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此预测为考点预测，考题仅为复习参考
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1
2016 年 12 月 CFA 一级百题预测
1- ETHICS .......................................................................................................................................... 2
2- QUANTITATIVE ........................................................................................................................ 81
3- ECONOMICS ............................................................................................................................ 119
4- FINANCIAL STATEMENT ANALYSIS ................................................................................. 206
5- CORPORATE FINANCE ......................................................................................................... 325
6- EQUITY ..................................................................................................................................... 362
7- FIXED INCOME ....................................................................................................................... 419
8- DERIVATIVES .......................................................................................................................... 491
9- ALTERNATIVE INVESTMENTS ............................................................................................. 81
10- PORTFOLIO ........................................................................................................................... 543
对于 2016 年 12 月考试，从全局来看，考试的难度在提高；另外，财务报表分析、
职业伦理和数学等相关经典题目必须认真掌握；相比较于 2015 年考纲，组合管理的改动
较大，增加了一个全新的章节（Risk Management），基本都是定性的内容，百题中这部分
的题目是来自原版书及 Mock 中的精选，复习时要花点时间重点掌握；固定收益方面增加
了结构化产品，其他类投资中增加了基础设施投资，权益类投资中对于行为金融学的讲
解更加细致。为了全面应对考试，我们全面推出了的各种学习平台，如金程网校、手机
APP、金融城 BBS、金程 CFA 微信平台答疑等活动，请各位充分利用。如有学术问题，请
登录至论坛 提问。祝大家好运！
金程教育 CFA 百题师资团队，为您呈现最完美的百题预测
汤震宇，洪波，单晨伟，纪慧诚，韩霄，杨宇，Kel Wang，王东，周琪，胡竹君，胡瑾
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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2
1-Ethics
P1-1 The Process for the Enforcement of the Code and Standards
Q1-1 After reviewing the material obtained during the investigation, then confirming violation,
the CFA Designated Officer will：
A. Issue a cautionary letter
B. Conclude the inquiry with no disciplinary sanction
C. Propose a disciplinary sanction
Solution: C.
第一步是对于对方展开调查，如果 find violation 之后直接进行惩罚。
Q2-1 ★Which of the following least likely reflects the two primary principles of the CFA
Institute Rules of Procedure for Proceedings Related to Professional Conduct?（Mock83
A. Confidentiality of proceedings
B. Fair process to the member and candidate
C. Public disclosure of disciplinary sanctions
Solution: C.
C is correct because the two principles of the Rules of Procedure for Proceedings Related to
Professional Conduct are confidentiality of proceedings and fair process to the member and
candidate.
Q3-1 If a member does not accept a sanction from a designated officer of CFA PCP, the
matter is referred to a hearing panel made up of:
A. Local CFA society board member
B. The CFA Institute Standards of Practice Council
C. DRC members and CFA Institute member volunteers
Solution: C.
C is correct because a hearing panel is composed of DRC members and CFA Institute member
volunteers affiliated with the DRC. The hearing panel reviews materials and presentations from
the Designated Officer and from the member or candidate.
Q4-1 Tamlorn Mager, CFA, is an analyst at Pyallup Portfolio Management. CFA Institute
recently notified Mager that his CFA Institute membership was suspended for a year
because he violated the CFA Code of Ethics. A hearing panel also came to the same
conclusion. Mager subsequently notified CFA Institute he does not accept the sanction,
or the hearing panel’s conclusion. Which of the following actions by Mager is most
consistent with the CFA Institute Professional Conduct Program?（mock91-10）
A. Presenting himself to the public as a CFA charterholder
B. Providing evidence for his position to an outside arbitration panel
C. Using his CFA designation upon expiration of the suspension period
Solution: C.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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3
C is correct because the Designated Officer may impose a summary suspension on a member
or candidate, which may be rejected or accepted by the member or candidate. If the member
or candidate does not accept the proposed sanction, the matter is referred to a hearing panel
composed of DRC members and CFA Institute member volunteers affiliated with the DRC. In
this case, the hearing panel also affirmed the suspension decision by the Designated Officer,
and therefore, the member loses the right to use his designation for a one-year period. Upon
expiration of the suspension period, the analyst would be able to use his CFA designation.
Key points:
R1-1 The process for the enforcement of the Code and Standards
Writted explanation from members/candidates
Interview the member/candidates
Collecting documents and records
Inquiry is initiated
Investigation
Issue a
cautionary
letter
No disciplinary
sanction
Propose a disciplinary sanction
The matter is referred to a
hearing by a panel of CFA
Institute members.
Violation
occurred
End
Reject Accept
The process for the enforcement of the Code and Standards:
R2-1 ★Primary Principles:
(1) Fairness of the process to members and candidates.
(2) Confidentiality of the proceedings.
R3-1 The CFA Institute Board of Governors maintains oversight and responsibility for the
Professional Conduct Program (PCP).
R4-1 PCP and Disciplinary Review Committee (DRC) and responsible for enforcement of the
Code and Standards.
R5-1 How to detect
Self-disclosure on annual Professional Conduct Statements of involvement in civil
litigation or a criminal investigation, or that the member or candidate is the subject of a
written complaint.
Written complaints about professional conduct received by the Professional Conduct
staff.
Evidence of misconduct by a member or candidate that the Professional Conduct staff
received through public sources, such as a media article or broadcast.
A report by a CFA exam proctor of a possible violation during the examination.
发现有人违反，经过 CFA 调查后，一般会有三种处理方法：1）不处罚；2）发警告
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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4
信；3）进行处罚（由轻到重依次为：private censure, public censure, timed revocation,
suspension, revocation）
R6-1 The Designated Officer may decide
That no disciplinary sanctions are appropriate
To issue a cautionary letter
To discipline the member or candidate
R7-1 Hearing panel
Consists of DRC members and CFA Institute member volunteers affiliated with the DRC
The hearing panel’s task is to determine whether a violation of the Code and Standards
occurred and, if so, what sanction should be imposed.
R8-1 ★★AMC vs. Code and standards
The Asset Manager Code of Professional Conduct (AMC), is to help asset managers
comply with the regulations mandating codes of ethics for investment advisers.
AMC was drafted specifically for firms.
Code and Standards is aimed at individual investment professionals.
P2-1 Knowledge of Law
Q5-1 ★★Dorian Solot, CFA, is responsible for a team of research analysts at Apac Bank,
located in a country with strict laws prohibiting intellectual property transfers. Solot
believes the work of one of her analysts, Blaine Paddock, CFA, is not completed as
carefully and thoroughly as it should be. Solot completely reviews all of Paddock’s
research and confirms her suspicions. Solot then confronts Paddock about his poor
quality research and tells him he can leave Apac voluntarily or be fired. Paddock
chooses to leave the bank, walking out with his personal papers and research notes
that were created prior to his joining Apac. Subsequently, Paddock uses this intellectual
property to help establish a high-net-worth investment advisory firm. When a
prospective client asks Paddock if he left Apac because of questions on the quality of
his work, Paddock says it was to start his own business. Paddock least likely violated the
CFA Institute Standards of Professional Conduct concerning his: (2012 Mock84)
A. Research.
B. Intellectual property.
C. Prospective client disclosure.
Solution: B.
B is correct because the analyst has not violated Standard related to intellectual property
because there is no indication the analyst was ignorant of, or has violated, any law related to
intellectual property, because these documents were created by the analyst prior to his
employment at Apac.
Q6-1 ★Jane and Joe work for an investment company and even in the same group. Jane, CFA,
always shares some latest information in the industry with Joe, who is studying for the
CFA level 2 exam. One day Joe discovered that Jane may conduct something that maybe
harmful to the company’s clients. What should Joe do with this situation?
A. Do nothing because he takes no supervisory duties and should appreciate the help from
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
5
Jane.
B. Report to the CFA committee.
C. Disassociate from the misconduct and report to the company’s compliance department
Solution: C.
如果发现同事有违规行为，采取的行动是首先保证自己不能参与，同时向 compliance
department or direct supervisor 报告自己的发现。
Q7-1 Charlie Mancini, CFA, is the Managing Director for Business Development at VES
Financial (VES), a large .-based mutual fund organization. Mancini has been under
pressure recently to increase revenues. In order to secure business from a large hedge
fund manager based in Asia, Mancini recently approved unusual terms for the fund’s
client agreement. To allow for time zone differences, the agreement allows the hedge
fund to trade in all of VES’s mutual funds six hours after the close of . markets.
According to the Standards of Practice Handbook, did Mancini violate any CFA Institute
Standards of Professional Conduct?
A. No.
B. Yes, because he failed to inform his other clients of the unusual terms under the new
client agreement, thus not treating clients equally.
C. Yes, because he failed to review regulations on late-trading and did not consult with VES’s
compliance director to determine if late-trading was acceptable.
Solution: C.
The Standards relating to Market Manipulation requires members/candidates not to engage in
practices that distort prices or artificially inflate trading volume with the intent to mislead
market participants. Mancini failed to follow regulations on late trading and allowed the hedge
fund client to manipulate the time of its trading and thereby misled other market participants
and benefited itself.
★About late trading: Late trading refers to the practice of placing orders to buy or redeem
mutual fund shares after the time as of which a mutual fund has calculated its net asset value
(NAV), usually as of the close of trading at 4:00 . Eastern Time, but receiving the price
based on the prior NAV already determined as of that day. Late trading violates the federal
securities laws concerning the price at which mutual fund shares must be bought or redeemed
and defrauds innocent investors in those mutual funds by giving to the late trader an
advantage not available to other investors.
Q8-1 ★A central bank fines a commercial bank it supervises for not following statutory
regulations regarding nonperforming loan provisions on three large loans as a result of
the bank's loan provisioning policy. Louis Marie Buffet, CFA, sits on the board of
directors of the commercial bank as a non-executive director, representing minority
shareholders. He also chairs the bank's internal audit committee that determines the
loan provisioning policy of the bank. Mercy Gatabaki, CFA, is the bank's external auditor
and follows international auditing standards whereby she tests the loan portfolio by
randomly selecting loans to check for compliance in all aspects of central bank
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
6
regulations. Which charterholder is most likely in violation of the Code and Standards?
A. Gatabaki
B. Buffet
C. Both
Solution: B.
Buffet sat on the audit committee that determined the bank's provisioning policies that were
contrary to the statutory regulations of the central bank. As a result, he most likely violated
Standard I–Professionalism by not abiding by regulations of a regulatory body. Gatabaki did not
violate Standard I - Professionalism because it is not apparent she knowingly facilitated the
incorrect provisioning policy.
Q9-1 In regard with Standard I(A) Knowledge of the law, members and candidates should
not:
A. Be a law expert
B. Be familiar with the details of law concerning your project.
C. Understand your firm’s rules and regulations.
Solution: A.
When questions arise, members and candidates should know their firm’s policies and
procedures for accessing compliance guidance. On the basis of their reasonable and good faith
understanding, members and candidates must comply with the laws and regulations that
directly govern their professional activities and resulting outcomes and that protect the
interests of the clients. However, this standard does not require members and candidates to
become expert.
Key points of Knowledge of law：
R9-1 必须了解并遵守与工作相关(governing their professional activities) 的法律法规，但不需
要成为 expert on compliance;
R10-1 如果法律法规之间存在冲突,总是遵守最严格的；
R11-1 不能故意(knowingly)参与或协助违法违规行为，同时必须脱离干系
R12-1 如果有传递关系，遵循最后一个生效的 law or regulations；
Work (applicable) Live Comply with
Ms Live Ls Ls < Code Code
Ls Live Ms Ms > Code Ms
R13-1 Guidance of compliance
如果你怀疑(suspect) 有人违法，首先要咨询相关人士（如独立第三方）, 但咨询
结果如果是错误的，你也不能免责;
★如果你知道(know)有人在违法，还可以采取分步骤的方法：向公司里的适当人
员（ supervisor or compliance department）汇报，也可以选择直面当事人
（confronting wrongdoers），如果仍没有改进，则你必须与违法行为划清界限
（disassociate）并且保存相关记录，甚至辞职；同时要进一步咨询以便采取进一
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
7
步的行动；
R14-1 当发现有违法行为时，CFA Institute 并不要求你向政府管理机构汇报。是否汇报取决
于适用法律(applicable law)是否有相关要求。
R15-1 如果一个人新到一家公司工作发现其内部有问题（明确具体的问题是什么），应该
Quit the job；
R16-1 ★ Inaction combined with continuing association with those involved in illegal or
unethical conduct may be construed as participation or assistance in the illegal or
unethical conduct.
R17-1 ★投资产品的开发与销售：投资产品的开发者、销售及维护人员要注意产品销售地
和来源地的法律；对于分销商，同样要注意其是否遵守了法律。
R18-1 跨境业务：需要 due diligence，为了保证公司及自身的声誉，要了解适用的法律
R19-1 对于个人：1）stay informed；2）encourage 公司时常对合规程序进行 review；3）保
存 readily accessible current reference copies of applicable statutes, rules, regulations
R20-1 对于公司：The formality and complexity of compliance procedures for firms depend on
the nature and size of the organization and the nature of its investment operations.
公司要 Develop or adopt a code of ethics，Provide information on applicable laws，
Establish procedures for reporting violations
P3-1 Independence and Objectivity
Q10-1 An analyst has been writing research reports on a firm for many years. As part of the
analyst’s continuing research efforts, the analyst allowed the firm to fly him to the
firm’s headquarters 500 miles away and put him up in the guest quarters the firm had
for all corporate visitors. In the current year, the firm is planning a secondary share
offering that coincides with the tenth anniversary of the firm going public. When the
analyst arrived at the headquarters, he found a new set of high-quality golf clubs as a
gift to him. On the golf clubs was the firm’s logo, and the firm was giving the clubs to all
visitors this year in honor of the anniversary and the IPO. Based upon this information,
Standard I (B), Independence and Objectivity, has:
A. Been broken because of the value of the golf clubs and the value of the trip to the
headquarters
B. Been broken because of the value of the golf clubs
C. Not been broken because the trip is allowed and the firm is giving the clubs to all visitors
Solution: B.
Modest gifts and entertainment are acceptable. Should commercial transportation be
unavailable, modestly arranged travel may be accepted to participate in appropriate
information gathering events.
Q11-1 Romar Brockman, CFA, is a sell-side analyst. Approximately half of Brockman’s
compensation comes from his firm’s Investment-banking division. Brockman was asked
to write a report about Anacortes Concrete (AC), an Investment-banking client. Despite
concerns about the slowdown in concrete demand, Brockman issued a very positive
report on AC. When issuing his report, Brockman least likely violates the CFA Institute
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
8
Standard relating to:
A. Loyalty to Employer.
B. Loyalty, Prudence, and Care.
C. Independence and Objectivity.
Solution: A.
The Standards require members to put client interests ahead of member and employer
interests. As Brockman’s compensation is dependent upon investment banking revenues,
Brockman may not be objective. When issuing the report, he is in jeopardy of violating
Standards relating to Independence and Objectivity; Loyalty, Prudence, and Care; and
Disclosure of Conflicts.
Q12-1 Kavily Poven recently left his job as a research analyst for a large investment adviser.
While looking for a new position, he was hired by an investor-relations firm to write a
research report on one of its clients, a small educational software company. The
investor-relations firm hopes to generate investor interest in the technology company.
The firm will pay Poven a flat fee plus a bonus if any new investors buy stock in the
company as a result of Poven’s report. If Poven accepts this payment arrangement, he
most likely violates the Code and Standards with respect to:
A. Disclosure of Conflicts
B. Misconduct
C. Independence and Objectivity
Solution: C.
If Poven accepts this payment arrangement, he will be in violation of Standard I(B) because the
compensation arrangement can reasonably be expected to compromise his independence and
objectivity. The agent option granted by Poven may compromise his objectivity.
Key points of Independence and Objectivity：
R21-1 Basic principle
Must not offer, solicit, or accept any gift, benefit, compensation, or consideration
that reasonably could be expected to compromise their own or another’s
independence and objectivity
R22-1 雇主可能为了与其他公司保持业务关系，可能会要求研究人员 issue favorable
research reports，正确的做法是保持客观独立，按照客观事实撰写报告
R23-1 社交活动也可能违反 I(B)，When seeking corporate financial support for conventions,
seminars, weekly society luncheons, evaluate both the actual effect on independence
and whether objectivity might be perceived to be compromised in the eyes of clients
R24-1 ★Investment banking
Firewall—minimizes conflicts of interest. Separate reporting structures for
personnel on the research side and personnel on the investment banking side
Compensation should not link analyst remuneration directly to investment
banking assignments in which analyst may participate as a team member.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
9
It is appropriate to have analysts work with investment bankers only when the
conflicts are adequately and effectively managed and disclosed.
R25-1 Public companies
Analysts should not be pressured to issue favorable research by the companies
they follow.
Can promise to cover the firm, should not promise favorable report about the
firm.
Due diligence in financial research and analysis involves gathering information
from public disclosure documents and also company management and
investor-relations personnel, suppliers, customers, competitors, and other
relevant sources.
R26-1 Buy-Side clients
Sell-side analyst should not be pressured by buy-side firms to issue favorable
research on current or prospective investment-banking clients.
基金经理也要尊重卖方分析师的独立性
R27-1 Gift from client & Gift from the third party
最好能拒绝所有会 compromise their own or another’s independence and
objectivity 的礼物. Modest gift is OK, but as long as its purpose is not to
compromise the objectivity.
★判断的原则：第一是礼物的金额很少（modest）；第二是礼物不能是单独为
你准备的(arrangement not unusual)
★Gift from client 可以接受, 但必须披露，否则违反 I(B)。尽量接受前披露，
如果实在没法披露，也要事后披露。
R28-1 Fund manager relationships
★Members and candidates who are responsible for hiring and retaining outside
managers should not accepts gifts, entertainment, or travel funding that may be
perceived as impairing their decisions.
For meeting sponsored funds, members and candidates must review the merits of
each offer individually in determining whether they may attend yet maintain their
independence of conduct regarding the analytic process and the distribution of
their reports.
R29-1 Performance Measurement and Attribution(NEW)
As performance analysts, their analysis may reveal instances where managers
may appeared to stray from their mandate.
The performance analyst may receive requests to alter the construction of
composite indices due to negative results for a selected account or fund.
The member or candidate must not allow internal or external influences to affect
their independence and objectivity as they faithfully complete their performance
calculation and analysis related responsibilities.
R30-1 ★The rating agencies
Members and candidates at rating agencies should ensure that procedures at the
agencies prevent undue influences from a sponsoring company during the
analysis.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
10
Abide by their agencies’ and the industry’s standards of conduct regarding the
analytical process and the distribution of their reports
Develop the necessary firewalls and protections to allow the independent
operations of their different business lines.
When using information provided by credit rating agencies, members and
candidates should be mindful of the potential conflicts of interest.
R31-1 Influence during the Manager Selection/Procurement Process(NEW)
When hiring or firing of those who provide many business services beyond
investment management or when working to earn a new investment allocation,
members and candidates should not receive, solicit or offer gifts, contributions,
or other compensation to influence the decision of the hiring representative.
R32-1 ★Issuer-Paid research
Analysts’ compensation for preparing such research should be limited, and the
preference is for a flat fee that is not linked to their conclusions or
recommendations (directly or indirectly)
Must fully disclose potential conflict of interest, including the nature of
compensation. If not misleading investors
Conduct a thorough analysis of the company’s financial statements based on
public information, benchmarking within a peer group, and industry analysis.
(Distinguish between fact and opinion)
R33-1 Travel Funding
最佳做法：always use commercial transportation rather than accept paid travel
arrangements from an outside company.
Should commercial transportation be unavailable, members and candidates may
accept modestly arranged travel to participate in appropriate
information-gathering events, such as a property tour.
May be influenced by discussions exclusively with the company executives when
flying on a corporate or chartered jet.
R34-1 Procedures for compliance
Protect the integrity of opinions: unbiased, design compensation systems with
integrity
Create a restricted list: if unwilling to issue unfavorable, put it on a restricted list
and only issue factual information
★Restrict special cost arrangement: pay charges by themselves when visiting
headquarter, not reimbursed for air fees by corporate issuer, limit use firm’s
aircraft only when no commercial transportation. Should not always be hosted by
issuer.
★Limit gifts: Customary, business-related entertainment is okay as long as its
purpose is not to influence professional independence or objectivity; 礼物的价
值要参考 local customs 并且说明价值限制是 per gift or annual total amount.
★Restrict invesments: develop formal policies about employee purchases of
equity or equity-related ipos, require prior approval for employee to participate in
ipos, disclose timely investment actions following the offering, strict limit on
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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11
investment personnel acquiring securities in private placements.
Review procedures: emplement effective supervisory and review procedures
about personal investment activities
Independence policy: formal written policy, not influenced by any parties that
could comprise their independence.
★Appointed officer: to supervise for compliance; provide procedures and policies
for reporting violation to every employee.
P4-1 Misrepresentation
Q13-1 ★Bryan Barrett, CFA, provides investment advice on gold and other hard assets to
several large institutions. To broaden his business and meet increased interest in these
assets from retail customers, Barrett advertises his services in publications that serve a
general audience. As the client base for the institutions that Barrett serves is large, he
is comfortable stating in the ads that thousands of his clients have benefited from his
advice. Does Barrett’s advertisement violate any CFA Institute Standards of
Professional Conduct?确认是否 suitable
A. No
B. Yes, related to Misrepresentation
C. Yes, related to Communication with Clients
Solution: B.
As Barrett’s client base is made up of a small number of large institutions, stating in the
advertisement that his customer base is a larger number is a misrepresentation and a violation
of Standard I (C). In addition, since the advertisement focuses only on the benefits and does
not mention the potential risks of these investments, it is also potentially misleading to clients.
Q14-1 ★★Colin Gifford, CFA, is finalizing a monthly newsletter to his clients, who are
primarily individual investors. Many of the clients’ accounts hold the common stock of
Capricorn Technologies. In the newsletter, Gifford writes, “Based upon the next six
months earnings of $ per share and a 10% increase in the dividend, the price of
Capricorn's stock will be $22 per share by the end of the year.” Regarding his stock
analysis, the least appropriate action Gifford should take to avoid violating any CFA
Institute Standards of Professional Conduct would be to:
A. Separate fact from opinion.
B. Include earnings estimates.
C. Identify limitations of the analysis.
Solution: B.
While pro forma analysis may be standard industry practice, it is not required by the
Standards. Earnings estimates are opinions and must be clearly identified as such.
Q15-1 Robert is responsible for the creation and distribution of ABC Company’s marketing
materials. In the materials, it says that the asset value of the company is 350 billion, but
actually the true value is 35 billion. Before Robert could make necessary change to the
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
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data, his subordinates had distributed these materials to their clients without seeking
Roberts’ permission. Robert doesn’t know the distribution of the materials. Under this
circumstance, does Robert violate any CFA Standards of Professional Conduct?
A. No
B. Misrepresentation
C. Misconduct
Solution: A.
这个属于打印错误，不是 Robert 故意为之，而且在他没有检查的情况下对外发布了，这
个不属于 Misrepresentation。可以参考 Handbook 第 40 页 Case 3, but he should correct the
error as soon as possible.
Q16-1 ★Elis is a portfolio manager of high net worth clients. One day, she received a material
from her brokerage introducing an investment product that claimed to provide an
insured income. She quickly reviewed the product and sent out the emails to all her
clients. The email heading was "New fixed income product! Hot opportunity!”, And she
also in-closed the products prospectus in her email. Did Elis most likely violate which of
the following standards?
A. Misrepresentation the nature of the product only
B. Misrepresentation the nature of the product and fail to disclose the detail of the product
C. Fail to disclose the detail of the product
Solution: A.
Insured income differs from fixed income. She in-closed the products prospectus in her email,
she didn’t fail to disclose the detail of the product.
Q17-1 Grey recommends the purchase of a mutual fund that invests solely in long¬term .
Treasury bonds. He makes the following statements to his clients: （原版书 Reading2-1
Statement 1: "The payment of the bonds is guaranteed by the . government;
therefore, the default risk of the bonds is virtually zero."
Statement 2: "If you invest in the mutual fund, you will earn a 10 percent rate of return
each year for the next several years based on historical performance of the market."
Did Grey's statements violate the CFA Institute Code and Standards?
A. Neither statement violated the Code and Standards.
B. Only Statement 1 violated the Code and Standards.
C. Only Statement 2 violated the Code and Standards.
Solution：C
This question involves Standard I(C)—Misrepresentation. Statement 1 is a factual statement
that discloses to clients and prospects accurate information about the terms of the investment
instrument. Statement 2, which guarantees a specific rate of return for a mutual fund, is an
opinion stated as a fact and, therefore, violates Standard I(C). If Statement 2 were rephrased to
include a qualifying statement, such as "in my opinion, investors may earn. . .," it would not be
in violation of the Standards.
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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
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Q18-1 ★★Roberto Sanchez, CFA, and Andreas Lopez, CFA, worked as financial analysts for
oneworld Analytics for years. While at oneworld, Lopez created a highly complex
financial valuation model with Sanchez making small contributions to its development.
Recently, Lopez left oneworld to start his own company using a simplified model he
developed prior to joining oneworld. Over a six-month period, he improves this
software, duplicating features he used at oneworld. His upgraded program produces
predictions similar to the results of the oneworld program. At One World, Sanchez
continues to use the complex model he and Lopez developed and attains superior
results. Whose behavior most likely conforms to the CFA Institute Code of Ethics and
Standards of Professional Conduct?（MOCK92-12）
A. Lopez but not Sanchez
B. Sanchez but not Lopez
C. Both Lopez and Sanchez
Solution：C.
C is correct because both Lopez and Sanchez upheld the requirements of Standard I (C)
Misrepresentation regarding work completed for an employer Sanchez has the right to
continue using the software primarily developed by Lopez because oneworld Analytics, not the
employee, owns the software. Lopez does not leave with the model he developed while
employed by oneworld Analytics, and therefore, he is not in violation of the Standards. Once
Lopez leaves oneworld, he develops a separate model based on a model he developed prior to
joining oneworld Analytics. The simplified model remains the intellectual property of Lopez.
The duplication of features is allowable under Standard IV (A) in that Lopez’s expertise gained
at his former employer is not considered to be confidential or privileged. Therefore, both
Lopez and Sanchez upheld the Standards.
Key points of Misrepresentation：
R35-1 下面的形式都与 Misrepresentation 相关
Oral representations, advertising, electronic communications, or written materials.
（written materials include research reports, market letters, newspaper columns,
and books; electronic communications includes internet communications, web
pages, chat room, and e-mail）
Misrepresentation 是指 untrue statement or omission of a fact 或者 false or
misleading
将“明知故犯”（knowingly）界定为知道或者应该知道 misrepresentation was being
made or that omitted information could alter the investment decision-making
process.
分析时要考虑多种情形（ from very positive scenarios to extremely negative
scenarios）
R36-1 Impact on Investment Practice:
不能保证 specific return which is inherently volatile.
Not prohibit from guaranteeing return which is built into the structure of the
product or for which an institution has agreed to cover any losses. 如,联邦储蓄利
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率是 2%，那么保证 2%利率是可以的
不可以对客户说“我们可以提供你需要的所有服务”，正确的做法是提供一个公司
所能提供的服务清单；
不能 misrepresent qualifications，一旦发现要立即改正，如果过了很长时间不改
正，就会被定义为 misrepresent（如名片打印错误一年后才发现就算违反）
★如果通过 outside managers 进行投资，must disclose intended use of external
managers, members and candidates must not represent outside managers’
investment practices as their own.
★使用第三方信息要注意：Exercise care and diligence，同时如果影响到了投资业
绩，investment professional 要对此负责
Social media: Members and candidates 在社会媒体上为客户所提供的信息必须要
和通过其他传统交流方式所提供的信息一致，并且也同样不能出现一些虚假或
者内幕消息。(new)
Social media: members and candidates 还必须遵守一些专门针对一些社会媒体交
流所制定的 Code and Standards. 在社会媒体上故意散播错误的投资建议或者虚
假陈述专业投资活动的信息，都会被视为违反了 Standard I(C)。(new)
Omission: the omission of a fact or a outcome can be misleading.当 members and
candidates 依赖模型来找寻新的投资机会，建立投资工具，提供投资建议，但是
往往通过模型得出的结论不会是事实。在选择 composite 的组成时，要建立严格
的政策来防止“cherry picking”。(new)
业绩基准的选择容易扭曲业绩报道，Members and candidates 不能选择一个与投
资策略不相符的业绩基准。不一定每一个投资组合都要选择一个 benchmark，像
hedge fund 这种比较复杂的投资组合就不需要一个基准。(new)
虚假陈述还会出现在对不流通证券(illiquid securities)进行定价的时候。当出现多
个不同的信息来源时，Members and candidates 应该为客户提供准确并且可靠的
证券定价信息。定价机构的选择应当保持一致性，不能因为新的定价机构提供
了一个较高的证券报价信息而随意更换现在的定价机构。信息的一致性在一定
程度上也限制了虚假陈述。(new)
R37-1 Plagiarism
Plagiarism 定义为：Copying or using in substantially the same form materials
prepared by others without acknowledging the source of the material or identifying
the author and publisher of such material.
适用于任何场合，包括口头交流，媒体采访等
未经许可 copy (or represent as their own) original ideas/material 就算违反，必须
acknowledge and identify the source of ideas/material.
常见形式：★Using excerpts from others’ reports without acknowledgement；Citing
quotations as “leading analysts” and “investment experts” without naming specific
reference；Using charts and graphs without stating sources；Presenting statistical
estimates of forecasts prepared by others and identifying the sources without
including the qualifying statements or caveats that may have been used；Copying
proprietary computerized spreadsheets or algorithms without authorization；
Preparation of research reports based on multiple sources without acknowledging
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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
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the sources
引用别人的思想需要鸣谢(credit or acknowledgement), 否则就是 Plagiarism；
引用他人的模型，分析师作了少许修改，把模型作为自己的，属于 plagiarism 行
为，违反了 I(C)，正确的做法是鸣谢这个模型的出处来源；
引用媒体的转载, obtain the information directly from the author and cite only that
author 或者 use the information provided by the intermediary and cite both
sources，不能 only cite the information from the intermediary
无心的打字错误不违反 misrepresentation，但是如果发现错误，却没有纠正，那
么就违反了 misrepresentation
R38-1 Work Completed for Employer
★The firm retains the right to continue using the work completed after a member
or candidate has left the organization.公司可以 issue future reports without
providing attribution to the prior analysts，但公司内其他员工不能 reissue a
previously released report solely under his name
R39-1 Procedures
Factual presentations: written list of available services and a description of
qualifications，并且指定专人作为公司发言人
Qualification summary: 对于 representations of qualifications，公司要定期检查
employee correspondence and documents
Verify outside information: 对于第三方要 verify，防止其因为错误陈述而影响公
司声誉. Encourage to develop policy to verify.
Maintain webpage: 保存网页; protect site’s integrity, confidentiality, and security;
not misrepresent and fully disclose.
★Plagiarism policy: maintain copies of all research reports with research ideas,
material with new methodologies, and other materials being relied on in preparing
the research report; attribute quotations, including projections, tables ,statistics,
model/product ideas, and new methodologies prepared by persons other than
recognized financial and statistical reporting service or similar service; attribute
summaries or paraphrase.
P5-1 Misconduct
Q19-1 ★Gabrielle Gabbe, CFA, has been accused of professional misconduct by one of her
competitors. The allegations concern Gabbe’s personal bankruptcy filing when she
was a college student ten years ago and had a large amount of uninsured medical bills.
By not disclosing the bankruptcy filing to her clients, did Gabbe violate any CFA
Institute Standards of Professional Conduct?
A. No
B. Yes, related to Misconduct
C. Yes, related to Misrepresentation
Solution: A.
A personal bankruptcy does not necessarily constitute a violation of Standard I (D). If the
circumstances of the bankruptcy involve fraudulent or deceitful business conduct, failing to
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此预测为考点预测，考题仅为复习参考
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disclose it may constitute a violation of the Standards.
Q20-1 A CFA Candidate purchased copyrighted CFA exam preparatory study guide from a
publisher. Two weeks prior to the exam, the Candidate lost the study guide, so he
photocopied a copy that his friend had purchased. According to the Standards of
Practice Handbook, did the Candidate most likely violate the CFA Institute Standards of
Professional Conduct?
A. Yes.
B. No, because he had purchased his own copy.
C. No, because both had purchased their own copies.
Solution: A.
The Candidate violated Standard I (A)-Knowledge of the Law and Standard I (D)-Misconduct. By
photocopying the material without the permission of the author and publisher, the Candidate
violated copy write laws and effectively stole the intellectual property of the author and
publisher, hence acted in a dishonest way.
Q21-1 ★★As a condition of his employment with an investment bank, Abasi Hasina, CFA, was
required to sign an employment contract, including a non-compete clause restricting
him from working for a competitor for three years after leaving the employer. After one
year, Hasina quits his job for a comparable position with an investment bank in a
country where non-compete clauses are illegal. Lawyers with whom he consulted prior
to taking the new position determined the non-compete clause was a violation of
human rights and thus illegal. Did Hasina most likely violate the CFA Institute Code of
Ethics? （2012 Mock84）
A. Yes
B. No, because the non-compete clause violates his human rights
C. No, because the non-compete clause is illegal in the new country of employment
Solution: A.
A is correct because by failing to adhere to the non-compete clause he agreed to abide by
when signing his employment contract, Hasina shows a lack of professional integrity toward his
employer. This behavior reflects poorly on the good reputation of members and is a violation
of the Code of Ethics, which states that members and candidates must act with integrity, and
Standard I (D) Misconduct, which states that members and candidates must not engage in any
professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects
adversely on their professional reputation, integrity, or competence. The Code of Ethics at
times requires a member or candidate to uphold a higher standard than that required by law,
rule, or regulation, or in this case the strict application of the employment agreement.
Q22-1 Christina Ng, a Level I CFA candidate, defaulted on a bank loan she obtained to pay for
her Master’s degree tuition when her wedding cost more than expected. A micro
finance loan company lent her money to pay off the tuition loan in full, including
penalties and interest. The micro finance loan company even extended further credit to
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pay for her parents’ outstanding medical bills. Unfortunately, her parents’ health
problems escalated to the point where Ng had to take extensive time away from work
to deal with the issues. She was subsequently fired and consequently defaulted on the
second loan. Because she was no longer employed, Ng decided to file for personal
bankruptcy. Do the loan defaults leading up to Ng’s bankruptcy most likely violate
Standard I (D) Misconduct?
A. No
B. Yes, with regard to the first loan default
C. Yes, with regard to the second loan default
Solution: A.
