CFA Foundations Trouble Questions with correct Answers

Q. Which objective of documentation is fulfilled when documents ensure thoroughness and consistency of action, thus allowing a company to function more efficiently and effectively? - Answer- Organizing. B is correct. Organising is the objective of documentation that is fulfilled when documents ensure thoroughness and consistency of action, thus allowing a company to function more efficiently and effectively. A is incorrect because educating is achieved when documents inform or provide instruction. C is incorrect because formalising is achieved when documents establish roles, deliverables, and obligations. Q. An employee handbook that outlines travel reimbursement guidelines is best classified as a(n): - Answer- C is correct. An employee handbook that outlines travel reimbursement guidelines is an associated document that employees would refer to in order to determine which travel expenses may or may not be reimbursed. A is incorrect because an ad hoc document is typically informal. Because an employee handbook usually describes policies and procedures, it is more likely to be a standardised document rather than an ad hoc document. B is incorrect because a derived document comes into existence because of other documents. In this context, an expense claim form would be a better example of a derived document. Q. The CFA Institute Code of Ethics requires members to: protect clients' interests at all times and in all situations. encourage competitors to increase their levels of competence. ensure investment recommendations are similar across an industry. - Answer- B is correct. The CFA Institute Code of Ethics requires CFA Institute members and candidates to maintain and improve their professional competence and even strive to improve the competence of others in the investment field. A is incorrect. An investment professional must put the interests of preserving the integrity of the market before a client's interests if the client's actions will harm the market. C is incorrect. The Code of Ethics does not require investment recommendations to be similar across an industry. It does require investment professionals to use independent judgment when making investment recommendations. Q. An employee is assigned a complicated task by her supervisor but believes she does not have the technical skills to carry it out. The employee should: refuse to carry out the assignment. carry out the work as best as she can. get a co-worker to do it and take credit for the work. - Answer- A is correct. Employees are expected to carry out their work with competence and care. If an employee cannot do so because she lacks the necessary skill set, she should refuse the assignment until such time that she develops the needed skills. A co-worker can help with the assignment, but the employee should not take credit for work done by others. B is incorrect. The employee should not carry out the assignment without the proper skill set as he has an obligation to work with competence and care. C is incorrect. A co-worker can help with the assignment but the employee should not take credit for work done by others. Q. Regulators often seek public consultation prior to the implementation of new regulations in order to: educate consumers and service providers on the new rules. improve the final rules by undertaking a cost-benefit analysis. ensure that the new rules are favourable to those likely to be affected. - Answer- B is correct. When drafting new regulations or rules, a regulator will often seek comments from the public on costs, benefits, and suggested alternative rules prior to implementation in order to improve the quality of the final rules and to ensure that the benefits of the final rules outweigh the costs of their implementation. Q. Regulators help capital markets do all of the following except: reduce investment risk. allocate capital to productive use. ensure investors are treated equally. - Answer- C is correct. Regulators ensure that investors are treated fairly but not equally. Investors have different risk and return requirements so they should not all be treated the same. Regulators also help to reduce investor risk and facilitate an efficient market for capital to be raised by companies for productive use through the implementation of guidelines, rules, and regulations. A is incorrect because regulators help to reduce investor risk through the implementation of guidelines, rules and regulations. B is incorrect because regulators facilitate an efficient market for capital to be raised by companies for productive use through the implementation of guidelines, rules and regulations. Q. The broadest-based measure of a nation's inflation rate is provided by the: implicit GDP deflator. consumer price index (CPI). producer price index (PPI). - Answer- A is correct. The implicit GDP deflator is the current dollar GDP divided by constant dollar GDP and is the broadest-based measure of a nation's inflation rate. B is incorrect. CPI measures the price change from year to year of a typical basket of goods purchased by consumers. C is incorrect. PPI measures the average selling price of goods in the economy received by producers. Unlike CPI it includes investment goods but excludes services. Q. A US merchant purchases wine from a vineyard outside of Paris. The wine is transported to the United States on a Canadian ship. The Canadian ship is insured by an insurance company incorporated in England. An export would be reported by: France only. France, England, and Canada. United States, France, England, and Canada. - Answer- B is correct. Exports are goods and services that a domestic economy sells to other countries. In the