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CFA Level II Exam practice questions

238 free questions with answers and explanations.

Practice test
  1. 201.An investment advisor, Sarah Chen, manages portfolios for high-net-worth individuals. One of her clients, Mr. Thompson, has explicitly stated in writing that he does not wish to participate in IPOs due to their perceived volatility. Chen’s firm receives an allocation for a highly anticipated IPO that is expected to generate significant first-day returns. Chen believes this IPO would be suitable for Mr. Thompson's aggressive growth objective, despite his stated preference. If Chen allocates shares of the IPO to Mr. Thompson's portfolio without his prior approval, which CFA Institute Standard of Professional Conduct would she most likely violate?Ethical and Professional Standards
  2. 202.A portfolio manager, Maria Rodriguez, CFA, works for a large institutional asset manager. Her firm has a strict policy against employees accepting gifts from clients or third parties that could be perceived as influencing investment decisions. One of her long-standing clients, an executive at a major corporation, offers Maria and her family a week-long, all-expenses-paid vacation to a luxury resort as a token of appreciation for her excellent service over the past five years. The client assures Maria that this gift is purely personal and unrelated to any future investment decisions. If Maria accepts this gift, which CFA Institute Standard is she most likely violating?Ethical and Professional Standards
  3. 203.An independent financial advisor, Emily White, CFA, is preparing to assume responsibility for a new institutional client's portfolio. The client, a pension fund, has a very detailed investment policy statement (IPS) that outlines specific asset allocation ranges, acceptable security types, and risk tolerance. Emily reviews the IPS and notices that a significant portion of the fund's current holdings, inherited from the previous advisor, falls outside the stipulated asset allocation ranges. What is Emily's most appropriate first action under the CFA Institute Standards of Professional Conduct?Ethical and Professional Standards
  4. 204.A risk manager is evaluating the credit risk associated with an interest rate swap. The swap has a notional principal of $50,000,000. Counterparty A is the fixed-rate payer and Counterparty B is the floating-rate payer. If interest rates unexpectedly increase significantly, which counterparty faces positive credit risk (i.e., would suffer a loss if the other counterparty defaulted)?Derivatives
  5. 205.A portfolio manager holds a bond with a value of $1,000,000 and wants to convert its interest rate exposure from fixed to floating. The manager enters into a plain vanilla interest rate swap where they pay a fixed rate and receive a floating rate. The current fixed rate for a 5-year swap is 4.00%, and the floating rate is 6-month LIBOR. The manager is concerned about the credit risk of the counterparty. Which of the following best describes the credit risk exposure of the manager in this swap?Derivatives
  6. 206.A portfolio manager is evaluating a plain vanilla interest rate swap. The manager enters into a 3-year swap to pay a fixed rate and receive a floating rate (based on 6-month LIBOR). The notional principal is $100 million. At initiation, the swap has zero value. Six months later, the fixed rate for a new 2.5-year swap is 3.00%, and the 6-month LIBOR rate observed is 2.50%. The current 6-month, 1-year, 1.5-year, 2-year, and 2.5-year LIBOR spot rates are 2.50%, 2.70%, 2.80%, 2.90%, and 3.00%, respectively. What is the approximate value of the swap to the fixed-rate payer after 6 months?Derivatives
  7. 207.A speculator is evaluating a long strangle strategy. The current stock price is $100. The speculator buys a 3-month call option with a strike price of $110 for a premium of $3.00 and simultaneously buys a 3-month put option with a strike price of $90 for a premium of $2.50. Ignoring transaction costs, what is the breakeven point on the upside for this strategy?Derivatives
  8. 208.A speculator believes that the price of a certain stock, currently trading at $75, will experience significant volatility but is unsure of the direction. The speculator wants to profit from a large price movement in either direction. Which option strategy would be most appropriate for this outlook?Derivatives
  9. 209.An investor owns a bond with a value of $980 that has a modified duration of 6.0. The investor expects interest rates to rise by 50 basis points. To hedge against this interest rate risk, the investor plans to use an interest rate future contract. Each futures contract has a price of $100,000 and a modified duration of 4.5. How many futures contracts should the investor sell to fully hedge the portfolio's interest rate risk?Derivatives
  10. 210.A portfolio manager is considering using a collar strategy to protect against a decline in the value of a stock they hold, while also generating some income. The stock is currently trading at $100. The manager buys a 3-month put option with a strike price of $95 for $2.00 and sells a 3-month call option with a strike price of $105 for $1.50. What is the maximum profit and maximum loss of this collar strategy?Derivatives
  11. 211.An investor enters into a long position in a forward contract on a non-dividend-paying stock. The current stock price is $50, the risk-free rate is 4% compounded continuously, and the time to expiration is 9 months. What is the no-arbitrage forward price for this contract?Derivatives
  12. 212.An investor holds a portfolio of European call options on a non-dividend-paying stock. The current stock price is $50, the strike price is $55, the risk-free rate is 3% (continuously compounded), and the time to expiration is 6 months. The volatility of the stock is 25%. Which of the following statements about the value of the call option is most accurate?Derivatives
