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CFA Level I practice questions

207 free questions with answers and explanations.

Practice test
  1. 51.Given a one-year spot rate of 2.50% and a two-year spot rate of 3.50% (annual compounding), the implied one-year forward rate one year from today is closest to 4.51%. According to the pure expectations theory of the term structure, this upward-sloping spot curve implies that the market expects future short-term interest rates to:Fixed Income
  2. 52.An analyst is comparing two bond structures. Bond X repays 100% of its principal in a single lump sum at maturity. Bond Y repays its principal gradually over its life through scheduled payments that include both interest and principal, similar to a mortgage loan. Bond Y is best described as a(n):Fixed Income
  3. 53.Orion Industrial has a target capital structure of 40% debt and 60% equity. Its before-tax cost of debt is 6%, the marginal tax rate is 25%, and its cost of equity (estimated using CAPM) is 12%. Using the market value weights, what is Orion's weighted average cost of capital (WACC)?Corporate Issuers
  4. 54.A machine costs $120,000, has an estimated salvage value of $20,000, and a 4-year useful life. The company uses the sum-of-the-years'-digits (SYD) depreciation method. What is the depreciation expense recognized in Year 2?Financial Statement Analysis
  5. 55.Quantum Materials Inc. is issuing new common equity to fund a project. The stock currently trades at $50 per share, and the firm expects to pay a dividend of $3.00 per share next year, growing at a constant rate of 6% thereafter. The investment bank will charge flotation costs equal to 5% of the issue price. Using the flotation-cost-adjusted dividend discount model approach, what is Quantum's cost of new common equity?Corporate Issuers
  6. 56.During a period of steadily rising input prices, a company switches its inventory cost-flow assumption from LIFO to FIFO. Holding all else constant, which of the following best describes the effect on the company's reported ending inventory and net income relative to LIFO?Financial Statement Analysis
  7. 57.An analyst compares two stocks using the PEG ratio (P/E divided by expected earnings growth rate, expressed as a whole number). Stock X trades at a P/E of 18 with expected annual EPS growth of 12%. Stock Y trades at a P/E of 10 with expected annual EPS growth of 8%. Based solely on PEG ratios, which stock appears more attractively valued relative to its growth prospects?Equity Investments
  8. 58.A market is characterized by many firms selling slightly differentiated products, relatively low barriers to entry and exit, and each firm facing a downward-sloping demand curve. In the long run, economic profits tend toward zero. Which market structure best describes this scenario?Economics
  9. 59.A stock just paid an annual dividend of $2.00 (D0). Dividends are expected to grow at a constant rate of 5% per year indefinitely, and the required return on equity is 11%. Using the Gordon growth model, what is the estimated value of the stock today?Equity Investments
  10. 60.A proprietary trader at a broker-dealer places a series of buy orders for a thinly traded stock, coordinating with an associate at another firm who simultaneously enters matching sell orders at the same price and size. Neither party intends to change beneficial ownership, but the transactions create the appearance of active trading volume and push the reported price from $50 to $52. The trader then sells 20,000 personally held shares at $52. Which of the following best describes the violation and the trader's approximate improper gain?Ethical and Professional Standards
  11. 61.A working capital manager describes her firm's approach as financing all permanent current assets and only a portion of fluctuating (seasonal) current assets with long-term capital, while relying on short-term borrowing only for the remaining seasonal needs. This approach is best described as which working capital financing strategy?Corporate Issuers
  12. 62.A portfolio manager decides to purchase 5,000 shares of a small-cap stock for his personal account. Before entering any client orders, he places and completes his personal trade. Two hours later, he submits buy orders for the same stock across his client accounts, causing the price to rise further. Which Standard has the manager most likely violated?Ethical and Professional Standards
  13. 63.An investor consistently attributes his portfolio's strong recent performance to his own stock-picking skill, while blaming poor-performing positions on 'bad luck' or market conditions beyond his control. He has also begun trading more frequently and taking larger position sizes. This behavior most likely reflects which behavioral bias?Portfolio Management
  14. 64.A central bank increases the money supply by 8% over the year. Velocity of money rises by 2%, and real GDP grows by 3%. According to the quantity theory of money, what is the approximate inflation rate implied for the year?Economics
  15. 65.A trader holds a long futures position on 5,000 bushels of corn. The initial margin is $5,000 and the maintenance margin is $3,500. The futures price falls from $6.00 to $5.65 per bushel. How much must the trader deposit to restore the account to the initial margin level?Derivatives