international accounts, France is recorded as the seller of the wine; Canada is recorded as the provider of transportation services for the wine; and England is recorded as the provider of insurance services for the Canadian ship. A is incorrect. Transportation and insurance are services which are provided by (households, firms or governments of) one country for similar entities in another country. C is incorrect. The United States engaged in international trade, but as an importer in this example. Q. An investor is deciding between two projects, both of which have an initial cost of £5,000. One project will return £10,000 in three years with a 5% discount rate and the other project will return £9,500 in two years with a 3% discount rate. The investor determines the first project is worth £8,638 today, whereas the second project is worth £8,955 today, and he determines to invest in the second project. In deciding between the projects, the investor is most likely using the: future value. present value. net present value. - Answer- B is correct. In deciding between the two projects, the investor determines the present value, or value today, of each project based on the future return, discount rate, and number of periods. A is incorrect. The future value is the expected return, the investor decides which project to invest in based on the value today rather than the expected return. C is incorrect. The investor uses the present value without consideration for the cost of the project, and so doesn't use the net present value. Q. A company that wants to convert fixed-rate interest payments on an outstanding loan to floating-rate interest payments will most likely enter into which of the following interest rate swaps? Basis interest rate swap Pay floating-rate interest and receive fixed-rate interest Pay fixed-rate interest and receive floating-rate interest - Answer- B is correct. By entering into a pay floating, receive fixed interest rate swap, the company can convert its fixed-rate interest obligation to a floating-rate interest payment. The fixed rate received on the swap can be used to make the fixed-rate interest payment on the outstanding loan. The net effect is that the company now makes a floating-rate interest payment. A is incorrect. A basis interest rate swap involves swapping floating rate payments with different bases. This swap will not convert the fixed rate obligation to a floating rate payment. C is incorrect. The directions of the floating and fixed interest payments have been reversed. Q. A fee-only investment adviser receives payments only from: clients. sales commissions. investment companies. - Answer- A is correct. Fee-only investment advisers accept payment only from clients, so they do not have an incentive to generate commissions by recommending certain products. B is incorrect. An investment advisor who is paid a salary or bonus by his employer is not fee-only. C is incorrect. An investment advisor who is paid commissions by investment companies for recommending investment products to his clients is not fee-only. Q. Compared with direct investments, indirect investments allow individual investors to: exercise more control over the underlying investments. choose when to buy or sell the underlying investments to minimise tax liabilities. obtain the services of professional managers that they could not otherwise afford. - Answer- C is correct. Indirect investments allow individual investors to obtain the services of professional managers that they could not otherwise afford. A is incorrect. Direct investments exercise more control over their investments B is incorrect. Direct investments would be better for tax minimisation Q. One advantage of commingled accounts over separate accounts is that: all investors earn equal returns. they are suitable for investors with different cash flow needs. the departure of an investor does not affect the tax status of other investors in the account. - Answer- A is correct. Commingled accounts do provide all investors with equal returns because the investors share ownership of a single account. B is incorrect. If the investments are pooled in a commingled account it is not possible to meet different investor's differing cash flow needs. C is incorrect. The departure of one investor can affect the tax status of others if assets must be sold to pay out the departing investor. Q. A company seeking to raise additional capital following its initial public offering will most likelyissue securities in the: dealer market. primary market. secondary market. - Answer- B is correct. The primary market is where issuers sell their securities to investors in order to raise cash. An initial public offering occurs when a company issues shares to the public for the first time. Subsequent issuances are known as seasoned offerings. A is incorrect. Dealers are proprietary traders who fill their clients' orders by trading with them. No cash is raised for issuers in the dealer markets. C is incorrect. In a secondary market, investors trade with each other but not with the original security issuer. No cash is raised for issuers in secondary markets. Q. In the "assess and prioritise risks" stage of the risk management process, the rationale for selecting key risk measures should include: historical success of key risk measures. compiling data from various internal and external sources. developing a reactive and preventive risk management function. - Answer- B is correct. Compiling data from various internal and external sources is a rationale for selecting key risk measures. A is incorrect because the rationale for selecting key risk measures is that they are proactive and predictive not based on historical success. C is