A is correct because although Ng’s first loan default, which played a part in the subsequent
bankruptcy, is a result of poor financial choices (. paying for higher wedding costs rather
than her tuition loan), neither of the loan defaults or the bankruptcy involves fraudulent or
deceitful business conduct but are based on unfortunate personal circumstances. Therefore,
she would most likely not be in violation of Standard I (D) Misconduct.
Key points of Misconduct：
R40-1 Scope of application
★凡是有关于欺诈的(dishonesty, fraud, or deceit)，或者影响到 professional
reputation, integrity, or competence 的行为都是 misconduct
但是职业无关的除欺诈以外的行为不当行为或则违法行为是不违反 misconduct
的，比如作为某一环保组织成员参加游行
Excessive drinking at lunch during work making negative effect on your ability to
make sound investment decisions is a violation of Standard I(D).
R41-1 ★个人破产 may not reflect on the integrity or trustworthiness of the person declaring
bankruptcy
如果是经营破产（如与欺诈无关），不算；
如果是因欺诈（fraudulent or deceitful business conduct）导致的破产，算。
R42-1 Recommended procedures
Code of ethics: every employee should subscribe and make clear that the unethical
activities will not be tolerated.
List of violations: potential violations and associated disciplinary sanctions.
Employee references: check potential employee’s character and eligible for work in
the investment industry because of past infractions of the law.
P6-1 Material Nonpublic Information
Q23-1 ★Diana Fairbanks, CFA, is married to an auditor employed at a large accounting firm.
When her husband mentioned that a computer firm he was auditing would receive a
qualified opinion, she thought nothing of it. Later that week, when she reviewed a new
client’s account, she noticed that there were substantial holdings of this company.
When she did an Internet search for news on the company, she did not find anything
about its most recent audit or anything adverse. Which of the following actions
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concerning the computer stock should Fairbanks most likely take to avoid violating the
CFA Institute Standards of Professional Conduct?
A. Take no investment action.
B. Complete a thorough and diligent analysis of the company and then sell the stock
C. Sell the stock immediately as she has a reasonable basis for taking this investment action.
Solution: A.
The information concerning the qualified opinion is nonpublic and material. She would be in
violation of Standard II (A) if she took investment action based on the information. She should
also make reasonable efforts to achieve public dissemination of the information.
Q24-1 According to the CFA Institute Standards of Practice handbook, insider trading is the
least likely to be prevented by establishing:
A. Watch list
B. Restricted list
C. Selective disclosure
Solution: C.
A firewall restricts the flow of confidential information to those who need to know the
information to make more appropriate decision. If the firm is not willing to disclose negative
recommendation on its clients, a restricted list should be established to dismiss only factual
information. The disclosure of information to a selected groups of analysts in a meeting room
cannot be considered as public.
Q25-1 ★★Andrews, a private wealth manager, is conducting interviews for a new research
analyst for his firm. One of the candidates is Wright, an analyst with a local investment
bank. During the interview, while Wright is describing his analytical skills, he mentions a
current merger in which his firm is acting as the adviser. Andrews has heard rumors of a
possible merger between the two companies, but no releases have been made by the
companies concerned. Which of the following actions by Andrews is least likely a
violation of the Code and Standards? (原版书 Reading2-32)
A. Waiting until the next day before trading on the information to allow time for it to
become public.
B. Notifying all investment managers in his firm of the new information so none of their
clients are disadvantaged.
C. Placing the securities mentioned as part of the merger on the firm's restricted trading list.
Solution：C.
The guidance to Standard II(A)—Material Nonpublic Information recommends adding
securities to the firm's restricted list when the firm has or may have material nonpublic
information. By adding these securities to this list, Andrews would uphold this standard.
Because waiting until the next day will not ensure that news of the merger is made public,
answer A is incorrect. Negotiations may take much longer between the two companies, and
the merger may never happen. Andrews must wait until the information is disseminated to the
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market before he trades on that information. Answer B is incorrect because Andrews should
not disclose the information to other managers; no trading is allowed on material nonpublic
information.
Q26-1 ★★James Simone, CFA, the CFO of a publicly listed company, seeks to improve the
quality of his company’s communication with institutional fund managers. He holds an
investor briefing with this group the evening before the company earnings are
announced. The company’s quarterly earnings are broadcast in a press release the next
day before the market opens. The earnings information in the investor briefing is
identical to that in the press release. Did Simone most likely violate the CFA Institute
Standards of Professional Conduct? （2012 Mock83）
A. Yes
B. No, because investor briefing and press release information are identical
C. No, because the company releases information while the market is closed
Solution: A.
A is correct because Simone violated Standard II (A) Material Nonpublic Information by giving
institutional fund managers access to material nonpublic information prior to public
dissemination (., the press release). By releasing earnings results to a select group of
institutional fund managers prior to a public press release, Simone allows the institutional fund
managers a time advantage over other investors not invited to the investor briefing.
Q27-1 ★Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry
conference, Zhao hears rumors that Green Run Software may have falsified its financial
results. When she returns to her office, Zhao conducts a thorough analysis of Green
Run. Based on her research, including discussions with some of Green Run’s customers,
Zhao is convinced that Green Run’s reported 50% increase in net income during recent
quarters is completely fictitious. So far, however, Zhao is the only analyst suspicious
about Green Run’s reported earnings. According to the CFA Institute Code of Ethics and
Standards of Professional Conduct, the least appropriate action for Zhao is to: （2012
Mock84）
A. Report her suspicions to Green Run’s management.
B. Do nothing, until other analysts support her analysis.
C. Recommend her clients sell their Green Run shares immediately.
Solution: B.
B is correct because the analyst has conducted thorough research that indicates the company
falsified its financial results, and she should request the company address this issue publicly as
recommended by Standard II (A) Material Nonpublic Information. If a member or candidate
determines that information is material, the member or candidate should make reasonable
efforts to achieve public dissemination of the information. This effort usually entails
encouraging the issuer company to make the information public. If public dissemination is not
possible, the member or candidate must communicate the information only to the designated
supervisory and compliance personnel within the member’s or candidate’s firm and must not
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take investment action on the basis of the information.
Q28-1 ★★While at a bar in the financial district after work, Ellen Miffitt, CFA, overheard
several employees at one of her competitors discussing how they would manipulate
down the price of a thinly traded micro-cap stock over the next few days. Miffitt’s
clients had large positions of this stock and when she arrived at work the next day, she
immediately sold all of these holdings. As she had determined that the micro-cap stock
was suitable for all of her accounts, even at its previously higher price, Miffitt bought
back her clients’ original exposure at the end of the week at the new, lower price.
Which CFA Institute Standards of Professional Conduct did Miffitt least likely violate:
A. Market Manipulation
B. Preservation of Confidentiality
C. Material Nonpublic Information
Solution: B
Miffitt has not violated the confidentiality Standard. Even though she did not initiate the
market manipulation, Miffitt added to the stock’s price movement when she sold into a
declining market. By repurchasing the shares for her clients, she was seeking to take advantage
of the manipulation and was in violation of Standard II (B). Miffitt has attempted to benefit her
clients by trading on information that could affect the value of the micro-cap stock and as such
would be classified as material nonpublic information. Information that is known regarding
orders for large trades before they are executed is considered material nonpublic information.
Q29-1 ★Charlotte BILLO, a junior analyst in a regional brokerage firm, overheard three senior
managers of a large listed company talking about a staff restructuring plan while she
was waiting for her flight. The managers determined those who would be dismissed.
Charlotte could not remember the names but was sure that they were just ordinary
employees. After returning from her journey, she made a thorough research on the
company and found that the company was likely to shut down a plant situated in her
local town because of a great loss on a new product line. She launched immediately a
recommendation Sell on the stock. Did she comply with the Standards?
A. Yes, because the recommendation was based on mosaic theory and she made a diligent
research.
B. No, because she did not reach her conclusion on a reasonable basis because she did not
remember the names of those who would be dismissed.
C. No, because she took advantage of non-public material information.
Solution: C.
The restructuring of staff should be considered material, and fire determination of ordinary
can’t change the nature of materiality, so she can’t make investment recommendation using
non-public material information.
Q30-1 ★While waiting in the business class lounge before boarding an airplane, Becca
Msafari, CFA, an equity analyst, overhears a conversation by a group of senior
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managers, including members of the board, from a large publicly listed bank. The
managers discuss staff changes necessary to accommodate their regional expansion
plans. Msafari hears several staff names mentioned. Under what circumstances could
Msafari most likely use this information when making an investment recommendation
to her clients? She can use the information: (2014 Mock 99-15)
A. If the discussed changes are unlikely to affect investor perception of the bank.
B. Under no circumstances.
C. If she does not breach the confidentiality of the names of the staff.
Solution: A.
To comply with the Code and Standards, a member or candidate cannot use material
nonpublic information when making investment recommendations. The information
overheard would not be considered material only if any public announcement of the staff
removal would be unlikely to move the share price of the bank, nor would the regional
expansion substantially impact the value of the bank.
Q31-1 ★Claire Jones, CFA, is an analyst following natural gas companies in the United States.
At an industry energy conference, the chief financial officer of Alpine Energy states that
the company is interested in making strategic acquisitions. At a separate event, Alpine's
head of exploration commented that he is bullish on natural gas production prospects
within northeastern Pennsylvania. Jones is aware that Alpine currently has very little
exposure to this region. She also knows another company in her universe, Pure Energy,
Inc. Is based in northeastern Pennsylvania and controls significant assets in the area.
Pure Energy is highly leveraged, and Jones believes it will need to raise additional
capital or partner with another firm to move to the production phase with their assets.
Jones attempts to contact Alpine's chief executive officer with an unrelated question
and is told he is unavailable because he is on a business trip to northeastern
Pennsylvania. Jones updates her research on Pure Energy and then recommends the
stock to Lisa Wong, CFA, a portfolio manager, who purchases significant positions in
client accounts. The following week, Pure Energy announces it has entered into an
agreement to be purchased by Alpine for a significant premium. Has either Jones or
Wong most likely violated standards with regard to the integrity of capital markets?
A. Yes, Jones' recommendation is based on insider information
B. Yes, both Jones and Wong have acted on insider information
C. No
Solution: C.
Jones has used the mosaic theory to combine nonmaterial, nonpublic information with
material public information.
Q32-1 An investment banking department of a brokerage firm often receives material
nonpublic information that could have considerable value if used in advising the firm's
brokerage clients. In order to conform to the Code and Standards, which one of the
following is the best policy for the brokerage firm? （原版书 Reading2-23）
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A. Permanently prohibit both "buy" and "sell" recommendations of the stocks of clients of
the investment banking department.
B. Establish physical and informational barriers within the firm to prevent the exchange of
information between the investment banking and brokerage operations.
C. Monitor the exchange of information between the investment banking department and
the brokerage operation.
Solution：B.
The best policy to prevent violation of Standard II(A)-Material Nonpublic Information is the
establishment of firewalls in a (inn to prevent exchange of insider information. The physical
and informational barrier of a firewall between the investment banking department and the
brokerage operation prevents the investment banking department from providing information
to analysts on the brokerage side who may be writing recommendations on a company stock.
Prohibiting recommendations of the stock of companies that are clients of the investment
banking department is an alternative, but answer A states that this prohibition would be
permanent, which is not the best answer. Once an offering is complete and the material
nonpublic information obtained by the investment banking department becomes public,
resuming publishing recommendations on the stock is not a violation of the Code and
Standards because the information of the investment banking department no longer gives the
brokerage operation an advantage in writing the report. Answer C is incorrect because no
exchange of information should be occurring between the investment banking department
and the brokerage operation, so monitoring of such exchanges is not an effective compliance
procedure for preventing the use of material nonpublic information.
Key points of Material nonpublic information：
R43-1 如果持有 MNI，自己不能利用或促使他人利用 MNI 进行投资
R44-1 ★判断 material 的条件: 来源可靠，对股价影响明确
R45-1 比如：Substance and materiality
Earnings
M&A, acquisitions, tender offers, or joint ventures
Changes in assets, Changes in management
Innovative products, processes, or discoveries
New licenses, patents, registered trademarks, or regulatory approval/rejection of a
product
Developments regarding customers or suppliers (., the acquisition or loss of a
contract)
Changes in auditor notification or the fact that the issuer may no longer rely on an
auditor’s report or qualified opinion
Defaults on senior securities, calls of securities for redemption, repurchase plans,
stock splits, changes in dividends, changes to the rights of security holders, public or
private sales of additional securities, and changes in credit ratings
Bankruptcies
Significant legal disputes
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Government reports of economic trends (employment, housing starts, currency
information, etc.)
Orders for large trades before they are executed.
竞争对手的预测不能认为是 MNI
R46-1 其他情形：
有名的公司或者分析师对股价的研究对市场有影响，算是 material
Suppliers：从供应商处了解到一个公司的信息，如果来源是可靠的，则算是 MNI，
不能使用；如果是自己观察到的，属于 Mosaic 理论，可以使用。竞争者的分析，
不算 material。
不管通过什么途径，公开发行的报告就是 public（失误引起的提前发行，算不算
做公开发布？算, can use for trading）
如果公司在分析师会议上内幕信息，怎么办？Can’t use.
Selective disclosure may violate MNI. If MNI was disclosed selectively, the listed
company should issue a press release or reach public dissemination.
R47-1 可以使用内幕消息的情况（new）：如果 A member or candidate 在根据商业协议为目
标公司的活动（这些活动包括兼并、贷款认购、信用评级以及其他提供服务）做尽
职调查时，用到公司合法提供的没有公开的内部消息，不算违背 Standard II(A)。如
果为了其他目的使用内幕信息，尤其是为了诱惑他人对该公司的证券进行交易，则
违背了 Standard II(A)。
R48-1 Social media(new): 一些社会媒体平台只能把信息提供给注册会员。Members and
candidates 需要确认这些信息能否从其他公开渠道获得。Members and candidates 在
通过这些社会媒体平台和客户进行交流时，只要其他投资大众也有权查阅这类信息，
那么这就不违背 standard II(A)。另外根据 Standard I(A)，会员需要完成同社会媒体有
关的相关监管文件的填写。
R49-1 Industry expert(new)：Members and candidates 需要对外部聘用的行业专家所提供的
信息负责，不能用一些 material nonpublic information。如果行业专家提供了一些企
业的 material nonpublic information，在这些信息被公开之前，members and candidates
不能使用这些信息进行投资。
R50-1 Mosaic Theory：可以使用 material public information and non-material non-public
information，但必须 save and document all the research
R51-1 ★Simply because the public in general find the conclusions material does not require
that the analyst make his/her work public. Investors who are not clients of the analyst
can either do the work themselves or become clients of the analyst for access to the
analyst’s expertise.
R52-1 ★公司如果拥有 MNI，不必禁止所有自营交易（Proprietary trading），
如果是做市商 market maker，remain passive to the market, take only the contra
side of unsolicited customer trades；
In risk arbitrage trading, Best to stop; If not stop, prove the adequacy of their
internal procedures and must document firm trades.
R53-1 ★Achieve public dissemination
If material, should try to achieve public dissemination.
Encourage the firm to make it public, if not possible, report only to designated
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supervisory and compliance personnel within her firm.
not invest on MNI, or induce insider to disclose MNI
R54-1 Adopt compliance procedures
Encourage firms to adopt compliance procedures to prevent the misuse of MNI.
Particularly important is improving compliance in such areas as the review of
employee and proprietary trading, documentation of firm procedures, and the
supervision of interdepartmental communications in multi-service firms.
Compliance procedures should suit the particular characteristics of a firm, including
its size and the nature of its business.
R55-1 The minimum elements of such firewall include, but are not limited to, the following:
★substantial control of interdepartmental communications, preferably through a
clearance area in either the compliance or legal department;
Review of employee trading through the maintenance of “watch,” “restricted,” and
“rumor” lists;
Documentation of the procedures designed to limit the flow of information between
departments and of the actions taken to enforce those procedures;
★heightened review or restriction of proprietary trading while a firm is in
possession of material nonpublic information.
R56-1 Physical separation of departments
R57-1 Prevention of personnel overlap
R58-1 ★A reporting system
Authorized people review and approve communications between departments.
Consult a designated compliance officer to determine whether sharing the
information is necessary and how much information should be shared.
If the sharing is necessary, the compliance officer should coordinate the process of
“looking over the wall”
A single supervisor or compliance officer should have the specific authority and
responsibility of deciding whether or not information is material and whether it is
sufficiently public to be used as the basis for investment decisions.
Ideally, the officer is independent.
R59-1 ★Personal trading limitations.
Consider restrictions or prohibitions on personal trading and carefully monitor
proprietary trading and personal trading.
Require employees to make periodic reports of their own transactions and
transactions made for the benefit of family members
Securities should be placed on a restricted list when a firm has or may have MNI.
A watch list shown to only the few people responsible for compliance should be
used to monitor transactions in specified securities.
R60-1 ★Record maintenance.
Multi-service firms should maintain written records of the communications between
various departments.
Firms should place a high priority on training and should consider instituting
comprehensive training programs, particularly for employees in sensitive areas.
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R61-1 ★Communication to all employees.
Written compliance policies and guidelines should be circulated to all employees of a
firm.
Policies and guidelines should be used in conjunction with training programs aimed
at enabling employees to recognize MNI.
Sufficient training to either make an informed decision or to realize they need to
consult a supervisor or compliance officer before engaging in questionable
transactions.
P7-1 Market Manipulation
Q33-1 ★Lin Liang, CFA, is an investment manager and an auto industry expert. Last month,
Liang requested securities regulators to open an investigation into accounting
irregularities at Road Rubber Company (RRC) despite having no basis for the request.
Shortly before he spoke to the regulators, Liang shorted RRC stock for his clients. Once
the regulators opened an investigation, Liang leaked this information to multiple
sources in the media. When news of the investigation became public, ‘the share price
of RRC immediately dropped 30%. Liang then covered the short positions and made $5
per share for his clients. Liang least likely violated which of the CFA Institute Standards
of Professional Conduct? （2012 Mock85）
A. Misconduct.
B. Market Manipulation.
C. Priority of Transactions.
Solution: C.
C is correct because the member has engaged in information-based manipulation of RRC stock.
Members and candidates must refrain from “pumping up” (or down in this case) the price of
an investment by issuing misleading positive (negative) information for their or their clients’
benefit. In addition, the member would be in violation of Standard I (A) Knowledge of the Law,
because he has not acted with professionalism and integrity. The member has not violated
Standard VI (B) Priority of Transactions because this concerns client investment transactions
having priority over member or candidate investment transactions and is not applicable here.
Q34-1 ★★Richard Cardinal, CFA, is the founder of Volcano Capital Research, an investment
management firm whose sole activity is short selling. Cardinal seeks out companies
whose stocks have had large price increases. Cardinal also pays several lobbying firms
to update him immediately on any legislative or regulatory changes that may impact his
target companies. Cardinal sells short those target companies he estimates are near the
peak of their sales and earnings and that his sources identify as facing legal or
regulatory challenges. Immediately after he sells a stock, Cardinal conducts a public
relations campaign to disclose all of the negative information he has gathered on the
company, even if the information is not yet public. Which of Cardinal’s following actions
is least likely to be in violation of the CFA Institute Standards of Professional Conduct?
（2012 Mock84）
A. Selling stock short
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B. Trading on information from lobbyists
C. Disclosing information about target companies
Solution: A.
A is correct because selling stock short is a management strategy and does not necessarily
violate any aspect of the Code and Standards.
Key points of Market manipulation:
R62-1 定义：distort prices or artificially inflate trading volume with the intent to mislead
market participants
R63-1 ★The intent of the action is critical to determine whether it is a violation of this
standard. 需要注意什么时候是违反的，出于什么样的目的是不违反的: (for tax and
inefficiency) 利用市场的非有效赚钱，是否违反？为了税收的目的，是否违反？No!!!
一家交易所与做市商签署协议，要求做市商保证最低交易量，同时，交易所承
诺佣金折让。如果他们的目的旨在操纵市场，则违反了 II(B)；如果他们的目的旨
在活跃市场，且此协议对外公布，则不违反 II(B)。
R64-1 以操纵为目的的信息发布(information based)和交易(Transaction based)都是违反的；
Info-based: spreading false or misleading information
Transaction-based: transactions that deceive or would be likely to mislead market
participants by distorting the price-setting mechanism of financial instruments
P8-1 Loyalty, Prudence and Care
Q35-1 ★★Jorge Lopez, CFA, is responsible for his bank’s proxy voting on behalf of the bank’s
asset management clients. Lopez recently performed a cost-benefit analysis, showing
that voting all proxies might not benefit the bank’s clients. Based on this analysis, Lopez
changes the proxy voting policies and procedures without informing anyone else of the
change. Lopez now votes client proxies on the side of management on all issues with
the exception of major mergers where a significant impact on the stock price is
expected. Lopez least likely violated the CFA Institute Standards of Professional Conduct
regarding: （2012 Mock85）
A. Cost-benefit analysis.
B. Voting with management.
C. Proxy voting policy disclosures.
Solution: A.
A is correct because there is no violation of Standard III (A) Loyalty, Prudence, and Care by
performing a cost-benefit analysis showing that voting all proxies might not benefit the client,
and concluding voting proxies may not be necessary in all instances. However, even though
voting proxies may not be necessary in all instances, part of a member’s or candidate’s duty of
loyalty under Standard III (A) Loyalty, Prudence, and Care includes voting proxies in an
informed and responsible manner, which is not being done by Lopez by automatically voting
with management on the majority of issues. In addition, members and candidates should
disclose to clients their proxy-voting policies, including any changes to that policy as required
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by Standard III (A) Loyalty, Prudence, and Care, which has not been done.
Q36-1 ★★One of the discretionary accounts managed by Farnsworth is the Jones
Corporation employee profit-sharing plan. Jones, the company president, recently
asked Farnsworth to vote the shares in the profit-sharing plan in favor of the slate of
directors nominated by Jones Corporation and against the directors sponsored by a
dissident stockholder group. Farnsworth does not want to lose this account because he
directs all the account's trades to a brokerage firm that provides Farnsworth with useful
information about tax-free investments. Although this information is not of value in
managing the Jones Corporation account, it does help in managing several other
accounts. The brokerage firm providing this information also offers the lowest
commissions for trades and provides best execution. Farnsworth investigates the
director issue, concludes that the management-nominated slate is better for the
long-run performance of the company than the dissident group's slate, and votes
accordingly. Farnsworth: （原版书 Reading2-14）
A. Violated the Standards in voting the shares in the manner requested by Jones but not in
directing trades to the brokerage firm.
B. Did not violate the Standards in voting the shares in the manner requested by Jones or in
directing trades to the brokerage firm.
C. Violated the Standards in directing trades to the brokerage firm but not in voting the
shares as requested by Jones.
Solution：B.
This question relates to Standard III (A) Loyalty, Prudence, and Care—specifically, a member's
or candidate's responsibility for voting proxies and the use of client brokerage. According to
the facts stated in the question, Farnsworth did not violate Standard III(A). Although the
company president asked Farnsworth to vote the shares of the Jones Corporation
profit-sharing plan a certain way, Farnsworth investigated the issue and concluded,
independently, the best way to vote. Therefore, even though his decision coincided with the
wishes of the company president, Farnsworth is not in violation of his responsibility to be loyal
and to provide care to his clients. In this case, the participants and the beneficiaries of the
profit-sharing plan are the clients, not the company's management. Had Farnsworth not
investigated the issue or had he yielded to the president's wishes and voted for a slate of
directors that he had determined was not in the best interest of the company, Farnsworth
would have violated his responsibilities to the beneficiaries of the plan. In addition, because
the brokerage firm provides the lowest commissions and best execution for securities
transactions, Farnsworth has met his obligations to the client in using this brokerage firm. It
does not matter that the brokerage firm also provides research information that is not useful
for the account generating the commission, because Farnsworth is not paying extra money of
the client's for that information.
Q37-1 ★Carter works for Invest Today, a local asset management firm. A broker that provides
Carter with proprietary research through client brokerage arrangements is offering a
new trading service. The broker is offering low-fee, execution-only trades to
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complement its traditional full-service, execution-and-research trades. To entice Carter
and other asset managers to send additional business its way, the broker will apply the
commissions paid on the new service toward satisfying the brokerage commitment of
the prior full-service arrangements. Carter has always been satisfied with the execution
provided on the full-service trades, and the new low-fee trades are comparable to the
fees of other brokers currently used for the accounts that prohibit soft dollar
arrangements. Which of the following is correct conduct for Carter?（原版书 Reading2-)
A. Carter can trade for his accounts that prohibit soft dollar arrangements under the new
low-fee trading scheme.
B. Carter cannot use the new trading scheme because the commissions are prohibited by
the soft dollar restrictions of the accounts.
C. Carter should trade only through the new low-fee scheme and should increase his trading
volume to meet his required commission commitment.
Solution：A.
The question relates to Standard III(A)—Loyalty, Prudence, and Care. Carter believes the broker
offers effective execution at a fee that is comparable with those of other brokers, so he is free
to use the broker for all accounts. Answer B is incorrect because the accounts that prohibit soft
dollar arrangements do not want to fund the purchase of research by Carter. The new trading
scheme does not incur additional commissions from clients, so it would not go against the
prohibitions. Answer C is incorrect because Carter should not incur unnecessary or excessive
"churning" of the portfolios (excessive trading) for the purpose of meeting the brokerage
commitments of soft dollar arrangements.
Q38-1 ★David Bravoria, CFA, is an independent financial advisor for a high net worth client
with whom he had not had contact in over two years. During a recent brief telephone
conversation, the client stated he wanted to increase his risk exposure. Bravoria
subsequently recommended and invested in several high-risk funds on behalf of the
client. Bravoria continued, as he had done in the past, to send to his client monthly,
detailed itemized investment statements. Did Bravoria most likely violate any CFA
Standards?
A. No.
B. Yes, with regard to investment statements.
C. Yes, with regard to purchasing venture capital funds.
Solution: C.
Bravoria violated Standard III (A) in not exercising Loyalty, Prudence and Care. Bravoria had not
updated his client’s profile in over two years thus should not have made further investments,
particularly in high risk investments until such time as he updated the client’s risk and return
objectives, financial constraints and financial position. Bravoria provided his client with
investment statements more frequently than that which is required; . Quarterly so was not
in violation of regular account information.
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Q39-1 ★★Jack Steyn, CFA, recently became the head of the trading desk at a large
investment management firm that specializes in domestic equities. While reviewing the
firm’s trading operations, he notices clients give discretion to the manager to select
brokers on the basis of their overall services to the management firm. Despite the
client directive, Steyn would most likely violate Standard III (A) Loyalty, Prudence, and
Care if he pays soft commissions for which of the following services from the brokers?
（2013 mock）
A. Equity research reports
B. Investment conference attendance
C. Database services for offshore investments
Solution: C.
C is correct because Standard III (A) Loyalty, Prudence and Care stipulates that the client owns
the brokerage. Therefore members and candidates are required to only use client brokerage to
the benefit of the clients (soft commissions policy). Because the firm specializes in domestic
equity, an offshore investment database service would not benefit clients.
Q40-1 ★★Chris Rodriguez, CFA, is a portfolio manager at Nisqually Asset Management,
which specializes in trading highly illiquid shares. Rodriguez has been using Hon
Securities Brokers almost exclusively when making transactions for Nisqually clients, as
well as for his own relatively small account. Hon always executes Rodriguez’s personal
trades at a more preferential price than for Rodriguez’s clients’ accounts. This occurs
regardless of whether or not Rodriguez personally trades before or after clients.
Rodriguez should least likely do which of the following in order to comply with the CFA
Institute Code of Ethics and Standards of Professional Conduct?（2013 mock afternoon
session）
A. Eliminate the exclusive trading arrangement.
B. Trade client accounts before his own account.
C. Average trade prices across all trading accounts.
Solution: C.
C is correct because Rodriguez is in violation of Standard IV (A) Loyalty, which requires that, in
matters related to their employment, members and candidates must act for the benefit of
their employer and not deprive their employer of the advantage of their skills and abilities,
divulge confidential information, or otherwise cause harm to their employer. Rodriguez should
not accept the special treatment from Hon, and he should seek such favors for the clients of
Nisqually, specifically the lower costs Rodriguez has been getting for his transactions.
Rodriguez should not average transaction costs because his clients should be given the lower
preferential prices according to Standard III (A) Loyalty, Prudence, and Care.
Q41-1 ★★★Dimitri Kuznetsov, CFA, is a portfolio manager and holds shares of Barnikoff
Limited and Matric Ventures in all client portfolios. Both companies have upcoming
annual general meetings scheduled for the same day. The management of Barnikoff
proposes to change its financial year-end from September to December, while Matric
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Ventures proposes to enter into a high-risk venture. The proxy voting policy clause in all
client investment management agreements managed by Kuznetsov states, “When
voting proxies provides a cost benefit to the client, the manager must vote a proxy.”
Regarding the proxy votes for Matric and Barnikoff, Kuznetsov would least likely violate
CFA Institute Standard III (A) Loyalty, Prudence, and Care if he votes:（MOCK92-15）
A. With management.
B. Only the Matric proxy.
C. Only the Barnikoff proxy.
Solution: B.
B is correct because Standard III (A) Loyalty, Prudence, and Care states: it is a member’s or
candidate’s duty to vote proxies on behalf of clients in an informed and responsible manner.
However, if a cost-benefit analysis shows voting all proxies may not benefit the client, voting all
proxies may not be necessary. The member or candidate is responsible for informing all clients
if this is the policy of the fund manager. The member or candidate must takes steps to disclose
this proxy voting policy to clients. Voting the Barnikoff proxy does not appear to offer a benefit
because the issue is not of a critical nature, while voting the proxy for Matric involves a
material issue and is a benefit that should be voted on.
Key points of Loyalty, prudence and care:
R65-1 信托义务和 Loyalty, Prudence, and Care 的区别。(new)
不管和客户有没有建立信托关系，Members and candidates 都必须对客户尽有
Loyalty, Prudence, and Care 的责任。
信托关系可以增加与客户之间的信任度。虽然 Members and candidates 必须遵守
合法的信托义务，但是 Code and Standards 并不要求每一个 Members and
candidates 都成为信托人。
Standard III(A)要求 Members and candidates 为客户争取最大利益。
R66-1 作为交易的执行者，但不需要为客户提供建议时(new):
Use their skills and diligence to execute trades in the most favorable terms that can be
achieved。（争取达到最好的结果）
R67-1 作为交易的执行者同时为客户提供投资建议时(new)：
The extent of the advisory arrangement and limitations should be outlined in the
agreement with the client at the outset of the relationship. 必须根据客户自身的
objectives and risk tolerances，以及自身需求给出建议。
R68-1 ★4 类客户
Individuals: An investment manager manages the personal assets of an individual.
Beneficiary: When the manager is responsible for the portfolios of pension plans or
trusts, the client is the beneficiaries of the plan or trust. The duty of loyalty is owed to
the ultimate beneficiaries.
Mandate: In some situations, the actual client or beneficiaries may not exist.
Members and candidates managing a fund to an index or an expected mandate owe
the duty of loyalty, prudence, and care to the stated mandate.
Investing public: The client may be the investing public as a whole, the goals of
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independence and objectivity of research surpass the goal of loyalty to a single
organization.
R69-1 Develop client’s portfolios
Should ensure that the client’s objectives and expectations of the account are realistic
and suitable to their circumstances and that the risks involved are appropriate.
Recommended investment strategies should relate to the long-term objectives and
circumstances of the client.
检查 investment manager or the firm 的利益是否 conflict with the best interests and
objectives of the client
一定遵守 any guidelines set by clients
投资决策要基于整个 portfolio
R70-1 ★Soft Commission Policies.
“Soft dollars” or “soft commissions” should benefit clients, not investment manager.
If pay a higher commission without corresponding benefit to the client, violate
“directed brokerage” is ok, but still obligated to seek “best price” and “best
execution”, and be assured by the client that the goods or services purchased from
the brokerage will benefit the account beneficiaries. In addition, should disclose to
the client that the client may not be getting best execution from the directed
brokerage.
“Best execution” refers to a trading process that seeks to maximize the value of the
client’s portfolio within the client’s stated investment objectives and constraints.如果
客户执意要求 directed brokerage，而不考虑利益的最大化，应该取得客户的书面
同意
R71-1 ★Regular account information should submit to each client, at least quarterly, an
itemized statement showing:
The funds and securities in the custody or possession plus all debits, credits, and
transactions that occurred during the period;
Where the assets are to be maintained, as well as where or when they are moved;
Should separate the client’s assets from any others’ and their own assets.
R72-1 Client approval.
If uncertain, should ask what he/she would expect or demand if the
member/candidate was the client.
If in doubt, should disclose questionable matter in writing to the client and obtain
client approval.
R73-1 ★Should diversify unless diversification is not consistent with plan guidelines or is
contrary to the account objectives
R74-1 Vote proxies in the best interest of beneficiaries and clients，并不是任何时候使用 vote
proxies 都是有益的，如果考虑到成本和收益之间关系的话,可以放弃每次的投票。
(Blind voting 是违反的). Should determine who is authorized and for the benefit of
beneficiaries, should disclose any change in voting proxy policy.
P9-1 Fair Dealing
Q42-1 ★★Monique Gretta, CFA, is a research analyst at East West Investment Bank. Gretta
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has several long-standing relationships with mutual funds and institutional investors.
Gretta often provides these clients with draft copies of her research before
disseminating the information to all of the bank’s clients. This practice has helped
Gretta avoid several errors in her reports and she believes it is beneficial to the rest of
her client base. Regarding her research, Gretta least likely violated the CFA Institute
Code of Ethics and Standards of Professional Conduct because: (Mock79-9)
A. Her report is a draft.
B. Of her conflicts of interest
C. This practice benefits clients.
Solution: B.
Even though the analyst is not treating all clients in an equitable manner, there is no indication
she has breached any conflicts of interest.(No special interest relationship of conflicts.
Q43-1 Clive Bowers, CFA, is a portfolio manager at Burlington Advisors (BA). Bowers manages
two mutual funds along with a number of individual accounts. All of the portfolios,
including the mutual funds, have similar return objectives, risk tolerances, and tax
constraints. When Bowers allocates shares from block trades, he fills the mutual fund
orders first and often allocates the remaining shares to the individual accounts based
on their portfolio size. When allocating shares from block trades, does Bowers violate
any CFA Institute Standards?
A. No
B. Yes, with respect to suitability
C. Yes, with respect to fair dealing
Solution: C.
Members must deal fairly with clients when taking investment actions for them. By treating
the mutual funds more favorably than the individual portfolios, Bowers violates the standard
relating to fair dealing. Additionally, shares should be allocated on order size basis.
