rates decrease.

B

Issuing asset-backed securities allows a corporation to dedicate the assets' cash flows to specific debt issues. This enables the issue to receive a higher credit rating than that of the corporation.

C

NOI=$176000-$15000-$11400-$17350 =$132250.

A

A forward contract on a bond is not an equity forward contract.

C

Forwards and futures are similar and serve similar needs. Both are considered types of financial derivatives in that payoffs depend on another financial instrument or asset. The primary difference is that forwards are designed for the needs of the particular parties entering the contract, where futures are standardized contracts.

B

Compared to investing in a single hedge fund, the increased diversification resulting from an investment in a fund of funds reduces risk but also reduces expected return.

A

Venture capital investments provided to initiate commercial manufacturing sales is considered a forma of first-stage financing.

A

Capital preservation is the objective of earning a return on an investment that is at least equal to the inflation rate. The concern is the maintenance of purchasing power, which means that the real rate of return must equal the inflation rate.

C

The standard deviation of returns for the resulting portfolio is a weighted average of the returns standard deviation of the risk-free asset (zero) and the returns standard deviation of the risky asset portfolio.

C

These ethical issues fall under the heading of individual investor concerns. Some investors would exclude these types of investments due to their own personal preferences.

C

Investors with short time horizons generally have a greater need for liquidity and lower risk tolerance because they have less time to recover form any performance shortfalls. Capital appreciation is an aggressive strategy that would not be appropriate.

B

E(R₁)=0.5×25+0.3×10+0.2×(-25)=10.5%.
   E(R₂)=0.5×1+0.3×(-5)+0.2×35=6.0%.
   E(R_p)=w₁R₁+w₂R₂=0.6×10.5+0.4×6.0=8.7%.

B

Portfolio X has a lower expected return and a higher standard deviation than portfolio Y. X must be inefficient.

A

If the cards were distributed today he would be in violation of Standard Ⅰ (C), Misrepresentation. However, if Smith does not make the cards public until after he receives the degree, there is no violation.

B

Standard Ⅰ (C)—Roberts has misrepresented her abilities; she should also have disclosed the riskiness of options trading, but this disclosure is not part of Standard Ⅰ (C).

C

An employee/employer relationship does not necessarily mean monetary compensation for services. Complying with the request is a violation of Ⅱ (A) which prohibits trading on insider information. Standard Ⅳ (A) Loyalty deals with going into business for yourself, leaving an employer and continuing to act in the employer's best interest until their resignation becomes effective, and whistle blowing which means that the member's interests and their firm's interests are secondary to protecting the integrity of capital markets and the interests of the clients.

C

Standard Ⅲ (B) states, "Members shall deal fairly and objectively with all clients and prospects when providing investment analysis, making investment recommendations, taking investment action, or in other professional activities. "
   The term  "fairly" implies that members should take care not to discriminate against a client when disseminating investment recommendations. All the responses, except for the telephoning of distant clients (which has the effect of putting them in the same position as local clients), describe a situation in which a client or group of clients is receiving preferential or detrimental treatment that is unfair.

C

As a CEO, Berger is responsible for reasonable procedures being in place for the entire firm. Since Berger is not the supervisor of Chennings, however, Berger assumes no extra responsibility upon his hiring.

B

Solicitation of the employer's clients prior to termination of employment would constitute a violation of Loyalty to Employer, but solicitation of clients following termination would not.

C

The analyst should verify that the research department has interpreted the chairman's speech correctly. The analyst must make it clear that the statement concerning inflation is only an opinion. No one knows if that is true or not at any point in time. Based upon the given information, we cannot say that the analyst is violating only one standard. The analyst may also be violating plagiarism in accordance with Standard Ⅰ (C), Misrepresentation. Hence, the answer citing the two standards and not limiting violations to just those two standards is the best answer.

A

Smith will be in violation if he acts solely on the basis of an opinion of an employee of another firm, since he does not know (or has not confirmed) the factual information that underlies the recommendation. The same can be said about what he read in the periodical. Use of information within the firm can be relied upon unless the Smith has reason to believe the source lacks a sound basis.

B

Analysts are required to have a reasonable and adequate basis, supported by appropriate research and investigation, for their recommendations.

C

Standard Ⅵ (A) requires that Members and Candidates fully disclose all matters which may impair their independence or objectivity or interfere with their duties to their employer, clients and prospects.