incorrect because selecting key risk measures is very important for the risk management function to be proactive and predictive. Key risk measures should give warnings when risk levels are rising. They require collecting and compiling data from various internal and external sources. Developing a reactive and preventive risk management function is not one of them. Q. A document that provides the precise instructions for the actions necessary to achieve a desired outcome is most likely a: policy document. process document. procedure document. - Answer- B is correct. A process document provides precise instructions for the actions necessary to achieve a desired outcome. Policy and procedure documents generally do not provide very specific instructions. A is incorrect. Policy and procedure documents generally do not provide very specific instructions. C is incorrect. Policy and procedure documents generally do not provide very specific instructions. Q. Documents facilitating a regular review process that contain obligations, past actions, and future or outstanding requirements are called: registers. fact sheets. activity reports. - Answer- A is correct. The regular review process is often managed by the use of registers, which are documents containing obligations and past actions as well as future or outstanding requirements. B is incorrect. Fact sheets of the firm's products that provide short summaries of the investment, typically detailing historical performance. C is incorrect. Activity reports do not help facilitate regular review processes that contain obligations, past actions, and future or outstanding requirements. Q. Regulation helps to reduce the risk of systemic financial market failure caused by: increasing levels of debt funding and interconnectivity among industry participants. companies failing to transfer financial risk to the buyers of corporate debt. the decreasing availability of investment-grade corporate debt traded in global financial markets. - Answer- A is correct. Systemic failure of financial markets is caused by the higher proportion of debt funding used in the financial services industry and the interconnections among industry participants. B is incorrect. Systemic failure of financial markets is caused by the higher proportion of debt funding used in the financial services industry and the interconnections between industry participants. C is incorrect. Systemic failure of financial markets is caused by the higher proportion of debt funding used in the financial services industry and the interconnections between industry participants. Q. A natural monopoly is most likely characterised by: many close substitutes. little freedom in setting prices. modest capital investment requirements. - Answer- B is correct. Natural monopolies are usually highly regulated and have little freedom in setting prices. A is incorrect. Natural monopolies, as is the case for all monopolies, have few, if any, substitutes. C is incorrect. Natural monopolies, e.g., utilities, usually require substantial capital investments. Q. Compared with GDP calculated using the expenditure approach, gross domestic income will most likely be: lower. higher. the same. - Answer- C is correct. Calculating GDP by using the expenditure approach involves summing expenditures on goods and services by consumers, businesses, governments, and net exports (i.e., exports minus imports). Gross domestic income is the term given to the estimation of total output (GDP) found by summing all incomes—that is, the income approach. GDP calculated by using the expenditure approach and the income approach should result in the same value because what one economic entity spends is another economic entity's income. A is incorrect. GDP by the income and expenditure approach should be the same. B is incorrect. GDP by the income and expenditure approach should be the same. Q. An analyst notes that the following economic conditions currently exist: Businesses are replacing obsolete equipment. Consumers who had previously postponed the purchase of household items are beginning to make those purchases. Interest rates and inflation are low. The business cycle is most likely: at a peak. in a trough. in an expansion. - Answer- B is correct. Low inflation and interest rates, along with the commencement of previously delayed investment and consumer spending, are characteristics of a trough. A is incorrect. Inflation and interest rates are high at an economic peak; both are low at a trough. C is incorrect. During an expansion, inflation and interest rates both rise. Unemployment drops, consumers are confident and spend, while companies faced with increased demand commit to capital investments. Q. In a recent release of economic indicators, personal income rose for the first time in nine months. An analyst will most likely conclude that the economy in the immediate future should be: weaker. stronger. unaffected. - Answer- C is correct. Personal income is a coincident indicator, changing at the same time as the economy, and it has no predictive value for the immediate future state of the economy. A is incorrect. Personal income is a coincident indicator with no predictive ability of the future state of the economy. B is incorrect. Personal income is a coincident indicator with no predictive ability of the future state of the economy. Q. According to the monetarist view of inflation, there is a relationship between inflation and the: money supply. cost of production. level of unemployment. - Answer- A is correct. According to the monetarist view of inflation, the supply of money dictates the demand for products, and thus inflation is driven by the money supply. If the supply of money is large, then more