Q44-1 Miranda Grafton, CFA, purchased a large block of stock at varying prices during the
trading session. The stock realized a significant gain in value before the close of the
trading day, so Grafton reviewed her purchase prices to determine what prices should
be assigned to each specific account. According to the Standards of Practice Handbook,
Grafton's least appropriate action is to allocate the execution prices(2014 Mock 98-7)
A. On a first-in, first-out basis with consideration of bundling orders for efficiency.
B. Across the participating client accounts at the same execution price.
C. Across the participating client accounts pro rata on the basis of account size.
Solution: C.
According to Standard III (B) best practices include allocating pro rata on the basis of order size,
not account size. All clients participating in the block trade should receive the same execution
price and be charged the same commission.
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Q45-1 ★Monique Gretta, CFA, is a research analyst at East West Investment Bank. Previously,
Gretta worked at a mutual fund management company and has a long-standing client
relationship with the managers of the funds and their institutional investors. Gretta
often provides fund managers, who work for Gretta’s former employer, with draft
copies of her research before disseminating the information to all of the bank’s clients.
This practice has helped Gretta avoid several errors in her reports, and she believes it is
beneficial to the bank’s clients, even though they are not aware of this practice.
Regarding her research, Gretta least likely violated the CFA Institute Code of Ethics and
Standards of Professional Conduct because: （2012 Mock84）
A. Her report is a draft.
B. This practice benefits all clients.
C. The long-standing client relationships are not disclosed.
Solution: C.
C is correct because the analyst does not violate any of the Standards of Professional Conduct
by having long-standing client relationships and generally is not required to disclose such
relationships. However, the analyst is not treating all clients fairly as required by Standard III (B)
Fair Dealing when disseminating investment recommendations; disclosure of the relationship
with long-standing clients is not the issue. The analyst has advantaged some clients over others
by providing advance information, and all clients do not have a fair opportunity to act on the
information within the draft report. Members and candidates may differentiate their services
to clients, but different levels of service must not disadvantage or negatively affect clients.
Q46-1 ★Henrietta Huerta, CFA, writes a weekly investment newsletter to market her services
and obtain new asset management clients. A third party distributes the free newsletter
on her behalf to those individuals on its mailing list. As a result, it is widely read by
thousands of individual investors. The newsletter recommendations reflect most of
Huerta’s investment actions. After completing further research on East-West Coffee
Roasters, Huerta decides to change her initial buy recommendation to a sell. To avoid
violating the CFA Institute Standards of Professional Conduct it would be most
appropriate for Huerta to distribute the new investment recommendation to: （2013）
A. Newsletter recipients first.
B. Asset management clients first.
C. Asset management clients and newsletter recipients simultaneously.
Solution: B.
B is correct because according to Standard III (A) Loyalty, Prudence and Care members and
candidates must place their clients’ interests first before their own interests. The temptation
may be to release the changed recommendation to newsletter recipients simultaneously with
or even before the asset management clients to try to obtain new clients. However, to avoid
violating Standard III (A) Loyalty, Prudence and Care, Huerta must ensure any change in an
investment recommendation is first distributed to her asset management clients before any
newsletter recipients, who are not necessarily clients (that is, they receive the newsletter for
free from a third party distribution list).
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Q47-1 ★Wouter Duyck, CFA, is the sole proprietor of an investment advisory firm serving a
middle-class retail clientele. Duyck claims to be different from his competitors because
he conducts his own independent research. Duyck has hundreds of clients. He fully
discloses that to simplify the management of all these accounts he has created a
recommended list of stocks, from which he selects investments for all of his clients.
Duyck's recommended list of stocks is obtained from his primary broker, who has
completed due diligence on each stock. Duyck's recommended list least likely violates
which of the following CFA Institute Standards of Professional Conduct? （2012
Mock85）
A. Fair Dealing.
B. Misrepresentation.
C. Diligence and Reasonable Basis.
Solution: A.
A is correct because Standard III (B) Fair Dealing concerns the fair treatment of clients when
making investment recommendations or taking investment action, but there is no indication
the advisor has discriminated against any clients regarding his recommendations as he invests
all clients in the same universe of stocks. Possibly violate Suitability.
Q48-1 ★Robin Herring, CFA, is a government bond research analyst at an independent credit
rating agency. A competitor credit rating agency just downgraded the bonds of a
government Herring follows. Herring notes all of the information in the competitor’s
report was covered in his analysis published last week. In the past, Herring has been
slow to downgrade bonds, so he starts to doubt his own analysis after seeing the
competitor’s report. Herring decides to reissue his credit rating of this government
bond and match the competitor’s downgrade. In his revised report, Herring states that
new information has been made available to justify the downgrade. Herring posts the
revision on the credit rating agency’s website and provides it by e-mail to all clients
who received the original. Herring’s rating change least likely violated which of the
following CFA Institute Code of Ethics and Standards of Professional Conduct? （2012）
A. Fair Dealing
B. Communication with Clients
C. Diligence and Reasonable Basis
Solution: A.
A is correct because the analyst has dealt fairly with all clients by sending them an e-mail and
posting his rating change on the credit rating agency’s website when making material changes
to his prior investment recommendation; therefore, he has not violated Standard III (B) Fair
Dealing. Clients should be treated fairly when material changes in a member’s or candidate’s
prior investment recommendations are disseminated, which has been done.
Q49-1 ★★Sheila Schleif, CFA, is an equity analyst at an investment bank. Schleif uses a
data-driven computer model in making her stock recommendations. Schleif discovers
the model contains a coding error. If the coding error were corrected, her most recent
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buy recommendation would change to a sell. Schleif corrects the coding error, issues a
bank-wide revision of her recommendation changing the buy to a sell, and then
forwards the revision to all bank clients who received the initial recommendation.
Concerning her actions related to the coding error, Schlief most likely violated which of
the following CFA Institute Standards of Professional Conduct? （2012 Mock85）
A. Fair Dealing.
B. Priority of Transactions.
C. Diligence and Reasonable Basis.
Solution: A.
A is correct as the analyst violated Standard III(B) Fair Dealing by selectively distributing the
recommendation internally at the investment bank prior to communicating her
recommendation to clients. This might also be a violation of Standard III(A) Loyalty, Prudence,
and Care, which requires that members must act for the benefit of their clients and place their
clients’ interests before their employer’s or their own interests.
Q50-1 ★Alexander Newton, CFA, is the chief compliance officer for Mills Investment Limited.
Newton institutes a new policy requiring the pro rata distribution of new security issues
to all established discretionary accounts for which the new issues are appropriate. The
policy also provides for the exclusion of newly established discretionary accounts from
the distribution until they have reached their one-month anniversary date. This policy
is disclosed to all existing and potential clients. Did Newton most likely violate any CFA
Institute Standards of Professional Conduct?(2014 Mock 98-18)
A. Yes
B. No, because the policy has been adequately disclosed to all existing and potential clients
C. No, because the allocation policy is not inequitable under the standards
Solution: A.
Under Standard III(B)-Fair Dealing, members and candidates should disclose to clients and
prospective clients how they select accounts to participate in and how they determine the
amount of securities each account will buy or sell. Trade allocation procedures must be fair
and equitable, and disclosure of inequitable allocation methods does not relieve the member
or candidate of this obligation. All discretionary accounts should be treated in the same
manner. Treating newer accounts differently would be considered inequitable regardless of
whether this policy is disclosed.
Key points of Fair dealing：
R75-1 Fair 不等于 Equal；如果 Equally，有可能违反 fair dealing.
R76-1 可以为不同的客户设置不同的服务等级，但是必须不对顾客造成负面影响。Different
clients have different levels of service. 这是可以的，只要满足前提:不损害其他客户的
利益、对所有客户进行披露并且所有客户在满足条件后都可以获得。
R77-1 Investment recommendation 的发表可以有多种方式：brief update report, by addition
to or deletion from a recommended list, or simply by oral communication，都必须确保
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all clients have a fair opportunity to act on every recommendation。
投资建议时，disclosure of inequitable allocation system, even accepted by clients,
can’t be exempt from fair dealing for disclosure and acceptance. Disclose trade
allocation procedures需要注意 disclosure of inequitable allocation methods does not
relieve the member of this obligation
R78-1 发现是一个股票是 Hot issue，给自己喜欢的顾客多配了一些，违反了 Fair dealing；
R79-1 ★把新的投资建议 e-mail 给顾客之后找大机构客户讨论细节，没有违反 fair dealing
R80-1 ★Investment action
When making investments in new offerings or in secondary financings, should
distribute the issues to all customers who are suitable for the investment and
consistent with the policies of allocating blocks of stock
对于 oversubscribed issues：round-lot basis，forgo any sales to themselves or
immediate families in order to free up additional shares for clients→not violate
If the investment professional’s family-member accounts are managed similarly to the
accounts of other clients of the firm, these accounts should not be excluded from
buying such shares.
Must make every effort to treat all individual and institutional clients in a fair and
impartial manner.
Disclose to clients and prospective clients the documented allocation procedures in
place and how the procedures would affect them.
Should not take advantage of their position to the detriment of clients.
R81-1 Procedures
Limit the number of people who are privy to the fact that a recommendation is going
to be disseminated
Shorten the time frame between decision and dissemination，Disseminate a short
summary report including the conclusion might be published in advance
Publish guideline for pre-dissemination behavior
Communicate recommendations both within the firm and to customers
simultaneously.
Maintain a list of clients and their holdings
Processing and executing orders on a first-in, first-out basis
Giving all client accounts participating in a block trade the same execution price and
charging the same commission
★When the full amount of the block order is not executed, allocating partially
executed orders among the participating client accounts pro rata on the basis of order
size while not going below an established minimum lot size for some securities.
Allocate partially executed orders among client accounts pro rata based on order size
(not account size), not below a minimum lot size
When allocating trades for new issues, obtaining advance indications of interest,
allocating securities by client (rather than portfolio manager), and providing for a
method for calculating allocations.
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P10-1 Suitability
Q51-1 ★Abigail Unger, CFA, is a portfolio manager at Cascade Investments (CI). After
thoroughly researching MBS and checking client investment objectives for
appropriateness, Unger purchased two of the bonds for several clients. Following steep
declines in MBS, several clients complain to CI, claiming the bonds were unsuitable
investments. Has Unger violated any CFA Institute Standards?
A. No.
B. Yes, with respect to suitability.
C. Yes, with respect to diligence and reasonable basis.
Solution: A.
Unger exercised diligence in her research, had a reasonable basis for the investment, and
confirmed the suitability of the investment for her clients. Her actions were consistent with the
Standards.
Q52-1 ★★One fund manager found that a product was suitable for his clients and made a
purchase for the clients. The transaction did not correspond exactly to the strategy of
the firm determined at the beginning of the year which the client understood well. The
manager decided to inform the client of the modification of the strategy in three
months, when they would communicate with their clients about the strategies of the
new year. Which standard did he most likely violate?
A. Suitability
B. Communication with clients
C. Fair dealing
Solution: A.
Standard III (C) Suitability requires that when members/candidates are responsible for
managing a portfolio, they make only investment recommendations consistent with the stated
objectives and constrains of the portfolio. The fund manager must have informed his/her
clients and received permission before he made the investment which did not correspond
exactly to the original strategy. By the way, not disclosing the change in strategy, violate V (B)
communication.
Q53-1 ★★★Frederic LUTHER, a salesperson, established an IPS for a client when he
persuaded the client to direct his transactions to their firms. All Frederic is doing is to
execute orders with some recommendations on choices made by the client. One day,
the client made an order to purchase of some stocks that are not suitable for him.
Frederic recommended the client take a second thought of his order, but the client
insisted. At last, Frederic agreed to execute the order. Did Frederic comply with the
Standards?
A. Yes, because it is the client himself who is responsible for his own decision.
B. No, because Frederic should assure all his client’s investments comply with the IPS.
C. No, because Frederic should make his client understand what he is doing.
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Solution: A.
The responsibilities to gather information and to make a suitability analysis before making a
recommendation or taking investment advice fall on those members/candidates in advisory
relationship with clients.
For unsolicited trade for individuals, if unsuitable, should refrain from making the trade until
he or she discusses the concerns with the client.
Q54-1 ★Noor Mawar, CFA, manages a trust fund with the beneficiary being an orphaned
18-year-old student. The investment policy dictates that trust assets are expected to
provide the student with a stable low risk source of income until she reaches the age of
30 years. Based on information from an internet blog, the student asks Mawar to invest
in a new business venture she expects will provide high returns over the next 5 years.
Mawar ignores the request, instead securing conservative investments to provide
sufficient income. Did Mawar most likely violate the CFA Institute Code of Ethics and
Standards of Professional Conduct? （2012 Mock83）
A. Yes
B. No, because the client’s objectives were met
C. No, because the investment time frame does not match the investment horizon
Solution: B.
B is correct because the client is the trust, not the beneficiary. Mawar followed Standard III (C)
Suitability by managing the trust assets in a way that would likely result in a stable source of
income while keeping the risk profile low, thereby complying with the investment objectives of
the trust.
Key points of Suitability：
R82-1 When in an advisory relationship
Know clients, suitable and under portfolio; when to a specific mandate, consistent
with stated objectives and constraints; suitality doesn’t prevent from losing value.
Make a reasonable inquiry into a client or prospective client’s investment experience,
risk and return objectives, and financial constraints prior to making any investment
recommendation or taking investment action, must reassess and update regularly.
Judge the suitability in the context of the client’s total portfolio.
R83-1 ★If unsolicited trade is known unsuitable:
R84-1 Refrain from making the trade until he or she discusses the concerns with the client.
An unsolicited request may be expected to have only a minimum impact on the entire
portfolio because the size of the requested trade is small or the trade would result in
a limited change to the portfolio’s risk profile.
necessitate client approval for executing unsuitable trades. At a minimum, the
client should acknowledge the discussion and accept the conditions that make
the recommendation unsuitable.
Unsolicited request expected to have a material impact on the portfolio, the member
or candidate should use this opportunity to update the investment policy statement.
Some clients that decline to modify their policy statements while insisting an
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unsolicited trade be made. Members or candidates will need to evaluate the
effectiveness of their services to the client and ultimately determine whether
they should continue the advisory arrangement with the client.
Some firms may allow for the trade to be executed in a new unmanaged
account.
R85-1 Developing an Investment Policy
Gather client information at the inception of the advisory relationship
Information should be incorporated into a written investment policy statement (IPS)
R86-1 Updating an Investment Policy
Repeated at least annually and also prior to material changes
Client should fully disclose complete financial portfolio, including those portions not
managed by the member or candidate，如果客户不如实汇报，无法进行 suitability
analysis. Analysis only based on provided information.
R87-1 Need for Diversification
An investment with high relative risk may be suitable in the context of the entire
portfolio or when the client’s stated objectives contemplate speculative or risky
investments
Managing to an Index or Mandate
Invest in a manner consistent with the stated mandate
Not responsible for any individual investor，Only those who have advisory relationship
are responsible for individual clients
R88-1 IPS
Client identification—(1) type and nature of client, (2) the existence of separate
beneficiaries, and (3) approximate portion of total client assets under management;
Investor objectives—(1) return objectives and (2) risk tolerance;
Investor constraints—(1) liquidity needs, (2) expected cash flows, (3) investable funds,
(4) time horizon, (5) tax considerations, (6) regulatory and legal circumstances, (7)
investor preferences, prohibitions, circumstances, and unique needs, and (8) proxy
voting responsibilities and guidance;
Performance measurement benchmarks.
R89-1 Regular updates.
Objectives and constraints should be maintained and reviewed periodically to reflect
any changes in the client’s circumstances
Should regularly compare constraints with capital market expectations to arrive at an
appropriate asset allocation.
Annual review is reasonable unless business or other reasons, such as a major change
in market conditions, dictate more frequent review.
Should document attempts to carry out review if circumstances prevent it.
★The suitability test procedures should require the investment professionals to look
beyond the potential return of the investment and include the following:
An analysis on the impact on the portfolio’s diversification,
A comparison of the investment risks with the client’s assessed risk tolerance,
The fit of the investment with the required investment strategy.
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P11-1 Performance Presentation
Q55-1 ★Sisse Brimberg, CFA, is responsible for performance presentations at her investment
firm. The presentation that Sisse uses states her firm:
(1) deducts all fees and taxes;
(2) uses actual and simulated performance results;
(3) bases the performance on a representative individual account.
Based on the above information, which of the following is the most appropriate
recommendation to help Brimberg meet the CFA Institute Standards of Professional
Conduct in her performance presentations? She should present performance based on:
A. A gross of fee basis.
B. Actual not simulated results.
C. A weighted composite for all similar portfolios.
Solution: C.
In order to meet their obligations under Standard III (D), members should present the
performance of the weighted composite of similar portfolios rather than using a single
representative or all accounts, so this is the best selection of the options provided.
Q56-1 ★★ABC Investment Management acquires a new, very large account with two
concentrated positions. The firm's current policy is to add new accounts for the
purpose of performance calculation after the first full month of management. Cupp is
responsible for calculating the firm's performance returns. Before the end of the initial
month, Cupp noticed that one of the significant holdings of the new accounts was
acquired by another company, causing the value of the investment to double. Because
of this holding, Cupp decided to account for the new portfolio as of the date of transfer,
thereby allowing ABC Investment to reap the positive impact of that month's portfolio
return.（原版书 Reading 2-34）
A. Cupp did not violate the Code and Standards because the GIPS standards allow
composites to be updated on the date of large external cash flows.
B. Cupp did not violate the Code and Standards because companies are allowed to
determine when to incorporate new accounts into their composite calculation.
C. Cupp violated the Code and Standards because the inclusion of the new account produces
an inaccurate calculation of the monthly results according to the firm's stated policies.
Solution: C.
Cupp violated Standard III (D)-Performance Presentations when he deviated from the firm’s
stated policies solely to capture the gain from the holding being acquired. Answer A is
incorrect because the firm does not claim GIPS compliance and the GIPS standards require
external cash flows to be treated in a consistent manner with the firm’s documented policies.
Answer B is incorrect because the firm does not state that it is updating its composite policies.
If such a change were to occur, all cash flows for the month would have to be reviewed to
ensure their consistent treatment under the new policy.
Q57-1 ★★Sam Snead, CFA, is the founder and portfolio manager of the Everglades Fund. In
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its first year the fund generated a return of 30%. Building on the fund’s performance,
Snead created new marketing materials that showed the fund’s gross 1-year return as
well as the 3-, and 5-year returns which he calculated by using back-tested
performance information. As the marketing material is used only for presentations to
institutional clients, Snead did not mention the inclusion of back-tested data. According
to the Standards of Practice Handbook, did Snead violate any CFA Institute Standards of
Professional Conduct?
A. No.
B. Yes, because he did not disclose the use of back-tested data.
C. Yes, because he failed to deduct all fees and expenses before calculating the fund’s track
record.
Solution：B
The Standard III (D) Performance Presentation prohibits members/candidates from making any
statements that misrepresent the performance achieved by them or their firms and requires
every reasonable effort to be made to ensure that performance information is fair, accurate,
and complete. By failing to identify the simulated performance results, Snead violated the
standard. Snead should have disclosed the fact that the returns were generated only in one
year of the fund’s operation and the other performance information is back-tested. .
Q58-1 Danielle Deschutes, CFA, is a portfolio manager and part of a ten-person team
managing an indexed stock portfolio for institutional accounts. A competing firm, South
West Index Managers (SWIM), asks Deschutes to interview with them and to bring her
performance history to the meeting. Deschutes informs her employer about the
interview and receives written permission to bring the performance history of the stock
portfolio with her. When Deschutes shows up for the interview at SWIM she discloses
that the performance numbers represent the work of her team and describes the role
of each member. To bolster her credibility, she also provides the names of institutional
accounts and related assets constituting the portfolio. In her interview at SWIM,
Deschutes least likely violated the CFA Institute Standards of Professional Conduct
regarding: （mock 85）
A. Her contribution to the portfolio’s returns.
B. The stock portfolio’s performance history.
C. Providing details on the institutional accounts.
Solution：B
B is correct because Standard III(D) Performance Presentation does not prohibit showing past
performance of funds managed at a prior firm as part of a performance track record as long as
showing that record is accompanied by appropriate disclosures about where the performance
took place and the person’s specific role in achieving that performance, which has been done
in this case.
Key points of Performance presentation:
R90-1 Should be accurate, complete and fair;
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Not misrepresent past performance or reasonably expected performance;
不可以说明或暗示有能力与过去业绩相同的收益;
Include terminated portfolio as part of performance history
Weighted rate of return rather than a single performance
R91-1 If the presentation is brief,
Make available to clients and prospects, on request, the detailed information
supporting that communication.
Best practice: brief presentations include a reference to the limited nature of the
information provided.
R92-1 推荐 Apply GIPS standards，如果不遵循 GIPS 也可以
Considering the knowledge and sophistication of the audience to whom a
performance presentation is addressed,
Presenting the performance of the weighted composite of similar portfolios rather
than using a single representative account,
Including terminated accounts as part of performance history with a clear indication
of when the accounts were terminated,
Including disclosures that fully explain the performance results being reported：用模
型模拟出来的业绩？获得该业绩时所担任的职位？Performance record from
prior entity？Gross of fees (investment management fee), net of fees, or after tax？
Maintaining the data and records.
P12-1 Preservation of Confidentiality
Q59-1 ★Townsend was recently appointed to the board of directors of a youth golf program
that is the local chapter of a national not-for-profit organization. The program is
beginning a new fund-raising campaign to expand the number of annual scholarships it
provides. Townsend believed that many of her clients made annual donations to charity.
The next week in her regular newsletter to all clients, she included a small section
discussing the fund¬raising campaign and her position on the organization's board.
Which of the following is correct regarding to Townsend?（原版书 Reading 2-40）
A. Townsend did not violate the Code and Standards.
B. Townsend violated the Code and Standards by soliciting donations from her clients
through the newsletter.
C. Townsend violated the Code and Standards by not getting approval of the organization
before soliciting her clients.
Solution: A.
Townsend did not provide any information about her clients to the leaders or managers of the
golf program; thus, she has not violated Standard III (E) Preservation of Confidentiality.
Providing contact information about her clients for a direct-mail solicitation would have been a
violation.
Answer B is incorrect because the notice in the newsletter did not violate Standard III (E).
Answer C is incorrect because the golf program’s fund-raising campaign had already begun, so
discussing the opportunity to donate was appropriate.
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Q60-1 Lewis McChord, CFA, a research analyst, covers the auto industry at an investment bank.
McChord recently read a report on an auto manufacturing company written by Pierce
Brown. Brown’s report provided extensive coverage of the company’s newly launched
products indicating that sales volume, not yet publicly available, would raise future
profits. Intrigued by the report, McChord called a senior executive at the company
whom she has known personally for years. The officer gave her specific details on new
vehicle sales, indicating that profits would double in the current quarter. McChord
added this data to Brown’s report and then circulated it within her firm as her own
report. McChord least likely violated which of the following CFA Institute Code of Ethics
and Standards of Professional Conduct?（Mock92-2）
A. Misrepresentation
B. Preservation of Confidentiality
C. Material Nonpublic Information
Solution: B.
B is correct because Standard III (E) Preservation of Confidentiality has not been violated. The
analyst has a personal relationship with the officer of the auto company, and he is not a
current, former, or prospective client, so there is no obligation for the analyst to maintain
client confidentiality. However, the analyst did violate Standard I(C) Misrepresentation when
she represented another analyst’s work as her own. In addition, the analyst violated Standard
II(A) Material Nonpublic Information by including data in her research report on sales figures,
which were material and nonpublic.
Key points of Preservation of confidentiality：
R93-1 Keep information about current, former, and prospective clients confidential unless
The information concerns illegal activities on the part of the client;
Disclosure is required by law; or
The client or prospective client permits disclosure of the information.
R94-1 III(E) is applicable when
Receiving information because of special ability to conduct a portion of the client’s
business or personal affairs, and
Receiving information that arises from or is relevant to that portion of the client’s
business that is the subject of the special or confidential relationship.
R95-1 Status of Client
Maintain the confidentiality of client records even after the client relationship has
ended. If a client or former client expressly authorizes the disclosure, may follow the
terms of the authorization and provide the information.
R96-1 遵守法律规定
If applicable law requires disclosure of client information in certain circumstances,
members and candidates must comply with the law.
★If applicable law requires maintaining confidentiality, even if the information
concerns illegal activities on the part of the client, should not disclose.
When in doubt, should consult with compliance personnel or legal counsel before
disclosing confidential information about clients.
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R97-1 Electronic Information and Security
Not require members or candidates to become experts in information security
technology, but they should have a thorough understanding of the policies of their
employers.
R98-1 When permissible under applicable law, shall consider the PCP an extension of
themselves when requested to provide information about a client in support of a PCP
investigation into their own conduct
Encouraged to cooperate with investigations into the conduct of others.
Any information turned over to the PCP is kept in the strictest confidence.
Will not be considered in violation of this standard by forwarding confidential
information to the PCP.
R99-1 The simplest, most conservative and effective way to comply with III(E) is to avoid
disclosing any information received from a client except to authorized fellow employees
who are also working for the client.
R100-1 Electronic information and security(new): 很多雇主对于通过电子设备交流以及存放
的客户信息都有严格的规定。近几年，对于移动远程数字通信，法规机构建立了更
为严格的数据安全法律。Members and candidates 应该鼓励公司对人员进行定期的关
于保密流程的训练
R101-1 Communication to clients(new): 随着科技的进步，与客户的交流方式不断增加。
Members and candidates 需要确保公司支持的通信方式以及合规流程符合防止信息
以外泄露的操作指导。★Members and candidates 还应该告诉客户机传递机密信息
的合理方式，并且告诉客户公司现有的资源并不都支持这种沟通方式
R102-1 In some instances, however, a member/candidate may want to disclose information
received from clients outside the scope of the confidential relationship and does not
involve illegal activities. Before making such a disclosure, a member/candidate should
ask the following:
In what context was the information disclosed? If disclosed, is the information
relevant to the work?
Is the information background material that, if disclosed, will enable better service to
the client?
P13-1 Loyalty to Employer
Q61-1 ★★Jan Loots, CFA, quit his job as a portfolio manager at an investment firm with
whom he had a non-solicitation agreement he signed several years ago. Loots received
permission to take his investment performance history with him and also took a copy of
the firm’s software-trading platform. Subsequently, Loots sent out messages on social
media sites announcing he was looking for clients for his new investment management
firm. Access to Loots’ social media sites is restricted to friends, family, and former
clients. Loots least likely violated the CFA Institute Standards of Professional Conduct
concerning his: （2012 Mock84）
A. Trading software.
B. Non-solicitation agreement.
C. Investment performance history.
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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
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Solution: C.
C is correct because the portfolio manager received permission to use his investment
performance history from his prior employer. The member violated his non-solicitation
agreement by indicating his availability to new clients on several social media sites accessible
by clients of his former employer, a violation of Standard IV(A) Loyalty, because he did not act
for the benefit of his former employer. In this case, the member may cause harm to his former
employer if his weekend messages result in clients moving to his new business from his former
employer. The member also violated this standard by taking his employer’s property, trading
software.
Q62-1 ★Marc Davidson, CFA, works as a trust specialist for Integrity Financial. Davidson starts
a part-time consulting business providing advice to trustees for a fee. He conducts this
business on his own time and therefore did not notify Integrity Financial of his
consulting. Davidson asks his assistant to compile a list of Integrity's clients and their
contact information. The following month, Davidson is offered a similar role at
Integrity's largest competitor, Legacy Trust Services, Inc. After he begins working at
Legacy, his new manager arranges for him to meet with a number of prospective clients,
many of whom are clients of Integrity. After meeting with Davidson, a number of
former Integrity clients decide to transfer their business to Legacy. Did Davidson's
action violate the Code and Standards?(2014 Mock 98-10)
A. Yes, both Davidson's part-time consulting business and his meetings with Integrity clients
are violations of the Standards
B. Yes, Davidson's part-time consulting business is a violation of the Standards
C. No
Solution: B.
Members and candidates are required to disclose any compensation arrangement to their
employers that involves performing tasks or services that their employers can charge for.
Disclosure is required even if the activities occur during non-work hours.
Q63-1 Ailey, CFA, is designated as a new supervisor in a large investment advisory company.
She requires that anyone under her supervision must comply with the Code and
Standard. Is her request appropriate?
A. Yes
B. No, only members and candidates
C. No, only members, candidates and analysts.
Solution: A.
Ailey is responsible to ensure that anyone subject to her supervision complies with applicable
laws, rules, regulations, and the Code and Standards.
Q64-1 ★★One of the discretionary accounts managed by Farnsworth is the Jones
Corporation employee profit-sharing plan. Jones, the company president, recently
asked Farnsworth to vote the shares in the profit-sharing plan in favor of the slate of
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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
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directors nominated by Jones Corporation and against the directors sponsored by a
dissident stockholder group. Farnsworth does not want to lose this account because he
directs all the account's trades to a brokerage firm that provides Farnsworth with useful
information about tax-free investments. Although this information is not of value in
managing the Jones Corporation account, it does help in managing several other
accounts. The brokerage firm providing this information also offers the lowest
commissions for trades and provides best execution. Farnsworth investigates the
director issue, concludes that the management-nominated slate is better for the
long-run performance of the company than the dissident group's slate, and votes
accordingly. Farnsworth: （原版书）
A. Violated the Standards in voting the shares in the manner requested by Jones but not in
directing trades to the brokerage firm.
B. Did not violate the Standards in voting the shares in the manner requested by Jones or in
directing trades to the brokerage firm.
C. Violated the Standards in directing trades to the brokerage firm but not in voting the
shares as requested by Jones.
Solution：B.
This question relates to Standard III (A) Loyalty, Prudence, and Care—specifically, a member's
or candidate's responsibility for voting proxies and the use of client brokerage. According to
the facts stated in the question, Farnsworth did not violate Standard III(A). Although the
company president asked Farnsworth to vote the shares of the Jones Corporation
profit-sharing plan a certain way, Farnsworth investigated the issue and concluded,
independently, the best way to vote. Therefore, even though his decision coincided with the
wishes of the company president, Farnsworth is not in violation of his responsibility to be loyal
and to provide care to his clients. In this case, the participants and the beneficiaries of the
profit-sharing plan are the clients, not the company's management. Had Farnsworth not
investigated the issue or had he yielded to the president's wishes and voted for a slate of
directors that he had determined was not in the best interest of the company, Farnsworth
would have violated his responsibilities to the beneficiaries of the plan. In addition, because
the brokerage firm provides the lowest commissions and best execution for securities
transactions, Farnsworth has met his obligations to the client in using this brokerage firm. It
does not matter that the brokerage firm also provides research information that is not useful
for the account generating the commission, because Farnsworth is not paying extra money of
the client's for that information.
Q65-1 Elbie Botha, CFA, an equity research analyst at an investment bank, disagrees with her
research team’s buy recommendation for a particular company’s rights issue. She
acknowledges the recommendation is based on a well-developed process and
extensive research but feels the valuation is overpriced based on her assumptions.
Despite her contrarian view, her name is included on the research report to be
distributed to all of the investment bank’s clients. To avoid violating any CFA Institute
standards, it would be least appropriate for Botha to undertake which of the following?
A. Leave her name on the report
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B. Insist her name is removed from the report
C. Issue a new report based on her conclusions
Solution: C.
C is correct because Standard IV (A) calls for employees to be loyal to their employer by not
causing harm. If Botha released a contradictory research recommendation report to clients, it
could possibly cause confusion amongst clients and embarrassment to the firm.
Q66-1 Scott Campbell, CFA, developed a complex quantitative model for selecting mortgage
bonds. Campbell was careful to document in writing all assumptions in the model and
his reasoning for the assumptions. Another firm offered Campbell a position leading
the startup of a mortgage bond research department. In his new position, Campbell
created a similar model and supporting documents. Does Campbell violate any CFA
Institute Standards?
A. No.
B. Yes, with respect to record retention.
C. Yes, with respect to loyalty to employer.
Solution: A.
The Standards do not impose a prohibition on the use of experience or knowledge gained at
one employer from being used at another employer. As records created on behalf of an
employer are the property of the firm and not the member, Campbell must take care not to
use the property or records of his former employer when creating a model for his new
employer.
Q67-1 Tonya Tucker, CFA, is a financial analyst at BC Corporation (BC). BC has numerous
subsidiaries and is actively involved in mergers and acquisitions. Tucker analyzes HR
Corporation (HR) and tells the CEO of BC that the acquisition of HR would be a good fit
for BC. After her discussion with the CEO, Tucker purchases 100,000 shares of HR at
$200 per share. BC does not have any pre-clearance procedures, so the next time she
meets the CEO, Tucker mentions she is a stockowner of HR. The CEO thanks her for this
information but does not ask for any details. Two weeks later, Tucker sees a
company-wide email from the CEO announcing BC’s acquisition of HR for $250 a share.
Regarding her purchase of HR stock, Tucker most likely violated the CFA Institute
Standards of Professional Conduct concerning:
A. Loyalty.
B. Market Manipulation.
C. Material Nonpublic Information.
Solution: A.
A is correct because even though the company does not have a stock pre-clearance procedure,
trading the stock of a company the analyst recommended as an acquisition candidate is an act
that violates Standard IV(A) Loyalty ,as she did not give her Employer the opportunity to take
advantage of her skill/recommendation prior to buying the shares for her own portfolio.
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内部使用资料，严禁传播，否则追究法律责任
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Key points of Loyalty to employer：
R103-1 Core rule is not to injure the firm, deprive of its profit, or deprive of the employee’s
advantage of ability and skills
R104-1 “Undertaking independent practice” means engaging in competitive business, as
opposed to making preparations to begin such practice.
R105-1 Should abstain from independent competitive activity that could conflict with the
interests of their employer，必须告知雇主：
Types of services they will render to prospective independent clients,
The expected duration of the services,
The compensation for the services
没有得到雇主同意不能进行 independent practice
R106-1 兼职工作：投资分析师，同时担任市长要披露吗？兼职教书可以吗？——考虑是否
太耗时间
R107-1 在职揭发(whistleblowing). 如果为保护客户利益、市场诚信和其他非个人利益目标，
是可以不将雇主利益放在首位的；In such instances, activities that would normally
violate a member’s/candidate’s duty to his/her employer (such as contradicting
employer instructions, violating certain policies and procedures, or preserving a record
by copying employer records) may be justified.
