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Free CFA Institute CFA-Level-II Exam Questions

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  • CFA Institute CFA-Level-II Exam Questions
  • Provided By: CFA Institute
  • Exam: CFA Level II Chartered Financial Analyst
  • Certification: CFA Level II
  • Total Questions: 713
  • Updated On: Sep 25, 2024
  • Rated: 4.9 |
  • Online Users: 1426
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  • Question 1
    • Henke Malfoy, CFA, is an analyst with a major manufacturing firm. Currently, he is evaluating the replacement of some production equipment. The old machine is still functional and could continue to serve in its current capacity for three more years. Tf the new equipment is purchased, the old equipment (which is fully depreciated) can be sold for $50,000. The new equipment will cost $400,000, including shipping and installation. If the new equipment is purchased, the company's revenues will increase by $175,000 and costs by $25,000 for each year of the equipment's 3-year life. There is no expected change in net working capital.
      The new machine will be depreciated using a 3-year MACRS schedule (note: the 3-year MACRS schedule is 33.0% in the first year, 45% in the second year, 15% in the third year, and 7% in the fourth year). At the end of the life of the new equipment (i.e., in three years), Malfoy expects that it can be sold for $10,000. The firm has a marginal tax rate of 40%, and the cost of capital on this project is 20%. In calculation of tax liabilities, Malfoy assumes that the firm is profitable, so any losses on this project can be offset against profits elsewhere in the firm. Malfoy calculates a project NPV of-$62,574.
      What is the IRR based on Malfoy's NPV estimate, and should the project be accepted or rejected in order to maximize shareholder value?
      IRR Project

      Answer: B
  • Question 2
    • Introduction
      Rajesh Singh is the CFO of Goldensand Jewelry, Ltd, a London-based retailer of fine jewelry and watches. Singh has noticed that the price of gold has begun to increase. If economic activity continues to pick up, the price of gold is likely to accelerate its rate of increase as both the level of demand and inflation rates increase.
      Implications of Rising Gold Price
      Singh has become concerned about the cost implications for Goldensand if gold prices continue to rise. He has requested a meeting with Anita Biscayne, Goldensand's COO. In preparation for the meeting, Singh asked one of his staff, Yasunobu Hara, to prepare a regression analysis comparing the price of gold to the average cost of Goldensand's purchases of finished gold jewelry. Hara provides the regression results as shown in Exhibit 1.

      210

      Reviewing the regression results, Biscayne becomes concerned about the implications for the cost of finished jewelry to Goldensand if the price of gold continues to rise. To remain profitable, the cost of finished jewelry should not exceed $2,000.
      Regression Concerns
      Overall Concerns
      Singh's principal concern about the regression is whether the time period chosen is a good predictor of the current situation. He makes the following statement:
      Statement 1: We may have a problem with parameter instability if the relationship between gold prices and jewelry costs has changed over the past 30 years. Singh also focuses on the value of the slope coefficient. He expected it to be 4.0 based on his experience in the industry. Hara computes the appropriate test statistic and reports the following:
      Statement 2: We fail to reject the null hypothesis that the slope coefficient is equal to 4.0 at the 5% level of significance.
      Testing for Heteroskedasticity
      Biscayne remarks that the dramatic increase in the price level over the past 30 years leads her to suspect heteroskedasticity in the regression results. She suggests to Singh that they should conduct a Breusch-Pagan chi-square test for heteroskedasticity by calculating the following test statistic:

      212

      Model Misspecification
      Biscayne and Singh have various views on the potential for model misspecification and the effect of any such misspecification.
      * Biscayne worries that the regression model is misspecified because it does not include a variable to measure the cost of the highly specialized labor used by manufacturing jewelers. She points out that the effect of omitting an important variable in a regression analysis is that the regression coefficients will be unbiased and inconsistent.
      * Singh adds that another common consequence of misspecifying a regression analysis is creating undesired stationarity.
      Multiple Regression
      Hara conducts a series of regression analyses using all possible combinations of the suggested independent variables based on their average quarterly values. He returns with the following regression results as shown in Exhibit 3 for the equation which uses all suggested independent variables.

