What should it be today?
Econ and Corp finance
Anything but Ethics
equity and FSA…folks that is ~50% of the test right there…let’s focus on them!
waca waca
Question 1 - 89101 The U.S. interest rate is 4%, the Jordan interest rate is 7% and the /JOD spot rate is 2.0010. What is the /JOD forward rate that satisfies interest rate parity? A) $0.5142 / JOD. B) $1.0936 / JOD. C) $1.9450 / JOD. -------------------------------------------------------------------------------- Question 2 - 89207 Which of the following is least likely to affect exchange rates? Differential: A) income growth. B) spending by firms. C) inflation rates. -------------------------------------------------------------------------------- Question 3 - 89046 If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD: A) appreciated and Canadians will find U.S. goods cheaper. B) depreciated and Canadians will find U.S. goods more expensive. C) depreciated and Canadians will find U.S. goods cheaper. -------------------------------------------------------------------------------- Question 4 - 89488 Getry Corporation has just made an intercorporate investment in another company’s securities and will use the cost method of accounting to record the transaction. When using the cost method of accounting, which of the following is NOT done? A) The premium or discount on debt securities is amortized over the life of the issue. B) If the parent company determines the investment value is permanently impaired, even though the security is not sold, the value is written down and the loss is recognized. C) A change in the market value of the securities, whether realized or unrealized, is reported in the income statement. -------------------------------------------------------------------------------- Question 5 - 87431 Which of the following statements regarding the functional currency under SFAS 52 is FALSE? A) The functional currency is defined as the primary currency of the economic environment in which the parent firm operates. B) Self-contained, independent subsidiaries whose operations are primarily located in the local market will use the local currency as the functional currency. C) If a firm operates in a country or environment which is subject to cumulative inflation of 100% or more over a three year period, that firm will use the parent’s currency as the functional currency. -------------------------------------------------------------------------------- Question 6 - 87557 Junior analyst Xander Marshall sends an e-mail to his boss, Janet Jacobs, CFA, suggesting that Peterson Novelties is manipulating its results to artificially inflate profits. He cites four reasons for his conclusion: The LIFO reserve is declining. Earnings are much higher in the September quarter than in other quarters. Many nonoperating and nonrecurring gains are being recorded as revenue. Much of Peterson’s earnings come from equity investments not reflected on the cash-flow statement. Jacobs is less concerned about Peterson’s earnings than Marshall is, though she does resolve to check out one of his concerns. Which of Marshall’s observations best supports his conclusion? A) Equity investment earnings not reflected on the cash-flow statement. B) Nonoperating and nonrecurring gains recorded as revenue. C) The declining LIFO reserve. -------------------------------------------------------------------------------- Question 7 - 87225 Financial leverage ratios tend to be to low in countries that have: A) a large institutional investor presence. B) a high reliance on the banking system for raising debt capital. C) inefficient legal systems. -------------------------------------------------------------------------------- Question 8 - 87501 The theoretical price range for a merger transaction is between the pre-merger price of the target (VT), and: A) VT + the takeover premium. B) VT + synergies resulting from the merger – the takeover premium. C) VT + synergies resulting from the merger. -------------------------------------------------------------------------------- Question 9 - 88299 George Go, CFA, a U.S. domestic investor, wishes to diversify his domestic portfolio. Which of the following investment alternatives offer the lowest diversification benefit primarily because of its high correlation to U.S. markets? A) Closed-end country funds. B) American Depository Receipts. C) Exchange Traded Funds. -------------------------------------------------------------------------------- Question 10 - 87802 The H model will NOT be very useful when: A) a firm has low or no dividends currently. B) a firm has a