R108-1 ★独立的合同签约人(independent contractors)必须遵守与雇主所达成的协议 (oral or
written agreement)
R109-1 在辞职前，雇员不可以做的行为包括但不限于以下所列：
盗用(misappropriation)客户的商业秘密(trade secrets)；
盗用(misappropriation)客户名单（client lists）。Memorizing client lists (name and
address) is not permitted, unless the info does not come from the records of former
employer or violate non-compete agreement
滥用(misuse)保密信息(confidential information)；
辞职前劝诱(solicit)客户转移业务；
盗用(misappropriation)客户资料；
Self-dealing (appropriating for one’s own property a business opportunity or
information belonging to one’s employer)
R110-1 Protocol for broker recruiting(new): 雇主和雇员会签署一份协议，同意雇员辞职后可
以带走一部分信息。
Members and candidates需要严格按照协议规定的内容带走可以带走的物品或者
信息。例如，在美国的经济业务的中间商之间存在一个协议，辞职的个人可以
带走一般性的客户信息，但是需要把带走的客户信息提供给原雇主的管理委员
会审核。
另外，客户的具体信息只能给离职员工使用，但是不能给新公司的其他员工使
用。
R111-1 Use of social media(new):社会媒体对 loyalty to employer 的影响。
通过社交媒体通知员工离职的信息需要符合公司的规章制度。以提供专业服务
为目的而建立起来的用户账号应当被视为公司资产的一部分。
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此预测为考点预测，考题仅为复习参考
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因此要求在员工离职的时候需要根据公司的章程规定对账号进行转移或者删
除。最好的方法是把个人账号和以提供专业服务为目的的公司账号分开，如果
不能分开，需要和公司讨论到底应该怎样处理。
R112-1 ★仅仅知道原雇主的客户名字是不属于机密 unless deemed such by contract or law;
R113-1 在雇主那儿学习的工作经验和技能是可以使用的, even if contract exists.（比如和原雇
主签订合同说离职之后不能使用这些技能，但是实际是可以用的，因为这个合同本
身就存在问题）；但是，在职过程中自己开发的模型不可以带走。
R114-1 自己电脑上或者纸质文件保存的工作资料要删除或归还公司
R115-1 推荐公司执行 Competition policy：
Must understand any restrictions placed by the employer on offering similar services
outside the firm while still employed.
If an employer elects to have its employees sign a non-compete agreement, should
ensure that the details are clear and fully explained prior to signing the agreement.
R116-1 推荐公司执行 Termination policy：
Should establish clear procedures regarding the resignation process, including
addressing how the termination will be disclosed to clients and staff.
May also outline the procedures for transferring responsibilities of ongoing research
responsibilities and account management
R117-1 推荐公司执行 Incident-reporting procedures
Should be aware of firm’s policies related to whistleblowing and encourage firms to
adopt industry best practices. Many firms are required by regulatory mandates to
establish confidential and anonymous reporting procedures that allow employees to
report potentially unethical and illegal activities in the firm
R118-1 Firms are encouraged to adopt a standardized classification structure for employees and
indicate how each of the policies applies to each employee class
P14-1 Additional Compensation Arrangements
Q68-1 ★★Alexandra Zagoreos, CFA, is the head of a government pension plan. Whenever
Zagoreos hires a money management firm to work with the pension plan, she finalizes
the deal over dinner at a nice restaurant. At these meals, Zagoreos also arranges for the
money manager to provide her payments equal to 10% of the management fee the
manager receives from the pension plan. Zagoreos keeps half of the payments for her
own use and distributes the remainder as cash incentives to a handful of her most
trusted staff. Zagoreos least likely violated which of the following CFA Institute Code of
Ethics and Standards of Professional Conduct?
A. Referral fees.
B. Loyalty, Prudence and Care.
C. Additional Compensation Arrangements.
Solution：A.
As the money should not be accepted without receiving written consent from all parties
involved, therefore Zagoreos is in violation of Standard IV (B) Additional Compensation
Arrangements. However, there is no indication that the member has received compensation,
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consideration, or benefit received from, or paid to, others for the recommendation of products
or services and therefore has not violated Standard VI (C) Referral Fees.
Q69-1 ★★Buta Singh, CFA, has a large extended family and manages the portfolios of several
family members. Singh does not charge the family members a management fee, but
receives a small percentage of each portfolio’s profits. Singh accepted a position as
portfolio manager for Bhotmange Investments to manage high net worth accounts .As
the family portfolios were not normal client relationships, Singh did not inform his new
employer of his side activity .With respect to the family portfolios; did Singh violate any
CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, because he failed to obtain consent from his employer.
C. Yes, because he failed to disclose his new employment to his existing clients.
Solution: B.
Members who plan to engage in independent practice for compensation should not render
services until receiving written consent from their employer.
Key points of Additional compensation arrangement：
R119-1 礼物包括从顾客或其他第三方收取的直接和间接的好处；只要造成了利益冲突，就
不能收，除非 obtain written consent from all parties involved
R120-1 所有安排必须得到雇主的同意(No arrangement without the employer's approval)，从
雇主之外收取的其他收益必须立即以书面形式(immediate written report)向雇主说明
所收到收益和服务的详细情况 (amount and nature of consideration)；
R121-1 当 member or candidate 作为兼职时，在招聘过程中需要和雇主讨论以及协商作为兼
职在提供同现雇主相竞争的服务时存在的局限性(new)。
R122-1 披露的目的在于：雇主有权知道雇员的报酬情况来评估服务的真实成本和对雇员忠
诚和客观的影响。
R123-1 Members/candidates must obtain permission for additional compensation/benefits
because such arrangements may affect loyalty and objectivity and create potential
conflicts of interest.
Disclose Consent Violate
√ × IV(B)
√ √ --
× × IV(B)
VI(A) I(B),
R124-1 Make an immediate written report to employer specifying any compensation they
propose to receive for services in addition to the compensation or benefits received
from their employer
R125-1 The details of the report should be confirmed by the party offering the additional
compensation, including performance incentives by clients
R126-1 The written report should state the terms of any agreement under which a member or
candidate will receive additional compensation
Include the nature of the compensation, the approximate amount of compensation,
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and the duration of the agreement
P15-1 Responsibility of Supervisors
Q70-1 ★★Wayne RUBY, a CFA Charterholder, is a director of brokerage department of a large
investment bank. Someone told him that a member in his team, Max CHANG, often
front-ran their clients. However, Max assured that the whistle-blower wanted to take
his place. Wayne was going to lead an investigation on the affair. Before he could arrive
at any conclusion, he permitted Max to stay on his current position with more closely
supervision. Did Wayne comply with the Standards?
A. Yes, because he was making an investigation.
B. Yes, because he had strengthened the supervision.
C. No, because he just permitted Max to stay on the current position before a conclusion
was arrived.
Solution: B.
According to Standard IV (C) Responsibilities of Supervisors, once a supervisor learns that an
employee has violated or may have violated the law or the Code and Standards, the supervisor
must promptly initiate an investigation to ascertain the extent of the wrongdoing while
placing limitations on the wrongdoer’s activities.
Q71-1 ★Ileana Inkster, CFA, was recently offered a senior management position with the trust
department of a regional bank. The department is new but the bank has plans to
expand it significantly over the next few months; Inkster has been told she needs to aid
that growth and has been asked to have her department conduct educational seminars
and then pursue new business by follow-up contacts with the attendees. Inkster notices
that advertisements for upcoming seminars, prepared by the marketing department,
do not mention any investment products. The ads indicate attendees can "learn how to
immediately earn $100,000 to their net worth." What is the first action Inkster most
likely should take to avoid violating any CFA Institute Standard of Professional Conduct?
A. Decline to accept the new position,
B. Accept the position and revise the marketing material.
C. Accept the position but bring the lack of procedures to the attention of senior
management.
Solution: A.
The prospective supervisor's first step should be to bring the inadequate compliance system to
the attention of the firm's senior managers and recommend corrective action before taking
the position. This may be accomplished by the supervisor taking on an interim consulting role
with the bank in order to implement adequate procedures before taking on the supervisory
role.
Q72-1 ★★Kim Klausner, CFA, manages several hundred employees as the head of research
for a large investment advisory firm. Klausner is a former securities regulatory official
who, until recently, ensured that his department’s compliance program always met or
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exceeded those of its competitors. Klausner has delegated his supervisory
responsibilities concerning compliance issues to Sue Chang. Klausner informed Chang
that her responsibilities include ensuring that the firm has appropriate compliance
procedures and is making reasonable efforts to detect and prevent violations of Rules,
Regulations, and the Code and Standards. Klausner most likely violated the CFA
Institute Standards of Professional Conduct by not telling Chang to consider（2012）
A. Firm policies.
B. Legal restrictions.
C. Industry standards.
Solution: B.
B is correct because a supervisor’s responsibilities under Standard IV (C) Responsibilities of
Supervisors include instructing those subordinates to whom supervision is delegated about
methods to prevent and detect violations of laws, rules, regulations, and the Code and
Standards. Laws would also include legal restrictions.
Q73-1 ★Francesca Ndenda, CFA, and Grace Rutabingwa work in the same department for
New Age Managers, with Rutabingwa reporting to Ndenda. Ndenda learns that
Rutabingwa received a Notice of Enquiry from the Professional Conduct Program at CFA
Institute regarding a potential cheating violation when she sat for the CFA exam in June.
As Rutabingwa's supervisor, Ndenda is afraid that Rutabingwa's behavior will be seen
as a violation of the Code and Standards. Does Ndenda most likely have cause for
concern? (2014 Mock 99-4)
A. No, not until Rutabingwa is found guilty of cheating
B. No, because her responsibilities do not apply
C. Yes
Solution: B.
A supervisor's responsibilities relate to detecting and preventing violations by anyone subject
to their supervision or authority regarding activities they supervise. Ndenda had no way of
detecting and/or preventing Rutabingwa from cheating during the CFA exam, if in fact that is
what she did, because it was an event she did not attend.
Q74-1 ★Madeline Smith, CFA, was recently promoted to senior portfolio manager. In her new
position, Smith is required to supervise three portfolio managers. Smith asks for a copy
of her firm's written supervisory policies and procedures but is advised that no such
policies are required by regulatory standards in the country where Smith works.
According to the Standards of Practice Handbook, Smith's most appropriate course of
action would be to: (2014 Mock 99-11)
A. Decline to accept supervisory responsibility until her firm adopts procedures to allow her
to adequately exercise such responsibility.
B. Require her firm to adopt the CFA Institute Code of Ethics and Standards of Professional
Conduct.
C. Require the employees she supervises to adopt the CFA Institute Code of Ethics and
金程教育 专业·领先·增值
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内部使用资料，严禁传播，否则追究法律责任
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Standards of Professional Conduct.
Solution: A.
According to guidance for Standard (IV(C), if a member cannot fulfill supervisory
responsibilities because of the absence of a compliance system or because of an inadequate
compliance system, the member should decline in writing to accept supervisory responsibility
until the firm adopts reasonable procedures to allow the member to adequately exercise such
responsibility.
Q75-1 Abe Seneca, CFA, supervises a team of analysts who create index funds for institutional
investors. When Seneca provides sales demonstrations to potential clients simulating
the fund’s performance, the scenarios he prepares show outcomes based on
assumptions reflecting upside bias and positive risk assessments. Gail Tremblay, CFA, an
analyst in Seneca’s group, observes that the actual performance of these index funds is
less than indicated in the scenario outcomes shown in the sales meetings. Seneca least
likely violated which of the following CFA Institute Code of Ethics and Standards of
Professional Conduct?（MOCK92-5）
A. Loyalty
B. Performance Presentation
C. Responsibilities of Supervisors
Solution: C.
C is correct because Standard IV (C) Responsibilities of Supervisors has not been violated;
Seneca is not responsible for the supervision of any employees when he makes sales
demonstrations to clients because he prepared the material himself. Seneca violated Standard
IV (A) Loyalty by misleading potential investors on the performance they might achieve with
the index funds, thereby causing reputational risk to his employer Seneca has also violated
Standard III (D) Performance Presentation because the sales demonstrations he conducts do
not provide a fair and accurate representation of performance that clients are likely to
experience.
Key points of Responsibility of Supervisor：
R127-1 Make reasonable efforts to detect and prevent violations by anyone subject to their
supervision.
R128-1 通过 establishing and implementing the written compliance system and ensuring such
system is followed through periodic review 来执行 reasonable supervision。
R129-1 在建立制度时，必须明确：What an adequate system is。
R130-1 如果将管理的职责委托给（delegate）他人，管理者不能免除监督管理的职责，且必
须 instruct 被委托的人 how to detect and prevent the violations of laws, rules and
code。
R131-1 对于 inadequate 的管理制度，管理者应提请上层注意并提出改进(corrective)建议。
R132-1 如果由于不存在（nonexistent）制度或制度不完善(poor)，管理者必须以书面形式拒
绝接受管理职责 until the firm adopts adequate system
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R133-1 Once knowing a potential violation, supervisor must promptly initiate an investigation.
Relying on employee’s statements or assurances that the wrongdoing will not recur
is not enough.
Reporting the misconduct up the chain of command and warning the employee to
cease the activity are also not enough.
Should take steps to ensure that the violation will not be repeated, by placing limits
on the employee’s activities or increasing the monitoring of the employee’s activities
R134-1 Detection Procedures
If adopted reasonable procedures and took steps to institute an effective compliance
program, may not violate IV(C) if he does not detect violations that occur despite
these efforts.
May violate IV(C) if he knows or should know that the procedures designed to detect
and prevent violations are not being followed
R135-1 Enforcement of Non-Investment-Related Policies.
Those who have supervisory responsibility should enforce policies related to
investment and non-investment-related activities equally.
Establish policies related to attendance and acceptable workplace actions, such as
mandatory vacations for specific positions.
R136-1 Adequate procedure
Be clearly written and tailored to the firm’s operations
In plain language, easy to understand;
Designate a compliance officer;
Describe hierarchy of supervision and assign duties among supervisors;
Create a system of checks and balances;
Outline the scope of the procedures and procedures to document the monitoring
and testing of compliance procedures;
Outline permissible conduct;
Delineate procedure for reporting violations and sanctions
R137-1 Once the compliance program is instituted, the supervisor should:
Disseminate the contents of the program to personnel;
Periodically update procedures to ensure that the measures are adequate under the
law;
Continually educate personnel regarding compliance procedures;
Issue periodic reminders of procedures to personnel;
Incorporate professional conduct evaluation in employee’s performance review;
Review the actions of employees;
Take steps to enforce procedures once violation occurred
R138-1 Once violation is discovered, a supervisor should
Promptly respond;
Thoroughly investigate to determine the scope of the wrongdoing;
Increase supervision or place appropriate limitations on the wrongdoer pending the
outcome of the investigation
P16-1 Diligence and Reasonable Basis
Q76-1 ★★Meshack Bradovic, CFA, was recently hired as a credit analyst at a credit rating
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agency whose major clients include publicly listed companies on the local stock
exchange. One of the clients is preparing to issue new bonds to finance a major factory
project. Analysts are speculating that without the new factory the company would not
survive the onslaught of competition from increasing imports; therefore, the company
is counting on an upgraded credit rating to enhance the subscription level of the issue.
Bradovic’s research suggests the creditworthiness of the company has severely
deteriorated over the last year due to negative operating cash flows. Without
conducting extensive research, Bradovic’s boss puts pressure on him to upgrade the
credit rating to an investment grade rating. What course of action is most appropriate
for Bradovic to prevent any violation of the CFA Code or Standards?
A. Quit his position with the firm.
B. Upgrade the rating but note his objections in writing.
C. Disassociate with the credit rating report, the bond issue and the client.
Solution: A.
The boss’ insistence that all credit ratings be given an investment grade rating irrespective of
the analysis undertaken indicates a systemic disregard for due diligence, reasonable basis and
true representation. This shows a total disregard for the CFA Standards. Bradovic’s best course
of action is to resign, as the company’s current practice of giving false credit ratings is likely to
continue.
Q77-1 ★Joyce La Valle, CFA is a portfolio manager at a global bank. La Valle has been told she
should use a specific vendor for equity investment research that has been approved by
the bank's headquarters. As La Valle is located in a different country, she is
uncomfortable with the validity of the research provided by this vendor when it applies
to her country and would like to use a local vendor on whom she has conducted due
diligence. Which of the following actions concerning the research vendor should La
Valle most likely take to avoid violating the CFA Institute Standards of Professional
Conduct?
A. Use the local research vendor.
B. Use the bank-approved research vendor.
C. Use both the local and the bank-approved research vendors.
Solution: A.
When a member has reason to suspect that either secondary or third-party research or
information comes from a source that lacks a sound basis, he/she must not rely on that
information as indicated by Standard V(A) Diligence and Reasonable Basis.
Q78-1 ★★Kirsten Kelso, CFA, is a research analyst at an independent research firm. Kelso is
part of a team of analysts who focus on the automobile industry. Recently, Kelso
disagreed with two research "sell" recommendations written by her team even though
she felt confident the research process was properly conducted. In discussions with
several clients, Kelso states "even though my name is on the sell reports, these stocks
are a buy because sales and share prices for both auto companies will rise significantly
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due to strong demand for their vehicles." Concerning the "sell" recommendations,
which of Kelso's following actions would most likely violate the CFA Institute Standards
of Professional Conduct? (Mock79-7)
A. Dissociating from the report
B. Distinguishing between fact and opinion
C. Sharing her personal opinion of the stocks
Solution: C.
The analyst can express her disagreement with the team by documenting her difference of
opinion, but it is inappropriate for the analyst to make selective disclosure. Members and
candidates must make every effort to treat all individual and institutional clients in a fair and
impartial manner.
Q79-1 ★Sallie Lewis, CFA, is a research analyst covering the mining industry. Along with other
analysts, Lewis visited the primary mine of Gold Rush Mines (GR). During the visit, a
major piece of equipment failed and Lewis overheard an unidentified employee state
that production would be stalled for six months. Lewis immediately filed a sell
recommendation on GR without any additional research. Has Lewis violated any CFA
Institute Standards?
A. No.
B. Yes, with respect to diligence and reasonable basis.
C. Yes, with respect to material nonpublic information.
Solution: B.
Lewis must investigate the reliability of the information before making an investment
recommendation based on the information.
Q80-1 Asset classes for his firm. In selecting external advisers or sub advisers, Rodrigues
reviews the adviser’s investment process, established code of ethics, the quality of their
published return information, and their compliance and internal control procedures. In
completing his review, Rodrigues most likely violated the CFA Institute Standards of
Professional Conduct regarding his due diligence on: （2012 Mock85）
A. Adherence to strategy.
B. Performance measures.
C. Internal control procedures.
Solution: A.
A is correct because Standard V (A) Diligence and Reasonable Basis applies to the level of
review necessary in selecting an external adviser or sub adviser and would include reviewing
the adviser’s adherence to its stated strategy.
Q81-1 ★David Gunard, CFA, is an equity analyst at Curry Securities. He received an
assignment to analyze Enterloch Corporation, of which the stocks were held by several
of Curry’s clients. Gunard completed a thorough, fundamental analysis of Enterloch.
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Given his analysis and the sharp rise in the company’s stock price during the past year,
Gunard concluded that the shares were substantially overvalued. After the approval of
the report by Gunard’s supervisor, but prior to the release, Gunard called his father to
suggest that he sell his Enterloch shares immediately. Gunard’s father informed him
that he had disposed of his holding. According to the Standards of Practice Handbook,
has Gunard violated the CFA Institute Standard of Professional Conduct relating to:
Duties to clients? Reasonable basis?
A. No Yes
B. Yes No
C. Yes Yes
Solution: B.
By communicating this information to his father prior to the release of the report, Gunard
failed to put the firm’s clients’ interests above his own. Nothing in the question indicates that
he did not have a reasonable basis for his recommendation; he conducted a thorough
fundamental analysis and his report was approved. The fact that Gunard’s father had disposed
of the shares does not negate the fact that Gunard violated a duty to the firm’s clients.
Q82-1 Lawrence Hall, CFA, and Nancy Bishop, CFA, began a joint research report on
Stamper Corporation. Bishop visited Stamper's corporate headquarters for several
days and met with all company officers. Prior to the completion of the report, Bishop
was reassigned to another project. Hall used his and Bishop's research to write the
report but did not include Bishop's name on the report, because he did not agree
with and changed Bishop's conclusion included in the final report. According to the
Standards of Practice Handbook, did Hall most likely violate any CFA Institute
Standards of Professional Conduct?(2014 Mock 98-14)
A. Yes, with respect to diligence and reasonable basis
B. Yes, with respect to misrepresentation
C. No
Solution: C.
Members are in compliance with CFA Institute's Standard V(A)-Diligence and Reasonable Basis
if they rely on the research of another party who exercised diligence and thoroughness.
Because Bishop's opinion did not agree with the final report, disassociating her from the
report is one way to handle this difference between the analysts.
Key points of Diligence and Reasonable basis：
R139-1 The requirements for research conclusions vary in relation to the role in investment
decision-making process, but must make reasonable efforts to cover all pertinent issues
when arriving at a recommendation
R140-1 Provide supporting information to clients enhance transparency
R141-1 Defining Diligence and Reasonable Basis
In providing investment service, often use a variety of resources
考虑：current stage of the industry’s business cycle；company’s operating and
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financial history；mutual fund’s fee structure and management history；output and
potential limitations of quantitative models；quality of the assets included in a
securitization；appropriateness of selected peer-group comparisons
Can base decisions only on the information available at the time the decision is
made. The steps taken in developing a diligent and reasonable recommendation
should minimize unexpected downside events.
R142-1 Secondary or Third-Party Research
检查 Criteria in forming an opinion on whether research is sound，If suspect the
soundness, must not rely on that information
May rely on others in the firm to determine soundness and use the information in
good faith assuming the due diligence process was deemed adequate.
Should verify that the firm has a policy about the timely and consistent review of
approved research providers to ensure the quality of the research.
If such policy not in place, should encourage development and adoption
R143-1 ★Quantitatively Oriented Research.
Need to have an understanding of the parameters used in the model or quantitative
research.
Although not required to be experts in technical aspects of the models, must be able
to explain to their clients the importance of the quantitative research and how the
results were used in the decision-making process.
Need to consider the time horizon of data input in financial models.
In development of a recommendation, may need to test the models by using
volatility and performance expectations that represent scenarios outside the
observable databases.
In reviewing computer models or the resulting output, pay attention to the
assumptions and rigor of the analysis to ensure that the model incorporates negative
market events
Members and candidates 需要对投资分析和建议报告所用到的数据来源进行调
查，保证这些数据的准确性。对通过网络搜集到的信息，Members and candidates
需要进行更为严格的审核。如果公司没有这项制度，会员或者候选人需要鼓励
公司采取这项制度。（new）
新模型的创建者需要比模型最终使用者在审核模型的时候表现出更高的审慎原
则，即模型开发者要比模型使用者更懂模型。
负责创建并且检验模型的 Members and candidates 需要对产品的技术有一个彻
底的了解。在模型发布之前需要对模型以及模型运行结果进行全面彻底的检验。
(new)
R144-1 Selecting External Advisers and Subadvisers
Ensure that the firm has standardized criteria for reviewing external advisers，包含以
下几方面
Reviewing the adviser’s established code of ethics,
Understanding the adviser’s compliance and internal control procedures,
Assessing the quality of the published return information
Reviewing the adviser’s adherence to its stated strategy
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R145-1 ★关于 group research
The conclusions or recommendations of the group report represent the consensus of
the group, but may not necessarily be the views of the member or candidate, even
though his name is included on the report
如果不同意结论，但是 consensus opinion has a reasonable and adequate basis and
is independent and objective，那么 need not decline to be identified with the report
如果不同意结论，而且 not confident in the process, should dissociate from the
report whether it does not reflect his opinion or not
Always recommending “hot” issue indicates without sound analysis → NO
reasonable basis
R146-1 Establish a policy requiring that research reports, credit ratings, and investment
recommendations have a basis that can be substantiated as reasonable and adequate
R147-1 Develop detailed, written guidance for analysts and review committees for judging
reasonable and adequate basis of a particular recommendation
R148-1 Develop measurable criteria for assessing the quality of research, the reasonableness
and adequacy of the basis for any recommendation or rating, and the accuracy of
recommendations over time
R149-1 Develop detailed, written guidance that establishes minimum levels of scenario testing of
all computer-based models used in developing, rating, and evaluating financial
instruments
R150-1 Develop measurable criteria for assessing outside providers
R151-1 Adopt a standardized set of criteria for evaluating the adequacy of external advisers. The
policy should include how often and on what basis the allocation of funds to the adviser
will be reviewed
P17-1 Communication with Clients and Prospect Clients
Q83-1 ★★Jimmi Alvarez, CFA, is the founder of an investment advisory firm serving high
net worth investors. For the past decade, Alvarez has invested his clients’ money in
mid-cap stocks. After much research, Alvarez determines that small-cap stocks are
undervalued and moves a portion of all of his clients’ assets into these stocks.
Alvarez plans to inform his clients of this change with their year-end statements in
three months. Has Alvarez violated any CFA Institute Standards?
A. No.
B. Yes, with respect to misrepresentation.
C. Yes, with respect to communication with clients and prospective clients.
Solution: C.
According to the Standards, members must promptly disclose to clients any changes to their
investment process. Alvarez should notify his clients promptly of the change in his investment
process and strategy.
Q84-1 ★★Colin Caldwell, CFA, is the chief investment officer of Northwest Mutual Fund,
whose investment objective is to invest in fixed income emerging market securities.
Caldwell allocates the fund’s assets primarily to bonds of commodity producers in
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emerging markets and invests in a combination of several different investments to
ensure an acceptable level of risk. The allocation is clearly disclosed in all fund
communications. High volatility in the commodities markets at the start of the year
makes Caldwell pessimistic about returns, so he shifts the fund into emerging market
and . government securities, positions he maintains at the end of the year. This
change is noted in the next annual report to fund shareholders. Caldwell’s investment
change least likely violated the CFA Institute Code of Ethics and Standards of
Professional Conduct concerning: （2012 Mock84）
A. Diversification.
B. Communication with clients.
C. Investments outside his mandate.
Solution: A.
A is correct because the investment officer has invested in a combination of several different
investments to ensure an acceptable level of risk rather than having all assets in a single
investment, and he has sought a reasonable amount of diversification. However, the shift into
emerging market and . government securities was communicated to clients in the annual
report and not on an ongoing basis, in violation of Standard V (B) Communication with Clients
and Prospective Clients. Additionally, the investment officer has not followed the investment
style previously communicated to fund investors (., to invest in fixed income emerging
market securities), specifically, when he invested in . government securities, a violation of
Standard III (C) Suitability.
Q85-1 ★Mailaka Securities (MS) advertises the use of a “bottom up” investment style in its
marketing material. Recently, MS senior management decided to switch to a “top
down” approach, citing the fact that it is less labor intensive. All other aspects of the
research process are to remain the same. The head of research at MS, Mara
Cherogony, CFA, was instructed to supervise the implementation of the new
procedures, to notify clients of the changes, and to revise the text of marketing
materials when new material was produced. Which of the following CFA Standards
pertaining to Investment Analysis, Recommendations and Actions is Cherogony least
likely in danger of violating?
A. Supervisory Responsibility.
B. Communication with Clients.
C. Diligence and Reasonable Basis.
Solution: C.
Research can still be considered diligent and having a reasonable basis if done using a “top
down” research methodology as opposed to a “bottom up” methodology. Violates Standard V
(B) – Communication with Clients for not promptly disclosing the change. As a supervisor,
Cherogony is responsible for ensuring compliance with the Code and Standards.
Key points of Communication with Clients and Prospective Clients:
Distinguish between fact and opinion
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“…Will be…” fact
“…May be …” opinion
Informing Clients of the Investment Process
Keep clients informed on an ongoing basis about changes to the investment process.
Understanding the basic characteristics of an investment is important in judging
suitability on a stand-alone basis, it’s especially important in determining the impact
each investment will have on the characteristics of a portfolio.
Should inform clients about the specialization or diversification expertise of external
advisers.
★交流有很多方式，包括 in person, over the call, or by the computer。 If
recommendations are in capsule form (such as a recommended stock list), should
notify clients that additional information and analyses are available upon request
Include limitations of the analysis and conclusions in the report
Distinction between Facts and Opinions in Reports
If not indicate that earnings estimates, changes in the dividend outlook, and future
market price information are opinions subject to future circumstances, thus fail to
separate past from future and violate V(B).
In the case of complex quantitative analyses, analysts must clearly separate fact from
statistical conjecture and should identify the known limitations of an analysis
Changes in style, ceilings, committee, universe of investment should disclose to the
clients and prospect clients. 如果投资过程发生了改变，如改变了投资方法，用
DDM 改为指数化投资、由个人决策到委员会决策等，都必须向 Clients and
prospects 进行披露。Illiquidity and capacity should be disclosed.
★Capacity is the investment amount beyond which returns will be negatively
affected by new investments.
Communicate significant risk and limitation of analysis(new):
Members and candidates 需要告诉客户在这些投资产品中所存在的风险。一般来
说，使用杠杆的风险，市场相关的风险，使用复杂的金融工具所产生的风险都
属于比较重要的风险，都需要告知客户。投资中所产生的局限性也要告知客户，
比如投资流动性和投资最大效能。
在投资之前 member 和 candidate 需要把自己已经意识到的风险向客户披露，没
有意识到的风险无需向客户披露。在合规的过程中，对于谣传的风险和局限性
要有一定的认知。在衡量风险和局限性的时候，一次性的投资损失不能作为长
期的因素来进行考量。如果是因为一些没有意识到的风险或限制导致了损失并
不违背 V(B)，这只能说明没有充分行使审慎性原则。
Report presentation(new): member or candidate 的分析报告必须包括对分析以及
报告的结论有重要影响的因素，这样读者就清楚的知道报告的投资逻辑并且可
以对投资逻辑进行挑战和质疑。如果报告撰写者已经做了充分的调研，在报告
中他突出重要的领域，简单提及或者省略其他不太重要的地方，只要把这种局
限性披露给投资者就不违反。投资意见要基于数量模型以及分析，这些数量模
型以及分析需要得到现有的参考资料的支持。分析模型和方法需要保持一致性，
若发生变动，需强调说明。
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P18-1 Record Retention
Q86-1 Guillermo Sandoval, CFA, owns an asset management firm with offices downtown,
To minimize rent expenses, each year Sandoval ships the previous year’s research
records to a nearby warehouse. There, the reports are digitized and stored in both
electronic and hard-copy forms. After five years, all paper copies are destroyed and
only electronic copies are retained. Are Sandoval’s record-retention procedures in
compliance with the CFA Institute Standards of Practice?
A. Yes.
B. No, because he did not retain the copies in his offices.
C. No, because he failed to retain the original documents.
Solution: A.
The Standards do not require on-site storage.
Q87-1 ★An analyst made a recommendation. As required by the firm, all documents
written on paper are destroyed in five years but the documents in hard disk should
be retained for ten years. The analyst recorded all documents in a movable hard disk
while keeping paper documents as required. Did the analyst comply with the
Standards?
A. Yes, because he keep record retention for a sufficient period.
B. No, because he destroyed paper documents in less than seven years.
C. No, because he should not use a movable hard disk to record documents.
Solution: A.
Trap: Seven years is recommended if no legal requirement for record retention.
Key points of Record Retention:
R152-1 ★必须保留得出投资结论和投资操作的所有研究记录，这些记录是公司的财产；
如果当地没有明确的规定，CFA 协会要求记录必须保留 7 年;
If applicable law requires 5-year record, 保存 5 年
R153-1 Records can be maintained either in hard copy or electronic form;
R154-1 Records Are Property of the Firm
Records created in professional activities are the property of the firm. When leaving
the firm, cannot take those records, including originals or copies of supporting
records of his work, to the new employer without the express consent of the
previous employer.
Cannot use historical recommendations or research reports created at the previous
firm because the supporting documentation is unavailable.
For future use, must re-create the supporting records at the new firm through public
sources, or directly from covered company, and not from memory or sources
through previous employer unless with permission.
R155-1 The responsibility to maintain records that support investment action generally falls with
the firm rather than individuals
Must archive research notes and other documents, either electronically or in hard
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copy, that support their current investment-related communications.
Doing so will assist their firms in complying with requirements for preservation of
internal or external records.
R156-1 New media record(new): 随着科技进步，新的社会媒体对记录保存带来挑战。
会员以及候选人需要理解虽然雇主以及当地的监管者会制定针对数字媒体记录
保存的政策规定，但是这个规定往往会滞后于新传播途径的诞生。
这种滞后就要求会员以及候选人自己确保所有的相关信息记录的保存。这些无
纸质形式的媒体类型包括但不局限于：邮件，短息，博客， Twitter 上的资料
P19-1 Disclosure of Conflicts
Q88-1 ★★Yao Tsang, CFA, has a large percentage of his net worth invested in the
Australian mining company Outback Mines, which he has held for many years. Tsang
is in the process of moving to a new employer where he will be responsible for
initiating research on . domestic mining companies. Shortly after his move, Tsang
is asked to complete a research report on Outback Mines. In order to meet the CFA
Institute Standards of Professional Conduct concerning his stock holding, which of
the following is the most appropriate action for Tsang to take?
A. Disclose his stock holding to his employer and to clients.
B. Sell his stock holdings to eliminate any potential conflict of interest.
C. Refuse to write the report and ask his employer to assign another analyst to complete the
analysis.
Solution: A.
Even though the best practice is to avoid conflicts, when conflicts cannot be reasonably
avoided, full disclosure should be made as required by Standard VI (A). As the stock in question
has been held for many years, it may not be practical to sell it due to things like tax
consequences. Since the analyst has been hired to initiate coverage of mining companies, it is
unlikely that another analyst at that firm would be as competent in completing a research
report on mining companies.
Q89-1 ★★Beth Kozniak, a CFA candidate, is an independent licensed real estate broker
and a well-known property investor. She is currently brokering the sale of a
commercial property on behalf of a client in financial distress. If the client’s building
is not sold within 30 days, he will lose the building to the bank. A year earlier,
another client of Kozniak’s had expressed interest in purchasing this same property.
However, she is unable to contact this client, nor has she discovered any other
potential buyers. Given her distressed client’s limited time frame, Kozniak purchases
the property herself and foregoes any sales commission. Six months later, she sells
the property for a nice profit to the client who had earlier expressed interest in the
property. Does Kozniak most likely violate the CFA Institute Standards of Professional
Conduct? （2012 Mock83）
A. No
B. Yes, she did not disclose her potential conflicts of interest to either client.
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C. Yes, she profited on the real estate to the detriment of her financially stressed client.
Solution: A.
