Exam Name: CFA Level I

Total Questions: 22
Assignment Name:
JUN18L1QME/C02(9dbafcb4)
Pass Mark Rate: 65%
Assignment Duration: 33 minutes
#1.
An investor invested $10,000 into an account five years ago. Today, the account value is
$18,682. What is the investor's annual rate of return on a continuously compounded basis?

A 11.33%.
B 13.31%.
12.50%.

Explanation:
ln(18,682/10,000) = 0.6250/5 = 12.50%

or

(18,682/10,000) 1/5 = 1.133143

ln(1.133143) = 12.4995%

#2. If a person needs $20,000 in 5 years from now and interest rates are currently 6% how
much do they need to invest today if interest is compounded annually?
A $14,683.
B $15,301.
$14,945.

Explanation:

PV = FV / (1 + r)n = 20,000 / (1.06)5 = 20,000 / 1.33823 = $14,945

N = 5; I/Y = 6%; PMT = 0; FV = $20,000; CPT → PV = -$14,945.16

#3. An investor deposits $10,000 in a bank account paying 5% interest compounded annually.
Rounded to the nearest dollar, in 5 years the investor will have:
$12,763.
$10,210.
B
$12,500.
C
Explanation:
PV = 10,000; I/Y = 5; N = 5; CPT → FV = 12,763.

or: 10,000(1.05)5 = 12,763.

#4. Which of the following statements about compounding and interest rates is least accurate?
A On monthly compounded loans, the effective annual rate (EAR) will exceed the annual
percentage rate (APR).
All else equal, the longer the term of a loan, the lower will be the total interest you pay.
Present values and discount rates move in opposite directions.
C
Explanation:
Since the proportion of each payment going toward the principal decreases as the original loan
maturity increases, the total dollars interest paid over the life of the loan also increases.

#5. An investor purchases a 10-year, $1,000 par value bond that pays annual coupons of $100.
If the market rate of interest is 12%, what is the current market value of the bond?
A $1,124.
$887.
$950.
C
Explanation:
Note that bond problems are just mixed annuity problems. You can solve bond problems
directly with your financial calculator using all five of the main TVM keys at once. For bond-
types of problems the bond’s price (PV) will be negative, while the coupon payment (PMT) and
par value (FV) will be positive. N = 10; I/Y = 12; FV = 1,000; PMT = 100; CPT → PV = –886.99.

#6.
If $2,500 were put into an account at the end of each of the next 10 years earning 15% annual
interest, how much would be in the account at the end of ten years?

A $41,965.
$50,759.
$27,461.
C
Explanation:
N = 10; I = 15; PMT = 2,500; CPT → FV = $50,759.

#7.
An investor who requires an annual return of 12% has the choice of receiving one of the
following:

A. 10 annual payments of $1,225.00 to begin at the end of one year.

B. 10 annual payments of $1,097.96 beginning immediately.

Which option has the highest present value (PV) and approximately how much greater is it
than the other option?

A Option A's PV is $42 greater than option B's.

Option B's PV is $27 greater than option A's.
Option B's PV is $114 greater than option A's.
C
Explanation:
Option A: N = 10, PMT = -$1,225, I = 12%, FV = 0, Compute PV = $6,921.52.
Option B: N = 9, PMT = -$1,097.96, I = 12%, FV = 0, Compute PV → $5,850.51 + 1,097.96 =
6,948.17 or put calculator in Begin mode N = 10, PMT = $1,097.96, I = 12%, FV = 0,
Compute PV → $6,948.17. Difference between the 2 options = $6,921.52 − $6,948.17 = -
$26.65.

Option B's PV is approximately $27 higher than option A's PV.

#8. Given a 5% discount rate, the present value of $500 to be received three years from today
is:
A $400.
$432.
$578.
C
Explanation:
N = 3; I/Y = 5; FV = 500; PMT = 0; CPT → PV = 431.92.

or: 500/1.053 = 431.92.

