CFA Investment Foundations questions
with answers.
Investment companies ANS -Companies that exist solely to hold investments on behalf of their
shareholders, partners, or unitholders, including mutual funds, hedge funds, venture capital funds, and
investment trusts.
Futures contract ANS -An agreement that obligates the seller, at a specified future date, to deliver the
buyer a specified underlying in exchange for the specified futures price.
Accrued liabilities ANS -Liabilities related to expenses that have been incurred but not yet paid as of the
end of an accounting period.
Marginal cost ANS -The cost of producing an additional unit of a product or service.
Brokerage services ANS -Trading services provided to clients who want to buy and sell securities; they
include not only executions services (that is, processing orders on behalf of clients) but also investment
advice and research.
Tracking error ANS -The standard deviation of the differences between the deviation over time of the
returns on a portfolio and the returns on its benchmark; a synonym of active risk.
Cash flow rights ANS -The rights of shareholders to distributions, such as dividends, made by the
company.
Risk management ANS -An iterative process that helps organizations reduce the chances and effects of
adverse events while embracing the realization of opportunities.
Cartel ANS -A special case of oligopoly in which a group of producers jointly control the production and
pricing of products or services produced by the group.
,Capitalism ANS -An economic system that promotes private ownership as the means of production and
markers as the means of allocating scarce resources.
Multiplier effect ANS -An initial increase (decrease) in spending produces an increase (decrease) in GDP
and consumption greater than the initial change in spending.
Registers ANS -Documents containing obligations, past actions, and future or outstanding
requirements.
Floating-rate bonds ANS -A bond with a finite life that offers a coupon rate that changes over time. Also
known as variable-rate bonds.
Reinvestment risk ANS -Risk that in a period of falling interest rates, the periodic coupon payments
received during the life of a bond and/or the principal payment received from a lower bond that is called
early must be reinvested at a lower interest rate than the bond's original coupon rate.
Inferior products ANS -Products whose consumption decreases as income decreases.
Interest rate risk ANS -The risk associated with decreases in bond prices resulting from increases in
interest rates.
Income effect ANS -A change in demand for a product or service as a result of a change in purchasing
power.
Zero-coupon bonds ANS -Bonds that do not offer periodic interest payments during the life of the
bond. The only cash flow offered by a zero-coupon bond is a single payment equal to the bond's par
value to be paid on the bond's maturity date.
Proprietary traders ANS -Traders who trade directly with their clients rather than by arranging traders
with others on behalf of their clients.
Bid exchange rate ANS -The exchange rate at which a bank or currency dealer will buy foreign currency.
, Net asset value (NAV) ANS -Total net value of a fund (the value of all assets minus the value of all
liabilities) divided by the fund's current total number of shares outstanding.
Foundations ANS -Grant-making institutions funded by gifts and by the investment income that they
produce.
Endowment funds ANS -Long-term funds owned by non-profit institutions.
Call market ANS -Market in which trades can be arranges only when the market is called, which is
usually once a day.
Rules-based ANS -Regulatory system in which explicit regulations are provided that, in theory, offer
clarity and legal certainty to industry participants.
Supply curve ANS -The curve that shows the quantity of a product or service supplied at different
prices.
London Interbank Offered Rate (Libor) ANS -The most widely used reference rate, defined as the
average interest rate that banks charge each other in the London Interbank market. Also called Libor).
Effective annual rate (EAR) ANS -The amount by which a unit of currency will grow in a year, with
interest on interest included.
Crossing network ANS -Type of alternative trading venue in which an electronic trading system matches
buyers and sellers who are willing to trade at prices obtained from exchanges or other alternative
trading venues but who are concerned about moving the price of the securities by submitting an order
to an exchange.
Back office ANS -Administrative and support functions necessary to run the firm, including account,
human resources, payroll, and operations.
Marginal revenue ANS -The amount of money from selling an additional unit of a product or service.
with answers.
Investment companies ANS -Companies that exist solely to hold investments on behalf of their
shareholders, partners, or unitholders, including mutual funds, hedge funds, venture capital funds, and
investment trusts.
Futures contract ANS -An agreement that obligates the seller, at a specified future date, to deliver the
buyer a specified underlying in exchange for the specified futures price.
Accrued liabilities ANS -Liabilities related to expenses that have been incurred but not yet paid as of the
end of an accounting period.
Marginal cost ANS -The cost of producing an additional unit of a product or service.
Brokerage services ANS -Trading services provided to clients who want to buy and sell securities; they
include not only executions services (that is, processing orders on behalf of clients) but also investment
advice and research.
Tracking error ANS -The standard deviation of the differences between the deviation over time of the
returns on a portfolio and the returns on its benchmark; a synonym of active risk.
Cash flow rights ANS -The rights of shareholders to distributions, such as dividends, made by the
company.
Risk management ANS -An iterative process that helps organizations reduce the chances and effects of
adverse events while embracing the realization of opportunities.
Cartel ANS -A special case of oligopoly in which a group of producers jointly control the production and
pricing of products or services produced by the group.
,Capitalism ANS -An economic system that promotes private ownership as the means of production and
markers as the means of allocating scarce resources.
Multiplier effect ANS -An initial increase (decrease) in spending produces an increase (decrease) in GDP
and consumption greater than the initial change in spending.
Registers ANS -Documents containing obligations, past actions, and future or outstanding
requirements.
Floating-rate bonds ANS -A bond with a finite life that offers a coupon rate that changes over time. Also
known as variable-rate bonds.
Reinvestment risk ANS -Risk that in a period of falling interest rates, the periodic coupon payments
received during the life of a bond and/or the principal payment received from a lower bond that is called
early must be reinvested at a lower interest rate than the bond's original coupon rate.
Inferior products ANS -Products whose consumption decreases as income decreases.
Interest rate risk ANS -The risk associated with decreases in bond prices resulting from increases in
interest rates.
Income effect ANS -A change in demand for a product or service as a result of a change in purchasing
power.
Zero-coupon bonds ANS -Bonds that do not offer periodic interest payments during the life of the
bond. The only cash flow offered by a zero-coupon bond is a single payment equal to the bond's par
value to be paid on the bond's maturity date.
Proprietary traders ANS -Traders who trade directly with their clients rather than by arranging traders
with others on behalf of their clients.
Bid exchange rate ANS -The exchange rate at which a bank or currency dealer will buy foreign currency.
, Net asset value (NAV) ANS -Total net value of a fund (the value of all assets minus the value of all
liabilities) divided by the fund's current total number of shares outstanding.
Foundations ANS -Grant-making institutions funded by gifts and by the investment income that they
produce.
Endowment funds ANS -Long-term funds owned by non-profit institutions.
Call market ANS -Market in which trades can be arranges only when the market is called, which is
usually once a day.
Rules-based ANS -Regulatory system in which explicit regulations are provided that, in theory, offer
clarity and legal certainty to industry participants.
Supply curve ANS -The curve that shows the quantity of a product or service supplied at different
prices.
London Interbank Offered Rate (Libor) ANS -The most widely used reference rate, defined as the
average interest rate that banks charge each other in the London Interbank market. Also called Libor).
Effective annual rate (EAR) ANS -The amount by which a unit of currency will grow in a year, with
interest on interest included.
Crossing network ANS -Type of alternative trading venue in which an electronic trading system matches
buyers and sellers who are willing to trade at prices obtained from exchanges or other alternative
trading venues but who are concerned about moving the price of the securities by submitting an order
to an exchange.
Back office ANS -Administrative and support functions necessary to run the firm, including account,
human resources, payroll, and operations.
Marginal revenue ANS -The amount of money from selling an additional unit of a product or service.