constant payout policy. C) a firm is growing rapidly. -------------------------------------------------------------------------------- Question 11 - 87893 The difference between free cash flow to equity (FCFE) and free cash flow to the firm (FCFF) is: A) after-tax interest and net borrowing. B) earnings before interest and taxes (EBIT) less taxes. C) before-tax interest and net borrowing. -------------------------------------------------------------------------------- Question 12 - 100882 A portfolio with an initial value of $100,000 contains two commodities: sugar and corn with a 60/40 percent strategic allocation in the two commodities, respectively. The portfolio is rebalanced at the end of each year to its strategic asset allocation. Corn prices remain unchanged over the next two years, with a 0% return in each of the periods. Sugar experiences significant swings in its price, returning 60% the first year while dropping 37.5% the second year. The value of sugar at the end of the second year and the portfolio’s geometric average return over the two years, respectively, are closest to: Value of sugar Portfolio return A) $51,000 2.7% B) $60,000 16.6% C) $60,000 0% -------------------------------------------------------------------------------- Question 13 - 88577 Assume that a property that you are evaluating has a gross annual income equal to $230,000, and that comparable properties are selling for 10.5 times gross income. The gross income multiplier approach provides a market value for this property that is closest to: A) $2,587,500. B) $2,190,476. C) $2,415,000. -------------------------------------------------------------------------------- Question 14 - 103957 When funds are withdrawn from the shadow banking system, which consists of hedge funds, structured investments, REITs, etc…, this is a sign that: A) investors are less risk averse, and it would lead to a lowering of liquidity. B) investors are more risk averse, and it would lead to a lowering of liquidity. C) investors are less risk averse, and it would lead to an increase in liquidity. -------------------------------------------------------------------------------- Question 15 - 100898 Subprime mortgage borrowers were granted a free at-the-money call option on the value of their property because: A) they did not put any money down, earned a profit if the home value increased but lost nothing if the home value decreased. B) adding a long call position on REITs was a usual deal sweetener. C) adding a long call position on a real-estate index was a usual deal sweetener. -------------------------------------------------------------------------------- Question 16 - 88403 Which of the following represents the greatest impediment to growth of the European mortgage-backed securities market? A) The availability of loan data and standardized credit scoring systems. B) The lack of firms with expertise in loan servicing. C) Regulatory differences among the countries of Europe. -------------------------------------------------------------------------------- Question 17 - 88153 Which of the following best describes how planned amortization class (PAC) bonds are protected against prepayment risk to create products that provide better asset and liability matching for institutional investors? PAC bonds: A) accrue the interest for one tranche and redistribute it to the support tranches. B) have several different companion tranches to which repayments are directed sequentially. C) have a fixed principal repayment schedule that must be satisfied as long as the support tranches exist. -------------------------------------------------------------------------------- Question 18 - 88787 The price of a forward contract: A) is determined at contract initiation. B) changes over the term of the contract. C) depends on forward interest rates. -------------------------------------------------------------------------------- Question 19 - 88474 Dividends on a stock can be incorporated into the valuation model of an option on the stock by: A) adding the present value of the dividend to the current stock price. B) subtracting the future value of the dividend from the current stock price. C) subtracting the present value of the dividend from the current stock price. -------------------------------------------------------------------------------- Question 20 - 88255 Which of the following is NOT one of the assumptions of the Black-Scholes-Merton (BSM) option-pricing model? A) Any dividends are paid at a continuously compounded rate. B) There are no taxes. C) Options valued are European style.