#9. A Treasury bill (T-bill) with a face value of $10,000 and 137 days until maturity is selling for
98.125% of face value. Which of the following is closest to the bank discount yield on the T-bill?
4.93%.
4.56%.
B
5.06%.
C
Explanation:
The formula for bank discount yield is: (D / F) × (360 / t). Actual discount is 1 − 0.98125 =
0.01875. Annualized is: 0.01875 × (360 / 137) = 0.04927

#10. Irene Tucker, CFA, buys ₤2,000 worth of Welch & Morrison PLC shares at the beginning of
each year for four years at prices of ₤100, ₤120, ₤150 and ₤130 respectively. At the end of the
fourth year the price of Welch & Morrison PLC is ₤140. The shares do not pay a dividend.Tucker
calculates her average cost per share as [(₤100 + ₤120 + ₤150 + ₤130) / 4] = ₤125. Tucker
then uses the geometric mean of annual holding period returns to conclude that her time-
weighted annual rate of return is 8.8%. Has Tucker correctly determined her average cost per
share and time-weighted rate of return?
Time-weighted
Average cost
return

A Correct Incorrect

Incorrect Correct

C Correct Correct

Explanation:
Because Tucker purchases shares each year for the same amount of money, she should
calculate the average cost per share using the harmonic mean. Tucker is correct to use the
geometric mean to calculate the time-weighted rate of return. The calculation is as follows:
 Beginning Ending Annual rate
Year
price price of return

1 ₤100 ₤120 20%

2 ₤120 ₤150 25%

3 ₤150 ₤130 −13.33%

4 ₤130 ₤140 7.69%

TWR = [(1.20)(1.25)(0.8667)(1.0769)]1/4 − 1 = 8.78%. Or, more simply, (140/100)1/4 − 1 =

8.78%.

#11. What is the yield on a discount basis for a Treasury bill priced at $97,965 with a face
value of $100,000 that has 172 days to maturity?
A 3.95%.
4.26%.
2.04%.
C
Explanation:
($2,035 / $100,000) × (360 / 172) = 0.04259 = 4.26% = bank discount yield.

#12. The holding period yield of a T-bill that has a bank discount yield of 4.70% and a money
market yield of 4.86% and matures in 240 days is closest to:
A 4.9%.
B 2.8%.
3.2%.

Explanation:
4.86 × (240/360) = 3.24%.

#13.
A Treasury bill has 40 days to maturity, a par value of $10,000, and was just purchased by an
investor for $9,900. Its holding period yield is closest to:

A 1.00%.
1.01%.
9.00%.
C
Explanation:
The holding period yield is the return that the investor will earn if the bill is held until it
matures. The holding period yield formula is (price received at maturity − initial price +
interest payments) / (initial price) = (10,000 − 9,900 + 0) / (9,900) = 1.01%. Recall that when
buying a T-bill, investors pay the face value less the discount and receive the face value at
maturity.

#14.
The financial manager at Mydeo, a farm implement distributor, is contemplating the following
three mutually exclusive projects. Mydeo’s required rate of return is 9.5%. Based on the
information provided, which should the financial manager select and why?

Project Investment at t = Cash Flow at t = IRR NPV @

0 1 9.5%

A $10,000 $11,300 13.00 $320

B $25,000 $29,000 16.00 $1,484

C $35,000 $40,250 15.00 $1,758

Project C with the highest net present value.

All of the projects, because they all earn more than 9.5%.
B
Project A with the lowest initial investment.
C
Explanation:
When projects are mutually exclusive, only one can be chosen. Project selection should be
done on the basis of which project will enhance firm value the most. That project, Project C in
this case, is the one with the highest NPV.

#15. Todd Cruz, CFA, buys 100 shares of Devcast Breweries each year for four years at prices
of C$10, C$12, C$15 and C$13 respectively. Devcast pays a dividend of C$1.00 at the end of
each year. One year after his last purchase he sells all his Devcast shares at C$14. Cruz
calculates his average cost per share as [(C$10 + C$12 + C$15 + C$13) / 4] = C$12.50. Cruz
then uses the internal rate of return technique to calculate that his money-weighted annual
rate of return is 12.9%. Has Cruz correctly determined his average cost per share and money-
weighted rate of return?