A is correct because Kozniak does not appear to have violated any CFA Institute Standards of
Professional Conduct. Because she is known in the market for investing and brokering property
and both parties have worked with Kozniak in the past, both parties would know of her
interests. In addition, in both cases she acts for her own account as a primary investor, not as a
broker. She buys the property for her own portfolio and then sells the property from her own
portfolio. Therefore, Kozniak did not violate Standard VI (A) Disclosure of Conflicts. When she
purchased the property for her portfolio, she saved her client from losing the building to the
bank and did not charge a sales commission. Because the sale of the property to her other
client did not take place until six months after her purchase and she was unable to contact the
client who had earlier expressed interest prior to her purchase, she cannot be accused of
violating any loyalty, prudence, or care to either client (Standard III (A) Loyalty, Prudence, and
Care).
Q90-1 ★Raymond Ortiz, CFA, provides investment advice to high-net-worth investors. Ortiz
has just completed an analysis of Continental Wheat, a manufacturer of wheat-based
food products. He rated the company a long-term hold for investors seeking growth
and income. Ortiz’s analysis included a review of the company’s management team,
financial data, pro forma financial positions, dividends and dividend policy, and a
comparison of Continental with its competitors. Although he does not tell anyone,
five years ago, Ortiz worked for and managed the commodities derivatives trading
unit of Continental. As part of his compensation at Continental, he received stock,
which he still owns. Based upon his research, Ortiz recommends Continental to
clients who have a moderate risk tolerance. Two weeks later Continental announces
its quarterly earnings are 30% less than a year ago. Consequently, shares of
Continental drop by 50%. Ortiz most likely violated the CFA Institute Code of Ethics
and Standards of Professional Conduct related to his stock: （2012 Mock84）
A. Research.
B. Ownership.
C. Recommendation.
Solution: B.
B is correct because there is a violation of Standard VI (A) Disclosure of Conflicts; the analyst
worked for Continental and still has ties to the company in the form of his stock ownership.
Q91-1 ★Jamison is a junior research analyst with Howard & Howard, a brokerage and
investment banking firm. Howard & Howard's mergers and acquisitions department
has represented the Britland Company in all of its acquisitions for the past 20 years.
Two of Howard & Howard's senior officers are directors of various Britland
subsidiaries. Jamison has been asked to write a research report on Britland. What is
the best course of action for her to follow? （原版书 Reading2-3）
A. Jamison may write the report but must refrain from expressing any opinions because of
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the special relationships between the two companies.
B. Jamison should not write the report because the two Howard & Howard officers serve as
directors for subsidiaries of Britland.
C. Jamison may write the report if she discloses the special relationships with the company
in the report.
Solution：C.
This question involves Standard VI(A)—Disclosure of Conflicts. The question establishes a
conflict of interest in which an analyst, Jamison, is asked to write a research report on a
company that is a client of the analyst's employer. In addition, two directors of the company
are senior officers of Jamison's employer. Both facts establish that there are conflicts of
interest that must be disclosed by Jamison in her research report. Answer B is incorrect
because an analyst is not prevented from writing a report simply because of the special
relationship the analyst's employer has with the company as long as that relationship is
disclosed. Answer A is incorrect because whether or not Jamison expresses any opinions in the
report is irrelevant to her duty to disclose a conflict of interest. Not expressing opinions does
not relieve the analyst of the responsibility to disclose the special relationships between the
two companies.
Q92-1 Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors, a
mid-sized mutual fund firm investing in domestic securities. She has watched the
hedge fund boom and on numerous occasions suggested her firm creates such a
fund. Senior management has refused to commit resources to hedge funds.
Attracted by potential higher fees associated with hedge funds, Grabbo and several
other employees begin development of their own hedge fund to invest in
international securities. Grabbo and her colleagues are careful to work on the fund
development only on their own time. Because Atlantic management thinks hedge
funds are a fad, she does not inform her supervisor about the hedge fund creation.
According to the Standards of Practice Handbook, Grabbo should most likely address
which one of the Codes and Standards immediately? (2014 Mock 99-2)
A. Additional Compensation Arrangements
B. Priority of Transactions
C. Disclosure of Conflicts
Solution: C.
According to Standard VI(A) Disclosure of Conflicts, Grabbo should disclose to her employer
her hedge fund development because this activity could possibly interfere with her
responsibilities at Atlantic. In setting up a hedge fund, Grabbo was not acting for the benefit of
her employer. She should have informed Atlantic she wanted to organize the hedge fund and
come to some mutual agreement on how this process would occur.
Key points of Disclosure of interest：
R157-1 Must make full and fair disclosure of all matters that could reasonably be expected to
impair their independence and objectivity or interfere with respective duties to their
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clients, prospective clients, and their employer
R158-1 Ensure that such disclosures are prominent, are delivered in plain language, and
communicate the relevant information effectively
★Best practice is to update disclosures when the nature of a conflict of interest
changes materially。
R159-1 If an analyst was asked to cover the company,而且他 inherit 该公司股票
Must disclose if continue to follow
Best practice: assign another analyst to follow up the company
R160-1 Restrict personal trading, outside board membership, and related activities to prevent
situations that could give the appearance of a conflict of interest.
R161-1 Disclosure to Clients：corporate financing；market making relationship；Security holding；
Directorship；Individual relationship
R162-1 Also disclose fee arrangements, subadvisory arrangements or situations involving
nonstandard fee structures. Equally important is to disclose arrangements in which the
firm benefits directly from recommendations
R163-1 部门间的冲突
Internal conflict between R&D and ibanking
External conflict with listed firms
Broker-sponsored limited partnerships to invest venture capital
R164-1 持股的冲突
May prohibit from owning any such securities overly burdensome.
Sell-side disclose ownership in stock recommended, buy-side disclose procedures
for reporting requirements for personal transactions
R165-1 Conflicts as a Director
Duties owed to clients and to shareholders of the company
Investment personnel as a director receive the securities or options
Board service receiving MNI
R166-1 Performance arrangement 的披露
Firms are encouraged to include information on compensation package in firms’
promotional literature.
If fee based on capital gains or capital appreciation (performance fee), should
disclose;
If outstanding options exist for incentives, should disclose the amount and
expiration date of these options as a footnote to any research report published
R167-1 Incentive fees should not be in conflict with the interests of clients’
If Yes, should disclose to clients;
If employer not permit disclosure, should dissociate, or quit the job
P20-1 Referral Fees
Q93-1 ★Yip Wai Yin, a CFA Candidate, is an independent mutual fund sales agent. For
every front-end load product she promotes, Yip receives a portion of the front-end
fee as commission at the time of sale. For every back-end load fund she sells, Yip
receives a smaller commission paid at the end of the year. Yip always informs her
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clients she is paid a commission as an agent, but does not provide details of the
compensation structure. When pitching her favored front-end load product line, she
tells clients 20% of her commission is always invested in the same fund as proof of
her confidence in the fund she recommends. Which CFA Code of Standards with
regard to Conflicts of Interest does Yip least likely violate?
A. Referral Fees.
B. Disclosure of Conflicts.
C. Priority of Transactions.
Solution: C.
Yip’s investments do not adversely affect the interest of the clients and therefore do not violate
the Priority of Transactions requirement. A Candidate having the same investment positions
does not always create a conflict of interest and in some instances, having an aligned
investment portfolio can be beneficial to the client.
Q94-1 Which of the following statements is a stated purpose of disclosure in Standard
VI(C)—Referral Fees? （原版书 Reading2-25）
A. Disclosure will allow the client to request discounted service fees.
B. Disclosure will help the client evaluate any possible partiality shown in the
recommendation of services.
C. Disclosure means advising a prospective client about the referral arrangement once a
formal client relationship has been established.
Solution: B.
Answer B gives one of the two primary reasons listed in the Handbook for disclosing referral
fees to clients under Standard VI(C)¬Referral Fees. (The other is to allow clients and employers
to evaluate the full cost of the services.) Answer A is inconsistent because Standard VI(C) does
not require members or candidates to discount their fees when they receive referral fees.
Answer C is inconsistent with Standard VI(C) because disclosure of referral fees, to be effective,
should be made to prospective clients before entering into a formal client relationship with
them.
Q95-1 ★★Fred Brubacher, CFA, is an analyst at Van City Bank (VCB). Brubacher receives
compensation for referrals to the banks brokerage and personal financial-planning
divisions. His recent referrals are long-time clients from his previous employer, and
Brubacher does not mention VCB’s referral arrangement. Does Brubacher violate any
CFA Institute Standards?
A. No.
B. Yes, with respect to misrepresentation.
C. Yes, with respect to conflicts of interest.
Solution: C.
Compensation or other benefits received for the recommendation of products or services
represents a conflict of interest. According to the Standards, Brubacher must disclose the
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referral fee arrangement.
Key points of Referral Fee：
R168-1 Disclosure 的目的在于让客户和雇主评估：1）any partiality shown in any
recommendation of services；2）the full cost of the services;
R169-1 Disclose to the clients being referred and employer if necessary；Disclose nature of
consideration
R170-1 Encourage employers to develop procedures for referral fees
R171-1 Firm may completely restrict such fees，if not restrict, should indicate the appropriate
steps for requesting approval.
R172-1 Employers should have investment professionals provide to the clients notification of
approved referral fee programs and provide the employer regular (at least quarterly)
updates on the amount and nature of compensation received.
R173-1 Summary: disclosure of referral fee to clients or employers
Situations Employer Clients and prospects
Inter-firm referral √ √
Inter-department referral × √
Salesperson promotion × ×
Funds manager promotion × ×(best practice √)
P21-1 Priority of Transaction
Q96-1 ★★Teresa Avila, CFA, is a micro-cap investment analyst at a hedge fund. The fund
requires Avila to hold any securities that she recommends for the fund in her own
account as well. The president of the fund has stated, “We require our analysts to
eat their own cooking”. As Avila has such a small account, whenever she trades for
her own portfolio, she combines the transactions with those of the hedge fund, so
that she is sure to have her account aligned with the fund. Has Avila violated any CFA
Institute Standards of Professional Conduct?
A. No.
B. Yes, related to Misconduct.
C. Yes, related to Priority of Transactions.
Solution: C.
Standard VI (B) requires that investment transactions for clients and employers have priority
over transactions in which members have beneficial ownership. By executing her own
accounts transactions with those of the hedge fund, the analyst has violated this standard.
Micro cap securities can be thinly traded and easily influenced by changes in the volume of
activity, so the analyst may benefit when she combines her transactions with the funds, and
she should let the fund execute its orders before she makes changes to her account.
Q97-1 ★★Eric Pantoja is enrolled as a candidate in the CFA examination program. He
works as an assistant for Chehalis Investments (CI). Pantoja saw CI’s purchase list and
purchased several of the recommended stocks. Pantoja least likely violates the CFA
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Institute Standard relating to:
A. Misconduct.
B. Priority of Transactions.
C. Diligence and Reasonable Basis.
Solution: C.
Pantoja least likely violates the Standard relating to Diligence and Reasonable Care because he
is taking investment actions on his own behalf rather than on behalf of clients. His actions
violate the Standards relating to Priority of Transactions (he trades ahead of his employer and
its clients), Loyalty to Employer (his actions cause harm to his employer), and Misconduct (his
actions reflect adversely on his professional integrity).
Q98-1 ★Spencer Rivers, CFA chart holder, manages the accounts of an institution, the
employer and his parents. His father does not pay for the investment service fee.
When ipos become available, how should he do?
A. Allocate to the institution client and to the employer.
B. Allocate to the institution client, his father and the employer.
C. Allocate to the institution client, the employer and his father
Solution: A.
Investment transaction for clients must have priory over investment transactions for
employers. Although his father does not pay for the investment service fee, his father’s
account still is not client comparable to other clients (normal fee-paying account).
Q99-1 ★★Kazuya Kato, CFA, is a widely followed economist at a global investment bank.
When Kato opines on economic trends, markets react by moving stock valuations
considerably. When Kato received information of a temporary oversupply of rare
earth metals, he issued a forecast that price trends for rare earth metals would be
down significantly on a long-term basis. Kato also secretly sold his report to a widely
followed Internet site. Prior to issuing this forecast, Kato emailed all portfolio
managers at his bank with a copy of his report indicating that his opinion would be
reversed shortly so there would be trading opportunities. Kato least likely violated
which of the following CFA Institute Code of Ethics and Standards of Professional
Conduct?
A. Market Manipulation.
B. Priority of Transactions.
C. Additional Compensation Arrangements.
Solution: B.
The Priority of Transactions Standard has not been violated as it relates to investment
transactions for clients and employers having priority over Member/Candidate transactions.
There is no indication in this case that transactions have occurred as a result of the report
being issued by the economist. Although it is reasonable to expect there will be transactions, it
is only when these happen that a violation will have occurred.
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Q100-1 ★A broker overheard that his firm was going to execute a block of large order on a
thinly traded stock. The order was so large that it would pull the stock price to a
historically high level. He returned and made a front-running. Which of the
Standards did he violate?
A. Standard II (A): Material Non-public Information
B. Standard VI (B): Priority of Transactions
C. Both Standard II(A): Material Non-public Information and Standard VI(B): Priority of
transactions
Solution: C.
The activity his firm intends to do will significantly influence the price of that stock, so it is
considered an MNI. He should place his clients and employer’s interest before himself. So he
violates Standard VI (B): Priority of Transactions.
Q101-1 ★Margie Germainne, CFA, is a risk management consultant who has been asked by
a small investment bank to recommend policies to prevent bank employees from
front running client orders. These clients generally invest in one or more of the
bank’s large cap equity unit trusts. To ensure compliance with the CFA Institute
Standards of Professional Conduct, Germainne should least likely recommend which
of the following? Employees should be restricted from trading: （2012 Mock83）
A. Equity related securities.
B. Without prior permission.
C. During established time periods.
Solution : A.
A is correct because while Standard VI (B) Priority of Transactions is designed to prevent any
potential conflict of interest or the appearance of a conflict of interest with respect to
personal transactions, it does not ban employees from trading securities. A ban on all equity
related securities could be excessively restrictive to employees and unnecessary if appropriate
personal transaction policies and procedures are in place.
Key points of Priority of Transaction:
R174-1 Investing Public > Client > Employer > Individual（Beneficial Owner）
R175-1 Avoiding Potential Conflicts
Conflicts between the client’s interest and an investment professional’s personal
interest may occur.
Although conflicts of interest exist, it’s OK for individual managers, advisers, or fund
employees making money from personal investments as long as：1）the client is not
disadvantaged by the trade；2）the investment professional does not benefit
personally from trades undertaken for clients；3）comply with applicable regulatory
requirements
R176-1 Standards for Nonpublic Information
Prohibit from conveying nonpublic information to any person whose relationship to
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the member or candidate makes him a beneficial owner of the person’s securities.
Must not convey this information to any other person if the nonpublic information
can be deemed material
R177-1 ★Family accounts
Family accounts that are client accounts should be treated like any other firm
account, should not be disadvantaged because of that relationship.
Disadvantage parents who are normal fee-paying clients: violate III (B) fair dealing
If a member/candidate has a beneficial ownership in the account, however, the
member or candidate may be subject to pre-clearance or reporting requirements of
the employer or applicable law.
R178-1 Recommended procedures for compliance
Limited participation in equity ipos
Restrictions on private placements
Establish blackout/restricted periods
Best method：1）disclosure of personal holdings/beneficial ownerships upon
commencement of the employment relationship and at least annually thereafter；2）
Providing duplicate confirmations of transactions；3）preclearance of participation in
ipos
Once trading restrictions are in place, must be enforced
Disclosures of policies
P22-1 Responsibilities as a CFA Institute Member or CFA Candidate; Reference to CFA
institute, designation
Q102-1 ★The basic structure for enforcing the CFA Institute Code and Standards under its
Professional Conduct Program is not formed by which of the following? The CFA
Institute’s:
A. Bylaws
B. Rules of procedures
C. Board of Governors
Solution: C.
Although the Board of Governors maintains oversight and responsibility for the PCP, the
Institute’s Bylaws and Rules of Procedure form the basic structure for enforcement of the
Code and Standards.
Q103-1 ★A CFA charterholder is the fund manager for a non-profit organization. During a
presentation regarding the restructuring of their investment portfolio’s asset allocation,
the Head of the Finance Committee questions the manager. As part of his response,
the manager states, “I am a CFA charterholder. I know what I’m talking about, and you
should do what I say”. According to the Standards of Practice Handbook, has the
charterholder violated any of the CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, Responsibilities as a CFA Institute Member.
C. Yes, Communication with Clients and Prospective Clients.
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Solution: B.
由于他在和 Head of the Finance Committee 交流的时候说“I am a CFA charterholder. I know
what I’m talking about, and you should do what I say”，这违反了 Responsibilities as a CFA
Institute Member，因为作为 CFA charterholder 应该对自己的 designation 和 reference 做出
合理的表述，例如“CFA charterholders achieve better performance results”，而不能没有任
何原因的，而且毫不客气的，牛气冲冲地只说我是 CFA charterholder，我知道我自己在说
什么，你只要按照我说的去做就可以了。这样违反了 Responsibilities as a CFA Institute
Member。
Q104-1 ★Vishal Chandarana, an unemployed research analyst, recently registered for the
CFA Level I exam. After two months of intense interviewing, he accepts a job with a
stock brokerage company in a different region of the country. While posting on his
social networking webpage he brags about how being a CFA Candidate really helped
him get a job. He adds he was so relieved his new employer didn't ask about his
being fired from his former employer. Which CFA Code of Ethics or Standards of
Professional Conduct did Chandarana least likely violate? (Mock79-14)
A. Integrity
B. Duties to Employers
C. Reference to the CFA Program
Solution: C.
There is no evidence that Chandarana violated Standard VII(B) with regard to his being a CFA
Candidate. It does appear that Chandarana did not act with integrity when he hid information
that could potentially harm his new employer's reputation, thus violating Standard I(C),
Professionalism (Misrepresentation), and Standard IV(A), Duty to Employers (Loyalty).
Q105-1 Tammi Holmberg is enrolled to take the Level I CFA exam. While taking the exam, the
candidate on Holmberg's immediate right took a stretch break and a piece of paper
from his pocket fell onto Holmberg's desk. Holmberg glanced at the paper and
realized there was information written on the paper, which included a formula
Holmberg needed for the question she was working on. Holmberg had not
memorized this formula and could not complete the question without this
information. Holmberg pushed the paper off her desk and used the formula to
complete the question. According to the CFA Institute Code of Ethics and Standards
of Professional Conduct, Holmberg most likely:
A. compromised her exam.
B. was free to act on the information that fell on her desk.
C. is responsible for notifying exam proctors of her neighbor's violation.
Solution: A.
Holmberg's conduct compromised the validity of her exam and violated Standard VII (A). Her
conduct was also a violation of the rules and regulations of the CFA Program, the Candidate
pledge, and the CFA Institute Code and Standards.
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Q106-1 Dorre, CFA, just founded her own investment company. On a TV advertisement, she
said: “through the CFA program, I improved my investment skill”. On that TV show,
she also assured that all her client’s investment return will increase with higher level
investment skill gained from CFA program. According to Code and Ethics and
Standards of Practice Handbook, which of following is allowed?
Improve my investment skill Increase clients’ investment return
A. Yes No
B. No No
C. No Yes
Solution: A.
Standard VII is intended to prevent promotional efforts that make promises or guarantees that
are tied to the designation. Statement referencing CFA institute, the CFA designation, or the
CFA program must not over-promise the competency of an individual or over promise future
investment result. “Improving skill” is allowed as long as this statement is true and is not linked
to performance or does not imply superior ability. The “assure” statement prominently links
the first statement to superior performance is not allowed.
Key points of Responsibilities as a CFA Institute Member/Candidate; Reference to CFA institute,
designation
R179-1 ★violations include:
Cheating on the CFA exam or other CFA Institute’s exams.
Not complying with rules and policies of the CFA program.
Divulging the confidential information to others.
Improperly using the designation.
Misrepresenting information on Professional Conduct Statement of the CFA.
Cheating on the CFA exam, violate VII(A), I(D).
R180-1 VII(A) 会员或候选人的行为（Conduct as Members and Candidates)。成员或候选人不
得从事任何有损于 CFA 协会和 CFA 称号名誉和声望，以及 CFA 考试公正性和含金量
的行为。CFA 考试或者其它任何考试中作弊都属于违反。
R181-1 Over-promise the competency of an individual 和 over-promise future investment results
as lower risk, higher performance 都不可以。
R182-1 The order of CFA and CPA has nothing to do.
R183-1 如果要获得使用 CFA 称号的权利，必须满足几个条件：是 CFA 协会的在册会员，按
时交会费（Membership due），依次通过 CFA 的三次考试，按时完成并提交年度述职
报告（annual conduct report）
R184-1 在名片上，CFA 的字体大小不能超过自己名字的字体大小
R185-1 CFA 是形容词，不是名词，不能说有几个 cfas
R186-1 唯一正确的表述是：CFA，Chartered Financial Analyst；其他说法都不对，如 cfa, ,
CFA-typed, China-CFA
R187-1 CFA mustn't be used as part of the name of the firm.
R188-1 Shouldn’t cite the expected date of exam completion and award of charter.
R189-1 只通过三级考试，没有持证的人不可以自称 CFA.
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R190-1 广告中，如果说明三次考试一次就通过，只要陈述是事实就可以了；但是，如果说
CFA 持证人有高超的投资业绩，则违反了 VII (B)；
R191-1 如果好几年没交会费，虽然以前是持证人，在名片后如果写 CFA，违反了 VII (B)。
R192-1 成员不需要向 clients and prospective clients 披露 duty to comply with the Code。
R193-1 持证人可以在个人的名片和个人的 letter head 上使用 CFA，但公司不可以。
Contrast between some similar standards:
R194-1 I(C) focuses on performance presentation, so guarantee the investment performance
with volatile return, misrepresentation of service and qualification, and plagiarism
violate this standard
R195-1 III(D) focuses on the statement of performance to clients, so the misleading statement
concerning performance, including give clients the hint that they can earn the historical
yield, violate this standard.
R196-1 V(B) focuses on disclosing the member‘s own changes for clients, letting clients know
their information, and differentiating between fact and opinion
I(C) Misrepresentation 所有的不正当陈述：服务范
围、资质；不允许抄袭等
III(D) Performance presentation 业绩的不正当陈述
V(B) Communication with Clients and
Prospective Clients
向客户披露自身的变化，并
且区分事实与意见
R197-1 违反的递推性：IV(B) →VI(A) →I(B)；III(D) →I(C)
R198-1 III(B) focuses on constraining the fairness of the order of transaction between clients
R199-1 VI(B) focuses on the order of transaction among clients, individuals and employers
III(B) Fair Dealing 客户之间的交易优先顺序
VI(B) Priority of Transactions 客户>雇主>个人
R200-1 IV(B) focuses on disclosing the additional compensation from clients and the third-party
to the employer
R201-1 VI(A) focuses on disclosing the possible interest conflict to clients and public, so that
clients can have right judgments
IV(B) Additional Compen
Ation
Arrangements
为雇主的利益，向其披露额
外收入
VI(A) Disclosure of conflicts
为客户及公众的利益，向其
披露额外收入
P23-1 GIPS Verification and GIPS composite
Q107-1 ABC Investment Management Company claims compliance with GIPS, but the GIPS
compliance is not verified. Does this company comply with GIPS?
A. Yes.
B. No, because the company should be verified.
C. No, because the internal control personnel should conduct the verification work.
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Solution: A.
Firms are encouraged to pursue independent verification from a third party on a firm-wide
basis, verification is not an obligation.
Q108-1 ★A GIPS-compliant investment firm presents its historical record for a global growth
stock composite. Which of the following method is least likely to violate the CFA
institute Standard?
A. Excluded terminated accounts.
B. No portfolio below minimum asset level is included.
C. Use a top-performing portfolio as representative of firm’s results.
Solution: B.
According to GIPS composite construction, A, C are not permitted.
Q109-1 ★★For periods beginning on or after 1 January 2011, the aggregate fair value of total
firm assets most likely includes all: （2012 Mock83）
A. fee-paying discretionary accounts.
B. fee- and non-fee-paying discretionary accounts.
C. fee- and non-fee-paying discretionary and non-discretionary accounts.
Solution: C.
C is correct because for periods beginning on or after 1 January 2011, total firm assets must
include the aggregate fair value of all discretionary and non-discretionary assets managed by
the firm. This includes both fee-paying and non-fee-paying portfolios ().
Q110-1 Which of the following is a key characteristic of the Global Investment Performance
Standards (GIPS)? The GIPS Standards:
A. Rely on the integrity of input data.
B. Consist of required provisions for firms to follow to achieve best practice.
C. Must be applied with the goal of achieving excellence in performance presentation.
Solution: A.
A key characteristic of the Standards is that the Standards rely on the integrity of input data.
The accuracy of input data is critical to the accuracy of the performance presentation.
Q111-1 ★★Fundamental Asset Managers (FAM) claims compliance with the CFA Institute
Global Investment Performance Standards (GIPS) and manages both discretionary
and nondiscretionary accounts. Alma Dzuya, CFA, includes all discretionary,
fee-paying value and growth accounts when constructing a composite for FAM. Does
the composite Dzuya constructed most likely meet GIPS criteria? (Mock79-11)
A. Yes.
B. No, because value and growth accounts are included,
C. No, because nondiscretionary accounts are not included.
Solution: B.
A composite must include all actual, fee-paying, discretionary portfolios managed in
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accordance with the same investment mandate, objective, or strategy. By including both value
and growth accounts, the composite is made up of portfolios with different investment
mandates or strategies.
Q112-1 ★★According to the GIPS, which of the following statements about composite
construction is least accurate?
D. All actual, fee-paying, discretionary portfolio must be included in at least one composite.
E. Non-fee-paying discretionary portfolio may be included in a composite.
F. Non-discretionary portfolios may be included in a firm’s composites.
Solution: C.
C is correct because non discretionary portfolios must not be included in a firm’s
composites.()
Q113-1 According to the Fundamentals of Compliance section of the Global Investment
Performance Standards, issues that a firm must consider when claiming compliance
include all of the following except: （原版书 Reading4-2）
A. Replicating performance
B. Properly defining the firm
C. Documenting firm policies and procedures used in establishing and maintaining
compliance with the Standards
Solution: A.
Replication of performance is not included in the Fundamentals of Compliance section within
the GIPS standards.
Q114-1 ★★In countries where new local laws relating to calculation and presentation of
investment performance conflict with GIPS standards, firms who have claimed GIPS
compliance should most likely: （mock 83）
A. Stop claiming GIPS compliance
B. Follow local laws, continue to claim GIPS compliance, and disclose conflicts
C. Continue to claim GIPS compliance, disclosing non-compliance with new laws
Solution: B.
B is correct because where local laws and regulations regarding calculation and presentation
conflict with GIPS standards, firms must abide by the local laws and regulations. They are still
allowed to claim GIPS compliance but must disclose areas where the local requirements
conflict with those of the GIPS standards.
Q115-1 Which of the following is least likely a requirement of the GIPS standards? Firms are
required to:
A. include all discretionary, fee-paying portfolios in at least one composite.
B. present a minimum of five years of annual investment performance compliant with the
gips standards.
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C. have their performance records verified by an independent third party.
Solution: C.
It is a recommendation but not a requirement that firms obtain independent third-party
verification to claim GIPS compliance. Firms are required to include all discretionary,
fee-paying portfolios in at least one composite. They must also present a minimum of five
years of annual investment performance compliant with the GIPS standards.
Q116-1 ★★According to GIPS, when an investment firm presents sub-advisor performance
in his report,
A. total firm assets should include assets assigned to a sub-advisor provided the firm has
discretion over the selection of the sub-advisor.
B. for periods beginning on or after 1 january 2006, the firm should disclose the use of a
sub-advisor and the periods a sub-advisor was used.
C. for periods prior to 1 january 2006, the firm should disclose the use of a sub-advisor and
the periods a sub-advisor was used.
Solution: C.
For periods prior to 1 January 2006, firms should disclose the use of a sub-advisor and the
periods a sub-advisor was used.
Q117-1 ★★If ABC parent company claims that ABC company is complied with the GIPS
standards, its subsidiary :
A. Should claim compliance with the GIPS standards.
B. Not need to make any claim.
C. Should inquire its parent company.
Solution: A.
The firm is defined as the whole ABC company.
Q118-1 Which of the following is least likely a requirement of the GIPS standards? Firms are
required to:(2014 Mock 98-16)
A. include all discretionary, fee-paying portfolios in at least one composite.
B. present a minimum of five years of annual investment performance compliant with the
GIPS standards.
C. have their performance records verified by an independent third party.
`
Solution: C.
It is a recommendation but not a requirement that firms obtain independent third-party
verification to claim GIPS compliance. Firms are required to include all discretionary,
fee-paying portfolios in at least one composite. They must also present a minimum of five
years of annual investment performance compliant with the GIPS standards.
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Key points of GIPS：
R202-1 Misleading practices that hinder performance comparability:
Representative accounts-showing a top-performing portfolio as representative of
firm's results.
Survivorship bias-excluding wake performance.
Varing time periods- showing performance for selected time periods with
outstanding returns.
R203-1 Complying with the GIPS standards is voluntary
R204-1 Only an investment management firm that actually manage assets can claim compliance
with the Standards
Plan sponsors & consultants can’t claim compliance unless actually manage assets.
Software (and vendor of software) cannot be compliant can assist firms in
compliance with GIPS
R205-1 Firm-wide and full compliance
Can’t be achieved on a single product or composite.
Two options: (1) Fully comply with all requirements; (2) Not comply with all
requirements and not claim compliance
R206-1 Benefit 2 groups: investment management firm and prospective clients
R207-1 ★关于 composite
A composite is a grouping of individual discretionary portfolios representing a similar
investment strategy, objective, or mandate
A composite, such as Global Equities, must include all portfolios (current and past)
that the firm has managed in accordance with this particular strategy.
The firm should identify which composite each managed portfolio is to be included in
before the portfolio’s performance is known.
All actual, fee-paying, discretionary portfolio must be included in at least one
composite. Non-fee-paying discretionary portfolio may be included in a composite.
Non-discretionary portfolios must not be included in a firm’s composites.
R208-1 Verification
Verification is the review of an investment management firm’s performance
measurement processes and procedures by an independent third-party “verifier”
Whether the firm has complied with all the composite construction requirements of
the GIPS standards on a firm-wide basis.
Whether the firm’s processes and procedures are designed to calculate and present
performance results in compliance with the GIPS standards.
A single verification report is issued in respect of the whole firm; verification cannot
be carried out for a single composite.
R209-1 Firm 的定义
The definition should reflect the “distinct business entity” that is held out to clients
and prospects as the investment firm.
GIPS are ethical standards for performance presentation which ensure fair
representation of results and full disclosure
R210-1 Include all actual fee-paying, discretionary portfolios in composites for a minimum of 5
years or since firm or composite inception. After presenting five years of compliant data,
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the firm must add annual performance each year going forward up to a minimum of 10
years
R211-1 No partial compliance and only full compliance can be claimed
R212-1 Firms are required to use certain calculation and presentation standards and make
specific disclosures, . Composite asset weighted
R213-1 GIPS contain both required and recommended provisions
R214-1 Follow the local laws for cases in which a local or country-specific law or regulation
conflicts with GIPS , but disclose the conflict
R215-1 Nine major sections of GIPS
0. Fundamentals of compliance
1. Input data
2. Calculation methodology
3. Composite construction
4. Disclosure
5. Presentation and reporting
6. Real estate
7. Private equity
8. Wrap fee/Separately Managed Account Portfolios
R216-1 0. Fundamentals of compliance
Firms must document their policies and procedures used in establishing and
maintaining compliance with the GIPS standards
Statements referring to the performance of a single, existing client portfolio as being
“calculated in accordance with the Global Investment Performance Standards” are
prohibited, except when a GIPS-compliant firm reports the performance of an
individual client’s portfolio to that client
Firms must make every reasonable effort to provide a compliant presentation to all
prospective clients. Must not choose to whom they present a compliant presentation.
As long as a prospective client has received a compliant presentation within the
previous 12 months, the firm has met this requirement.
Firms must provide a compliant presentation for any composite listed on the firm’s
list of composite descriptions to any prospective client on request.
Firms must be defined as an investment firm, subsidiary, or division held out to clients
or prospective clients as a distinct business entity.
For periods after January 2011, total firm assets must be the aggregate fair value of
all discretionary and non-discretionary assets managed by the firm.
Changes in a firm’s organization must not lead to alteration of historical composite
performance.
When the firm jointly markets with other firms, the firm claiming compliance with the
GIPS standards must be sure that it is clearly defined and separate relative to other
firms being marketed, and that it is clear which firm is claiming compliance.
Fair Value: the amount at which an investment could be exchanged in a current arm’s
length transaction between willing parties in which the parties each act
knowledgeably and prudently
Valuation hierarchy: 1) market price 2) market price for similar investment 3)
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market-based inputs for pricing the investment 4) subjective unobservable inputs for
pricing the investment
R217-1 1. Input data
For periods beginning on or after I January 2011, portfolios must be valued in
accordance with the definition of fair value and the GIPS Valuation Principles.
R218-1 2. Calculation methodology
Firms must calculate time-weighted rates of return that adjust for external cash flows.
Both periodic and sub-period returns must be geometrically linked
R219-1 3. Composite construction
All actual, fee-paying, discretionary portfolios must be included in at least one
composite. Although non-fee-paying discretionary portfolios may be included in a
composite (with appropriate disclosure), non-discretionary portfolios must not be
included in a firm’s composites.
Firms must not link performance of simulated or model portfolios with actual
performance.
R220-1 5. Presentation and reporting
At least 5 years of performance (or since inception if less than five years) that meets
the requirements of the GIPS standards. After a firm presents a minimum of five years
of GIPS compliant performance, the firm must present an additional year of
performance each year, building up to a minimum of 10 years of GIPS compliant
performance.
Firms must not link non-GIPS-compliant performance for periods beginning on or
after 1 January 2000 to their GIPS-compliant performance. Firms may link
non-GIPS-compliant performance to GIPS-compliant performance provided that only
GIPS-compliant performance is presented for periods beginning on or after 1 January
2000.
R221-1 7. Private Equity
Firms must calculate the annualized since-inception internal rates of return (SI-IRR)
R222-1 8. Wrap fee/separately managed account (SMA) portfolios
Wrap fee: A type of bundled fee and are specific to a particular investment product.
A wrap fee portfolio is sometimes referred to as a “Separately managed account”
(SMA) or “managed account.”