A

According to Ⅵ (C), Referral Fees, as a member of CFA Institute, Towers must tell his clients about the payment in kind to Smith along with an estimate of the value of those services.

C

Among other things, Standard Ⅵ (B) covers how the firm keeps unannounced information confidential. At a minimum, the intern should be supervised by someone familiar with the Code and Standards. The firm needs to have adequate procedures for preventing the dissemination of information before it is released to the public. One method of doing so is to limit the number of access persons privy to confidential information. An intern should not be an access person.

C

Standard Ⅶ (B), Reference to CFA Institute, the CFA Designation, and the CFA Program, applies. In order to use the CFA designation, the member must pay annual dues and submit a yearly Professional Conduct Statement.

B

According to Standard I (D) "Members shall not engage in any professional conduct involving dishonesty, fraud, deceit, or commit any act that reflects adversely on their professional reputation, integrity, or competence.. " The standard is not intended to regulate one' s personal behavior.

B

Since the programs are the property of the organization, the analyst can only use them for the organization. It does not matter whether the analyst is an employee or not. Personal use of the programs without permission from the charitable organization is dishonest and prohibited.

C

The mosaic theory permits an analyst to make recommendations based upon several pieces of public or nonmaterial information, even though the complied result is both material and nonpublic.

A

Taylor is in violation of Standard Ⅱ (B), Market Manipulation, by creating a scheme that caused others to trade on false information. Sims is not in violation of Standard Ⅱ (B). The Standard does not prohibit transactions conducted for tax purposes.

B

According to Standard Ⅳ (A) Loyalty to Employer, it is the employee's duty to inform the employer about any type of outside consulting service, including duration and any compensation. Only after receiving permission from her employer, can she proceed.

C

This is a Bernoulli trial because a U. S. pension fund either has investments in hedge funds or it does not; i.e., the experiment must have one of two outcomes. A binomial random variable is defined as the number of successes in Bernoulli trials.

C

Projection models and averages are normally used to forecast medium-term cash flow needs while statistical techniques are normally used to forecast long term needs.

B

The money market yield is the annualized yield on the basis of a 360-day year and does not take into account the effect of compounding. The money market yield=(holding period yield)× (360/number of days until maturity)=(0.604%)×(360/40)=5.436%.

C

When investor credit balances are falling, investors are bullish, so contrary-opinion technicians are bearish.
   The other statements are incorrect. The weak form of the efficient market hypothesis (EMH) refutes technical trading. A narrowing yield spread is a bullish sign to smart-money technicians, but because it means that the confidence index has increased. Although an increase in margin (debit) balances in brokerages accounts means investors are bullish, it is not an indicator used by contrary-opinion technicians. This would be a bullish sign to smart-money technicians.

C

The APR remains the same since the APR is computed as (interest per period)×(number of compounding periods in 1 year). As the frequency of compounding increases, the interest rate per period decreases leaving the original APR unchanged. However, the EAR increases with the frequency of compounding.

C

333×0.06+0.333×0.10+0.333×0.05=0.07.

A

The alternative hypothesis is determined by the theory or the belief. The researcher specifies the null as the hypothesis that he wishes to reject (in favor of the alternative). Note that this is a one-sided alternative because of the "less than" belief.

B

The formula for the money market yield is: [360×bank discount yield]/[360-(t×bank discount yield)]. Therefore, the money market yield is: [360×0.0382]/[360-(38×0. 0382)]=0.0384, or 3.84%.
   Alternatively: Actual discount=3.82%×(38/360)=0.4032%.
   T-Bill price=100-0.4032=99.5968%.
   HPR=(100/99.5968)-1=0.4048%.
   MMY=0.4048%×(360/38)=3.835%.

C

The money market yield is equivalent to the holding period yield annualized based on a 360- day year=(2000/98000)×(360/140)=0.0525, or 5.25%.

B

The third quartile is calculated as: L_y=(7+1)(75/100)=6.When we order the observations in ascending order: 7%, 10%, 12%, 15%, 20%, 23%, 27%, "23%" is the sixth observation from the left.

C

A Type I error is the rejection of the null when the null is actually true. The significance level of the test (alpha) (which is one minus the confidence level) is the probability of making a Type I error. A Type Ⅱ error is the failure to reject the null when it is actually false.