  16. 66.A simple linear regression of a stock's returns on a market index using 42 monthly observations produces a sum of squared residuals (SSE) of 240. What is the standard error of estimate (SEE) for this regression?Quantitative Methods
  17. 67.A supplier offers a manufacturer credit terms of '2/10, net 45.' If the manufacturer forgoes the discount and pays on day 45, what is the approximate annualized cost of trade credit (using a 365-day year)?Corporate Issuers
  18. 68.A company has a return on equity (ROE) of 18% and a dividend payout ratio of 35%. Assuming no external equity financing and stable capital structure, what is the company's sustainable growth rate?Equity Investments
  19. 69.A company has a return on equity (ROE) of 15%, a retention ratio (b) of 40%, and a required return on equity of 10%. Using the constant-growth dividend discount model relationship, what is the company's justified forward (leading) P/E ratio?Equity Investments
  20. 70.A company reports net income of $1,000,000 and pays preferred dividends of $50,000. It has 500,000 common shares outstanding throughout the year. The company also has $500,000 par value of 6% convertible bonds outstanding, convertible into 50,000 common shares. The company's effective tax rate is 40%. What is diluted EPS?Financial Statement Analysis
  21. 71.A company reports EBIT of $500,000 and interest expense of $100,000 for the year. What is the company's interest coverage ratio?Financial Statement Analysis
  22. 72.A sudden global increase in oil prices causes a leftward shift in an economy's short-run aggregate supply (SRAS) curve while aggregate demand remains unchanged. What is the most likely short-run effect on the price level and real GDP?Economics
  23. 73.An investment adviser refers clients to a mortgage broker and receives $500 for each referral that results in a closed loan. Under the CFA Institute Code and Standards, what must the adviser do?Ethical and Professional Standards
  24. 74.A company spends $500,000 on a cost that it capitalizes as an asset, whereas an otherwise identical competitor expenses an equivalent cost immediately. In the year of the expenditure, relative to the competitor, the capitalizing company will most likely report:Financial Statement Analysis
  25. 75.A GIPS-compliant firm's portfolio begins the year with a market value of $1,000,000. On day 182 of a 365-day year, the portfolio receives an external cash inflow of $200,000. The portfolio ends the year with a market value of $1,300,000. Using the Modified Dietz method (an approved approximation for time-weighted return), what is the approximate annual return?Ethical and Professional Standards
  26. 76.An analyst is pricing a one-year futures contract on a commodity using the cost-of-carry model. The current spot price is $50, the annual risk-free rate is 5%, annual storage costs are 3% of spot price, and the convenience yield is estimated at 2%. What is the theoretical one-year futures price?Alternative Investments
  27. 77.An analyst tests H0: mu = 8% versus Ha: mu ≠ 8% for a fund's mean annual return, using a sample of n = 36 years with sample mean of 9.2% and sample standard deviation of 3.5%. At the 5% significance level, the two-tailed critical t-value is approximately ±2.030. What is the calculated t-statistic and the correct conclusion?Quantitative Methods
  28. 78.A portfolio manager at an asset management firm routinely allocates new client assets into the firm's proprietary mutual fund, which carries management fees 50 basis points higher than comparable external funds with similar risk/return profiles, without disclosing this fee differential or the reason for the allocation to clients. Which duty is most clearly violated?Ethical and Professional Standards
  29. 79.NovaTech Inc. has two classes of common stock outstanding: Class A shares, held by public investors, carry one vote per share, while Class B shares, held exclusively by the founding family, carry ten votes per share. The founding family owns only 15% of the company's total equity value but controls the majority of voting power. This dual-class share structure primarily results in which of the following governance outcomes?Corporate Issuers
  30. 80.A retailer reports the following for the year: sales revenue $800,000; cost of goods sold $500,000; selling, general, and administrative expenses $150,000; interest expense $20,000; and income tax expense $30,000. What is the company's gross profit?Financial Statement Analysis
  31. 81.An investor in the 32% marginal tax bracket is comparing a tax-exempt municipal bond yielding 3.50% to a taxable corporate bond of similar risk and maturity. The taxable-equivalent yield the corporate bond must offer to match the municipal bond's after-tax return is closest to:Fixed Income
  32. 82.A CFA candidate is asked to distinguish between the Capital Market Line (CML) and the Security Market Line (SML). Which statement correctly describes a key difference between the two?Portfolio Management
