Free Access to CFA.CFA-Level-I.v2022-03-26.q499 with Valid Practice Test (Page 29)

Question 136

The amount of one good that is just sufficient to compensate the consumer for the loss of some amount of another good is called

A.the marginal rate of substitution.
B.consumer surplus.
C.the substitution effect.

Question 137

We would like to refer all probability statements to one set of normal probability values. The distribution hat fills this role is known as the

A.binomial distribution.
B.standard normal distribution.
C.continuous uniform distribution.

Question 138

Ben Nagler wants to purchase a bond and has narrowed his selection down to two choices. He is indifferent between holding a bond for 13 periods or 18 periods. He knows the spot rates for each bond but wants to compute the 5f13 . What is the 5 period forward rate 13 periods from now assuming a spot rate of 5.0127% for 13 periods and another spot rate of 5.2350% in 18 periods?

A.5.8141%
B.6.3955%
C.5.0873%

Correct Answer: A

Forward rate calculations require candidates to assess the future interest rate for some period in the future. The appropriate nomenclature for this problem is shown as 5f13 . The subscript before "f" is "t" or the length of time that the rate applies. The subscript after "f" is "m" and refers to the period when the forward rate begins. This question asks what the 5 forward rate is 13 periods into the future.
Candidates should remember that spot rates are related to forward rates. In fact, the spot rates contain the forward rates implied by the market. This calculation is very complicated and provides numerous opportunities to make an error. Candidates should remember to always place the longer period spot rate in the numerator and the smaller period in the denominator. Moreover, it is important to take one half of the spot rate and add "1" to each spot rate before using the exponent function. An important distinction to note when computing a forward rate for multiple time periods is the exponent computation after dividing the longer spot rate by the shorter spot rate. This additional computation recognizes the geometric return earned on the bond during the time period.
Finally it is important to remember to subtract "1" at the end of the calculation and double (for the annualized forward rate). Many students may make an error in forgetting to double (or halve) certain calculations or by forgetting to add or subtract the number 1 when dealing with the exponential functions.
The detailed answer is shown below:
((Spot rate for 18 periods)18/(Spot rate for 13 periods)13)(1/5) The spot rate for 18 periods equals 5.2350
The spot rate for 13 periods equals 5.0127 The numerator becomes (1+ 0.0262)18 or 1.5922 and the denominator becomes (1 + 0.0251)13 or 1.3796 Next, divide1.5922 by 1.3796 = 1.1541 then take the 1/5 root = 1.0291 subtract 1 =the semiannual rate of 0.0291% Doubling the semiannual rate provides the annualized forward rate or the answer of 5.8141%.

Question 139

As per Standard VI (A) of the Code and Standards, that deals with the disclosure of conflicts, a CFA
Institute member that is elected to serve as a Trustee of a large Pension fund, may do so, provided that:

A.The member may not accept the new position.
B.The new position is not time consuming and does not take away time from performing his duties to his current employer.
C.The member reports the position and gets the consent of his employer.

Question 140

Beaumont Bearings is analyzing two mutually exclusive projects with the following cash flows. Its cost of capital is 9%.
The IRRs for the two projects are:

A.X: 34.55%; Y: 27.87%
B.X: 10.5%; Y: 12.9%
C.X: 46.45%; Y: 54.85%

Question 136

Question 137

Question 138

Question 139

Question 140

Download PDF File