  13. 213.A currency trader believes the Japanese Yen (JPY) will appreciate against the US Dollar (USD). The current spot exchange rate is USD/JPY 140.00. The 3-month risk-free rate in the US is 5% (annualized), and in Japan, it is 0.5% (annualized). What is the no-arbitrage 3-month forward exchange rate (USD/JPY)?Derivatives
  14. 214.A fund manager wants to increase the duration of a bond portfolio from 5 years to 7 years without changing the overall market value. The current portfolio value is $100 million. The manager plans to use an interest rate futures contract with a modified duration of 4 years and a current price of $98,000. How many futures contracts should the manager buy or sell?Derivatives
  15. 215.An investor owns a portfolio of equities and is concerned about a potential short-term market downturn. To hedge against this risk, the investor decides to use futures contracts on a broad market index. The portfolio beta is 1.2, and its current value is $5,000,000. Each index futures contract has a multiplier of $250 and is currently priced at 4,000. How many futures contracts should the investor sell to fully hedge the portfolio's market risk?Derivatives
  16. 216.A financial institution is quoting a 3-month European put option on a stock with a strike price of $60. The current stock price is $62. The risk-free rate is 3% per annum (continuously compounded), and the stock does not pay dividends. The volatility of the stock is 20% per annum. Using put-call parity, if a European call option with the same strike and expiration is priced at $3.50, what is the approximate price of the put option?Derivatives
  17. 217.A portfolio manager is considering using a covered call strategy. The current stock price is $100. The manager buys 100 shares at this price and simultaneously sells a call option with a strike price of $105 for a premium of $3.00. Ignoring transactions costs, what is the maximum profit the manager can achieve with this strategy?Derivatives
  18. 218.A fund manager wants to increase the duration of a bond portfolio from 5 years to 7 years using interest rate futures. The current market value of the bond portfolio is $100 million. The duration of the futures contract is 4.5 years, and its current price is $105,000. How many futures contracts should the manager buy or sell?Derivatives
  19. 219.A currency trader is analyzing the implied forward rate for the EUR/USD exchange rate using covered interest parity. The spot exchange rate is 1.1000 USD/EUR. The 90-day USD interest rate is 1.50% (annualized) and the 90-day EUR interest rate is 0.50% (annualized). Assuming 360 days in a year, what is the 90-day forward exchange rate (USD/EUR)?Derivatives
  20. 220.An American call option on a non-dividend-paying stock has a current price of $5. The stock price is $50, the strike price is $45, and the time to expiration is 6 months. The risk-free rate is 4% compounded continuously. Which of the following statements about the early exercise of this American call option is most accurate?Derivatives
  21. 221.Which of the following statements most accurately describes a key difference between a forward contract and a futures contract?Derivatives
  22. 222.A portfolio manager holds a long position in a stock currently trading at $70. To protect against a moderate decline in the stock price while still allowing for some upside potential, the manager implements a partial hedge using a protective put strategy. The manager buys a put option with a strike price of $65 for a premium of $2.00. What is the maximum loss per share the manager could incur with this strategy, ignoring transaction costs?Derivatives
  23. 223.A financial analyst is modeling the future performance of a mature manufacturing company, 'Industrial Gears Inc.' The analyst is focusing on the company's free cash flow to firm (FCFF) and notes that the company has significant capital expenditures but also substantial non-cash depreciation expense. The analyst has already calculated operating income (EBIT), the tax rate, and net capital expenditures (CapEx - Proceeds from asset sales). Which of the following adjustments is necessary to accurately derive FCFF from after-tax operating income (EBIT * (1 - Tax Rate))?Financial Statement Analysis
  24. 224.An equity analyst is valuing 'BioGen Corp.', a biotechnology company with no current dividends but significant expected free cash flow to equity (FCFE) in the future. The analyst projects FCFE for the next three years to be $2.00, $2.50, and $3.00 per share, respectively. After year 3, FCFE is expected to grow at a constant rate of 4% indefinitely. If the required rate of return for BioGen Corp. is 12%, what is the intrinsic value per share today?Equity Investments
  25. 225.A U.S. multinational corporation (functional currency USD) has a subsidiary operating in a country where the local currency has significantly depreciated against the USD throughout the year. The subsidiary's balance sheet includes inventory valued at historical cost. If the temporal method is used for translation, how will the translation of this inventory impact the consolidated financial statements compared to if the current rate method were used?Financial Statement Analysis
  26. 226.An analyst is reviewing the financial statements of Horizon Corp, a U.S. company with operations in various countries. Horizon Corp uses the current rate method to translate the financial statements of its subsidiary in Country X. The functional currency of the Country X subsidiary is the local currency (LC). The analyst observes that Horizon Corp's consolidated balance sheet shows a significant increase in the cumulative translation adjustment (CTA) account during a period when the LC depreciated against the USD. Which of the following is the most likely explanation for this observation?Financial Statement Analysis
  27. 227.A financial analyst is evaluating 'Global Manufacturing Inc.' which reports under IFRS. The company has a defined benefit pension plan. During the year, the company's actuary re-evaluated the plan's assumptions, leading to a significant increase in the discount rate used to calculate the present value of the defined benefit obligation. How will this change in discount rate primarily affect the company's financial statements under IFRS?Financial Statement Analysis