  33. 83.A bond currently priced at 100.00 is analyzed using a 50 bp yield shock in each direction. If yields fall by 50 bps, the price rises to 104.50; if yields rise by 50 bps, the price falls to 96.00. The bond's approximate modified duration is closest to:Fixed Income
  34. 84.A company sells a piece of equipment for $80,000 cash. The equipment originally cost $100,000 and had accumulated depreciation of $40,000, giving it a book value of $60,000. The $20,000 gain on sale is included in net income. Under the indirect method, how should this transaction be reflected in the statement of cash flows?Financial Statement Analysis
  35. 85.A corporate bond indenture includes a sinking fund provision requiring the issuer to retire a portion of the principal each year prior to maturity. Relative to an otherwise identical bond without this provision, the sinking fund provision most likely:Fixed Income
  36. 86.An investor holds a stock that has declined 40% since purchase and refuses to sell it, stating 'I'll sell once it gets back to what I paid for it.' Meanwhile, she quickly sold another stock after it rose just 10%, fearing it might give back the gain. This pattern of behavior is best explained by:Portfolio Management
  37. 87.A compliance officer at an asset management firm discovers that a senior portfolio manager has been using client soft-dollar credits to pay for the firm's general office rent, a clear misuse of client brokerage. The compliance officer reports this to firm management, but management takes no corrective action and allows the practice to continue. The compliance officer decides to do nothing further, believing his reporting obligation is satisfied. Under Standard IV(C), Responsibilities of Supervisors, what additional step should the compliance officer have taken?Ethical and Professional Standards
  38. 88.An analyst constructs a two-asset portfolio with 60% invested in Stock X (standard deviation = 20%) and 40% invested in Stock Y (standard deviation = 30%). The correlation between the two stocks is 0.30. What is the portfolio's standard deviation?Portfolio Management
  39. 89.An investment adviser operates in a country whose securities law requires firms to retain client records for only three years. Under CFA Institute Standard V(C), Record Retention, what is the minimum period the adviser should retain those records?Ethical and Professional Standards
  40. 90.A 3-year annual-pay bond has an 8% coupon rate, a face value of $1,000, and a yield to maturity of 8%. The bond's Macaulay duration (in years) is closest to:Fixed Income
  41. 91.A portfolio has an expected annual return of 12% and a standard deviation of 18%. What is the coefficient of variation (CV) of returns?Quantitative Methods
  42. 92.An investor who outperformed the market for two consecutive years begins trading more frequently, taking larger positions, and using greater leverage, believing his stock-picking skill has improved based on his recent winning streak. This behavior is best described as an example of:Portfolio Management
  43. 93.An investor keeps his retirement savings entirely in low-risk bonds, consistent with his stated low overall risk tolerance. Separately, he takes a $10,000 work bonus and invests it aggressively in speculative options, treating it as "house money" unrelated to his core portfolio. This behavior is best described as:Portfolio Management
  44. 94.A callable bond has the following yields: yield to maturity = 6.20%, yield to call in 3 years = 5.80%, and yield to call in 5 years = 6.50%. Assuming these are the only redemption possibilities, the bond's yield to worst is closest to:Fixed Income
  45. 95.A homebuyer takes out a $200,000 mortgage at a 6% annual interest rate, compounded monthly, to be repaid over 30 years (360 monthly payments) in equal installments. What is the amount of principal repaid in the very first monthly payment?Quantitative Methods
  46. 96.The current one-year spot rate is 3.00% and the current two-year spot rate is 4.00% (both annual compounding). The implied one-year forward rate, one year from today (the '1y1y' forward rate), is closest to:Fixed Income
  47. 97.A commercial office property generates potential gross rental income of $2,000,000 per year. The vacancy and collection loss rate is 5%, and annual operating expenses (excluding debt service and capital expenditures) are $600,000. If comparable properties trade at a 6.5% capitalization rate, what is the estimated value of the property using the income approach?Alternative Investments
  48. 98.A CFA charterholder's marketing brochure states, "As a CFA charterholder, I guarantee market-beating returns for every client portfolio I manage." Which Standard, if any, does this statement most likely violate?Ethical and Professional Standards
  49. 99.A monopolist faces the demand curve P = 100 - 2Q and has constant marginal cost of $20. What price and quantity maximize the monopolist's profit?Economics
  50. 100.While working out at a private gym, an equity analyst overhears the CEO of Company A tell a friend, "The board approved our acquisition of Company B this morning, but the announcement isn't until next Monday." The analyst has no other information about the deal. What is the analyst's best course of action under Standard II(A), Material Nonpublic Information?Ethical and Professional Standards