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Free Test Prep CFA-Level-I Exam Questions (page: 95)

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Consider a bond that pays an annual coupon of 5 percent and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6 percent. How much does the bond price change over the next twelve-month interval if the term structure of interest rates does not change?

  1. 0.84.
  2. -0.84.
  3. -0.56.
  4. 0.00.

Answer(s): A

Explanation:

The bond price change is computed as follows: Bond Price Change = New Price ­ Old Price = (5/1.06 + 105/1.062) - 5/1.06 + 5/1.062 + 105/1.063 = 0.84.



A bond has a modified duration of 6 and a convexity of 62.5. What happens to the bond's price if interest rates rise 25 basis points?

  1. it goes up 1.46%
  2. it goes down 1.46%
  3. it goes up 4%
  4. it goes down 15%

Answer(s): B

Explanation:

P/P = (-)(MD)(i) + (C)P/P = (-)(6)(+.0025) + (62.5)=- .015 + .00039 = - .01461



Which theory about the term structure of interest rates is correct?

  1. The expectations hypothesis indicates that investors have varying opinions about future interest rates.
  2. The liquidity premium hypothesis assumes investors will give up yield to lock in longer-term interest rates.
  3. That the segmented markets hypothesis contends that borrowers and lenders prefer particular segments of the yield curve.
  4. The expectations hypothesis contends that the long-term rate is equal to the expected short-term rate.

Answer(s): C



You have a 1 year, 10% semi annual coupon bond with a price of $975. If the 6 month T-Bill rate is 6%, what is the one year theoretical spot rate?

  1. 7.4%
  2. 8.7%
  3. 9.9%
  4. 12.8%

Answer(s): D

Explanation:

975 = 50/1.06 + 1050/
975 - 47.17 = 1050/
= 1050/927.83 = 1.1317
r =- 1
r = 6.4%, note this rate is on a semi annual basis. If you annualized this rate by doubling it you would get 12.8.



The six-year spot rate is 7% and the five-year spot rate is 6%. What is the implied one-year zerocoupon bond rate five years from now?

  1. 5%
  2. 6.5%
  3. 7%
  4. 12%

Answer(s): D

Explanation:

5r1= [(1 +/ (1 +] - 1 = [(1.07/(1.06] ­ 1[1.5 / 1.338] - 1 = .12



Which of the following definitions about appraisal is false?

  1. The cost approach to valuation is based on what it would cost to rebuild the property at today's prices.
  2. The comparative sales approach to valuation is based on the sales price of properties that are similar to the subject property.
  3. The income approach to valuation projects the property's value as the present value of its future annual after-tax net operating income.
  4. The `capitalization rate' equals the required rate of return minus the growth rate.

Answer(s): C



David Bateman is contemplating the purchase of a shopping center. The average annual after tax cash flow for the next ten years is expected to be $30,000. The property cost $750,000. Bateman will put down 25 percent and borrow the rest. In ten years, the property will be sold netting $350,000 after taxes. What is the approximate yield on the shopping center?

  1. 21.35.
  2. 17.2%.
  3. 12.3%.
  4. 14.8%.

Answer(s): B

Explanation:

[30000 + (350,000-187,500)/10] / [(187500 + 350000) /2]



Which of the following statements about investment companies is false?

  1. The 12b-1 plan allows funds to deduct up to 1.25% of average assets per year to cover marketing expenses.
  2. Closed end investment companies trade at the net asset value of the shares.
  3. The fund's net asset value is the prevailing market value of all the fund's assets divided by the number of fund shares outstanding.
  4. The typical management fees charged to compensate the Management Company for the expense of running the fund are between ¼ and 1% of the fund's net asset value.

Answer(s): B

Explanation:

Closed end funds sell for whatever people will pay for them. CE funds typically sell at premiums or discounts from their NAV.



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