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2-Quantitative
P1-2 Interest rate
Q1-2 Now, the nominal risk-free rate decreases. Keep the credit risk, liquidity risk and
maturity risk constant, if the inflation rate increases, the real risk-free rate will be:
A. decrease
B. no change
C. increase
Solution: A.
The real risk free rate equals to the nominal risk-free rate minus the expected inflation rate. If
the nominal risk-free rate decrease and expected inflation rate increase, the real risk-free rate
should decrease.
Key points of Required rate of return
R1-2 Required rate of return: the return that investors and savers require to get them to willing
lend their funds; affected by the supply and demand of funds in the market.
Discount rate: the interest rate we use to discount payments to be made in the future.
Opportunity cost: the benefit from the second best choice at the same risk level.
两个证券公司对同一个股票估值，使用相同的现金流预测，得出不一样的价格。原
因：使用的 required rate of return 不一样。
R2-2 Decompose required rate of return:
premiumrisk rateinflation expectedrate freerisk realrateInterest
Real risk free rate: compensation for consumption delay
Expected inflation rate: 要注意不是 historical inflation rate, 因为利率是向前看的。
Risk premium: Default risk premium, liquidity risk premium, maturity risk premium.
Real risk free risk=(1)
Nominal risk free risk=(1)+(2), also called risk free rate.
Required rate of return=(1)+(2)+(3)
P2-2 Time Value of Money
Q2-2 A couple plans to pay their child’s college tuition for 4 years starting 18 years from
now. The current annual cost of college is C$7,000, and they expect this cost to rise at
an annual rate of 5 percent. In their planning, they assume that they can earn 6%
annually. How much must they put aside each year, starting next year, if they plan to
make 17 equal payments?
A. $2,
B. $2,
C. $3,
Solution: A.
Step1: calculate the CF since 18,
CF18=7000*(1+5%)18=16846, CF19=7000*(1+5%)19=17689,…
Step 2: PV of tuition (4 CF since 18) at year 17
C$16,846 (1,06)-1 + C$17,689 ()-2 + C$18,573 ()-3 + C$19,502 ( )-4=$62,677
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Step 3: Calculate PMT
Input FV=C$62,677, PV=0, I/Y=6, N=17, then CPT PMT= C$2,
In summary, the couple will need to put aside C$2, each year if they start next year and
make 17 equal payments.
Q3-2 ★For planning purposes, an individual wants to be able to spend €80,000 per year, at
the end of each year, for an anticipated 25 years in retirement. In order to fund this
retirement account, he will make annual deposits of €6,608 at the end of each of his
working years. What is the minimum number of such deposits he will need to make to
fund his desired retirement? Use 6% interest compounded annually for all
calculations.
A. 29 payments
B. 40 payments
C. 51 payments
Solution: B.
Using a financial calculator, first calculate the needed funds at retirement:
N = 25, I/Y = 6, PMT = 80,000, FV = 0; calculate PV to be 1,022,668.
Then use 1,022,668 as the FV of the accumulation phase annuity as per:
I/Y = 6, PV = 0, PMT = - 6,608, FV = 1,022,668; calculate N. N is 40.
Q4-2 ★★A borrower is considering three competing mortgage loan offers from her bank
The amount borrowed on the mortgage is $100,000 with monthly compounding.
Mortgage type
Nominal(stated)annual interest
rate at initiation of the loan
Year in which
rate first adjusts
30-year fixed rate 5% N/A
15-year fixed rate % N/A
30-year 3 / 5 adjustable
rate mortgage(ARM)
% 3
The rate on the ARM resets at the end of the year 3. Assuming the ARM is reset at
% (. the remaining balance on the loan will now be repaid with % nominal
annual interest), which of the three loans will have the smallest monthly payment
after the rate reset at the end of year 3? (Mock85-26)
A. 30-year ARM.
B. 15-year fixed-rate loan.
C. 30-year fixed-rate loan.
Solution: C.
After year 3 the 30-year fixed-rate loan has the lowest payment. The loan payments,
summarized in the table, are calculated using a financial calculator following the table.
Loan Initial Payment ($) Payment after 3 years($)
30-year fixed
15-year fixed
ARM
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Payment on the 30-year fixed is:
N = 12×30= 360; I/Y= (5/12) = ; PV= -100,000; FV = 0; calculate PMT=
Payment on the 15-year fixed is:
N = 12×15= 180: I/Y= ( = ; PV =-100,000; FV=0; calculate PMT=
Calculations for the ARM
Initial payment
N = 12×30 = 360; I/Y = ( / 12) = ; PV = -100,000; FV = 0; calculate PMT =
Balance at end of year 3:
N = 12×27 = 324;I/Y = ( / 12) = ; FV = 0; PMT = ; calculate PV = 94,
Payment after the end of year 3:
N = 324; I/Y = ( / 12) = ; PV = 94,; FV = 0; calculate PMT =
R3-2 Annuities 的计算：FV, PV, required payment
N = number of periods
I/Y = interest rate per period
PMT = amount of each periodic payment
FV= 0
Compute (CPT) present value (PV)
考察方法：计算——N, I/Y, PMT, FV, PV 中任意给定四个，求另外一个
P3-2 Calculation of HPR
Q5-2 An analyst gathered the following information about a common stock investment:
Date Amount
Stock purchase 15 January 2007
Cash dividend 14 July 2007
Stock sale 15 July 2007
The holding period return on the common stock investment is closest to:
A. %
B. %
C. %
Solution: B.
HPR = (P1 – P0 + D1)/P0, where P0 is the initial investment, P1 is the price received at the end of
the holding period, and D1 is the cash paid by the investment at the end of the holding period.
In this case: HPR = (54 - 48 + 4) / 48 = %. The HPR is not annualized for holding periods
shorter than a year.
R4-2 概念：Total return an investor earns between the purchase date and the sale or maturity
date.
R5-2 公式：HPR =
1 0 0
0
-P P D
P
=
1 0
0
-1
P D
P
Notes: 这个指标没有年度化，所以不同的 HPR 是不具可比性的。
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P4-2 Calculation and conversion amony RBD，HPY，EAY and Rmm
Q6-2 ★A money manager has $1,000,000 to invest for one year. She has identified two
alternative one-year certificates of deposit (CD) shown below:
Compounding frequency Annual interest rate
CD1 Quarterly %
CD2 Continuously %
Which CD has the highest effective annual rate (EAR) and how much interest will it
earn?
Highest EAR Interest earned
A. CD1 $82,432
B. CD2 $82,746
C. CD2 $83,287
Solution: B.
Quarterly: EAR= - 1= - 1 = = %
Interest = $1,000,000×% = $82,432
Continuous: EAR = -1= = %
Interest = $1,000,000 x % = $82,746
Therefore, the CD paying % compounded continuously offers the highest effective annual
rate.
Q7-2 An investor buys a T-bill at 98,000 with 50 days to maturity. The par value of this T-bill
is 100,000. The money market yield is closest to: （2012 年 12 月考题回顾）
A. %
B. %
C. %
Solution: B.
Money market yield = [ (par value – purchase price) / purchase price] * (360/50) = [(100,000 –
98,000) / 98,000] * (360 / 50) = %
Q8-2 ★The nominal (quoted) annual interest rate on an automobile loan is 10%. The
effective annual rate of the loan is %. The frequency of compounding periods per
year for the loan is closest to:
A. weekly.
B. monthly.
C. quarterly.
Solution: B
The effective annual return is: EAR = (1 + Periodic interest rate)m-1
For weekly compounding, (1 + / 52)52 — 1 = = %
For monthly compounding, (1 + / 12)12 — 1 = = %
For quarterly compounding, (1 + / 4)4 — 1 = = %
Thus, the correct answer is monthly compounding.
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R6-2 掌握几种收益率的计算：rBD，HPY，EAY，rMM，并且知道相互之间的转化
BD
t
PV = FV * (1- r * )
360
MM
t
FV = PV * (1+r * )
360
t
2*
1365
FV - PV + DBEY
1+ HRY = (1+ ) HPR =
2 PV
BD
MM
BD
r
r =
t
1- * r
360
t t
365 365FV = (1+ EAR) * PV 1+ HRY = (1+ EAR)
t t
360 365
单利时用 复利时用
★注：对于同一笔投资来说，rBD＜rMM＜EAY＜Rc
R7-2 EAR(考察方法：计算——算 EAR，或者是算计息次数)
EAR = (1+ periodic rate)m – 1
那么如果是 semi, m=2; 如果是 quarterly, m=4; 如是 weekly, m=52
如果是连续复利，公式则变为 EAR = e annual int-1
P5-2 Time-weighted return and Money-weighted return
Q9-2 ★A fund’s holding period yield is as follows:
Quarter 1 10%
Quarter 2 9%
Quarter 3 3%
The value of the fund is $6,700,000 at the beginning of the fourth quarter, and the
investor receives dividend of $200,000 at the end of 2007. At the end of the fourth
quarter, the value of the fund is $6,100,000, the time-weighted return of 2007 is:
A. 13%.
B. 15%.
C. 16%.
Solution: C.
Yield in Quarter 4: (200,000+6,100,000-6,700,000)/6,700,000= %
Time-weighted return: (1+10%)(1+9%)(1+3%)(%) – 1=16%
Q10-2 Investor A and Investor B invest in a fund for two years:
Year 1 Year 2
Fund Return Positive Negative
Portfolio Money-Weighted Rate of Return
Investor A %
Investor B %
Given the information in the table, which of the following is least likely to be an
explanation for the difference between the two money-weighted rates of return?
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A. Investor B decreased the investment in the fund at the end of year 1 whereas investor A
did not make any additions or withdrawals.
B. The investors invested different amounts at inception and afterward did not make any
additions or withdrawals.
C. Investor A increased the investment in the fund at the end of year 1 whereas investor B
did not make any additions or withdrawals.
Solution: B.
The money-weighted rate of return (MWR) is sensitive to the additions and withdrawals of
funds in a portfolio over the course of an investment. If, at inception, investor A and B invest
amounts of different size in the same fund but then neither add nor withdraw any cash for two
years, they will obtain exactly the same MWR. In contrast, if investor A increases the
investment in the fund at the end of year 1 and investor B does not make any additions or
withdrawals, then Investor A will have a lower MWR than investor B because in year 2 the fund
underperformed with respect to year 1. By the same token, if investor B decreases the
investment at the end of year 1 and investor A does not make any additions or withdrawals,
then investor B will have a higher MWR than investor A because she decreased the investment
before an underperforming year.
Q11-2 ★★An analyst collected the return of a portfolio for consecutive three years:
Year 1 10%
Year 2 4%
Year 3 -2%
The fund manager made an investment at the beginning of every year. Compared with
the money-weighted return, the time-weighted return is:
A. Greater.
B. Less.
C. Same.
Solution: A.
Time-weighted return: 3 1 %
因为每年初都投资，而每年的投资收益率下降，则 MWRR 相对来讲比较小。
假设每年初都投资 1 元，则现金流分别为: IRR 为 ％
t 0 1 2 3
CFt +1 +1 +1 -[(1*(1+10%)+1)*+1]*=
Q12-2 Which of the following statements least likely represents a characteristic of the
time-weighted rate of return? It is:
A. not affected by the timing of cash flows.
B. used to measure the compound rate of growth of $1 over a stated measurement period.
C. defined as the internal rate of return on an investment portfolio, taking into account all
inflows and outflows.
Solution: C.
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The money-weighted rate of return is the IRR of an investment’s net cash flows.
Q13-2 ★An analyst gathered the following information about a common stock investment:
Date Amount
Stock purchase (1) 15 January 2006 €
Stock purchase (1) 15 January 2007 €
Stock sale (2@106) 15 January 2008 €
The stock does not pay a dividend. The money-weighted and time-weighted rates of
return on the investment are closest to:
Money-weighted rate
of return
Time-weighted rate
of return
A. % %
B. % %
C. % %
Solution: C.
Cash outflow of €86 occurs at t=0, another outflow of €94 occurs at t=1, and an inflow of €212
occurs at t=2. Using a financial calculator, the IRR of these cash flows is %. The
time-weighted rate of return is the geometric mean of the annual rates of return in the stock
irrespective of the amounts invested in the various time periods. The rate of return for the first
period is (94 - 86)/ 86 = % and for the second period is (106 - 94)/ 94 = %. The
geometric mean is ( x ) - 1 = %.
Q14-2 ★★Which of the following return calculating methods is best for evaluating the
annualized returns of a buy–and–hold strategy of an investor who has made annual
deposits to an account for each of the last five years?(原版书 R44-4)
A. Geometric mean return.
B. Arithmetic mean return.
C. Money–weighted return.
Solution: C.
The arithmetic mean is the statistically best estimator of the next year’s returns given the
historical return outcomes.
Since past annual returns are compounded each period, the geometric mean of past annual
returns is the appropriate measure of past performance.
However, if the investor can fully control the amount and time of each cash flows (In this case,
an investor who has made annual deposits to an account for each of the last five years can be
treated as a full control of cash flow timeing and amount), the Money-weighted return is the
best measure of past performance instead of geometric mean return.
Q15-2 An analyst gathers the following information about the performance of a portfolio
($ millions):
Quarter Value at Beginning of Cash Inflow (Outflow) Value at End
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Quarter at Beginning of Quarter of Quarter
1
2
3 ()
4
The portfolio’s annual time-weighted rate of return is closest to: (2014 Mock 99-24)
A. 32%.
B. 27%.
C. 8%.
Solution: A.
The time-weighted rate of return is calculated by computing the quarterly holding period
returns and linking those returns into an annual return as follows:
Quarter
Value ($ millions)
at Beginning of
Quarter (Considering
Inflows and Outflows)
Value ($ millions)
at End of Quarter
Holding Period Return
1 + = ( – ) / = %
2 + = ( – ) / = –%
3 – = ( – ) / = %
4 + = ( – ) / = –%
The time-weighted return (TWR) is found as follows:
(1 %) (1 %) (1 %) (1 %) 1 32%( )TWR rounded
R8-2 TWRR =(1+HPR1)*(1+HPR2)*…*(1+HPRn)
R9-2 ★TWRR and MWRR:
TWRR: Not be influenced by the timing and direction of CF, so it’s an objective indicator
of investment managers’ performance;
注意计算 time-weighted return 时，如果不是年度的 HPR 不用开方
MWRR: However, if can control the timing and direction, MWRR is the best indicator to
measure the return.
R10-2 概念：the money weighted return applies the concept of IRR to investment portfolio. The
IRR based on the cash flows related to the investment.
R11-2 步骤及公式：Firstly, determine the timing of each cash flow; then, using the calculator to
compute IRR, or using geometric mean.
R12-2 ★Only appropriate for the investment when manager can control the timing and direction
of CF.
R13-2 ★rBD is not representative of the return earned by the investor, the reason is as following:
It is simple interest, not compounded interest
It's based on face value, not purchase price--it is not the true yields
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It's based on 360-day year, rather than 365.
R14-2 ★Performance measurement with means
The geometric mean of past annual return is the appropriate measure of past
performance
The arithmetic mean is the statistically best estimator of the next year’s returns
P6-2 Ratio, ordinal, interval, nominal scales
Q16-2 ★An analyst gathered the price-earnings ratios (P/E) for the firms in the S&P 500 and
then ranked the firms from highest to lowest P/E. She then assigned the number 1 to
the group with the lowest P/E ratios, the number 2 to the group with the second
lowest P/E ratios, and so on. The measurement scale used by the analyst is best
described as:
A. ratio.
B. ordinal.
C. interval.
Solution: B.
The analyst is using an ordinal scale which involves sorting data into categories based on some
characteristic, such as the firms’ P/E ratios.
R1-2 Ratio, ordinal, interval, nominal scales 各自的意义是什么
Nominal scales: weakest level of measurement, categorize data but do not rank them,
only has mode.
Ordinal scales: stronger level of measurement, sort data into categories that are
ordered with respect to some characteristics. Has mode and median.
Interval scales: provide not only ranking but also assurance that the differences
between scale values are equal, no absolute zero, can add and deduct.
Ratio scales: the strongest level of measurement. Have absolute zero; can do all kinds of
calculations.
Notes: 一般 CFA 协会会给出具体场景，让考生判断属于哪种类型
P7-2 Describe, calculate and interpret quartiles, quintiles, deciles and percentiles
Q17-2 Which of the following statements is most accurate?
A. The first quintile generally exceeds the median.
B. The first quintile generally exceeds the first decile.
C. The first quintile generally exceeds the first quartile.
Solution: B.
The first quintile is the 20th percentile. The first decile is the 10th percentile, the first quartile
is the 25th percentile, and the median is the 50th percentile. While it is possible that these
various percentiles or some subsets of them be equal (for example the 10th percentile possibly
could be equal to the 20th percentile), in general the order from smallest to largest would be:
first decile, first quintile, first quartile, median.
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P8-2 Measures of mean
Q18-2 ★If the observations in a data set have different values, is the geometric mean for
that data set less than that data set's:
Harmonic mean? Arithmetic mean?
A. No No
B. No Yes
C. Yes No
Solution: B.
Unless all the values of the observations in a data set have the same value, the harmonic mean
is less than the corresponding geometric mean, which in turn is less than the corresponding
arithmetic mean. In other words, regarding means, typically
harmonic mean < geometric mean < arithmetic mean.
P9-2 Measure of dispersion
Q19-2 ★An analyst gathered the following annual return information about a portfolio since
its inception on 1 January 2003:
Year Portfolio return
2003 %
2004 %
2005 %
2006 %
2007 %
The portfolio’s mean absolute deviation and variance of annual returns, respectively,
for the five-year period are closest to:
Mean absolute deviation variance
A. %
B. %
C. %
Solution: A.
Compute the mean portfolio return = ( + + + - )/ 5 = %；
MAD = (|| + || + || + || + | |) / 5 = %
Variance= [( – )2 + ( – )2 + ( – )2 + ( – )2] / 5 ≈
The population variance calculation is appropriate because the analyst is analyzing all the
annual returns on the portfolio since its inception.
Q20-2 ★The following ten observations are a sample drawn from an approximately normal
population:
Observation 1 2 3 4 5 6 7 8 9 10
Value -3 -11 3 -18 18 20 -6 9 2 -16
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The sample standard deviation is closest to: （Mock85-21）
A. .
B. .
C. .
Solution: C.
The sample mean is:
/ ( 3 11 3 18 18 20 6 9 2 16) /10 /10
n
i
i
X X n
The sample variance is:
2 2( ) / 1
n
i
i
S X X n
The sample standard deviation is the (positive) square root of the sample variance
Value mean [value-()] Difference Square
-3
-11
3
-18
18
20
-6
9
2
-16
Sum of Squared differences 1,
Divided by n-1
Square root
R2-2 Quantiles
Quartile /Quintile/Deciles/Percentile
The third quartile: 75%, or three-fourths of the observations fall below that value.
Calculation Ly = (n+1)y/100, Ly is the position.
R3-2 Measures of mean
The arithmetic mean： 1
N
i
i
X
X
n
The weighted mean：
1 1 2 2
1
( )
n
W i i n n
i
X w X w X w X w X
L
The geometric mean： 1/1 2 3
1
... ( )
N
NN
N i
i
G X X X X X
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P10-2 Correlation and covariance
Q21-2 ★The joint probability of returns, for securities A and B, are as follows:
Joint Probability Function of Security A and Security B Returns. (Entries are joint
probabilities)
Return on security B =30% Return on security B=20%
Return on security A= 25% 0
Return on security A= 20% 0
The covariance of the returns between securities A and B is closest to:
A. 3(%)2.
B. 12(%)2.
C. 24(%)2.
Solution: B.
Expected return on security A= x 25% + x 20% = 15% + 8% = 23%
The harmonic mean：
1
(1/ )
H n
i
i
n
X
X
Harmonic mean<= geometric mean<=arithmetic mean
R4-2 Measure of dispersion:
Range=highest value-lowest value
N
X
MAD
N
i
i
1
N
X
N
i
i
12
)(
(for population)
2 1
( )
1
N
i
i
X X
S
n
(for sample)
★Coefficient of variation: measures the amount of dispersion in a distribution relative
to the distribution's mean. It can be used to measure the risk per unit of return.
R5-2 MAD 和 Variance 掌握计算和比较：
1
-
n
i
i
X X
MAD
n
2
2 1
( - )
n 1
N
i
i
X X
s
★理解：variance 比 MAD 要好，因为 variance 是连续的，处处可导。MAD 计算的
是绝对值，相对比较繁琐。但是 variance 和 MAD 都是表示风险的。注意 MAD＜=
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Expected return on security B= x 30% + x 20% = 18% + 8% = 26%
Cov (RA, RB) = [(25% - 23%)(30% - 26%)] + [(20% - 23%)(20% - 26%)]
= (2% * 4%) + (-3% * -6%)= 12(%)2.
Q22-2 ★An analyst gathered information about three economic variables, He noted that
whenever variable A increased by one unit, variable B increased by units but
variable C decreased by units. The correlation between variables A and B and the
correlation between variables A and C respectively, are closest to:
Correlation between variables A and B Correlation between variables A and C
A.
B.
C.
Solution: C.
The relationship between variables A and B is perfect positive correlation () and the
relationship between variables A and C is perfect negative correlation ().
Q23-2 ★The correlation coefficient that indicates the weakest linear relationship between
variables is: (原版书 R8-20)
A.
B.
C.
Solution: B.
Correlations near positive exhibit strong positive linearity; correlations near negative
exhibit strong negative linearity. Correlations of zero indicate no linear relation between
variables. The closer the correlation is to zero, the weaker is the linear relationship.
R6-2 Covariance:
Covariance measures how one random variable moves with another random variable
The covariance of RA with itself is equal to the variance of RA
Covariance ranges from negative infinity to positive infinity
COV(X,Y) E[(X-E(X))(Y-E(Y))]
)X(E(X))]-E(X))(X-E[(XX)COV(X,
2
A B A,i B, j A,i A B, j B
i j
Cov(R ,R )= P(R ,R )(R - ER )(R - ER )
R7-2 Correlation:
Correlation measures the linear relationship between two random variables
ρ=COV(A,B) / (σAσB)
Correlation has no units, ranges from –1 to +1, standardization of covariance
If ρ=0, this indicates?
R8-2 理解: 介于[-1, 1]; 在 portfolio 中，负相关的产品进行组合可以分散风险
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If ρx, y =1, the two random variables have perfect positive linear correlation. This means
one random variable will move in proportion in response to the movement of another
random variable.
If ρx, y=-1, the two random variables have perfect negative linear correlation. This
means one random variable will move in proportion but in opposite direction to the
movement of another random variable.
Ifρx, y =0, the two random variables have no linear correlation. This means movement of
one random variable cannot be used to predict the movement of another random
variable.
P11-2 Chebyshev’s Inequality
Q24-2 ★Using Chebyshev’s inequality, what is the minimum proportion of observations from
a population of 500 that must lie within two standard deviations of the mean,
regardless of the shape of the distribution?
A. 71%.
B. 75%.
C. 89%.
Solution: B.
Chebyshev’s inequality holds for any distribution, regardless of shape, and states that the
minimum proportion of observations located within k standard deviations of the mean is equal
to 1 – 1 / k2. In this case, k=2 and 1 – 1 / 4= or 75%.
Q25-2 What is the minimum percentage of any distribution that will lie within (+ -)
standard deviations of the mean? （2012 年 12 月考题回顾）
A. %
B. %
C. %
Solution: B.
Applying Chebyshev’s inequality, we have 1-1/K2=1-1/=%
R9-2 Chebyshev’s Inequality 掌握计算及理解：
2
1
( - ) 1P x k
k
（对任意一组观测值，个体落于均值周围 k 个标准差之内的
概率不小于
2
1
1
k
任意 k＞1）
This relationship applies regardless of the shape of the distribution.
P12-2 CV & Sharpe Ratio
Q26-2 ★If the risk-free rate is equal to zero and the mean is less than the standard deviation,
compared with Sharp ratio, the coefficient of variation is?
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A. Greater.
B. Same.
C. Less.
Solution: A.
Sharpe ratio = [expected return (mean) – risk-free rate]/standard deviation = mean/standard
deviation; CV = standard deviation/expected return. The mean is less than the standard
deviation, so compared with Sharp ratio, the coefficient of variation is GREATER.
Q27-2 ★An analyst gathered the following information:
Portfolio Mean Return (%) Standard Deviation of Returns (%)
1
2
3
If the risk-free rate Of return is percent, the portfolio that had the best
risk-adjusted performance based on the Sharpe ratio is: (原版书 R7-24)
A. Portfolio 1.
B. Portfolio 2.
C. Portfolio 3.
Solution: B.
The Sharpe ratio is the mean excess return (mean return less risk-free rate of percent)
divided by the standard deviation of the portfolio. It is highest for portfolio 2 with a Sharpe
ratio of / = . For portfolio 1, the Sharpe ratio is = and for
portfolio 3 the Sharpe ratio is / = .
Q28-2 An analyst gathered the following information:
Portfolio Mean Return (%) Sharpe ratio (%)
1
2
If the risk-free rate of return is percent, which portfolio’s coefficient of variance is
larger? （2012 年 12 月考题回顾）
A. Portfolio 1
B. Portfolio 2
C. The same
Solution: A.
Sharpe ratio = [E(Rp) - rf]/ , based on the Sharpe ratio formula,
we can get the sigma = [E(Rp) - rf]/ Sharpe ratio,
1=(%-3%) / %=%,
2= (%-3%) / %=%.
CV = / X , CV1= % / % = , CV2=% / %=.
The portfolio 1’s CV is larger.
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R10-2 Coefficient of variation measures the amount of dispersion in a distribution relative to the
distribution’s mean. (relative dispersion)
100%X
S
CV
X
R11-2 The sharp ratio measures excess return per unit of risk.
P f
P
R R
Sharpe Ratio
P13-2 Safety First Ratio
Q29-2 ★On 1 January 2004, the value of an investor's portfolio is $89,000. The investor plans
to donate $6,000 to charity organization and pay $2,000 to his insurance account on
31 December 2004, but meanwhile he does not want the year-end portfolio value to
be below $89,000. If the expected return on the existing portfolio is 12% with a
variance of , the safety-first ratio that would be used to evaluate the portfolio
based on Roy's criterion is closest to:
A.
B.
C.
Solution: A.
Roy's safety-first criterion states that the optimal portfolio minimizes the probability that the
return of the portfolio falls below some minimum acceptable level. This minimum acceptable
level is called the "threshold" level. Symbolically, Roy's safety-first criterion can be stated as:
Maximize the SFR where SFR = [E(Rp) - RL] / σ
Where: Rp = portfolio return; RL = threshold level return
RL=8000/89000=%, SFR = (12%%)/(
1/2) = / =
R12-2 SFR 掌握计算及理解：
[E(Rp) - RL] /σ the bigger, the better
For P(Rp<RL)min, the optimal portfolio minimizes the probability that the return of
portfolio falls below some minimum acceptable level, simply, minimize P(Rp<RL).
R13-2 SFR 与 Sharpe ratio 的区别
SF Ratio= p L
E(R )-R / p
Sharpe ratio=
/ P F PR R s
Sharpe ratio will be a special case of SFR if L F
r r
Sharpe ratio 只能用于 Rank，没有实在含义；当小于零时，可能会得到错误的结论。
P14-2 Skewness and Kurtosis
Q30-2 A distribution with mode , median , mean 2, the distribution can be described
as:
A. long tail in the left and positively skewed.
B. long tail in the right and negatively skewed.
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C. long tail in the left and negatively skewed.
Solution: C.
As mean < median < mode, the distribution has long tail in the left and negatively skewed.
Q31-2 An analyst gathered the following information about the return distribution for two
portfolios during the same time period：
Portfolio skewness kurtosis
A
B
The analyst stated that the distribution for Portfolio A is more peaked than a normal
distribution and that the distribution for Portfolio B has a long tail on the left side of
the distribution. Is the analyst’s statement correct with respect to:
Portfolio A Portfolio B
A. No No
B. No Yes
C. Yes No
Solution: A.
The kurtosis of a normal distribution is 3. If the kurtosis is greater than 3, the distribution is more
peaked than a distribution with a kurtosis less than 3. A distribution with a positive skewness has
long right tail while that with a negative skewness has a long left tail.
Q32-2 Two distributions have the same mean. One is negative skew, the other is positive
skew. Which one has the larger median? （2012 年 12 月考题回顾）
A. Distribution with negative skew
B. Distribution with positive skew
C. The same
Solution: A.
As shown in the following figure, the median is smaller than the mean for the positive skew. In
contrast, the median is larger than the mean for the negative skew.
Therefore, if the two means equal, the median of the negative skew is larger than that of
positive skew.
Mode<Median<Mean
Positive (right) skew
Mean<Median<Mode
Negative (left) skew
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Q33-2 ★When we calculate the kurtosis, what is the power of the kurtosis?
A. 2
B. 3
C. 4
Solution: C.
Sample kurtosis is measured using deviations raised to the fourth power.
4
1
4
( )
1
n
n
i
i
X X
Sample kurtosis
s
R14-2 Skewness 掌握概念：
概念：refer to the extent to which a distribution is not symmetrical.
种类：Positively skewed – skewed right and long right tail (mean>median>mode)
Negatively skewed – skewed left and long lower tail (mean<median<mode)
R15-2 Kurtosis 掌握概念：
概念：refer to the extent to which a distribution is not symmetrical.
种类：leptokurtic，normal and platykurtic
理解：kurtosis>3，也就是 leptokurtic 代表尖峰肥尾:more peak, extreme outcome is
greater 可能在考试中会和 skew 合并考核综合知识
P15-2 Relative Frequencies and Cumulative Relative Frequencies
Q34-2 An analyst gathered the following information about the price-earning (P/E) ratios for
the common stocks held in a foundation’s portfolio:
Interval P/E range Frequency
I 24
II 48
III 22
IV 16
The relative frequency and the cumulative relative frequency, respectively, for interval
III are closest to:
Relative frequency Cumulative relative frequency
A. 20% 85%
B. 22% 36%
C. 22% 85%
Solution: A.
The relative frequency is the number of observations in an interval divided by the total
number of observations. For Interval III, relative frequency = 22 / 110 = 20%. The cumulative
relative frequency is the sum of the relative frequencies of the relevant class and all the classes
before it. For Interval III, the cumulative relative frequency = (24 + 48 + 22) / 110 =%.
Relative Frequencies and Cumulative Relative Frequencies：
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R16-2 Relative frequency is calculated by dividing the absolute frequency of each return interval
by the total number of observations.
R17-2 Cumulative relative frequency is calculated by summing the absolute or relative
frequencies at the lowest interval and progressing through the highest.
P16-2 Empirical, priori or subjective probability
Q35-2 ★If an analyst estimates the probability of an event for which there is no historical
record, this probability is best described as：
A. Objective.
B. Empirical.
C. Subjective.
Solution: C.
since there is no historical data, the estimates can only be based on the subjective estimate of
the analyst.
R18-2 Empirical, priori, or subjective probability
Empirical probability 经验概率
eg. Historically, the Dow Jones Industrial Average has closed higher than the
previous close two out of every three trading days. Therefore, the probability
of the Dow going up tomorrow is two-thirds, or %.
Priori probability 先验概率
eg. Yesterday, 24 of the 30 DJIA stocks increased in value. Thus, if 1 of 30 stocks
is selected at random, there is an 80%(24/30) probability that its value
increased yesterday
Subjective probability 主观概率
will close higher tomorrow is 90%.
P17-2 Properties of Probability
Q36-2 ★The probability of price change is as follows:
Price change
Price increase
What is the probability that the two situations happen simultaneously?
A.
B.
C.
Solution: B.
Price change includes price increase.
Q37-2 ★If events A and B are mutually exclusive, then:
A. P(A|B)=P(A).
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B. P(AB) = P(A) ×P(B).
C. P(A or B)= P(A) + P(B).
Solution: C.
There is no intersection of events when events are mutually exclusive, P(AB) = P(A) x P(B) is
only true for independent events. Note that since A and B are mutually exclusive (cannot both
happen), P(A |B) and P(AB) must both be equal to zero.
Q38-2 ★An analyst finds that the probability of stock A outperform the market is 60%. What
is the odds for of the stock A underperform the market? (2012 年 12 月考题回顾)
A. 2 / 3
B. 1 / 3
C. 3 / 2
Solution: A.
The probability of underperform = 1 – 60% =40%
The odds for of underperform = 40% / 60% = 2 / 3
Q39-2 ★★An analyst gathered the following information: the probability of economy
prosperity is 75%, the probability of economy recession is 25%. For a company, when
the economy is prosperity, there is 10% of probability that its EPS is $ and 90% of
probability that the EPS is $. However, when the economy is recession, there is 25%
of probability that the EPS is $ and 75% of probability that the EPS is $. What is
the variance of this company’s EPS, when the economy is recession?
A.
B.
C.
Solution: C.
When the economy recession:
E(EPS) = 25% * 2 + 75% *4 =
Var(EPS) = 25% * ()2 + 75% * ()2 =
Q40-2 ★Assume that a stock’s price over the next two periods is as shown below.
Time = 0 Time = 1 Time = 2
S0 = 100 Su = 110 Suu= 121
Sd = 92 Sud,du=
Sdd=
The initial value of the stock is $100. The probability of an up move in any
given period is 40% and the probability of a down move in any given period
is 60%. Using the binomial model, the probability that the stock’s price will
be $ at the end of two periods is closest to:
A. 16%.
B. 24%.
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C. 48%.
Solution: C.
Across two periods, there are four possibilities: an up move followed by an up move ($
end value), an up move followed by a down move ($ end value), a down move followed
by an up move ($ end value), and a down move followed by a down move ($ end
value). The probability of an up move followed by a down move is times equals .
The probability of a down move followed by an up move is times also equals .
Both of these sequences result in an end value of $. Therefore, the probability of an end
value of $ is 48%.
R19-2 Properties of Probability 掌握基本公式：
“×” rule: P(AB)=P(B)×P(A|B); if A and B are independent: P(A|B)=P(A), P(B|A)=P(B),
P(AB) = P(A) × P(B)
“+” rule: P(A or B)=P(A) + P(B) - P(AB)
R20-2 Mutually exclusive vs. independent events
For mutually exclusive events: P(A or B) = P(A)+ P(B)
For independent events: P(A or B) = P(A)+ P(B)- P(A)×P(B)
注意：不独立未必互斥，互斥一定不独立。
R21-2 Odds for an event: 表示一个事件发生的相对可能性。
Odds for an event: P(E)/(1-P(E))
Odds against an event: (1-P(E)) /P(E)
P18-2 Bayes’ Formula
Q41-2 ★As from the record of CFA Institute and GARP, the passthrough rate of CFA level I
exam is 40%, and the passthrough rate of FRM exam is 50%. And as an investigation
led by the two institutes, among the people who has passed the FRM, the passthrough
rate of CFA level 1 exams is 60%. So what is the passthough rate of FRM members who
has also passed the CFA level 1 exam before?