      213

      Hara is concerned about the equation described in Exhibit 3. He makes the following statement:
      Statement 3: The Durbin-Watson statistic indicates the presence of positive autocorrelation at the 5% level.
      Biscayne responds with the following statement:
      Statement 4: An autocorrelation problem can be addressed by using the Hansen method to adjust the .

      214

      Is Biscayne correct regarding his statement concerning how to correct for autocorrelation?

      Answer: C
  • Question 3
    • Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
      Statement I: Employers often face onerous disclosure requirements.
      Statement 2: Employers often bear all the investment risk.
      Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski's employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.
      Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
      This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.
      Is Carson correct with respect to defined contribution plans?

      Answer: A
  • Question 4
    • Trent Black is a government fixed-income portfolio manager and on January 1, he holds $30 million of fixed-rate, semi-annual pay notes. Black is considering entering into a 2-year $30 million semi-annual pay interest rate swap as the fixed-rate payer. He must first determine the swap rate. Black notes the following term structure:

      59

      Black is also evaluating receiver and payer swaptions on the same $30 million interest rate swap. The swaptions are European-style swaptions that mature in 240 days. Black anticipates a decline in interest rates and would like to use the swaptions to profit from his interest rate forecast.
      Black is also concerned about the potential credit risk inherent in both interest rate swaps and swaptions, so he consults Marcus Coleman, a contract specialist in the legal department. Coleman advises Black that:
      Statement 1: The fixed rate payer in any plain vanilla interest rate swap is exposed to potential credit risk at the initiation of the swap but the floating rate payer is not.
      Statement 2: The long position is exposed to potential credit risk in a payer swaption at initiation but the short
      position in a payer swaption is not.
      On May I after 120 days. Black is asked to determine the value of the 2-year, $30 million swap. The term structure after 120 days is:

      60
      Is Coleman correct with respect to the credit risk of swaps and swaptions?

      Answer: C
  • Question 5
    • Kylie Autumn, CFA, is a consultant with Tri-Vision Group. Robert Lullum, Senior Vice President ai Langsford Investments, has asked for assistance with the evaluation of mortgage-backed and collateralized mortgage obligation (CMO) derivative securities for potential inclusion in several client portfolios. Langsford Investments mainly deals with equity investments and REITs, but the company recently purchased a small firm that invests mainly in fixed-income securities.
      Lullum has done some research on the appropriate spread measures and option valuation models for fixed-income securities and wants to clarify some points. He wants to know if the following statements are correct:
      Statement 1: The proper spread measure for option-free corporate bonds is the nominal spread.
      Statement 2: Callable corporate bonds and mortgage-backed securities should be measured using the option-added spread.
      Statement 3: The Z-spread is appropriate for credit card ABS and auto loan ABS.
      While Lullum meets with Autumn, Janet Van Ark, CFA charterholder and equity-income portfolio manager for Langsford, is attempting to purchase bonds that may also provide her with equity exposure in the future. She has decided to analyze an 8% annual coupon bond with exactly 20 years to maturity. The bonds are convertible into 10 common shares for each $ 1,000 of par (face) value. The bond's market price is $920, and the common stock has a market price of $40. Van Ark estimates that the stock will increase in value to $70 within the next two years. The stock's annual dividend is $0.40 per share, and the market yield on comparable non-convertible bonds'is 9.5%.
      Carl Leighton, a Langsford analyst and Level 2 CFA candidate, works with mortgage-backed and other asset-based securities. He provides Lullum with a list of credit enhancements for asset-backed securities, which includes letters of credit, excess servicing spread funds, overcollateralization, and bond insurance. Lullum then asks him for a status report of the firm's exposure to paythrough securities. He also asks Leighton to calculate the single-monthly mortality rate (SMM) and estimate the prepayment for the month for a seasoned mortgage pool with a $500,000 principal balance remaining. The scheduled monthly principal payment is $ 150 and the conditional prepayment rate (CPR) is 7%.
      Which of the following pairs correctly identifies the two external credit enhancements in Leighton's list?

      Answer: C
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