  28. 228.A financial analyst is valuing 'GlobalTech Solutions', a rapidly growing technology company, using the Free Cash Flow to Equity (FCFE) model. The analyst has projected the following for the next five years: current FCFE is $20 million, expected to grow at 25% for the next two years (Stage 1), then at 15% for the subsequent three years (Stage 2). After five years, the growth rate is expected to stabilize at 5% indefinitely (Stage 3). The company's required rate of return on equity is 12%. What is the value of FCFE in Year 3?Equity Investments
  29. 229.An investment manager is constructing a financial statement model for 'Global Logistics Inc.' The company recently acquired a 25% stake in 'Freight Forwarders Ltd.' for $100 million, obtaining significant influence but not control. Freight Forwarders Ltd. reported net income of $20 million and paid dividends of $5 million during the year. Global Logistics Inc. accounts for this investment using the equity method. How will this investment impact Global Logistics Inc.'s cash flow statement for the year?Financial Statement Analysis
  30. 230.A financial analyst is evaluating an out-of-the-money European call option with a strike price of $55, expiring in three months. The underlying stock currently trades at $50, pays no dividends, and has a volatility of 25%. The risk-free rate is 4% per annum, compounded continuously. Using the Black-Scholes-Merton model, the analyst calculates the option premium. Which of the following statements about the option's sensitivity to a small change in the underlying stock price is most accurate?Derivatives
  31. 231.An analyst is comparing two companies, 'Global Tech' and 'Local Innovate,' operating in the same industry. Global Tech reports under IFRS, while Local Innovate reports under U.S. GAAP. Both companies use the cost model for their property, plant, and equipment (PP&E). The analyst notes that Global Tech reports significantly higher depreciation expense than Local Innovate, despite having similar asset bases and useful lives. Which of the following differences in accounting standards is the most likely reason for this observation?Financial Statement Analysis
  32. 232.An analyst is evaluating a company's financial statements and notes a pattern of consistently higher sales growth and profitability metrics compared to its industry peers, despite similar operational efficiencies and market conditions. The company frequently re-estimates the useful lives of its assets, often extending them, and changes its depreciation methods more frequently than competitors. Which of the following quality of financial reports concerns is most indicated by these observations?Financial Statement Analysis
  33. 233.A financial analyst is evaluating the financial statements of a U.S. company (reporting currency USD) that has a 35% equity investment in a foreign associate, 'Global Ventures.' Global Ventures operates in a country whose functional currency is the euro (€). The analyst notes that during the year, Global Ventures reported net income of €5,000,000 and paid dividends of €1,000,000. The average exchange rate for the year was $1.20/€, and the exchange rate at the date dividends were received was $1.22/€. The U.S. company's share of Global Ventures' net income, as reported on its income statement under the equity method, would be closest to:Financial Statement Analysis
  34. 234.A U.S. company (functional currency USD) has a manufacturing subsidiary in a country whose currency is the Euro (EUR). The subsidiary's operations are largely self-contained, and it conducts most of its business in EUR. For consolidation purposes, which method should the U.S. parent company use to translate the subsidiary's financial statements?Financial Statement Analysis
  35. 235.A financial analyst is evaluating the quality of financial reporting for 'Tech Innovators Inc.' The analyst notes that the company consistently reports revenue growth significantly higher than its industry peers, but its cash flow from operations has been declining relative to net income over the past three years. Additionally, Tech Innovators frequently uses aggressive revenue recognition policies and has a complex ownership structure involving several unconsolidated special purpose entities (SPEs). Which of the following concerns is most likely indicated by these observations?Financial Statement Analysis
  36. 236.A client is evaluating 'SwiftLogistics Inc.', a private transportation company, for a potential acquisition. The client's analyst is using the asset-based valuation method. SwiftLogistics has the following balance sheet items at fair market value: Cash and Equivalents = $5 million, Accounts Receivable = $10 million, Inventory = $8 million, Property, Plant, & Equipment (PP&E) = $30 million. On the liability side, Accounts Payable = $7 million, Short-term Debt = $3 million, Long-term Debt = $15 million. The analyst also identifies unrecorded intangible assets (e.g., brand value, customer relationships) with an estimated fair value of $12 million. What is the estimated equity value of SwiftLogistics Inc. using the adjusted net asset method?Equity Investments
  37. 237.A financial analyst is modeling the Free Cash Flow to Equity (FCFE) for 'Tech Solutions Inc.' for the upcoming year. The company's net income is projected to be $100 million. Depreciation is $20 million, capital expenditures are $30 million, and the increase in working capital is $10 million. Tech Solutions Inc. has no debt. What is the projected FCFE for the upcoming year?Financial Statement Analysis
  38. 238.An analyst is comparing two companies, Company X and Company Y, operating in the same industry. Company X uses the LIFO inventory method, while Company Y uses FIFO. In a period of rising inventory costs, which of the following is most likely true regarding their reported financial statements?Financial Statement Analysis