1 C 2 B 3 A 4 C 5 A 6 B 7 C 8 C 9 B 10 A 11 A 12 A 13 C 14 B 15 A 16 A 17 B 18 A 19 C 20 B
Question 1 - 89101 C) $1.9450 / JOD. -------------------------------------------------------------------------------- Question 2 - 89207 B) spending by firms. -------------------------------------------------------------------------------- Question 3 - 89046 A) appreciated and Canadians will find U.S. goods cheaper. -------------------------------------------------------------------------------- Question 4 - 89488 C) A change in the market value of the securities, whether realized or unrealized, is reported in the income statement. -------------------------------------------------------------------------------- Question 5 - 87431 A) The functional currency is defined as the primary currency of the economic environment in which the parent firm operates. -------------------------------------------------------------------------------- Question 6 - 87557 B) Nonoperating and nonrecurring gains recorded as revenue. -------------------------------------------------------------------------------- Question 7 - 87225 C) inefficient legal systems. -------------------------------------------------------------------------------- Question 8 - 87501 B) VT + synergies resulting from the merger – the takeover premium. -------------------------------------------------------------------------------- Question 9 - 88299 C) Exchange Traded Funds. -------------------------------------------------------------------------------- Question 10 - 87802 A) a firm has low or no dividends currently. -------------------------------------------------------------------------------- Question 11 - 87893 A) after-tax interest and net borrowing. -------------------------------------------------------------------------------- Question 12 - 100882 Value of sugar Portfolio return A) $51,000 2.7% -------------------------------------------------------------------------------- Question 13 - 88577 C) $2,415,000. -------------------------------------------------------------------------------- Question 14 - 103957 B) investors are more risk averse, and it would lead to a lowering of liquidity. -------------------------------------------------------------------------------- Question 15 - 100898 A) they did not put any money down, earned a profit if the home value increased but lost nothing if the home value decreased. -------------------------------------------------------------------------------- Question 16 - 88403 A) The availability of loan data and standardized credit scoring systems. -------------------------------------------------------------------------------- Question 17 - 88153 A) accrue the interest for one tranche and redistribute it to the support tranches. -------------------------------------------------------------------------------- Question 18 - 88787 A) is determined at contract initiation. -------------------------------------------------------------------------------- Question 19 - 88474 C) subtracting the present value of the dividend from the current stock price. -------------------------------------------------------------------------------- Question 20 - 88255 A) Any dividends are paid at a continuously compounded rate.
Q1.C 1.944897200 $/ JOD Q2.B Q3.A CAD up USD down - cheaper for CAD people Q4.C That is done in HFT securities Q5.A primary currency of the economic environment in which the subsidiary firm operates Q6.B moved up the line to show inflated revenues Q7.A institutional investor presence Q8.B VT + synergies resulting from the merger - the takeover premium Q9.C Exchange Traded Funds as they track a index like S&P Q10.A no divs Q11.A FCFE = FCFF - INT(1-TR) + NB Q12.A Sugar— 60K----96K----81.6K----51 Corn-----40K----40K—54.4-----54.4 Q13.C 230K*10.5 = 2415 Q14.B more risk averse and liq problem Q15.A they did not put any money down, earned a profit if the home value increased but lost nothing if the home value decreased Q16. A ‘greatest’ - LData and CCSystem Q17.C fixed schedule unless it’s a busted PAC Q18.A Contract initiation Q19.C S0 - PVD Q20.A the underliers are non cash producing
So I call up my CTA (Commodity Trading Advisor) to try and long CPK passing Level 2, and all I got was laughs. CTA, “Dude, no one is dumb enough to be a counterparty to that contract.” Dang, thought I discovered some alpha. I can put up more questions too if you guys want. ------------------------------------------------------------------------ Question 1 - #89101 Your answer: C was correct! Forward(DC/FC) = Spot (DC/FC)[(1 + r domestic) / (1 + r foreign)] (2.0010)(1.04/1.07) (2.0010)(0.972) = 1.9450 This question tested from Session 4, Reading 18, LOS h, (Part 1). -------------------------------------------------------------------------------- Question 2 - #89207 Your answer: B was correct! The main determinant of exchange rates is the supply and demand for a currency, which is determined by the difference between the two countries in their: income growth, inflation rates, and