CFA Exam Question of the Day

Level I | Level II | Level III

2022-07-01

Question:
You have just received a sales brochure from a reputable investment firm which describes a financial investment vehicle which pays $300 at the end of year 1, $500 at the end of year 2, and $100 at the end of year 3.

If you are looking for an annual return of 6%, what's the maximum amount you should be willing to purchase this investment certificate for?

Select an Answer:
$797
$812
$827
$900
Rationale:
The maximum amount you should pay equals the present value of the payments (you would like to pay less). This equals:


2022-06-30

Question:
In an investment environment, an initial outlay of $100 grows to $156 in 7 years.

The quarterly compounded rate of annual interest implicit in this is ________.

Select an Answer:
6.12%
6.56%
6.40%
6.73%
Rationale:
There are 28 quarters in 7 years. If the quarterly compounded rate is r, then we have:


2022-06-29

Question:
Three banks have quoted interest rates as follows:

Bank A: 10% per year, compounded quarterly
Bank B: 11% per year, compounded annually
Bank C: 10.5% per year, compounded semi-annually

Which bank should you choose to invest with for a period of one year, and what is the effective annual rate?

Select an Answer:
Bank A, 11.19%
Bank C, 10.68%
Bank C, 12.01%
Bank B, 11%
Bank A, 10.38%
Rationale:
The annual yield for Bank A equals:



Bank B annual yield equals 11%.

Bank C annual yield equals:



Therefore, you should invest with Bank B.

2022-06-28

Question:
According to the IFRS Framework, which of the following is a constraint of the financial statements?

Select an Answer:
accuracy
timeliness
comparability
consistency
Rationale:
The following constraints are recognized on providing reliable, relevant information: timeliness, costs versus benefits, and balancing the qualitative characteristics.

2022-06-27

Question:
A stock has an expected dividend growth rate of 2.4%. The firm has just paid a dividend of $2.30 per share.

Investors expect a rate of return of 12% from the stock and the stock is trading at $26.12. The stock is ________.

Select an Answer:
underpriced
insufficient information
fairly priced
overpriced
Rationale:
In the usual notation, the Dividend Discount Model gives:

P0 = D1 / k − g

In this case, g = 2.4%, D1 = D0 × (1 + g) = 2.3 × 1.024 = $2.355, P0 = $26.12.

Therefore, k = g + D1/P0 = 2.4% + 2.355/26.12 = 11.42%.

Thus, the rate of return built into the price is less than that required by the investors, implying that the stock is overpriced.

Another way of seeing this is to find the price that will give k = 12%. This price equals P = 2.355/(12% − 2.4%) = $24.53.

Since the stock is trading at a price higher than this, it is overpriced (by $1.59).