Free CFA Level 1 practice question bank for June 2011 exam

[Roadrunner314]

My Rationale would be that,

Since a bonds price sensitivity to fluctuations in interest rates depend on coupon rates ,embedded options & MATURITY

Answer : B

[DG Mod]

Q2. Ans B
Default risk is low as firms are AAA. As all payments are concentrated at maturity (no coupons) so price sensitive to maturity.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q3. The effective annual yield (EAY) of a loan with a quoted rate of 8%, compounded quarterly is equivalent to the EAY of a loan with a continuously compounded quoted rate of:

A) 8.16%.
B) 8.08%.
C) 7.92%.

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[anita123]

Q2. Ans B
Default risk is low as firms are AAA. As all payments are concentrated at maturity (no coupons) so price sensitive to maturity.

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q3. The effective annual yield (EAY) of a loan with a quoted rate of 8%, compounded quarterly is equivalent to the EAY of a loan with a continuously compounded quoted rate of:

A) 8.16%.
B) 8.08%.
C) 7.92%.

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Ans to Q3: C

[Daulat Guru]

Q3. Ans C
This will not require any calculation.
Please remember that a corresponding continuous compound rate will be lesser than that of the discrete rate if they are yielding same.

If you wish to calculate, (1.02)^4 = exp(r) [e raised to the power of r]
Solving for r will give you the result of 7.92%

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q4. An investment advisor comes to you with 2 plans.
First plan will pay nothing in first four years and then it will pay $20,000 per year for 5 years.
Second plan will pay $15,000 per year in first 3 years and then a payment of $20,000 in the fourth year.
All payments are done at the end of year. Which plan should you go for if both require an investment of $50,000 now? Your required rate of return is 10%.

A. First Plan
B. Second Plan
C. None of the plans

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[ssoffline]

First Plan option A has higher NPV of 1783

First Plan
CF0 = -50000 CO1 - 0 F01-4, CO2-20000 FO2-5 , I/Y=10 , CPT NPV=1783
Second Plan CF0 = -50000 CO1 - 15000 F01-3, CO2-20000 FO2-1 , I/Y=10 , CPT NPV=900+

[DG Mod]

Q4 Answer: A:
First Plan: Find the PV after 4 years; FV = 0 ; PMT = 20,000 N=5, I/Y = 10%
Find the PV now => PV0 = PV4/(1.1)4=> 51,783 => NPV = 1,783

Second Plan: For recurring payments PMT = 15K, I/Y = 10, N=3, FV = 0; PV = -37,302. Find the present value of the single payment; PV = 13,660.26. So the second plan gives total PV of 50,963.04 => NPV = 963.04

So Plan A is better

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q5.What is the effective annual rate on a personal loan that charges 24% per annum compounded monthly?
A. 24%
B. 26.8%
C. Data Insufficient

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[Sriram Raju]

Q4 Answer: A:
First Plan: Find the PV after 4 years; FV = 0 ; PMT = 20,000 N=5, I/Y = 10%
Find the PV now => PV0 = PV4/(1.1)4=> 51,783 => NPV = 1,783

Second Plan: For recurring payments PMT = 15K, I/Y = 10, N=3, FV = 0; PV = -37,302. Find the present value of the single payment; PV = 13,660.26. So the second plan gives total PV of 50,963.04 => NPV = 963.04

So Plan A is better

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q5.What is the effective annual rate on a personal loan that charges 24% per annum compounded monthly?
A. 24%
B. 26.8%
C. Data Insufficient

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Ans of Q5 is: B
26.8%

[Daulat Guru]

[COLOR=DarkRed]Q5. Ans B:

Periodic rate = 2%
EAR= (1.02)^12

[naveen]

[QUOTE=Daulat Guru;1702][COLOR=DarkRed]Q5. Ans B:

Periodic rate = 2%
EAR= (1.02)^12

[DG_Admin]

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