C

A subjective probability draws on personal judgment and can vary from person to person.

C

Mean=120/10=12, median=10, and mode=10. The distribution is skewed to the right, so the mean is greater than the median and mode. Generally, for positively skewed distributions, the mode is less than the median, which is less than the mean. In this case, the mode and median are equal because the number of observations is small.

B

The normal distribution has a skewness of 0 because it is symmetrical.

A

Increased budget deficits will increase the demand for loanable funds and lead to higher interest rates and thus lower private investment.  Crowding-out implies that an increase in government spending will choke off private investment and reduce the intended impact of fiscal policy changes on aggregate demand.

A

Percentage change in quantity=[(4-3)]/[(4+3)/2]=1/3.5=0.286=28.6%
   Percentage change in price=[(2-2.5)]/[(2+2.5)/2]=-0.5/2.25=-0.222=-22.2%

B

If real GDP rises, more goods and services are bought and sold, and more money is needed to conduct these transactions. Increases in real GDP shift the money demand curve up. Decreases in real GDP shift it down so that less money is demanded at each level of interest rates. The increased use of credit cards and debit cards, the availability of interest bearing checking accounts, easier transfer of funds from savings to checking, the proliferation of ATMs, and internet banking and bill paying are all financial innovations that have affected the demand for money curve. Overall, financial innovation has reduced the demand for money below what it would have been if only the increase in real GDP was at work.  The increased uses of credit cards and ATMs have likely been the most important innovations with respect to the demand for money.

C

The deposit expansion multiplier increases when the required reserve ratio falls and the money supply increases as a result.

B

The potential deposit expansion multiplier=1/( required reserve ratio)
   The potential increase in the money supply=potential deposit expansion multiplier×increase in excess reserves.

C

A decrease in the price of a substitute resource would induce producers to use the substitute resource, reducing demand for the resource in question. An increase in the price of a complementary resource would decrease demand for both resources.

A

For an individual, consumer surplus is defined as the sum of the differences between what that individual is willing to pay for each individual unit of a good or service that he or she purchases (marginal benefit) and the amount that he or she actually pays for each of these individual units.

C

Ideally, price regulation of a natural monopoly would improve resource allocation if price was set equal to the firm's average total cost per unit of output. The resulting output level would produce zero economic profits for the firm. If price was set equal to marginal cost, however, economic losses would occur and the monopolist would not undertake production.

C

The business cycle has four phases that normally occur in sequence: 1) peak , 2) contraction, 3) recessionary trough, and 4) expansion.

A

Profit maximization occurs when price equals marginal cost in a perfectly competitive industry, not a monopoly. A natural monopoly exists when economies of scale or scope are so significant that total industry production should be produced by only one firm. In this case, average total cost declines over the entire range of demand.

A

The inflation rate can be calculated as (142-135)/135=5.2%.

C

If market participants come to believe that actual inflation will be greater than the expected inflation premium embedded in the nominal risk-free rate, the demand for financial capital will increase, the supply will decrease, and, eventually, the nominal risk-free rate will increase to reflect the new expectations.

A

Reliability refers to information that presents substance over form (the economic reality of a transaction or event, not just its legal form) and has representational faithfulness (it is what it is reported to be). Reliable information should also reflect neutrality in that it is unbiased. Predictive value is not a characteristic of reliability; it is associated with the relevance of accounting information.

B

The key word is "unreliable. " The completed contract method is used when cost estimates are unreliable. The percentage-of-completion method recognizes profit corresponding to the percentage of cost incurred to total estimated costs associated with long-term construction contracts. Percent-of-completion is used where contracts and cost estimates are reliable.
   The installment sales method recognizes revenue and associated cost of goods sold only when cash is received. Gross profit (sales-cost of goods sold) reflects the proportion of cash received. The cost recovery method is similar to the installment sales method but is more conservative. Sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

B

The cost recovery method is used when the costs to provide goods or services are not known. Under this method, sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.

C

Liabilities are equal to $ 3790 million ($ 240 million unearned revenue+$1570 long-term debt+$1150 accounts payable+$ 830 accrued expenses). Stockholders' equity is equal to $ 3420 million ($ 30 common stock at par+$ 440 capital in excess of par-$ 2000 treasury stock+$5160 retained earnings-$210 accumulated other comprehensive loss).