interest rates. This question tested from Session 4, Reading 19, LOS d. -------------------------------------------------------------------------------- Question 3 - #89046 Your answer: A was correct! The CAD is now more expensive in terms of USD, and thus it has appreciated. Therefore, each CAD yields more USD than before, and Canadians are able to purchase more U.S. goods with each CAD, making U.S. goods relatively cheaper. This question tested from Session 4, Reading 18, LOS a, (Part 2). -------------------------------------------------------------------------------- Question 4 - #89488 Your answer: C was correct! The cost method requires security values to be reported on the balance sheet at cost. It is the market method that requires recording publicly traded securities at market value and recording changes in market value, realized or unrealized, in the income statement. This question tested from Session 5, Reading 21, LOS b. -------------------------------------------------------------------------------- Question 5 - #87431 Your answer: A was correct! The basis for using the all current method is when Functional Currency is NOT the same as Parent’s Presentation (reporting) Currency. The basis for using the temporal method is when Functional Currency = Parent’s Presentation Currency. The functional currency is defined as the primary currency of the economic environment in which the foreign subsidiary operates. This question tested from Session 6, Reading 24, LOS c. -------------------------------------------------------------------------------- Question 6 - #87557 Your answer: B was incorrect. The correct answer was A) Equity investment earnings not reflected on the cash-flow statement. On its own, a declining LIFO reserve is not a sign of fraud. Peterson Novelties could have simply moved a lot of inventory and disclosed the LIFO liquidation in its footnotes. When unusual gains are recorded as revenue rather than income, they will boost sales growth, but have no effect on net income. Each of the above issues are potential danger signs, but can also be easily explained in a manner beyond reproach. However, earnings from equity investments that do not generate cash flow are of very low quality and warrant further examination. This question tested from Session 7, Reading 26, LOS g. -------------------------------------------------------------------------------- Question 7 - #87225 Your answer: C was incorrect. The correct answer was A) a large institutional investor presence. Firms operating in countries with an active, large institutional investor presence tend to have less financial leverage. Large institutional investors tend to have greater resources to analyze companies and reduce information asymmetries, which reduces the use of debt. By contrast, companies with weak legal systems and a high reliance on the banking system will all tend to have higher debt ratios. This question tested from Session 8, Reading 29, LOS p. -------------------------------------------------------------------------------- Question 8 - #87501 Your answer: C was correct! Assuming that the true intrinsic values and synergies from the takeover can be correctly estimated, the theoretical price range for a merger transaction is between a low of the pre-merger price of the target (VT), and a high of VT + synergies resulting from the merger. At the low, all of the gains from the merger accrue to the acquirer. At the high, all of the gains accrue to the target. This question tested from Session 9, Reading 32, LOS n. -------------------------------------------------------------------------------- Question 9 - #88299 Your answer: B was incorrect. The correct answer was A) Closed-end country funds. One of the primary disadvantages of a closed-end fund is that its NAV may be highly correlated with the U.S. stock market, which reduces the benefit of international diversification. This question tested from Session 10, Reading 35, LOS i. -------------------------------------------------------------------------------- Question 10 - #87802 Your answer: A was correct! The H model is useful for firms that are growing rapidly but the growth is expected to decline gradually over time as the firm gets larger and faces increased competition. The assumption of constant payout ratio makes the model inappropriate for firms that have low or no dividend currently. This question tested from Session 11, Reading 41, LOS a. -------------------------------------------------------------------------------- Question 11 - #87893 Your answer: A was correct! FCFE = FCFF � [interest expense] (1 � tax rate) + net borrowing. This question tested from Session 12, Reading 42, LOS b. -------------------------------------------------------------------------------- Question 12 - #100882 Your answer: A was correct! The following table shows the portfolio values: T=0 T=1 Rebalanced to strategic allocation T=2 Sugar $60,000 $96,000 $81,600 $51,000 Corn $40,000 $40,000 $54,400 $54,400 Portfolio $100,000 $136,000 $136,000 $105,400 The portfolio�s geometric average return is: This question tested from Session 13, Reading 49, LOS d. -------------------------------------------------------------------------------- Question 13 - #88577 Your answer: C was correct! Gross income multiplier technique: MV = gross income × income multiplier. MV = $230,000 × 10.5 = $2,415,000 This question tested from Session 13, Reading 47, LOS c. -------------------------------------------------------------------------------- Question 14 - #103957 Your answer: B was correct! In the shadow banking system, investors will withdraw liquidity in times of crisis. When investor risk aversion has increased in the U.S., investors have sold shadow bank assets and refused to fund the shadow banks. When investor risk aversion increases, funds are withdrawn from the shadow banking system and liquidity decreases. This question tested from Session 14, Reading 53, LOS a. -------------------------------------------------------------------------------- Question 15 - #100898 Your answer: A was correct! Borrowers had been granted a free at-the-money call option on the property. The option was free because no down payment or origination fees were required to obtain the mortgage. It was a call option because, if the property value increased above the purchase (strike) price, all of the gains accrued to the borrower (the option holder). If prices declined, the borrower did not lose any money. This question tested from Session 14, Reading 53, LOS c. -------------------------------------------------------------------------------- Question 16 - #88403 Your answer: A was correct! The major impediments to the growth of the mortgage-backed securities market in Europe are the availability of data and standardized credit scoring systems. The availability and standardization of mortgage loan data is inconsistent from one European country to the other. Furthermore, there may be a significant difference in data standardization and availability within a given European country. This question tested from Session 15, Reading 57, LOS b. -------------------------------------------------------------------------------- Question 17 - #88153 Your answer: B was incorrect. The correct answer was C) have a fixed principal repayment schedule that must be satisfied as long as the support tranches exist. The PAC tranche has significant protection against prepayment risk at the expense of the support or companion tranches. This question tested from Session 15, Reading 56, LOS g. -------------------------------------------------------------------------------- Question 18 - #88787 Your answer: A was correct! The price of a forward contract is established at the initiation of the contract and is expressed in different terms, depending on the underlying assets. It is the price that makes the contract value zero, and depends on current interest rates through the cost-of-carry calculation. This question tested from Session 16, Reading 60, LOS a. -------------------------------------------------------------------------------- Question 19 - #88474 Your answer: C was correct! The option pricing formulas can be adjusted for dividends by subtracting the present value of the expected dividend(s) from the current asset price. This question tested from Session 17, Reading 62, LOS g. -------------------------------------------------------------------------------- Question 20 - #88255 Your answer: B was incorrect. The correct answer was A) Any dividends are paid at a continuously compounded rate. The BSM model assumes there are no cash flows on the underlying asset. This question tested from Session 17, Reading 62, LOS c.
damn’it…didn’t read 17 properly…
18/20 Nuked - Q6 & Q8
I think question 6 is a bad question…wtf equity income is non-cash…unless you were paid dividends or something…you just need to be careful about that…that is why the best way to compare two firms is on operating income…plus that is not a ‘sign of danger’ or ‘sign of fraud’ a company can legitimately make equity investments that are in its best interest and recognize the equity income…per GAAP and not be fraud… I think if companies are including non-recurring gains as revenue than that is the most troubling.
15/20 nuked. 6, 7, 8, 9, 17
- C 2) B 3) A 4) C 5) A 6) B 7) B 8) B 9) C 10) A 11) A 12) C 13) C 14) B 15) A 16) C 17) B 18) A 19) C 20) A Edit: 14/20… argh gotta be truthful to myself Edit2: missed 6, 8, 9, 12, 16, 17 I notice people usually miss the same questions as each other so there is some element in bad wording.
Are these from QBANK… Someone shares from stalla
waca waca me hearties - 14/20. jacked on 6, 8, 9, 10, 16, and 17 1 C 2 B 3 A 4 C 5 A 6 C 7 A 8 B 9 C 10 B 11 A 12 A (Random guess, havent reached PM yet) 13 C 14 B 15 A 16 C (Random guess, will reach this tonight) 17 B (Random guess, havent reached there yet) 18 A (Random guess, havent reached there yet) 19 C (Random guess, havent reached there yet) 20 A (Random guess, havent reached there yet)