Average
Money-weighted
cost return

A Correct Incorrect

Correct Correct
C Incorrect Correct

Explanation:
Because Cruz purchased the same number of shares each year, the arithmetic mean is
appropriate for calculating the average cost per share. If he had purchased shares for the
same amount of money each year, the harmonic mean would be appropriate. Cruz is also
correct in using the internal rate of return technique to calculate the money-weighted rate of
return. The calculation is as follows:

Time Purchase/Sale Dividend Net cash flow

0 -1,000 0 -1,000

1 -1,200 +100 -1,100

2 -1,500 +200 -1,300

3 -1,300 +300 -1,000

4 400 × 14 = +400 +6,000

+5,600

CF0 = −1,000; CF1 = −1,100; CF2 = −1,300; CF3 = −1,000; CF4 = 6,000; CPT → IRR =
12.9452.

#16.
Ozu, Inc., is evaluating the benefits of investing in a new industrial printer. The printer will cost
$28,000 and increase after-tax cash flows by $8,000 during each of the next five years. What
are the respective internal rate of return (IRR) and net present value (NPV) of the printer
project if Ozu’s required rate of return is 11%?

13.20%; $1,567.
17.97%; $5,844.
B
5.56%; −$3,180.
C
Explanation:
IRR Keystrokes: CF0 = -$28,000; CF1 = $8,000; F1 = 5; CPT → IRR = 13.2%.

NPV Keystrokes: CF0 = -$28,000; CF1 = $8,000; F1 = 5; I = 11; CPT → NPV = 1,567.

Since cash flows are level, an alternative is:

IRR: N = 5; PMT = 8,000; PV = -28,000; CPT → I/Y = 13.2%.
NPV: I/Y = 11; CPT → PV = -29,567 + 28,000 = 1,567

#17. If the historical mean return on an investment is 2.0% and the standard deviation is 8.8%,
what is the coefficient of variation (CV)?
A 1.76.
4.40.
6.80.
C
Explanation:
The CV = the standard deviation of returns / mean return or 8.8% / 2.0% = 4.4.

#18. When creating intervals around the mean to indicate the dispersion of outcomes, which of
the following measures is the most useful? The:
A median.
B variance.
standard deviation.

Explanation:
The standard deviation is more useful than the variance because the standard deviation is in
the same units as the mean. The median does not help in creating intervals around the mean.

#19. A portfolio has a return of 14.2% and a Sharpe’s measure of 3.52. If the risk-free rate is
4.7%, what is the standard deviation of returns?
A 3.9%.
2.7%.
2.6%.
C
Explanation:
Standard Deviation of Returns = (14.2% – 4.7%) / 3.52 = 2.6988.

#20. Consider the following set of stock returns: 12%, 23%, 27%, 10%, 7%, 20%,15%. The third
quartile is:
A 20.0%.
23%.
21.5%.
C
Explanation:
The third quartile is calculated as: Ly = (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.

#21. An investor has a $12,000 portfolio consisting of $7,000 in stock A with an expected
return of 20% and $5,000 in stock B with an expected return of 10%. What is the investor’s
expected return on the portfolio?
15.8%.
12.2%.
B
C 15.0%.
Explanation:
Find the weighted mean where the weights equal the proportion of $12,000. (7,000 / 12,000)
(0.20) + (5,000 / 12,000)(0.10) = 15.8%.

#22.
Use the results from the following survey of 500 firms to answer the question.

Number of Frequency
Employees

300 up to 400 40

400 up to 500 62

500 up to 600 78

600 up to 700 101

700 up to 800 131

800 up to 900 88

The frequency of the third class is:

A 180.
78.
156.
C
Explanation:
The third class is 500 - 600 with a frequency of 78.