A. 48%
B. 60%
C. 75%
Solution: C.
P(CFA I|FRM) =60%, P(FRM)=50%
P(CFA I and FRM)= P(CFA I|FRM) × P(FRM) = 60% × 50% = 30%
( ) 30%
( ) 75%
( ) 40%
P CFA I and FRM
P FRM CFA I
P CFA I
= = =
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R22-2 Bayes’ Formula 掌握计算：
Updated probability = (probability of new information for given event / unconditional
probability of new information) prior prob. of event, posterior probability（后验概率）
1 1
1
1 1 2 2
( ) ( )
( )
( ) ( ) ( ) ( )
P A P B A
P A B
P A P B A P A P B A
Updated probability: By Bayes formula, we can update a given set of prior probabilities
for a given event in response to the arrival of new information.
P(O I)
P(I O )= P(I)
P(O)
P19-2 Discrete and continuous random variables
Q42-2 ★Which of the following is a discrete random variable considering a company’s stock?
A. Quoted price
B. Rate of return
C. Price-to-earning ratio
Solution: A.
A discrete random variable can take on at most a countable number of possible values. Stocks
traded on the stock exchange are quoted in ticks of $. Quoted stock price is thus a discrete
random variable with possible values $0, $, $,……
R23-2 Discrete and continuous random variables
Discrete random variables: the number of possible outcomes can be counted, and for
each possible outcome, there is a measurable and positive probability.
Continuous variables: the number of possible outcomes is infinite, even if lower and
upper bounds exist.
P (x)=0 even though x can occur.
P (x1<X<x2)
P20-2 Discrete Random Distribution
Q43-2 Which of the following best describes the discrete uniform distribution? The discrete
uniform distribution:
A. has an infinite number of unspecified outcomes.
B. is based on the Bernoulli random variable.
C. has a finite number of specified outcomes.
Solution: C.
The discrete uniform distribution is known as the simplest of all probability distributions. It is
made up of a finite number of specified outcomes and each outcome is equally likely.
R24-2 Uniform random variable is one for which the probabilities for all possible outcomes for a
discrete random variable are equal. F(Xn) = np(X)
R25-2 Binomial random variable defined as the number of “successes” in a given number of
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trials, whereby the outcome can be either “success” or “failure”.
P(x)=P(X=x)=
-(1- )x x n xnC p p
P21-2 Normal distribution
Q44-2 The random variable X distributed with μ equals and standard deviation equals
to , what is the probability that X will be smaller than 0? (2012 年 12 月考题回顾)
A.
B.
C.
Solution: C.
Here we want to know P(X<0), which is the area under the curve to the left of the z-value
corresponding to X = 0
The z-value for X=0 is:
Z = (x-μ)/ = () / =-1
That is 0 is 1 standard deviation below the mean value of .
Form the z-table we have F (-1) = 1- F(1) = =
Q45-2 An analyst stated that, all else equal, increasing sample size will decrease both the
standard error and the width of the confidence interval. The analyst's statement is
correct in regard to: (原版书 R10-22)
A. both the standard error and the confidence interval.
B. the standard error, but incorrect in regard to the confidence interval.
C. the confidence interval, but incorrect in regard to the standard error.
Solution: A.
All else equal, a larger sample size will decrease both the standard error and the width of the
confidence interval. In other words, the precision of the estimate of the population parameter
is increased.
Q46-2 A variable is normally distributed with a mean of and a variance of . Calculate
the probability of observing a value of negative or less. That is, calculate P (X1 ≤
) given X is distributed as N(5, 4). Use this excerpt from the cumulative
distribution function for the standard normal random variable table to calculate your
answer.
Cumulative Probabilities for a Standard Normal Distribution
P(Z≤X)=N(x)for x≥0 or P(Z≤z)=N(z)for z≥0
X or Z 0
…
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The calculated value is closest to: (Mock85-30)
A. %
B. %.
C. %.
Solution: A.
First standardize the value of interest, , for the given normal distribution:
Z = (X - ) / = (- - ) / 2 =
Then use the given table of values to find the probability of a Z value being standard
deviations below the mean (., when z ≤ 0). The value is 1 - P(Z ≤ +).
In this problem, the solution is: 1 - = = %
R26-2 Normal distribution:
Standardization: if X~N(µ , σ²), then X~ N(0,1)
Symmetrical distribution: skewness=0, kurtosis=3
A linear combination of normally distributed random variable is also normally
distributed.
The tails get thin and go to zero but extend infinitely.
P22-2 Cross-sectional data vs Time series data
Q47-2 Cross-sectional data is best defined as:
A. Multiple variables at a single time point
B. Single variable at multiple time points
C. Multiple variables at multiple time points
Solution: A.
Cross-sectional data are data on some characteristic of individuals, groups, geographical
regions, or companies at a single point in time.
P23-2 Central Limit Theorem
Q48-2 According to the central limit theorem, a sampling distribution of the sample mean
will be approximately normal only if the:
A. sample size n is large.
B. variance of the underlying distribution is known.
C. population mean of the underlying distribution is known.
Solution: A.
According to the central limit theorem, the sample mean of a population described by any
probability distribution can be determined if the sample size n is sufficiently large, ., equal
to or greater than 30. This process is used to estimate the population mean and standard
deviation, which usually are unknown.
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Q49-2 If the distribution of the population from which the samples are drawn is positively
skewed, and given that the sample size is large, the sampling distribution of the
sample means is most likely: (mock84-20)
A. approximately normally distributed.
B. to have a variance equal to that of the entire population.
C. to have a mean smaller than the mean of the entire population.
Solution: A.
The central limit theorem establishes that the sampling distribution of sample means will be
approximately normal, will have a mean equal to the population mean, and will have a
variance equal to the population variance divided by the sample size.
R27-2 Central Limit Theorem
Definition: The sampling distribution of the sample mean approaches a normal
distribution as the sample size becomes large(>=30);
The mean of sample mean distribution=μ，The variance of sample mean distribution
=σ2/n
R28-2 Standard error of the sample mean
Known population variance =σ/n1/2
Unknown population variance=s/n1/2
P24-2 Lognormal Distribution
Q50-2 ★An analyst stated that normal distributions are suitable for describing asset returns
and that lognormal distributions are suitable for describing distributions of asset
prices. The analyst's statement is correct in regard to: (原版书 R9-20)
A. both normal distributions and lognormal distributions.
B. normal distributions, but incorrect in regard to lognormal distributions.
C. lognormal distributions, but incorrect in regard to normal distributions.
Solution: A.
A normal distribution is suitable for describing asset returns. However, the normal distribution
is not suitable for asset prices because asset prices cannot be negative. The lognormal
distribution is bounded by zero (skewed to the right) and is suitable for describing
distributions of asset prices.
R29-2 ★Lognormal distribution
Definition: If lnX is normal, then X is lognormal, which is used to describe the price of
asset
Right skewed
Bounded from below by zero
P25-2 t- Distribution
Q51-2 Compared with normal distribution, which of the following statements about
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t-distribution is the most accurate if the significance levels of these two distributions
are the same?
A. It has no difference with normal distribution.
B. Its tails are fatter than the tails of normal distribution.
C. It has less probability in the tails than the normal distribution.
Solution: B.
If the t-distribution and the normal distribution have a same significance level, the tails of
the t-distribution are fatter than the tails of normal distribution, which means it has less
probability in the tails than the normal distribution. As the degrees of freedom increase, the
t-distribution approaches the standard normal.
Q52-2 An analyst stated that as degrees of freedom increase, a t-distribution will become
more peaked and the tails of the t-distribution will become less fat. Is the analyst's
statement correct with respect to the t-distribution: (原版书 R10-21)
Becoming more peaked? Tails becoming less fat?
A. No Yes
B. Yes No
C. Yes Yes
Solution: C.
As degrees of freedom increase, the t-distribution will more closely resemble a normal
distribution, becoming more peaked and having less fat tails.
R30-2 t-distribution
The t-distribution is also symmetrically distributed, just like the normal distribution.
As the degrees of freedom increase, the t-distribution approaches the standard normal.
The t-distributions have fatter tails.
P26-2 Point estimation and interval estimation
Q53-2 ★When an analyst is unsure of the underlying population distribution, which of the
following is least likely to increase the reliability of parameter estimates? (mock83-31)
A. Increase in the sample size
B. Use of point estimates rather than confidence intervals
C. Use of the t-distribution rather than the normal distribution to establish confidence
intervals
Solution: B.
Point estimates are not as reliable as confidence interval estimates. A conservative approach
to confidence intervals relies on the t-distribution rather than the normal distribution, and use
of the t-distribution will increase the reliability of the confidence interval. Increasing the
sample size increases the reliability of the confidence interval.
Q54-2 ★If the accuracy of a sample enhances when the size is becoming larger, which of the
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characteristic does it represent?
A. Unbiasedness.
B. Consistency.
C. Efficiency.
Solution: B.
A consistent estimator is one for which the accuracy of the parameter estimate increases as
the sample size increases.
Efficiency represents that the variance of its sampling distribution is smaller than all the other
unbiased estimators of the parameter you are trying to estimate.
Unbiasedness indicates that the expected value of the estimator is equal to the parameter
that are trying to estimate.
Q55-2 ★An analyst determines that approximately 99% of the observations of daily sales for
a company are within the interval from $230,000 to $480,000 and that daily sales for
the company are normally distributed. If approximately 99% of all the observations fall
in the interval μ±3σ, then using the approximate z-value rather than the precise table,
the standard deviation of daily sales for the company is closest to(2014 Mock 98-34)
A. $83,333.
B. $41,667.
C. $62,500.
Solution: B.
Given that sales are normally distributed, the mean is centered in the interval. MeanUnder a
normal distribution, 99% of the observations will be approximately plus or minus three
standard deviations. Next, use the following formula:
Z=(X-μ)/σ
or, by rearranging:
σ=(X-μ)/Z,
where Z = 3,
X = $480,000, and
μ = ($480,000+$230,000)/2=$355,000.
Thus, ($480,000 – $355,000)/ = $41,667.
Alternatively, use Z = –3, X = $230,000, and μ = $355,000: ($230,000 – $355,000)/(–) =
$41,667.
R31-2 Concept of sampling and estimation
Methods of sampling: simple random sampling, stratified random sampling.
Sampling error: sampling error of mean=sample mean-population mean.
R32-2 ★The desirable properties of an estimator：
Unbiasedness: expected value of the estimator is equal to the parameter that are trying
to estimate
Efficiency: for all unbiased estimators, if the sampling dispersion is smaller than any
other unbiased estimators, then this unbiased estimator is called efficient.
Consistency: the accuracy of the parameter estimate increases as the sample size
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increases. (the standard deviation of the parameter estimate decreases as the sample
size increases)
As the sample size increases, the standard error of the sample mean falls.
R33-2 Point estimation: the statistic, computed from sample information, which is used to
estimate the population parameter
R34-2 Interval estimation:
Level of significance （alpha）
Degree of Confidence （1－alpha）
Confidence Interval = [ Point Estimate +/- (reliability factor) ×Standard error]
R35-2 Biases in sampling
★Data-mining bias: refers to results where the statistical significance of the pattern is
overestimated because the results were found through data mining. To detect this bias,
out-of-sample test and economic significance testing.
Sample selection bias: some data is systematically excluded from the analysis, usually
because of the lack of availability.
Survivorship bias: usually derives from sample selection for only the existing portfolio
are included
Look-ahead bias: occurs when a study tests a relationship using sample data that was
not an available on the test date.
Time-period bias: time period over which the data is gathered is either too short or too
long. If the time period is too short, research results may reflect phenomena specific to
that time period, or perhaps even data mining. If too long, cannot find the law.
P27-2 Hypothesis Testing
Q56-2 When an investigator wants to test whether a particular parameter is larger than a
specific value, the null and alternative hypothesis are best defined as:
A. H0: θ = θ0 versus Ha: θ ≠ θ0
B. H0: θ ≤ θ0 versus Ha: θ > θ0
C. H0: θ ≥ θ0 versus Ha: θ < θ0
Solution: B.
A positive “hoped for” condition means that we will only reject the null (and accept the
alternative) if the evidence indicates that the population parameter is greater than θ0. Thus, H0:
θ ≤ θ0 versus Ha: θ > θ0 is the correct statement of the null and alternative hypotheses.
Q57-2 ★William Adams wants to test whether the mean monthly returns over the last five
years are the same for two stocks. If he assumes that the returns distributions are
normal and have equal variances, the type of test and test statistic are best described
as:
A. Paired comparisons test, t-statistic.
B. Paired comparisons test, F-statistic.
C. Difference in mean test, t-statistic.
Solution: A.
Since return of two stocks are correlated, paired comparisons test is adopted. Paired
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comparison test is used when samples are not independent, and t-statistic is used.
Q58-2 An analyst wants to test the samples selecting from a population are random or not,
he should choice: (2012 年 6 月考题回顾)
A. T-test
B. χ2-test
C. nonparameter test
Solution: C.
Test the selected samples are random or not, nonparameter test should be used.
Q59-2 Independent samples drawn from normally distributed populations exhibit the
following characteristics:
Sample Size Sample mean Sample standard deviation
A 25 200 45
B 18 185 60
Assuming that the variances of the underlying populations are equal, the pooled
estimate of the sample variance is 2,. The t-test statistic appropriate to test the
hypothesis that the two population means are equal is closest to: (mock84-29)
A. .
B. .
C. .
Solution: B.
The t statistic for the given information (normal populations, variances assumed equal) is
calculated as:
2
2
1
2
2121 )(
n
S
n
S
XX
t
pp
Where
2 2
2 1 1 2 1
1 2
( 1) ( 1)
2
p
n s n s
s
n n
- + -
=
+ -
in this case we have:
2 2
2 (25 1)45 (18 1)60
25 18 2
ps
- + -
= =
+ -
18
25
0)185200(
t
Q60-2 ★An analyst collects the following data related to paired observations for Sample A
and Sample B. Assume that both samples are drawn from normally distributed
populations and that the population variances are not known.(mock83-28)
Paired Observation Sample A Value Sample B Value
1 25 18
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2 12 9
3 -5 -8
4 6 3
5 -8 1
The t-statistic to test the hypothesis that the mean difference is equal to zero is
closest to:
A. .
B. .
C. .
Solution: C.
First, calculate the mean difference:
id
n
d
1
Then, calculate the sample variance and the standard error of the mean difference:
1
)( 2
2
n
dd
S
i
d
.
n
S
S d
d
then, calculate the t-statistic: .
d
dz
S
ud
t
In this case, the mean difference is . The sample variance is . The standard error of the
mean difference is . The t-statistic is .
Q61-2 As the degree of freedom increases, the tails of t-distribution will be: (2012 年 12 月考
A. Thinner
B. Fatter
C. No change
Solution: A.
The t-distribution is flatter and has thicker tails than the standard normal distribution. As the
degrees of freedom get larger, the shape of t-distribution approaches standard normal
distribution. The tail will become thinner.
Q62-2 The null hypothesis is most appropriately rejected when the p-value is:
A. close to zero.
B. negative.
C. close to one.
Solution: A.
The p-value is the smallest level of significance at which the null hypothesis can be rejected.
The smaller the p-value, the stronger the evidence against the null hypothesis. P-values close
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to zero strongly suggest that the null hypothesis should be rejected.
R36-2 Hypothesis testing:
Sample statistics Hypothesized value
Test Statistic
stanard error of the sample statistic
Test Statistic follows Normal, T, Chi Square or F distributions
Test Statistic has formula. Calculate it with the sample data.
This is the general formula but only for Z and T distribution
R37-2 Student’s t-distribution: Degrees of freedom (df)=n-1
Symmetrical
Less peaked than a normal distribution (“fatter tails”)
As the degrees of freedom gets larger, the shape of t-distribution approaches
standard normal distribution
R38-2 T-test 和 Z-test 的不同应用：
When sampling f
rom a: Test Statistic
S
all
sample (n
<3
0) Large sample (n>=30)
orm
l distribution with known variance z-Statistic z-Statistic
Normal distr
ibut
on with unknown variance t-Statistic t-Statistic/z
Nonnormal dis
ribution with known variance not available z-Statistic
Nonnormal distribution with unknown variance not available t-Statistic/z
R39-2 Z 分布、T 分布、卡方分布、F 分布
Test type Assumptions H0 Test-statistic
Critical
value
Mean
hypothesis
testing
Normally
d
stributed
opulation,
known population
variance
μ=μ0
0
/
x
z
n
N(0,1)
Normally distributed
population, unknown
populat
n
variance
μ=μ0
0
/
x
t
s n
t(n-1)
Independent
populations, unknown
population variances
assum
d equal
μ
1
−μ
2
=0
1 2 1 2
2 2
1 2
2 2
1 1 2 22
1 2
,
/ /
1 1
2
p p
p
x x
t
s n s n
n s n s
where s
n n
t(n1 + n2 -
2)
Independent
populations, unknown
population variances
not assumed equal
μ
1
−μ
2
=0
1 2 1 2
2 2
1 1 2 2/ /
x x
t
s n s n
t*
Samples not
independent,
μ
d
=0
d
dt
s
t(n-1)
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paired comparisons test
for example, two
returns of stocks in the
market, the return of
gas and that of oil
For example, the same population after and before
an event, or comparison with the two different
styles, which are affected by the same macro
factors.
Variance
hy
othesis
testing
Normally distributed
population
σ²=
2
0
2
2
2
0
( 1)n s
2 ( 1)n
Two independent
nor
ally distributed
po
ulations
σ1²=σ2²
2
1
2
2
s
F
s
1 2
( 1, 1)F n n
P28-2 Type I and Type II Errors
Q63-2 ★Which of the following statements about hypothesis testing is most accurate?
A. A type II error is to reject the null when it is actually true.
B. The significance level equals one minus the probability of a Type I error.
C. A two-tailed test with a significance level of 5% has z-critical values of ±.
Solution: C.
Type I error is the rejection of the null hypothesis when it’s actually true, while Type II error is
the failure to reject the null hypothesis when it’s actually false. Significance level (α) is the
probability of making a Type I error. Power of a test is the probability of correctly rejecting the
null hypothesis when it is false
Q64-2 All else equal, is specifying a smaller significance level in a hypothesis test likely to
increase the probability of a: (原版书 R11-16)
Type I error? Type II error?
A. No No
B. No Yes
C. Yes No
Solution: B.
Decrease the significance level can increase type II error and decrease type I error.
Q65-2 All else equal, is increasing the sample size for a hypothesis test likely to decrease the
probability of a: (原版书 R11-17)
Type I error Type II error
A. Yes No
B. No Yes
C. Yes Yes
Solution: C.
The only way to avoid the trade-off between the two types of errors is to increase the sample
size; increasing sample size (all else equal) reduces the probability of both types of errors.
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From the reading on sampling and estimations, all else equal, a larger sample size will decrease
both the standard error and the width of the confidence interval. In other words, the precision
of the estimate of the population parameter is increased.
Q66-2 ★If the probability that fail to reject the null hypothesis when it’s actually false
increases, how about the confidence level? (2012 年 12 月考题回顾)
A. Increase
B. Decrease
C. No change
Solution: A.
When the probability of Type II error increase, the probability of Type I error will decrease,
which means that the significance level (α) will decrease. The confidence level = 1- significance
level. Therefore, the confidence level will increase.
R40-2 Type I and Type II error
Type I error: 拒真，reject the null hypothesis when it’s actually true
Type II error: 取伪，fail to reject the null hypothesis when it’s actually false
Significance level (α): the probability of making a Type I error
Significance level =P(Type I error)=P(H0×|H0√)
Power of a test: the probability of correctly rejecting the null hypothesis when it is false
Power of a test = 1−P(Type II error)= P(H1√|H1√)
P(Type II error)=P(H1×|H1√)
要掌握 decision rule：包括 critical value 和 p value
P29-2 The fundamentals of Technical Analysis
Q67-2 Why is technical analysis especially useful in the analysis of commodities and
currencies?
A. Valuation models cannot be used to determine fundamental intrinsic value for these
securities.
B. Government regulators are more likely to intervene in these markets.
C. These types of securities display clearer trends than equities and bonds do.
Solution: A.
Commodities and currencies do not have underlying financial statements or an income stream;
thus, fundamental analysis is useless in determining theoretical values for them or whether
they are over- or undervalued.
Q68-2 For the following, which one is not the assumption of technical analysis?
A. The historical information can affect the current analysis.
B. Supply and demand does not determine the prices.
C. Prices can be projected with charts and other technical tools.
Solution: B.
For the assumption of technical analysis, supply and demand determine the price.
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R41-2 技术分析概述
Technical analysis relies on Price and Volume data.
Technical analysis is the study of collective market sentiment, as expressed in buying
and selling of assets.
The market price equates supply and demand at any instant. Price and volume reflect
the collective behavior of buyers and sellers.
Market price reflects both rational and irrational investor behavior. This assumption
implies that the efficient markets hypothesis does not hold.
R42-2 技术分析三大假设
Supply and demand determine prices;
Changes in supply and demand cause changes in prices;
Prices can be projected with charts and other technical tools.
R43-2 技术分析的作用
Behavior is reflected in trends and patterns that tend to repeat and can be identified
and used for forecasting prices.
R44-2 技术分析的优劣势
Actual price and volume data are observable and objective. Data is not subject to
assumptions or restatements. 优势
In illiquid markets price and volume data might not truly reflect supply and demand.
劣势
由于缺乏可靠的估值模型以决定内在价值，技术分析特别适用于商品、外汇等资产
的分析。
R45-2 Cycle
Kondratieff cycle: long 54-year economic cycle; 18-year cycle：常用于房地产
Decennial pattern：0 最好，5 最差
Presidential cycle：第三年最好
R46-2 Elliot Wave Theory
Impulse wave & corrective wave: 5 moving up in a bull market and three moving down
in a bear market
Fibonacci sequence: ratio of the size of subsequent waves was a Fibonacci ratio (,
, , , , 2, , , , ), golden ratio
P30-2 Charts
Q69-2 In analyzing a price chart, high or increasing volume most likely indicates which of the
following?
A. Predicts a reversal in the price trend.
B. Predicts that a trendless period will follow.
C. Confirms a rising or declining trend in prices.
Solution: C.
Rising volume shows conviction by many market participants, which is likely to lead to a
continuation of the trend.
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Q70-2 A downtrend line is constructed by drawing a line connecting:
A. the lows of the price chart.
B. the highs of the price chart.
C. the highest high to the lowest low of the price chart.
Solution: B.
A downtrend line is constructed by drawing a line connecting the highs of the price chart.
Q71-2 ★Which chart can best reflect the daily price trend of a stock?
A. Line Chart
B. Bar Chart
C. Point and figure chart
Solution: B.
Bar Chart: A price chart with four bits of data for each time interval—the high, low, opening,
and closing prices. A vertical line connects the high and low. A cross-hatch left indicates the
opening price and a cross-hatch right indicates the close.
R47-2 掌握理解各类 technical analysis charts：
Line Charts: Show closing prices for each period as a continuous line.
Bar charts: Add the high and low prices for each trading period. Each period is displayed
as a vertical line, with the closing price indicated as a point or dash on the right side of
the line.
Candlestick Charts: Display a box bounded by the opening and closing price. Box clear
表示股票涨了。Box filled 表示股票跌了。
Distinction among line charts, bar charts, and candlestick charts：line chart 只包含收盘
价与连接收盘价的直线，bar chart 包含收盘价、开盘价、最高价、最低价，candlestick
chart 不仅包括 4 个价格，本身的形状颜色还代表了一段时间的涨跌大局。
Charts of Price Data：方向相同时，每变化一个 box size 做一个记号，方向相反变化
超过 reversal point 就换一列做相反记号，注意横轴不代表时间，反映价格变化了
多少次，剔除了 Noise。
Relative strength analysis: compare the performance of a stock with a benchmark,
usually an index.
注意 chart 的时间区间，可以是日、周，也可以是月、年。
注意 Volume 与 Trend 的关系：放量预示趋势确认，缩量预示趋势逆转。
P31-2 Patterns
Q72-2 ★In an inverted head and shoulders pattern, if the neckline is at €100, the shoulders
at €90, and the head at €75. The price target is closest to which of the following?
A. €50.
B. €110.
C. €125.
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Solution: C.
Target = Neckline + (Neckline - Head): €100 + (€100 - €75) = €125
Q73-2 ★In a head and shoulders pattern, if the neckline is at $22, the shoulders at $26, and
the head at $30. The price target is closest to which of the following:
A. $14
B. $18
C. $38
Solution: A.
Head and shoulders pattern: Price target = neckline – (head – neckline) = 22 – (30 – 22) = 14
R48-2 学会分析使用 trend, support and resistance lines, and change in polarity
Uptrend: Prices are consistently reaching higher highs and retracing to higher lows.
With connecting the lows of the price chart. The Longer price below the trendline, the
more meaningful the breadkdown. The forces of demand are greater than forces of
supply.
Downtrend: Prices are consistently declining to lower lows and retracing to lower highs.
记忆诀窍: uptrend 是低点越来越高，downtrend 是高点越来越低。
Trendline: Can help to identify whether a trend is continuing or reversing.
Change in polarity：突破 resistance level 后，resistance level 极性变化为 support level。
也就是我们平时说的阻力位一旦突破后就会成为支撑位。
R49-2 Reversal patterns（反转图形，改变原趋势）
Head and shoulders pattern is the most widely recognized reversal pattern
Volume is an important indicator. A clear trend should exist before the formation of the
pattern. Shoulders should be symmetrical.
For uptrend: head-and-shoulder, double top, triple top. For HAS, Left shoulder:上升斜
率大，量大，形成倒 V 型；Head：上升到更高位，但量下降，又下降到肩的开始
上升位（Neckline），且最低位突破了趋势线；Right shoulder: 与左肩对称，但是量
更低。
难点：Head and shoulders pattern Price target ＝ neckline - (head-neckline).Reversal
head and shoulders pattern price target = neckline+(neckline – head)
Triple tops and bottoms: three peaks or troughs at roughly the same price level.
R50-2 Continuation patterns（盘整图形，突破后保持原趋势）
Ascending triangle（上面为水平线，下降得越来越小，最后突破向上）；Descending
triangle（下面是水平线，上升得越来越小，最后突破向下）；symmetrical triangle
（bullish 和 bearish 寻找 consensus，突破后方向与突破前一致）
Rectangle: 上下水平线，分别为支撑线和阻力线
Flags and Pennants are similar to rectangles and triangles in shape, but they are not
horizontal.（旗形和楔形一般出现在短期，突破后趋势不变）
P32-2 Indicators
Q74-2 ★★Which of the following Sentiment indicators is most likely to increase when
investors forecast a bullish market?
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A. Put/Call ratio
B. Debt Margin
C. CBOE Volatility Index
Solution: B.
The put /call ratio is put option volume divided by call option volume. Increases in the put/call ratio
indicate a more negative outlook for the price of the asset.
VIX measures the volatility of options on the S&P 500 stock index. High levels of the VIX suggest
investors fear declines in the stock market, suggesting a bearish market.
When stock margin debt is increasing, investors are aggressively buying and stock prices will move
higher because of increased demand, indicating a bullish market.
R51-2 ★Price-based indicators
移动平均线：20, 60, 120 trading days
Golden cross: a short-term MA line crosses from underneath a long-term MA; Dead
cross: a short-term MA line crosses from above a long-term MA.
Bollinger bands：移动平均线加减几个标准差，短期突破无意义；长期突破，在上
面则为超买指标。
R52-2 Momentum oscillators:
To detect out of ordinary. 1) 可以用技术分析的方法，如趋势、支持和阻力线；2）
分析与价格的 Convergence and divergence。如果价格到高位，但是趋势振荡指标相
反，early sign of weakness. 有三个应用：1）确定 strength of trend; 2) 如果达到历
史的高低点，表明要反转；3）for non-trending, 可用于短期交易决策。
Rate of change: M=(V-Vx)100, 如果与趋势同向且穿过零，则为买卖信号；
Relative Strength Index：RSI=＝100-100/(1+RS), RS=价格上升总和除以下降总和。一
般为在 30-70 之间，过多则为 overbought。过大，则波动率大。
Stochastic Oscillator, KD 线：％K＝100(C-L14)/(H14-L14), %D 为％K 的最近三天移动平
均。When %D moves from below the %K line to above it, a bullish short-term trading
signal.
MACD: MACD 为 12 and 26 差异的指数移动平均，Signal line 为 MACD 的移动平均（9
days）。应用：1）交叉说明趋势结束；2）做 MACD 的趋势线。
R53-2 Sentiment indicators
Put/Call ratio: The put /call ratio is put option volume divided by call option volume.
Increases in the put/call ratio indicate a more negative outlook for the price of the
asset. This ratio is generally viewed as a contrarian indicator. Extremely high ratios
indicate strongly bearish investor sentiment and possibly an oversold market, while
extremely low ratios indicate strongly bullish sentiment and perhaps an overbought
market.
CBOE Volatility Index: VIX measures the volatility of options on the S&P 500 stock
index. High levels of the VIX suggest investors fear declines in the stock market.
Technical analysts most often interpret the VIX in a contrarian way, viewing a
predominantly bearish investor outlook as a bullish sign. VIX is usually used with trend,
pattern, or oscillator, contrarian
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Margin debt: When stock margin debt is increasing, investors are aggressively buying
and stock prices will move higher because of increased demand, indicating a bullish
market. Falling prices may trigger margin calls and forced selling, thereby driving prices
even lower. If margin debt reaches its bottom and turns up, it is a sign of bullish.
Short interest ratio: The number of shares of a particular security that are currently sold
short is called “short interest.”
Short interest ratio = Short interest / Average daily trading volume
A high short interest ratio means investors expect the stock price to decrease, it also
implies future buying when short sellers must return their borrowed shares.
R54-2 Flow-of-funds indicators
Arms Index=平均下降量（下降总量除以下降家数）/平均上升量，When Arms Index
<1 means that most trading activity is in rising stocks. When Arms Index >1 , means that
there is more volume in declining stocks, suggesting that the market continued to be in
a selling mood.
Margin debt：如果下降，则说明在卖股票，继续下跌。
Mutual fund cash position. Contrarian.
New equity issuance & Secondary offerings: uptrend may be to turn down
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3-Economics
P1-3 Demand and supply function
Q1-3 A college student’s monthly demand for pizza is given by the equation:
QDpizza=+
Where QDpizzais the number of pizzas ordered per month
Ppizza is the price of a pizza
I is her monthly food budget
Pcola is the price of cola per bottle
The student’s current monthly food budget is $500, the price of a pizza is $5, and the
price of a bottle of cola is $ If the student’s monthly food budget were to
increase to $700, the slope of her demand curve for pizza would be closest to:
A. .
B. .
C. .
Solution: B.
Initial Price Quantity Relationship:
11 $500 pizza PizzaQ P P
Resulting Demand Curve:
DPizza PizzaP Q
Price Quantity Relationship at New Income Level
11 $700 Pizza PizzaQ P P
Resulting Demand Curve:
DPizza PizzaP Q
The slope of her demand curve for pizza will still be even with the higher income effect
will result in a parallel shift of the initial demand curve to the right.
注：需求曲线是指需求反函数, demand curve is the graph of the inverse demand function.
Q2-3 ★Which of the following least likely describes an unstable market equilibrium?
A. Excess supply will tend to drive prices down.
B. The supply curve is less steeply sloped than the demand curve.
C. Prices that differ from equilibrium values tend to move further away from equilibrium.
Solution: A.
Unstable market equilibrium result when a downward sloping supply curve is less steeply
sloped than the demand curve, so that excess supply tends to drive prices up and excess
demand tends to drive prices down (further away from the equilibrium price)
这道题目首先可以排除 C，因为 C 选项就是不稳定均衡的定义。但是 A 和 B 的表述都不充
分，大家只需要掌握这个知识点就可以了，对于这道题目不需要纠结。
A：如果 A 选项里的供给曲线斜率为正，而需求曲线斜率为负，此时如果有超额供给，价
格会下降，即稳定均衡。不过如果供求曲线的斜率都为负，且需求曲线更陡，此时的过
量供给会使得价格下降，但它是不稳定均衡。
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B：如果 B 选项里的 supply curve 是向上倾斜的，虽然更平坦，仍然是稳定均衡，但是如
果 supply curve 和 demand curve 是向下倾斜的，supply curve 更加平坦，说明是不稳定的
均衡。
Q3-3 Movement along the demand curve for good X occurs due to a change in: (原版书
R13)
A. income.
B. the price of good X.
C. the price of a substitute for good X.
Solution：B.
The demand curve shows quantity demanded as a function of own price only.
Q4-3 Which of the following statements about market equilibrium is most accurate? (原版
A. The difference between quantity demanded and quantity supplied is zero.
B. The demand curve is negatively sloped and the supply curve is positively sloped.
C. For any given pair of market demand and supply curves, only one equilibrium point can
exist.
Solution：A.
At market equilibrium the quantity demanded just equals quantity supplied, and thus, the
difference between the two is zero.
Q5-3 ★Assume the following:
An individual consumer’s demand
for tea
Qdt = 1,800 – 40Pt + + 150Pc
Seller’s supply of tea Qst = –516 + 350Pt – 120W
Legend and Initial Values Assumed Values
Qdt Quantity of tea
Pt Price of tea per 100 grams
I Household income £2,400
W Hourly wage rate for labor
Pc Price of coffee per 100 grams £
Equilibrium price of tea £
If the household income increases by % while Pc and W do not change, the new
equilibrium quantity will be closest to(2014 Mock 98-41)
A. 5,166.
B. 5,136.
C. 5,163.
Solution：C.
Qdt = 1,800 – 40Pt + + 150Pc
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= 1,800 – 40 × + ( × 2400) + (150 × ) = 5,136 = Qst (equilibrium)
Qst = –516 + 350Pt – 120W = 5,136
Solve for W = [5,136 + 516 – (350 × )]/(–120) =
I increased by %; I = 2,400 × = 2,460.
Set Qdt = Q
s
t and solve for new Pt:
Pt = [1,800 + ( × 2,460) + (150 × ) + 516 + (120 × )]/390 =
Qd = 1,800 – (40 × ) + ( × 2,460) +(150 × ) = 5,
Q6-3 ★A producer's supply function is given by the equation
Q=-55+26Ps+
where Q is the quantity of steel supplied by the market, Ps is the per unit price of steel,
and Pa is the per unit price of aluminum. If the unit price of aluminum is 10, the slope
of the supply curve is closest to:
A. .
B. .
C. .
Solution：A.
