Topic: Ethics

1. Pele, CFA, works for Mooney Capital and serves as the lead Financial advisor
for Paul Industries’ employee pension program. The CEO of Paul, Michael
Hussey, asks Pele to purchase Paul’s stock in the open market for the
employee plan in effort to dissuade Water Enterprise’s attempted hostile
takeover of Paul. While Pele believes the stock to be overvalued, he does so
to maintain the company’s good favour and to maintain a soft-dollar research
arrangement with Gavin Securities, a subsidiary of Paul. Are Pele and
Michael in violation of the Standards of Practice?
A. Pele violated Standard III (A) Loyalty, Prudence, and Care, and Michael
violated Standard II(B) Market Manipulation
B. Pele violated Standard III (A) Loyalty, Prudence, and Care, and Michael
C. Pele violated Standard V(A) Diligence and Reasonable Basis, and Michael
violated Standard III (A) Loyalty, Prudence, and Care
The correct answer is B. Pele has a responsibility to the employees and
retirees of the pension program, not Paul management. Michael is not a CFA
and Standards are not applicable

2. Nick, a CFA, has recently joined as an equity research analyst at Pringston

Securities. He recreates the analysis documentation supporting his
recommendation using publicly available information, information given by
new company and whatever information he could retain in his memory. He
maintained research records for a period of 7 year earlier because his
previous firm required a record retention of 7 years. At Pringston there is no
regulatory standard, so he maintains a record retention of only 6 years. Has
he violated any standards?
A. Yes, he has violated Standard V(C) Record retention for relying on his
memory for recreating the analysis documentation supporting his
recommendation. He can maintain 6-year record retention if there is no
regulatory standard.
B. Yes, he violated Standard V(C) Record retention because he relied on his
memory for recreating the analysis documentation supporting his
recommendation. Also, because in case of no regulatory standard, CFA
Institute recommends at least 7-year holding period.
C. Yes, he violated Standard V(C) Record retention because in case of no
regulatory standard, CFA Institute recommends at least 7-year holding
period. He can rely on his memory for recreating the analysis
documentation supporting his recommendation.

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The correct answer is B. Yes, he violated Standard V(C) Record retention
because he relied on his memory for recreating the analysis documentation
supporting his recommendation. Also, because in case of no regulatory
standard, CFA Institute recommends at least 7-year holding period

Quantitative Methods

1. When Alan hears that a baseball loving friend is coming to visit, he purchases
two premium seating tickets for $45 per ticket for an evening game. As the
date of the game approaches, Alan's friend telephones and says that his trip
has been cancelled. Fortunately for Alan, the tickets he holds are in high
demand as there is chance that the leading Major League Baseball hitter will
break the home run record during the game. Seeing an opportunity to earn a
high return, Alan puts the tickets up for sale on an internet site. The auction
closes at $150 per ticket. After paying a 10% commission to the site (on the
amount of the sale) and paying $8 total in shipping costs, Alan's holding
period return is approximately:
A. 191%.
B. 182%.
C. 202%.
The correct answer is A. The holding period return is calculated as: (ending price −
beginning price +/any cash flows) / beginning price. Commission of $30 (0.10 × 150
× 2 tickets) and the shipping cost of $8 (total for both tickets). Thus, her holding
period return is: (2 × 150 − 2 × 45 − 30 − 8) / (2 × 45) = 1.91, or approximately 191%.

2. Lilly and Lara borrowed $150,000 to finance their vacation. The monthly
payment loan has a term of seven years and a 14% interest rate. The amount
of interest in first EMI and the amount of principal in second EMI are
approximately:
A. $16,500; $14,680.
B. $14,680; $17,020.
C. $16,500; $17,020.
The correct answer is C. Step 1: Calculate the annual payment. PV = 150,000; FV
= 0; I/Y = 11; N = 7; PMT = $31,830Step 2: Calculate the portion of the first payment
that is interest. Interest = Principal × Interest rate = (150,000 × 0.11) = 16,500Step 3:
Calculate the portion of the second payment that is principal. Principal = Payment −
Interest = 31,830 – 16,500 = 15,330 (interest calculation is from Step 2) Interest =
Principal remaining × Interest rate = [(150,000 – 15,330) × 0.11] = 14,810Principal =
Payment − Interest = 31,830 – 14,810 = 17,020

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FRA

1. ING prepares its financial statements under IFRS. On December 31, 2008,
ING has inventory of manufactured goods with a cost of $720,000. The
estimated selling cost of that inventory is $50,000 and its market value is
$740,000. By January 31, 2009, none of the inventory has been sold but its
market value has increased to $810,000. Selling costs remain the same.
Which of the following entries is most likely permissible under IFRS?
A. Make no adjustments to the valuation of inventory on either date.
B. Write down inventory by $30,000 on December 31, 2008 and write up
inventory by $70,000 on January 31, 2009.
C. Write down inventory by $30,000 on December 31, 2008 and write up
inventory by $30,000 on January 31, 2009.
The correct answer is C. IFRS rules require inventory to be valued at the lower of
cost or net realizable value (NRV). NRV is calculated as estimated sales price less
estimated selling costs. At December 31, 20X8, NRV = $740,000 − $50,000 =
$690,000. Since cost is $720,000, then the lower of cost or NRV is $690,000 and a
$30,000 write down is required. At January 31, 20X9, NRV = $810,000 − $50,000 =
$760,000. Under IFRS, when inventory recovers in value after being written down, it
may be "written up" and a gain recognized in the income statement. The amount of
such gain, however, is limited to the amount previously recognized as a loss. Under
IFRS it is not permissible to report inventory on the balance sheet at an amount that
exceeds original cost, except in the case of some agricultural and mineral products.
Since cost is $720,000, the lower of cost of NRV is $720,000.