A

A classified balance sheet groups assets and liabilities by subcategories. It distinguishes between current and noncurrent assets and current and noncurrent liabilities. The assets and related liabilities are reported separately, they are not netted.

C

C

Net income is ($ 6000-3200-800)×(1-0.4)= $1200. Adjustments to reconcile net income to cash flow from operating activities will require that depreciation ($ 800) be added back, and increase in accounts receivable ($1000) be subtracted: $1200+800-1000=$1000.

B

Ending inventory equals 20+10+35+20-60=25 of the first units purchased equals:
   (20 units)×($50/unit)+(5 units)×($45/unit)=$1000+$225=$1225.

C

Beginning Inventory+Purchases-Ending Inventory=COGS.
   $19924+$15923-$19204=$16643.

C

The liabilities are simply advance billings minus costs incurred under the completed-contract method. The net liability at the end of year 1 is $300 ($1000-$700) and at the end of year 2 it grows by an additional $100 ( $1000-$ 900). The firm has billed $ 2000 at the end of year 2 and has incurred $1600 of costs so the net liability at the end of year 2 is $400.

B

Surveys indicate that European companies and private companies tend to use the payback period criterion more than other types of companies.

B

NPV for Project X=-100000+50000/(1.15)¹+40000/(1.15)²+30000/(1.15)³+10000/(1.15)⁴=-833
   NPV for Project Y=-100000+10000/(1.15)¹+30000/(1.15)²+40000/(1.15)³+60000/(1.15)⁴=-8014
   Reject both projects because neither has a positive NPV.

C

This choice is FALSE because of the second sentence. The first part of this explanation is correct-the completed contract method does not recognize revenue and expense until the contract is completed. However, all profits are recognized when the contract is completed, not on a pro-rata basis. The completed contract method is used when selling price or cost estimates are unreliable.
   The other choices are correct definitions.

C

To compute Indigo's basic earnings per share (EPS) ((net income-preferred dividends)/ weighted average common shares outstanding), the weighted average common shares must be computed. ((500000×12)+(200000×6)-(100000×3)/12=)575000. EPS was ($ 5600000/575000=)$9.74.
   For Diluted EPS, assume the bonds were converted on January 1, and that interest payments were not made on the bonds. Increasing net income by the amount of bond interest net of tax effect is ($5600000+((6000×$1000×0.05)×(1-40))=)$5780000. Diluted EPS was ($ 5780000/(575000+120000)=)$ 8.32.

B

FIFO companies have higher net income and higher taxes.

A

If Train decided to amortize the franchise cost, it would be capitalized and $1 million each year would be treated as a reduction in cash flow from investing (CFI). None of the cash expended would flow though CFO, and all of the $ 8 million would be added back to CFO.

C

A permanent difference between tax and financial reporting is a difference that is expected to not reverse itself. Under normal circumstances, the effects of the different depreciation methods will reverse.

A

Sunk costs are not to be included in investment analysis. Opportunity costs, changes in net working capital, and the project's impact on taxes are all relevant variables in determining project cash flow for a capital investment.

B

Mutually exclusive projects should be analyzed based on NPV. WACC may be adjusted up or down to reflect differences in project risk.

C

Taxes payable are the taxes due to the government and are determined by taxable income and the tax rate. Note that pretax income is income before tax expense and is used for financial reporting. Taxable income is the income based upon IRS rules that determines taxes due and is used for tax reporting.

C

An increase in customer advances can be viewed as a prediction of future revenues rather than expected cash outflows. Thus, by itself, an increase in customer advances would not indicate a deteriorating liquidity position. The shift from operating liabilities to financing liabilities may indicate the beginning of a liquidity crisis. Suppliers eventually balk at slower payments (decrease in accounts payable turnover) and an increase in borrowing may be necessary to finance day-today operations.

B

PMT=800000; FV=10000000; N=5; I/Y=8.25; CPT→PV=$ 9900837
   Interest expense=9900836.51×0.0825=$ 816819.01
   Year-end adjustment: 816819.01-800000=$16819.01
   Year-end debt=$ 9900836.51+$16819.01=$ 9917655.52
   Note: Since this is a discount bond, we know the value will increase each year. So we really didn't have to do any calculations to answer this question.

