CFA II Practice Problem || errorless answers 100%.
Neoclassical growth theory concludes that capital accumulation affects the correct answers
Neoclassical growth theory concludes that capital accumulation affects the level of output but not
the long-run growth rate.
The objectives of regulators in financial markets include correct answers The objectives of
regulators in financial markets include
(1) prudential supervision,
(2) financial stability,
(3) market integrity, and
(4) economic growth.
Low inflation is likely to be an objective of the central bank.
Reclassifying an amortized cost security to FVPL involves correct answers Reclassifying an
amortized cost security to FVPL involves stating the investment on the balance sheet at fair value
and recognizing the difference in the fair value and the carrying value in the income statement
Full GW method correct answers Consider the value 100% ownership i.e. pro rata value if the
company was acquired 100%. Compare buying price with current fair value.
Partial GW method correct answers Compare the buying price (the price you paid for particular
ownership) with the FV of the same ownership
,I.e. if acquire 60% - then have to compare with 60% of the fair value
GW Impairment GAAP correct answers FV vs Carrying Value
Impaired if FV < CV
GW Impairment IFRS correct answers Recoverable amount vs carrying value
Impaired if RA < CV
When applying the financial analysis framework to Delicious, which of the following is the best
example of an input Scott should use when establishing the purpose and context of the analysis?
correct answers Review of the pension fund's guidelines related to developing the specific work
product.
The institutional guidelines related to developing the specific work product is an input source in
the first phase (defining the purpose and context of the analysis). Audited financial statements
are an example of an input in the data collection phase. Ratio analysis is an example of the
output from the data processing phase
High quality cash flow is most likely to be characterized by: correct answers positive OCF that
covers capital expenditures, dividends and debt repayments.
Using the data found in Exhibit 1 and Exhibit 4, Delicious's implied P/E multiple without regard
to its U.S. associate is closest to: correct answers Delicious's implied value without its U.S.
associate is €90,736 [€97,525 Delicious market cap − €6,789 share of associate's market cap
($32,330 × 30% × €0.70 / $ current exchange rate)].
Delicious's net income without associate is €6,147 (€6,501 net income − €354 pro-rata share of
income from associate).
,Implied P/E = 14.8 (€90,736 Delicious implied value without associate / €6,147 Delicious net
income without associate).
Evaluate Swift's comments regarding multicollinearity and predictive power. Which of the
following comments is correct? correct answers Swift has correctly stated that if
multicollinearity is present in a model, the interpretation of the individual regression coefficients
becomes problematic. The existence of multicollinearity is generally signaled by a high R-
squared value and low t-statistics on the regression coefficients. The t-stat for the coefficients for
payout ratio, g, and ROE can be calculated as (8..52) = 1.26, (14..24) = 1.54, and
(2..10) = 1.34, respectively. Note that all of these t-stats are well below the approximate
critical value of 2, indicating they are statistically insignificant. With the high R-squared of 81%
and insignificant t-stats, it appears that multicollinearity is indeed present in this model. Swift's
comment regarding predictive power is incorrect. Cross-sectional regressions have unknown
predictive power outside the specific sample and time period used to generate the regression.
Swap curve is more commonly used among correct answers Wholesale banks than retail banks;
retail banks normally use the government yield curve.
Z-Spread correct answers Z-spread: Calculated as the constant basis point spread added to the
implied spot yield curve so that the discounted cash flows of a bond equal its market price. For a
risky bond, the Z-spread is a more accurate measure of compensation for credit and liquidity risk
than the swap spread.
LIBOR-OIS Spread correct answers LIBOR-OIS spread: Calculated as the difference between
LIBOR and the overnight indexed swap rate. It is considered a good indicator of the risk and
liquidity inherent in the money markets
SWAP vs TED correct answers The swap spread gives more information about supply and
demand conditions in the market at a given maturity, whereas the TED spread more accurately
reflects the level of risk in the banking system.
TED Spread correct answers The TED spread is the difference between the three-month Treasury
bill and the three-month LIBOR based in U.S. dollars. To put it another way, the TED spread is
, the difference between the interest rate on short-term U.S. government debt and the interest rate
on interbank loans.
The TED spread is the difference between the three-month LIBOR and the three-month Treasury
bill rate.
The TED spread is commonly used as a measure of credit risk, as U.S. Treasury bills are seen as
risk-free.
The TED spread often widens in periods of economic crisis, as the default risk widens; the
spread narrows when the economy is more stable and defaults are less of a risk.
Option-Adjusted Spread (OAS) correct answers OAS = Z-spread - Option value (in basis points
per year).
The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security
rate and the risk-free rate of return, which is then adjusted to take into account an embedded
option. Typically, an analyst uses Treasury yields for the risk-free rate. The spread is added to the
fixed-income security price to make the risk-free bond price the same as the bond.
The option-adjusted spread (OAS) measures the difference in yield between a bond with an
embedded option, such as an MBS or callables, with the yield on Treasuries.
Embedded options are provisions included with some fixed-income securities that allow the
investor or the issuer to do specific actions, such as calling back the issue.
Using historical data and volatility modeling, OAS considers how a bond's embedded option can
change the future cash flows and thus the overall value of the bond.