funds chase the same amount of goods, and prices are pushed higher, leading to inflation. B is incorrect. Both the availability and utilisation of labour and capital are the factors that give rise to inflation under the resource slack view: shortages lead to higher production costs which eventually are passed on to consumers in the form of higher prices. C is incorrect. Both the availability and utilisation of labour and capital are the factors that give rise to inflation under the resource slack view: shortages lead to higher production costs which eventually are passed on to consumers in the form of higher prices. Q. Three parents are discussing the allowances that they give to their 10-year-old sons. Although each child receives a total of $520 per year, the manner in which the payments are made differs: Jack gives his son $10 per week. Bill gives his son $400 on January 1 and the remaining $120 on December 31. Brian gives his son half ($260) on January 1 and the other half on July 1. The parent(s) whose payment system can be described as an annuity is (are): only Jack. both Jack and Brian. all three, because all provide the same annual amount. - Answer- B is correct. An annuity is a series of payments in which each periodic payment is the same: Jack provides an annuity of $10 per week for 52 weeks, and Brian provides an annuity of two semiannual payments, each for $260. A is incorrect. Brian's payments also qualify as an annuity of 2 semi-annual periods with $260/period C is incorrect. Bill's payments are not all the same and hence not an annuity. Q. In an amortising mortgage, which of the following portions of the fixed payment decreases with the passage of time? Interest only Principal only Both interest and principal - Answer- A is correct. In an amortising mortgage, each periodic payment is the same (fixed), but the interest paid each period is based on the principal remaining at the start of that period. From the payment, interest is paid first and the remainder of the payment pays down principal. As some principal is repaid each period, the amount of interest decreases over time and more of each future payment goes toward repaying principal. B is incorrect. As time goes on, principal is repaid, the interest component falls and the repayment of principal increases. C is incorrect. In a mortgage, each periodic payment is the same (fixed). Q. A Treasury security is most likely issued by: the US government. any central government. the treasury function of large corporations. - Answer- A is correct. Bonds issued by the US government are called Treasuries. B is incorrect because Treasuries are only issued by the US government. C is incorrect because Treasuries are only issued by the US government. Q. The risk that coupon payments might have to be invested at a rate that reflects current market conditions is called: liquidity risk. interest rate risk. reinvestment risk. - Answer- C is correct. Reinvestment risk refers to the fact that in a period of falling interest rates, the coupon payments received during the life of a bond and/or the principal payment received from a bond that is called early must be reinvested at a lower interest rate than the bond's original coupon rate. A is incorrect because the type of risk described is reinvestment risk. B is incorrect because the type of risk described is reinvestment risk. Q. The way in which an investor is protected from higher inflation in an inflation-linked bond is through: an adjustment to the coupon rate. an adjustment to the principal. an adjustment to the principal and coupon. - Answer- B is correct. For most inflation-linked bonds, the par value—not the coupon rate—of the bond is adjusted at each payment date to reflect changes in inflation, usually measured via a consumer price index. A is incorrect because the principal is adjusted. C is incorrect because the principal is adjusted. Q. The sales and client relations department most likely exists: only in a buy-side firm. only in a sell-side firm. in both sell-side and buy-side firms. - Answer- C is correct. The main departments of buy-side and sell-side firms are similar. Thus, the sales and client relations department is likely to exist in both buy-side and sell-side firms. A is incorrect. The main departments of buy-side and sell-side firms are similar. Thus, the sales and client relations department is likely to exist in both buy-side and sell-side firms. B is incorrect. The main departments of buy-side and sell-side firms are similar. Thus, the sales and client relations department is likely to exist in both buy-side and sell-side firms. Q. At which stage in the trading process is cash exchanged for securities between parties in a given security trade? Clearing Settlement Confirmation - Answer- B is correct. Settlement is when cash and securities are exchanged between parties. Q. A market in which investors trade with dealers at the prices quoted by dealers is called a(n): brokered market. order-driven market. price-driven market. - Answer- C is correct. A price-driven, or quote-driven, market is one in which investors trade with dealers at the prices quoted by dealers. A is incorrect. Brokered markets are where brokers arrange trades between clients B is incorrect. In an order-driven market a broker uses rules to arrange trades based on orders that are submitted. Q. An organisation's travel policy document is an example of a(n): derived document. original document. associated document. - Answer- C is correct. An organisation's travel policy document is an associated document. A is incorrect. The expense claim form the employee has to fill upon her return is a derived document. B is incorrect. The taxi receipts are the original documents.