B

CL increases, so CR will decrease.
   D increases, so D/E ratio will increase.
   EBIT/I decrease, so EBIT/I decrease.
   CL increases so acid test ratio [(CA-Inv)/CL] decreases.

C

2007 inventory turnover was 5 (365/73 days in inventory).  Given inventory turnover and COGS, 2007 average inventory was $ 20 million ($100 million COGS/5 inventory turnover). 2008 inventory turnover is expected to be 7.3 (365/50 days in inventory). Given expected inventory turnover, 2008 average inventory is $17 million ($124.1 million COGS/7.3 expected inventory turnover). To achieve 50 days of inventory on hand, average inventory must decline $ 3 million ($20 million 2007 average inventory -$17 million 2008 expected inventory). A decrease in inventory is a source of cash.

B

Treasury notes have maturities between 2 and 10 years and, thus, have maturities longer than those of securities suitable for cash management. Allowing short-term securities to mature without reinvesting the cash generated would be one way to meet seasonal cash needs. Short-term bank borrowing or issuing commercial paper that can be paid off when holiday sales generate cash would be appropriate strategies for dealing with a predictable short-term need for cash.

C

Introducing a new product or entering a new market involves sales and expense projections that can be highly uncertain. Expanding capacity, replacing old machinery, or complying with environmental regulation all involve less uncertainty and analysis.

C

Using the EBITDA coverage (EBITDA/Interest expense) to measure leverage tolerance, Omega has less tolerance for leverage. Omega's EBITDA coverage is 1.4 ($ 79300 EBITDA/$58100 interest expense) and Alpha's EBITDA coverage is 1.6 ($69400 EBITDA/$44000 interest expense). Using the quick ratio to measure liquidity, Alpha is more liquid than Omega. Alpha's quick ratio is 0.6 ($216700 quick assets/S361000 current liabilities) and Omega's quick ratio is 0.5 ($ 211300 quick assets/$ 404400 current liabilities). Using EBITDA margin to measure operational efficiency, Alpha is less operationally efficient than Omega.  Alpha's EBITDA margin is 4.2% ($69400 EBITDA/$1650000 revenue) and Omega's EBITDA margin is 5.5% ($ 79300 EBITDA/$1452000 revenue). Using fixed asset turnover to measure the efficiency of fixed assets, Omega uses its fixed assets less efficiently than Alpha. Alpha's fixed asset turnover is 5.5 ($1650000 revenue/$ 300000 average fixed assets) and Omega's fixed asset turnover is 4.5 ($1452000 revenue/$ 323000 average fixed assets).

B

2007 FIFO inventory was $ 36 million ( $ 20 million LIFO inventory+$ 16 million reserve). 2007 FIFO COGS was $ 54 million ($ 64 million LIFO COGS -$ l0 million increase in LIFO reserve).

C

U.S. GAAP does not permit upward valuations of plant and equipment. Under IFRS, the recovery is reported in the income statement to the extent that the previous downward adjustment (loss) was reported in net income. Otherwise, the increase in value is reported as an adjustment to equity. Thus, under IFRS, $5 million will be reported in 2007 net income and $ 2 million will be directly added to equity.

B

The LIFO inventory method is permitted under U. S. GAAP but is not allowed under IFRS. Upward revaluations of assets and proportionate consolidation of joint ventures are permitted under IFRS but not under U.S.  GAAP.  Unrealized gains and losses from held-for-trading securities are recognized on the income statement under both IFRS and U.S. GAAP.

C

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. An aging schedule shows either the absolute or percentage amount of accounts receivable that are current and that are past due by various lengths of time.

B

Choice A: Buying fixed assets on credit does not affect current assets but increases current liabilities. Therefore, the current ratio falls.
   Choice B: Buying inventory on account increases both inventory and accounts payable. Because the current ratio started off below 1, the ratio will increase.
   Choice C: Selling marketable securities for cash does not affect the amount of current assets and leaves the current ratio unaffected.

C

An increase in inventory could indicate poor sales and an accumulation of obsolete items or could be the result of a conscious effort to have adequate supplies to avoid losses from not having items to satisfy customer orders (stock outs). Higher-than-average inventory turnover could indicate better inventory management or could indicate that a less than optimal inventory is being maintained by the company.