"...I would suggest one area you could look at improving is the portion on term structure
theories. Personally I would remove the theory stating that lenders and borrowers influence the
Neoclassical growth theory concludes that capital accumulation affects the correct answers
Neoclassical growth theory concludes that capital accumulation affects the level of output but not
the long-run growth rate.
The objectives of regulators in financial markets include correct answers The objectives of
regulators in financial markets include
(1) prudential supervision,
(2) financial stability,
(3) market integrity, and
(4) economic growth.
Low inflation is likely to be an objective of the central bank.
Reclassifying an amortized cost security to FVPL involves correct answers Reclassifying an
amortized cost security to FVPL involves stating the investment on the balance sheet at fair value
and recognizing the difference in the fair value and the carrying value in the income statement
Full GW method correct answers Consider the value 100% ownership i.e. pro rata value if the
company was acquired 100%. Compare buying price with current fair value.
Partial GW method correct answers Compare the buying price (the price you paid for particular
ownership) with the FV of the same ownership
,I.e. if acquire 60% - then have to compare with 60% of the fair value
GW Impairment GAAP correct answers FV vs Carrying Value
Impaired if FV < CV
GW Impairment IFRS correct answers Recoverable amount vs carrying value
Impaired if RA < CV
When applying the financial analysis framework to Delicious, which of the following is the best
example of an input Scott should use when establishing the purpose and context of the analysis?
correct answers Review of the pension fund's guidelines related to developing the specific work
product.
The institutional guidelines related to developing the specific work product is an input source in
the first phase (defining the purpose and context of the analysis). Audited financial statements
are an example of an input in the data collection phase. Ratio analysis is an example of the
output from the data processing phase
High quality cash flow is most likely to be characterized by: correct answers positive OCF that
covers capital expenditures, dividends and debt repayments.
Using the data found in Exhibit 1 and Exhibit 4, Delicious's implied P/E multiple without regard
to its U.S. associate is closest to: correct answers Delicious's implied value without its U.S.
associate is €90,736 [€97,525 Delicious market cap − €6,789 share of associate's market cap
($32,330 × 30% × €0.70 / $ current exchange rate)].
Delicious's net income without associate is €6,147 (€6,501 net income − €354 pro-rata share of
income from associate).
,Implied P/E = 14.8 (€90,736 Delicious implied value without associate / €6,147 Delicious net
income without associate).
Evaluate Swift's comments regarding multicollinearity and predictive power. Which of the
following comments is correct? correct answers Swift has correctly stated that if
multicollinearity is present in a model, the interpretation of the individual regression coefficients
becomes problematic. The existence of multicollinearity is generally signaled by a high R-
squared value and low t-statistics on the regression coefficients. The t-stat for the coefficients for
payout ratio, g, and ROE can be calculated as (8..52) = 1.26, (14..24) = 1.54, and
(2..10) = 1.34, respectively. Note that all of these t-stats are well below the approximate
critical value of 2, indicating they are statistically insignificant. With the high R-squared of 81%
and insignificant t-stats, it appears that multicollinearity is indeed present in this model. Swift's
comment regarding predictive power is incorrect. Cross-sectional regressions have unknown
predictive power outside the specific sample and time period used to generate the regression.
Swap curve is more commonly used among correct answers Wholesale banks than retail banks;
retail banks normally use the government yield curve.
Z-Spread correct answers Z-spread: Calculated as the constant basis point spread added to the
implied spot yield curve so that the discounted cash flows of a bond equal its market price. For a
risky bond, the Z-spread is a more accurate measure of compensation for credit and liquidity risk
than the swap spread.
LIBOR-OIS Spread correct answers LIBOR-OIS spread: Calculated as the difference between
LIBOR and the overnight indexed swap rate. It is considered a good indicator of the risk and
liquidity inherent in the money markets
SWAP vs TED correct answers The swap spread gives more information about supply and
demand conditions in the market at a given maturity, whereas the TED spread more accurately
reflects the level of risk in the banking system.
TED Spread correct answers The TED spread is the difference between the three-month Treasury
bill and the three-month LIBOR based in U.S. dollars. To put it another way, the TED spread is
, the difference between the interest rate on short-term U.S. government debt and the interest rate
on interbank loans.
The TED spread is the difference between the three-month LIBOR and the three-month Treasury
bill rate.
The TED spread is commonly used as a measure of credit risk, as U.S. Treasury bills are seen as
risk-free.
The TED spread often widens in periods of economic crisis, as the default risk widens; the
spread narrows when the economy is more stable and defaults are less of a risk.
Option-Adjusted Spread (OAS) correct answers OAS = Z-spread - Option value (in basis points
per year).
The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security
rate and the risk-free rate of return, which is then adjusted to take into account an embedded
option. Typically, an analyst uses Treasury yields for the risk-free rate. The spread is added to the
fixed-income security price to make the risk-free bond price the same as the bond.
The option-adjusted spread (OAS) measures the difference in yield between a bond with an
embedded option, such as an MBS or callables, with the yield on Treasuries.
Embedded options are provisions included with some fixed-income securities that allow the
investor or the issuer to do specific actions, such as calling back the issue.
Using historical data and volatility modeling, OAS considers how a bond's embedded option can
change the future cash flows and thus the overall value of the bond.
"...I would suggest one area you could look at improving is the portion on term structure
theories. Personally I would remove the theory stating that lenders and borrowers influence the