2. Ionex's stock transactions during the year 2004 were as follows: January 1
720,000 shares issued and outstanding May 1 2 for 1 stock split occurred
What was Ionex's weighted average number of shares outstanding during
2004, for earnings per share (EPS) computation purposes?
D. 1,440,000.
E. 1,500,000.
F. 1,666,667.
The correct answer is A. The January 1 balance is adjusted retroactively for the
stock split and (720,000 × 2 =) 1,440,000 shares are treated as outstanding from
January.

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 3. What is the difference between the direct and the indirect method of
calculating cash flow from operations?
A. Balance sheet items are not included in the cash flow from operations for
the direct method, while they are included for the indirect method.
B. The indirect method starts with gross income and adjusts to cash flow from
operations, while the direct method starts with gross profit and flows
through the income statement to calculate cash flows from operations.
C. The direct method starts with sales and follows cash as it flows through
the income statement, while the indirect method starts with net income and
adjusts for noncash charges and other items.
The correct answer is C. The main difference between the direct and indirect
methods of calculating cash flows is the way that cash flow from operations is
calculated. The direct method starts with sales and follows cash as it flows through
the income statement, while the indirect method starts with income after taxes and
adjusts backwards for noncash and other items. Both methods will have the same
result for operating cash flows. The direct and indirect method calculates the
financing and investing cash flows the same way and both methods will result in the
same cash flow figure.

Corporate Finance
1) Two competitor’s capital structure is as below
Competitor Debt (in millions) Equity (in millions)
A 30 40
B 50 30

If the company is to determine the capital structure basis competitors, what would
be its weight of equity in the capital structure?
A. 37%
B. 47%
C. 57%

The correct answer is B. Weight of equity for competitor A = 40/(30+40) = 57%.

Weight of equity for competitor B = 30 /(30+50) = 37%. Average = (37%+57%)/2
= 47%

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Fixed Income
1. A corporate bond with a 4.25% coupon is priced at $104.03. This bond's
duration and reported convexity are 5.3 and 0.325. If the bond's credit spread
widens by 75 basis points due to a credit rating downgrade, the impact on the
bondholder's return is closest to:
A. −3.96%.
B. −3.89%.
C. +4.05%.
The correct answer is B. Return impact ≈ −(Duration × ΔSpread) + (1/2) ×
(Convexity × (ΔSpread))≈ −(5.3 × 0.0075) + (1/2) × 32.5 × (0.0075)≈ −0.0398 +
0.0009≈ −0.0389 or 3.89%

Derivatives
1. An investor buys 5 calls on Stock ABC with a strike price of $10 for a price of
$1 per call. Three months later, Stock ABC is trading for $15 per share. Each
call entitles the owner to buy 2 shares of Stock ABC. What is the investor's
net profit?
A. $45.
B. $20.
C. $0.
The correct answer is A ($15 - $10) × (5 × 2) - ($1 × 5 calls). The gross payoff is (15
- 10) × 10 = $50. The net profit is $50 - price of calls ($5) = $45.

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Portfolio Management

1. From the following information calculate the expected rate of return:

Covariance between the assets returns and returns on the market =
0.09216Standard deviation on market returns = 32% Market risk premium =
25% Risk free rate = 8%
A. 30.5%
B. 23.3%
C. 15.2%
The correct answer is A. Expected rate of return = 8 + (25) *0.09216/(0.32*0.32) =
30.5%

Alternative Investment
1. Which of the following statements with respect to investment companies is
(are) true? I. Shares of a closed-end fund may only be bought from the
issuing company. II. Load funds sell at a premium over the fund's NAV.
However, they may only be redeemed at the fund's NAV.III. Load funds are
generally bought through brokers.
A. II and III only
B. III only
C. I and II only
The correct answer is A. Choice I is not entirely true. At first, the company issues
closed-end units; however, the shares may be traded among shareholders
afterwards without affecting the issuing company.

Economics
1. Real GDP for the year 2010 is $2.9 billion. Nominal GDP for the same year is
$3.2 billion. Nominal GDP had increased by $0.3 billion in 2010 as compared
to 2009. Real GDP in 2005 was $2.1 billion. Calculate the compound annual
growth rate in real GDP from 2005 to 2009. The GDP deflator for year 2010
was same as that of 2009.
A. 5.79%
B. 4.86%
C. 4.02%

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The correct answer is A. GDP deflator = (3.2 * 100) / 2.9 = 110.3 Nominal GDP in
2009 = 3.2 billion - 0.3 billion = $2.9 billion Real GDP for the year 2009 = $2.9 /
1.103 = $2.63 billion. The compound annual growth rate in real GDP from 2005 to
2009 is (2.63/2.1)1/4 – 1 = 5.79%.

Equity Investment

1. On a particular day a stock A has a price of $15, stock B has a price of $25,
and stock C has a price of $80. If stock C splits 2-for-1, what is the new
denominator for price weighted index?
A. 1
B. 2
C. 3
The correct answer is B. $80/2 = 40 (15+25+80)/3 = 40 (15+25+40)/x = 40 X = 2