A

The appropriate method for estimating the cost of equity for a firm in a developing market is to add a country risk premium (CRP) to the market risk premium, so the revised CAPM equation becomes: ke=RF+β[E(RMKT)-RF+CRP]. The CRP is the sovereign yield spread adjusted for the volatility of the developing country's equity market. An alternative approach is to add the CRP (not the sovereign yield spread) to the cost of equity as calculated from the CAPM. The CRP is necessary because beta does not fully capture country risk. However, adjusting beta is not the recommended approach.

B

The trailing P/E would be negative.

B

Using average ROE provides a better estimate of P/E when a company's size has changed. The average ROE is 8.8; an estimate of normal earnings per share can be derived by multiplying average ROE by ending book value per share:
   0.088×17.65 per snare=$1.55 normal earnings per share, P/E =40+1.55=25.8.

B

The Vast majority of major bond indexes are calculated based upon trader prices and market value weightings. The major exception is an all Treasury index that is market priced since it only contains treasury securities.

A

This is a geometric mean question.
   (1.2×0.9×1.05)^1/3-1=0.043=4.3%

B

New issues of securities, which provide initial and/or additional capital for governmental units and corporations, are underwritten and sold in the primary market; secondary capital markets provide liquidity to the owners of existing securities.

B

A short seller borrows stock from another investor and must pay any dividends due on that stock to the lender the corporation pays the dividend to the investor who purchased the stock from the short seller.

A

A security market in which all the bids and asks for a stock are gathered to arrive at a single price that satisfies most of the orders is a call market.

B

P₀×(1-initial margin)/(1-maintainanee margin)=50×(1-60%)/(1-30%)=28.57.

C

Cash Return %=[(Ending Value/Beginning Equity Position)-1]×100=[(($ 200×200)/($100×200))-1]×100=100%
   Leverage Factor=1/Initial Margin %=1/0.40=2.50
   Margin Transaction Return=All cash return×Leverage Factor=100%×2.50=250%
   Note: You can verify the margin return as follows:
   Margin Return %=[((Ending Value-Loan Payoff)/Beginning Equity Position)-1]×100=[(([$200×200]-[$ 100×200×0.60])/($ 100×0.40×200))-1]×100=[((40000-12000)/8000)-1]×100=250%.

B

Other than corn orate insiders and market specialists, no other group has monopolistic access to information, which supports the strong-form EMH. The other statements are true.

B

The tendency to seek out good news and ignore bad news falls under the heading of confirmation bias in the context of behavioral finance.

C

The risk components that need to be assessed in determining country risk premium for use in estimating the required rate of return for foreign securities include Business risk, Financial risk, Liquidity risk ,Exchange rate risk, Country risk .

A

The market segmentation theory states that the shape of the yield curve is determined by the supply and demand for bonds within certain market segments. If the demand for long-term bonds exceeds supply, prices will be forced up and yields down. Hence a large demand for long bonds could force a downward-sloping yield curve.

B

A spot rate is the appropriate discount rate for a security that makes a single payment in the future. Treasury bills and Treasury strips promise a single future cash flow and their yields represent spot rates. Treasury inflation protected securities (TIPS) have coupon cash flows, so a 2 year TIPS yield is not a spot rate.

C

The fair price of the bond is 700/1.0325+700/1.03352+10700/1.03653=$10942.The arbitrage profits available are $ 92.

A

N=20, I=9/2=4.5, PMT=80/2=40, FV=1000, CFF PV=$934.96.

B

The value of the embedded put option of the putable bond is the difference between the price of the putable bond and the price of the option free bond. The value of the option free bond is computed as follows: PMT=5, N=2, FV=100, I=6, CPT PV=-98.17( ignore sign).
   The option value=101.79-98.17=3.59.

A

If economic conditions are expected to get worse, then the probability that corporations may default increases and causes credit spreads to widen.

A

When the yield curve is perfectly flat, all spot interest rates are equal, and the spot rates will equal the YTM of the bond. The static spread and the YTM spread will diverge when the yield curve gains shape (upward-sweeping, humped, or downward-sweeping).

B

Current yield=(Annual dollar coupon interest)/(Price of the bond)=8/130=0.0625 or 6.25%.

C

N=6; PV=-1100.00; PMT=80; FV=1080; CPF I/Y=7.02%.

B

Calculate the new bond prices at the 50 basis point change in rates both up or down and then plug into the effective duration equation:
   Current Price: N=50; FV=1000; PMT=(0.075/2)×1000=37.50; I/Y=4.625; CPT →PV=$ 830.54
   +50 Basis Pts: N=50; FV=1000; PMT=(0.075/2)×1000=37.50; I/Y=4.875; CPT →PV=$ 790.59
   -50 Basis Pts: N=50; FV=1000; PMT=(0.075/2)×1000=37.50; I/Y=4.375; CPT →PV=$ 873.93.
   

B

PVBP represents the change in the price of the bond when its yield changes by one basis point, or 0.01%. PVBP=duration×0.0001×bond value. This calculation ignores convexity because for a small change in yield, the curvature of the price-yield relationship typically has no material effect on the PVBP.

A

125%.
   The price would thus be $1000×1.04125=$1041.25.

C

If bonds are identical except for maturity, and coupon, the one with the shortest maturity and highest coupon will have the shortest duration. The rationale for this is similar to that for price volatility. Duration is approximately equal to the point in years where the investor receives half of the present value of the bond' s cash flows. Therefore, the earlier the cash flows are received, the shorter the duration.

C

Since the buyer of a putable bond must pay extra for the put option, the OAS spread for a putable bond is the Z-spread plus the put option cost in percent.

C

OTC derivative contracts (securities) are customized and have poor liquidity. The contract is with a specific counterparty and there is default risk since there is no clearinghouse to guarantee performance.

C

The correct adjustment is to subtract the present value of the expected dividend payments from the current stock price.

A

Early exercise of an in-the-money American put option on an asset with no cash flows can generate more, X-S, than the minimum value of the European option, X/(1+R)^T-S. The possibility of profitable early exercise leads to a higher, lower bound on the price of the American put option.

C

Marking-to-market means that, at the end of the day, all gains or losses are tallied to the trader's account.

B

Equity swaps involve one party paying the return or total return on a stock or index periodically in exchange for a fixed return.

C

Each party to a forward contract faces default risk to some extent. If the floating rate at contract expiration (LIBOR or Euribor) is above the rate specified in the FRA, the long position in the contract can be viewed as the right to borrow at below market rates and the long will receive a payment from the short. If floating rates (LIBOR or Euribor) at the expiration date are below the rate specified in the FRA, the short will receive a cash payment from the long. However, "the short profits if LIBOR decreases" is not necessarily true because LIBOR can decrease but remain above the rate specified in the FRA.

A

C

The total return on the position equals the gain or loss on the futures position plus the interest earned on the Treasury position.

A

Only venture capital requires a large investment.

B

The sales comparison approach uses recent transactions to estimate a benchmark value. The discounted cash flow model is used as a check on investment valuation. The hedonic price model is a variation of the sales comparison approach, but is a more formalized, structured approach. The income approach uses a property's NOI, divided by the market cap rate, to estimate market value.

C

   

A

The variance of the portfolio is (0.25.×0.20)²+(0.75×0.40)²+2×0.25×0.75×0.20×0.40×0.70=0.1135. Then the standard deviation is 0.3369.

B

The policy statement does not guarantee anything. It merely sets out the objectives and constraints. It also does not educate the investor about financial markets. This step is necessary before constructing a policy statement.

B

One of the key assumptions of the CAPM is the ability of investors to lend and borrow at the risk-free rate. This assumption is what makes the CML a straight line. Investors can lend all they want by buying investments at the risk-free rate, but investors must pay a premium over the risk-free rate to borrow. Unequal borrowing and lending rates put a kink in the CML.

B

Using the CAPM, the required rate of return for each stock is:
   E(RA)=4%+0.6×(10%-4%)=7.6%.
   5.0%-7.6%=-2.6% overvalued.
   E(R_B)=4%+1.0×(10%-4%)=10.0%.
   10.0%-10.0%=0.0% properly valued.
   E(R_C)=4%+1.6×(10%-4%)=13.6%.
   16.0%-13.6%=2.4% undervalued.
   E(R_D)=4%+2.0×(10%-4%)=16.0%.
   16.0%-16.0%=0.0% properly valued.

B

As securities are added to a portfolio, the diversifiable (unsystematic) risk decreases and the nondiversifiable (systematic) risk remains the same.