The slope coefficient of Q. in the inverse supply function is .
Start with the supply equation : Q=-55+26Ps+
Insert Pa=10; =-55+26Ps+(10)
=-42+26 Ps
Solve for Ps : Ps=+ (the inverse supply function)
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需求与供给基本概念
R1-3 Demand and supple function
Inverse demand function: PD= a -bQD ——需求曲线
Inverse supply function: PS =a+bQS ——供给曲线
In order to draw demand and supply curves, own price and own quantity
must be allowed to vary. However, all other variables are held constant to
focus on the relation of own price with quantity.
Law of Demand and supply
demand decreases as the price increases
supply increases as the price increases
Aggregating demand and supply curves:
Add the firms that comprise market supply together to get the market supply
function.
Add the many individual demand curves to get the market demand function
R2-3 Shift or move along
Price 变化使得 move along 需求/供给曲线，其他因素导致 Shift
R3-3 Stable and unstable equilibria
The lower-priced equilibrium is stable, with a positively sloped supply curve and a
negatively sloped demand curve.
The higher-priced equilibrium is unstable because at a price above that
equilibrium price there would be excess demand, thus driving price even higher. At
a price below that equilibrium there would be excess supply, thus driving price
even lower toward the lower-priced equilibrium, which is a stable equilibrium.
P2-3 Auction
Q7-3 ★Which statement is most likely to be true in a single-price . Treasury bill auction?
A. Only some non-competitive bids would be filled.
B. Bidders at the highest winning yield may only get a portion of their order filled.
C. All bidders at a yield higher than the winning bid would get their entire order filled.
Solution: B.
Non-competitive bids and bidders at lower yields will get their orders filled first. Securities may
then not be available to fill demand entirely at the highest winning yield.
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Q8-3 An auction in which the auctioneer starts at a high price and then lowers the price in
increments until there is a willing buyer is best called a:
A. Dutch auction.
B. Vickery auction.
C. private-value auction.
Solution: A.
The basic Dutch auction is a descending-price auction.
Q9-3 The winner's curse in common value auctions is best described as the winning bidder
paying: (原版书 R13-14)
A. more than the value of the asset.
B. a price not equal to one's own bid.
C. more than intended prior to bidding.
Solution：A.
The winning bidder in such auctions may be overly optimistic about the underlying value of
the item won.
拍卖的基本概念
R4-3 Common value auction VS Private value auction
Common value auction:拍卖商品对每一个 bidder 都具有相同的价值
Private value auction：拍卖商品对每一个 bidder 都具有不同的潜在价值
R5-3 Common type of auctions
ascending price auction (English auction):拍卖人先以一个保留价格起拍，出价最
高的人获得这件商品
Winner’s curse: bid more than the ultimate value of the asset for common
goods.
sealed bid auction：每一个 bidder 将出价记录在一张纸上，并密封在信封中，
which is unknown to other bidders
the optimal bid for the bidder with the highest reservation price
reservation price：密封拍卖中存在保留价格，若所有出价都低于这个保留
价格，那么商品将不属于任何 bidder
second price sealed bid auction (Vickrey auction): Vickrey 拍卖类似于密封拍卖，
但却有一个关键性差异：商品由出价最高的投标者获得，但却只需按第二高的
出价支付
descending price auction (Dutch auction)：拍卖人先以一个较高价格起拍，然后
逐步降低价格，直到某个投标人愿意接受这个价格为止
the first sealed bid auction
Bids are opened simultaneously and the item is sold to the highest bidder for the
actual bid price.
The highest bidder wins the auction, must pay full bid price. winner’s curse
In recognition of the possibility of being overly optimistic, bidders might bid very
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conservatively below their expectation of the true value.
R6-3 Noncompetitive bid
. Treasury securities, a single price auction is held but bidders may also submit
Noncompetitive bid
bidders will accept the amount of Treasuries indicated at the price determined by
the auction, rather than specifying a maximum price in their bids
US Treasury offers 90 billion to be auctioned with both competitive and
non-competitive. 价格为 的总量为 97，满足 Non-competitive
15billions, 满足 competitive 3 billion, 小于等于 的全部满足，
所有的成交价格都为 （贴现率），即价格为
Discount
Rate Bid
(10%)
Bid
Price
per $100
Competitive
Bids
($billions)
Cumulative
Competitive
Bids($billions)
Non-competitive
Bidds($billions)
Total
Cumulative
Bids($billions)
10 10 15 25
15 25 15 40
20 45 15 60
12 57 15 72
10 67 15 82
5 72 15 87
10 82 15 97
P3-3 Consumer Surplus
Q10-3 The monthly demand curve for playing tennis at a particular club is given by the
following equation: PTennis Match = 9 – × QTennis Match. The club currently charges
members $ to play a match but is considering changing to a new flat-rate monthly
membership fee for unlimited play. The most that the club will be able to charge for
the flat-rate monthly membership is closest to:（mock89-40）
A. $
B. $
C. $
Solution：B.
MR D C
10
6
2
0
5 10 15 20 25 30 35 40 45 50
P
R
I
C
E
A
B
P=×Q
QUANTITY
MC
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On rearrangement, the demand function is QTennis Match = 45 – × PTennis Match.
The number of matches played per month at $ = 45 – × =25.
The Y-intercept of the demand curve occurs when Q = 0: P= 9
The X-intercept of the demand curve occurs when P=0: Q = 45
The club will be able to charge the consumer surplus: the area under the demand curve above
the current price per match to a total of 25 matches: × ($ – $) × 25 = $.
This is illustrated in the diagram as Triangle A.
Q11-3 Assume a market supply function is given by the equation Q = —7 + where Q is
the quantity supplied and P is the price. If P equals 15, the value of the producer
surplus is closest to: (原版书 R13-22)
A.
B.
C.
Solution：A.
With a linear supply curve, producer surplus is equal to the area of a triangle with base equal
to the market clearing price minus the price intercept, height equal to the market clearing
quantity, and bounded by the supply curve as the hypotenuse. Given a (market clearing) price
of 15, quantity is 2:
Q= -7 +(15) =2
Next find the inverse supply function : P=(1/)7+(1/)Q
P=+
Note that the price intercept is and the quantity intercept is .
Thus, producer surplus is 1/2 Base X Height = (1/2) (2) (15 - ) = .
Q12-3 Assume a market demand function is given by the equation Qd = 50 — where
Qd is the quantity demanded and P is the price. If P equals 10, the value of the
consumer surplus is closest to: (原版书 R13-20)
A. 67
B. 1205
C. 1667
Solution：B.
We find consumer surplus as the area of the triangle formed by the y(price) axis, the inverse
demand curve, and a line segment from the y axis to the inverse demand function at P = 10.
Put the price into the demand equation : Qd=(10)
Qd=(this is the base of the triangle)
Invert the demand function by solving for P: = Qd-50
P= Qd+
Note the price intercept is . The height of the triangle is -10 = . The consumer
surplus is the area of the triangle above the price of 10 and below the demand curve, with
base equal to the quantity of : 1/2 Base X Height = (1/2) () ( - 10) = 1,205.
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Q13-3 Which of the following best describes producer surplus? (原版书 R13-21)
A. Revenue minus variable costs.
B. Revenue minus variable plus fixed costs.
C. The area above the supply curve and beneath the demand curve and to the left of the
equilibrium point.
Solution：A.
Producer surplus is the difference between the total revenue that sellers receive from selling a
given amount of a good and the total variable cost of producing that amount.
R7-3 Efficient allocation
The efficient quantity of a good is achieved: marginal benefits = marginal cost ( the
intersect of demand and supply curve).
The allocative efficiency is attained when marginal benefits equates marginal cost.
At this equilibrium price and quantity, the sum of the consumer and producer
surplus is at a maximum.
R8-3 Surplus 的理解
Consumer surplus: the difference between the total value to consumers of the
units of a good that they buy and the total amount they must pay for those units
Producer surplus: the sum of difference between the price received for each unit of
good produced and the opportunity cost of each unit for the total units produced.
R9-3 Obstacles to the efficient allocation of productive resources: Price ceilings and price
floors; Taxes, subsidies and quotas; Monopoly; External costs External benefits.
R10-3 ★Price ceiling
the upper limit on the price which a seller can charge. When placed below the
equilibrium price, it makes seller provide less products, and dead weight loss is
produced.
In the long run, price ceilings lead to the following:(1) wait a long line to purchase
（春运火车票）, (2) suppliers engage in discrimination, (3) take bribes to do
so(rent-seeking), (4) suppliers reduce the quality of the goods.
R11-3 ★Price floor
the minimum price that a buyer has to pay for a good. When placed above the
equilibrium price, it produce dead weigh loss.
In the long run, price ceilings lead to the following: (1) overproduction(价格高，生
产更多，卖不出去), (2) consumers will buy less if the price floor is above the
equilibrium price. （工人的最低工资导致失业）
P4-3 Tax
Q14-3 The tax division between buyers and sellers with respect to products with perfectly
elastic and perfectly inelastic demand, respectively, are:
Perfectly elastic demand Perfectly inelastic demand
A. Buyers pay the entire tax Buyers pay the entire tax
B. Buyers pay the entire tax Sellers pay the entire tax
C. Sellers pay the entire tax Buyers pay the entire tax
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Solution: C.
In the extreme cases of products with perfectly elastic and perfectly inelastic demand, the
sellers and buyers, respectively, pay the entire tax.
Q15-3 ★Compared to a producer, the consumer is most likely to pay the largest part of a tax
increase if the elasticity of demand and elasticity of supply, respectively, are more:
Elasticity of Demand Elasticity of Supply
A. Elastic Elastic
B. Elastic Inelastic
C. Inelastic Elastic
Solution: C.
The buyer pays the largest portion of a tax when demand is more inelastic and supply is more
elastic.
Q16-3 In principle and in practice, rent ceilings are most likely to:
A. be fair.
B. be efficient.
C. prevent the housing market from operating in the social interest.
Solution: C.
In principle and in practice rent ceilings are inefficient and unfair. They prevent the housing
market from operating in the social interest.
Q17-3 If an excise tax is paid by the buyer instead of the seller, which of the following
statements is most likely to be true? The price: (原版书 R13-18)
A. paid will be higher than if the seller had paid the tax.
B. received will be lower than if the seller had paid the tax.
C. received will be the same as if the seller had paid the tax.
Solution：C.
The trade price should be the same whether the tax is imposed on the buyer or on the seller.
R12-3 Tax 的理解:
The actual tax incidence is independent of whether the government imposes the
tax (statutory incidence) on consumers or suppliers.
If demand is less elastic than supply, consumers will bear a higher burden.(弹性弱
的一方承担更多税收)
If supply is less elastic than demand, suppliers will bear a higher burden.
弹性越小，DWL 越小
P5-3 Subsidies and quotas
Q18-3 Which of the following provides the best description of the effect of subsidies on the
prices of goods and the relationship between marginal cost and marginal benefit?
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Solution: B.
Upon introduction of a subsidy, the equilibrium level of supply increases and the price falls. In
the new equilibrium, marginal cost (on the supply curve) exceeds marginal benefit (on the
demand curve) and a deadweight loss arises due to overproduction.
补贴，限额对供给，需求和市场均衡的影响：
R13-3 Subsidies：供给曲线下降 subsidy 个单位→市场均衡从 O 移动到 O’，均衡价格下降，
均衡产量上升→形成一块 deadweight loss（如图箭头指向的三角形）
R14-3 Quotas：供给曲线，需求曲线和市场均衡都没有变化→quotas 使市场处于非均衡
状态，供给量小于需求量，形成供需缺口→形成一块 deadweight loss（如图箭头
指向的三角形）
P6-3 Elasticity
Q19-3 ★If the number of ice cream bars demanded increases from 19 to 21 when the price
decreases from $ to $, the price elasticity of demand is:
A. -5.
B. .
C.
Solution: C.
If the number of ice cream bars demanded changes from 19 to 21 when the price changes
from $ to $, the percentage change in quantity is (21-19) / [(21 + 19)/ 2]=10%, and the
percentage change in price is () / [(+) /2]= -100%. Thus, price elasticity = 10%
/-100%=
Q20-3 ★The market demand function for item X is a function of its price, household income,
and the price of item Y.（2013 mock afternoon session）
Own-price elasticity of demand for X
Income elasticity of demand for X
Cross-price elasticity of demand for X with respect to the price of Y
Effect on prices Relationship between marginal cost and marginal benefit?
A. Price falls Marginal benefit exceeds marginal cost
B. Price falls Marginal cost exceeds marginal benefit
C. Price increases Marginal cost exceeds marginal benefit
Subsidies Quotas
Deadweight loss
P
S
Q
S
O
Q
S-subsidy
D
O
O’
Deadweight loss
P
D
MB Quota
MC Quota
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Given the above elasticity coefficients for the two items, which of the following
statements is most accurate?
A. X and Y are substitutes.
B. Demand for X is elastic.
C. Item X is an inferior good.
Solution: A.
The cross-price elasticity is positive, indicating that as the price of Y increases, more of X is
demanded, making X and Y substitutes.
Q21-3 ★★The market demand function for four-year private universities is given by the
equation (原版书 R13-25)
Qpr
d = 84 – Ppr + +
Where Qpr
d is the number of applicants to private universities per year in thousands ,
Ppr is the average price of private universities (in thousands of USD), I is the household
monthly income (in thousands of USD), and Ppu is the average price of public
(government-supported ) . Assume that Ppr is equal to 38, I is equal to 100, and Ppu is
equal to 18 .
The cross-price elasticity of demand for private universities with respect to the price of
public universities is closest to:
A. .
B. .
C. .
Solution：A.
From the demand function:
Solve for Qpr
d:
ΔQpr
d/ΔPpu=(the coefficient in front of Ppu)
Qpr
d = Ppr++ Ppu
=(38)+(100)+(18)
=
At Ppr = 38 ,and Ppu=18, the cross-price elasticity of demand
=(ΔQpr
d/ΔPpu)( Ppu/ Qpr
d)=()(18 / )=
Q22-3 If a price cut of a product increases total revenue, demand is best described as: (201
A. inelastic.
B. unit elastic.
C. elastic.
Solution: C.
A product's demand is elastic if demand increases by a greater percentage than the percentage
price cut when prices are cut. For example, if a 1% price cut increases the quantity sold by
more than 1%, total revenue increases and demand is said to be elastic.
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Q23-3 ★For a particular company's product, the percent change in quantity demanded is
smaller than the percent change in price that caused the change in quantity
demanded. If the company increased the price of that product, total revenue from
sales of that product would most likely:
A. increase more in the short run than in the long run.
B. increase more in the long run than in the short run.
C. decrease more in the short run than in the long run.
Solution: A.
The price elasticity of demand for the product is inelastic (absolute value of elasticity
coefficient is less than one). An increase in price will increase total revenue in the short run.
The longer the time that has elapsed since a price change, the more elastic is demand. In the
long run consumers will reduce their consumption by a larger amount than in the short run.
Q24-3 For a particular product produced by a firm, the quantity at which demand is unit
elastic is most likely the quantity that maximizes:
A. total profit from the product but not total revenue from the product.
B. total revenue from the product but not total profit from the product.
C. both total profit from the product and total revenue from the product.
Solution: B.
A firm maximizes its revenue at the price (or quantity) where demand is unit elastic. This price
or quantity is not the one that maximizes profit unless output can be increased at zero cost (no
marginal costs).
Elasticity 掌握概念及公式：
R15-3 需求点弹性、交叉弹性和收入弹性的计算，分母用平均值。
percent change in quantity demanded %ΔQ
price elasticity of demand= =
percent change in price %ΔP
percent change in quantity demanded
cross elasticity of demand=
percent change inprice of substitute or complement
percent change in quantity demanded
income elasticity of demand=
percent change inincome
R16-3 Inelasticity demand & elasticity demand 商品的定价策略，怎样才能使受益最大化
R17-3 Different kinds of goods:
Normal Goods: positive income elasticity, demand rises with income. (> 0)
Luxuries: high positive elasticity, demand rises strongly with income. (>1)
Necessity goods: normal but low elasticity
Inferior Goods: negative income elasticity, demand falls with income (<0)
R18-3 商品的价格与它的互补品的需求量正向，商品的价格与它的替代品的需求量成反向
R19-3 Factors influencing the elasticity of demand:
Availability of substitutes↑, higher
Relative amount of spent on the good ↑,higher
Time period since price change ↑,higher
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R20-3 Factors influencing the elasticity of supply:
Availability of substituting inputs↑, higher.
Time period since price change, long-term>short-term>momentary（供电弹性大，
水果小）
R21-3 Price elasticity along a linear demand curve
Point in a higher price range has greater price elasticity of demand than point in
the lower price range.
Revenue is maximized at the point that has unitary elasticity (elasticity=-1)
P7-3 Utility theory of consumers
Q25-3 ★Partial information on three baskets (1, 2, and 3) containing goods A and B is given
in the table below. The marginal rate of substitution of B for A, (MRSBA), at basket 2 is
also provided.（mock85-34）
Basket Units of A Unit of B MRSBA
1 30
2 50 35
3 40 40
A consumer claims that he is indifferent between baskets 2 and 3 and his indifference
curves are strictly convex. If he is also indifferent between baskets 1 and 3, the
number of units of A in basket 1 is most likely.
A. equal to 60.
B. less than 60.
C. greater than 60.
Solution: C.
As he is indifferent between all three baskets, all three must fall on the same indifference
curve. The MRSBA at basket 2 is 4, meaning that the slope of the indifference curve at that
point is -4, hence ΔA/ΔB = -4 = (A - 50) / (30 - 35): Solve for A = 70: greater than 60.
从另一个角度，由于无差异曲线具有严格的凸性，所以
(50 ) (40 50)
=2
35 30 40 35
X
，得
出 X>60。换句话说，对于 B 增加 5 个单位，所放弃的 A 的数量越来越少。
A
B 40 35 30
X
50
40
MRS
BA
=2
MRS
BA
>2
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Q26-3 Which of the following ranking systems best describes consumer preferences within a
utility function?（原版书 R14-2）
A. Utility.
B. Ordinal.
C. Cardinal.
Solution: B.
Utility functions only allow ordinal rankings of consumer preferences.
Q27-3 If a consumer's marginal rate of substitution of good X for good Y (MRSxy) is equal to 2,
then the:（原版书 R14-4）
A. consumer is willing to give up 2 units of X for 1 unit of Y
B. slope of a line tangent to the indifference curve at that point is 2.
C. slope of a line tangent to the indifference curve at that point is -2
Solution: C.
The marginal rate of substitution is equal to the negative of the slope of the tangent to the
indifference curve at that point, or -2.
Q28-3 Which of the following statements best explains why indifference curves are generally
convex as viewed from the origin?
A. The assumption of non-satiation results in convex indifference curves.
B. The marginal rate of substitution of one good for another remains constant along an
indifference curve.
C. The marginal utility gained from one additional unit of a good versus another diminishes
the more one has of the first good.
Solution: C.
The slope of the indifference curve at any point gives the marginal rate of substitution of one
good for another. The curve is convex because the marginal value of one good versus another
decreases the more one has of the first good.
Q29-3 Suppose the units goods of x is on the horizontal axis while the units goods of y is on
the vertical axis. The marginal rate of substitution good x for good y (MRSxy)
decreases from to ，which of the following changes the consumer’s budget
constraint line?
A. increase in price x.
B. increase in price y.
C. increase in income.
Solution: A.
MRSxy= - Δy/Δx, the slope of budget line equals to the MRS, that is , the slope of budget line
changes from to , more steeper, the reason may be the increase in price of x
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(intercept in the horizontal axis is I/Px), or decrease in the price of y. The sole change in the
income will shift the budget line, thus the slope remaining the same.
消费者行为理论
R22-3 Utility theory（消费者偏好）
A utility function（ordinal utility）: U=U(Q,QB,...,QN)
Assumption: for bundle A, B and C, “>” stand for prefer
complete preference: U(A)>U(B), U(B)>U(A), U(A)=U(B) (indifference)
transitive preference: U(A)>U(B), U(B)>U(C)=>U(A)>U(C)
non-satiation: U(A+1)>U(A), more is better
R23-3 Indifference curve 特征
较高无差异曲线的效用高于较低无差异曲线
同一消费者无差异曲线不相交
无差异曲线向右下倾斜
无差异曲线凸向原点，是凸图形(convex)
R24-3 边际替代率(MRS)
MRSXY =-△ Y/ △ X(商品 X 对商品 Y 的替代）例如： MRSXY＝3，X 对 Y 的替代
率为 3，即增加（＋1）X，放弃（-3）Y，效用水平不变。
If two consumers (A and B) have different MRS, they can both benefit from
voluntary trade until MRSAXY=MRSBXY
R25-3 边际替代率递减规律：在维持效用水平不变的前提下，随着一种商品的消费数量连
续增加，消费者为得到每一单位的这种商品所需要放弃的另一种商品的消费数量是
递减的。（随着 X 越来越大，放弃的 Y 数量越来越小，斜率绝对值越来越小）
R26-3 Budget constraint (预算约束线）
Consumption option are determined by income & price；PXQX+PYQY<=Income
R27-3 Consumer equilibrium (最优化选择)
Utility is maximized, subject to the budget constraint
Tangency between budget constraint & the highest attainable indifference curve
At Tangency, MRSXY（边际替代率，消费者意愿）= Price ratio（相对价格，市场
意愿）
Good Y
6 I/P X
5
I/P Y
Good Y
6 I/P X
5
I/P Y
Good X
Most preferred affordable combination
I/PX为横坐标截距
I/PY为纵坐标截距
PX/PY为预算线斜率
XY
-MRS
X X
YY
Y
X
MU P
MU P
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P8-3 Substitution effect and income effect
Q30-3 ★In the case of a normal good with a decrease in own price, which of the following
statements is most likely true?（原版书 R14-6）
A. Both the substitution and income effects lead to an increase in the quantity purchased.
B. The substitution effect leads to an increase in the quantity purchased, while the income
effect has no impact.
C. The substitution effect leads to an increase in the quantity purchased, while the income
effect leads to a decrease.
Solution: A.
In the case of normal goods, the income and substitution effects are reinforcing, leading to an
increase in the amount purchased after a drop in price.
Q31-3 Which of the following is least likely to be a characteristic of a Giffen good? (MOCK92-)
A. Its income effect is negative.
B. Its demand curve slopes upward.
C. Its substitution effect is negative.
Solution: C.
A Giffen good is an inferior good. All inferior goods have a negative income effect (less is
purchased as income rises). While the substitution effect is always positive for all goods, for a
Giffen good the income effect is so strong and so negative that it overpowers the substitution
effect. The result is that as its price declines, less of it is purchased: This results in a positively
sloped individual demand curve. Therefore, it is least likely that the substitution effect is
negative.
Q32-3 The diagram illustrates a consumer’s allocation of her budget between items X and Y.
With an initial budget (BC1) she consumes Qa units of item Y. When the price of Y
drops, she consumes Qc units of item Y. Lines BC2 and BC3 are parallel to one another.
The income effect arising from this change in the price of Y is best described as the
distance between:
A. Qb and Qa.
B. Qc and Qb.
Q
u
a
n
ti
ty
o
f
X
Quantity of Y
BC2
BC1 BC3
Qa Qc Qb
a
b
c
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C. Qc and Qa.
Solution: B.
When the price of Y falls, the budget constraint shifts outward from BC1 to BC2, indicating an
increase in the consumption of Y. Points a and b reflect the change in consumption of Y due
solely to a decrease in price because BC3 reduces her income by a sufficient amount to return
her to her original indifference curve. Qc – Qb is the income effect (which is negative here)
because this is an inferior good.
Q33-3 Which of the following is most accurate regarding only substitution effect?（2012 年
12 月考题回顾）
A. Substitution effect is positive for both normal goods and inferior goods
B. Substitution effect is negative for both normal goods and inferior goods
C. Substitution effect is negative for normal goods and positive for inferior goods
Solution: A.
When the price of Good X decreases, there is a substitution effect that shifts consumption
towards more of Good X. Substitution effect is positive for both normal goods and inferior
goods. Income effect is the opposite.
R28-3 Substitution effect：商品 X价格减低时，商品 X相对于其他商品相对价格减,Consumer
equilibrium 在无差异曲线上移动，带来对商品 X 需求量的增加
R29-3 Income effect：商品X价格减低时，消费者实际购买力变化，real income提高， budget
constraint 曲线移动带来对商品 X 需求量的变化。
R30-3 When decrease in the price of Good X:
The substitution effect is positive, and the income effect is also
positive—consumption of Good X will increase.
The substitution effect is positive, and the income effect is negative but smaller
than the substitution effect—consumption of Good X will increase.
The substitution effect is positive, and the income effect is negative and larger than
the substitution effect—consumption of Good X will decrease, Giffen goods
P9-3 Giffen and Veblen goods
Q34-3 ★Which of the following statements best illustrates the difference between a Giffen
good and a Veblen good? （原版书 R14-8）
A. The Giffen good alone is an inferior good.
B. The substitution effect for each is in opposite directions.
C. The Veblen good alone has a positively sloped demand curve.
Solution: A.
Veblen goods are not inferior goods, whereas Giffen goods are. An increase in income for
consumers of a Veblen good leads to an increase in the quantity purchased at each price. The
opposite is true for a Giffen good.
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R31-3 Giffen goods(吉芬商品):
Income effect （inferior goods） > Substitution effect
demand curve has positive slope
R32-3 Veblen goods(韦伯伦商品, Conspicuous goods): Price is used by the consumer to signal
the status in the society
have a positively sloped demand curve (.: Gucci bag)
But when price increases, the slope may be negative.
R33-3 two important distinctions between Giffen goods and Veblen goods.
First, Giffen goods are inferior goods (negative income effect), while Veblen goods
certainly are not.
Second, the existence of Giffen goods is theoretically supported by the rules of
consumer choice, while the existence of Veblen goods is not.
P10-3 Economic profit
Q35-3 Which of the following is least likely to be classified as an explicit opportunity cost?
A. Employee payroll.
B. Economic depreciation.
C. Salary paid to the owner.
Solution: B.
Economic depreciation is classified as an implicit opportunity cost. The salary was paid to the
owner not forgone and thus is an explicit cost.
Q36-3 Chace’s House Industry has compiled the following information in order to determine
its economic profit for the year:
Total revenue $460,000
Value of buildings and machinery
- At the beginning of the year $320,000
- At the end of the year $270,000
Cost of raw materials $80,000
Wages paid during the year $ 30,000
Normal profit for the year $ 50,000
What is the economic profit of Choice Malts Breweries closest to?
A. $110,000.
B. $250,000.
C. $230,000.
Solution: B.
机会成本包括: 显性成本和隐性成本, 确切的说, 固定资产的经济性贬值也是一种隐性成
本, 也应扣除.
Opportunity costs= 80,000 + 30,000 + 50,000 = 160,000
Economic depreciation= 320,000 - 270,000 = 50,000
Economic profit= Total revenue - Opportunity costs – Economic depreciation=460,000 -
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160,000 - 50,000 =250,000
Q37-3 Normal profit is best described as:
A. zero economic profit.
B. total revenue minus all explicit costs.
C. the sum of accounting profit plus economic profit.
Solution: A.
Normal profit is the level of accounting profit such that implicit opportunity costs are just
covered; thus, it is equal to a level of accounting profit such that economic profit is zero.
R34-3 Economic Profit 的理解
Opportunity cost: Opportunity cost is the return that a firm’s resources could have
earned elsewhere in its next most valuable use, which includes:
Explicit costs are measurable cash flows for operating expenses (wages, rent,
material costs).
Implicit costs measure the opportunity cost of using a firm's assets (wages or
rental, which are not claimed by the owner of the business).
explicit costs
Opportunity cost implied rental rate
implied costs
normal profit
R35-3 The differences between economic profit and accounting profit：
Economic profit includes both explicit and implicit cost components of the firm,
while accounting profit ignores implicit costs such as the opportunity cost of equity
capital.
Accounting profits are generally higher than economic profits.
R36-3 When the firm’s revenues are just equal to its costs (explicit and implicit, including the
normal rate of return) economic profits will be zero
In highly competitive market situations, firms tend to earn the normal profit level
over time because ease of market entry allows for other competing firms to
compete away any economic profit over the long run. Economic profit that exists
over the long run is usually found where competitive conditions persistently are
less than perfect in the market.
In the short run, the normal profit for a firm may be considered fixed. In the long
run, it will vary with the required rate of return on equity investments.
Accounting profit is often highly variable in both the long run and the short run.
Economic profit is highly variable in both the short run and long run.
Normal profit is minimum requirement for a firm to continue operating in the long
run.
A firm unable to earn a normal profit (a firm with negative economic profit) will
find it more difficult to raise equity capital, and the value of its equity in the market
is likely to decline.
Earning a positive economic profit will increase the value of a firm’s equity, and
negative economic profit will decrease the value of a firm’s equity
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R37-3 Economic rent & opportunity cost
The opportunity cost of an employee is what he could make in his next
highest-paying alternative employment.
The different between a factor of production's earnings and opportunity cost is
called economic rent.
Economic rent:对于 fixed supply 的经济租（例如：土地，黄金 & 石油），拿到
的所有 revenue 都是经济租,故要素价格越高经济租越高
P11-3 TR AR & MR
Q38-3 The marginal revenue per unit sold for a firm doing business under conditions of
perfect competition will most likely he:
A. equal to average revenue.
B. less than average revenue.
C. greater than average revenue.
Solution: A.
Under perfect competition, a firm is a price taker at any quantity supplied to the market, and
AR = MR = Price.
Q39-3 With its existing production facilities, a monopolist firm can produce up to 100 units.
It faces the following demand and cost schedules:
Output (units) Price($/unit) Total cost($/unit)
0 3,000 600
20 2,800 10,600
40 2,600 32,600
60 2,400 66,600
80 2,200 112,600
100 2,000 170,600
The optimal output level for this producer (in units) is closest to:
A. 20.
B. 60.
C. 100.
Solution: B.
Output (units) Price($/unit) Total Revenues Total cost ($/unit) Profit
20 2,800 56,000 10,600 45,400
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60 2,400 144,000 66,600 77,400
100 2,000 200,000 170,600 29,400
REVENUE: (OUTPUT-----REVENUE)
R38-3 Total revenue= Price*output
Marginal revenue = change in total revenue / change in output
Average revenue = total revenue / output
R39-3 Perfect competition
P
Q
P
Q
P12-3 Short-run & Long-run Decision Time Frames
Q40-3 Regarding a company’s production function, both labor costs and capital costs are best
described as:
A. fixed in the long run.
B. variable in the long run.
C. variable in the short run.
Solution: B.
In the short run, a company can vary the quantity of labor but the quantity of capital is fixed. In
the long run, a firm can vary both the quantity of labor and the quantity of capital.
R40-3 Short-run & Long-run Decision Time Frames 的理解
Short run: a time period for which quantities of some resources are fixed, which is
a constraint on a firm’s ability to increase production. （labor and raw materials are
variable while plant size, capital equipment, and technology are constant）
Long run: a time period for which a firm can adjust its input quantities, production
methods, and plant size. (所有因素都可变)
R41-3 Short-run & Long-run Decision Time Frames 的理解
Labor and raw materials are variable in the short run.
Plant size, capital equipment, technology are constant in the short run.
P13-3 Product output and costs
Q41-3 Consider the following data for a firm operating in perfect competition.
Quantity Total Revenue Total Cost
21 $210 $138
22 $220 $145
23 $230 $154
24 $240 $165
The firm’s profit-maximizing output (in units) is most likely:
A. 21.
B. 23.
D = P = MR=AR（price taker）
DWL=0, 市场实现最优配置
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C. in excess of 24.
Solution: B.
Under perfect competition, economic profits are maximized where marginal revenue equals
marginal cost; in this case where marginal cost crosses $10 per unit. Profits are maximized at
23 units of production.
Q42-3 If adding one additional unit of labor results in a positive but declining marginal
product of labor, then total product most likely is:
A. constant.
B. decreasing.
C. increasing at a decreasing rate.
Solution: C.
As long as marginal product is positive, total product is increasing. If the marginal product
declines as additional units of labor are added, the rate of increase in total product is declining,
., increasing at a decreasing rate.
Q43-3 If marginal cost per unit is greater than average total cost per unit, increasing output
will most likely cause:
A. marginal cost to decrease.
B. average fixed cost to increase.
C. average variable cost to increase.
Solution: C.
If marginal cost is greater than average total cost, then increasing output will cause marginal,
average variable, and average total costs to increase. Average fixed cost will continue to
decrease as output increases.
Q44-3 ★★Which of the following best describes the elasticity of demand in a perfectly
competitive market?
A. The firm elasticity is zero and the market elasticity is infinite.
B. The firm elasticity is infinite and the market elasticity is zero.
C. The firm elasticity is infinite and the market elasticity is some finite number.
Solution: C.
Infinite elasticity reflects perfect elasticity of demand. This characterizes the elasticity of
demand for the products of a firm operating in a perfectly competitive market. If the firm
increases prices, customers will go to another firm. However, the market demand is not
perfectly elastic as it depends on substitutability with other products. Market elasticity will be
greater than zero but less than infinite.
Q45-3 Which of the following is the best reason for price discrimination?
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A. Differences in applicable tariffs.
B. Differences in consumers' willingness to pay.
C. Differences in production and/or transportation costs.
Solution: B.
Price discrimination is charging different prices for a single good or service because of
differences in buyers' willingness to pay and not because of differences in production costs.
Q46-3 In the short run, an increase in output at low levels of production will most likely
cause:
A. an increase in the marginal cost due to the rising total fixed cost.
B. an increase in the marginal cost due to the law of diminishing returns.
C. a decrease in the marginal cost due to economies from greater specialization.
Solution: C.
The marginal cost decreases at low levels of output due to economies from greater
specialization. However, at higher levels of production, it eventually increases because of the
law of diminishing returns.
Q47-3 The following equations have been developed for a company:
Demand curve P = 150 – 5 × Q
Total revenue curve TR = 150 × Q – 5 × Q
2
Marginal revenue curve MR = 150 – 10 × Q
Total cost curve TC = Q
3
– 10 × Q
2
+ 73 × Q + 120
Average cost curve AC = Q
2
– 10 × Q + 73 + 120/Q
Marginal cost curve MC = 3 × Q
2
– 20 × Q + 73
P: price per unit Q: cost per unit
The profit maximizing output for this firm (in units) is closest to: （mock84-39）
A. 7.
B. 8.
C. 11.
Solution: A.
The profit-maximizing output will arise when MR = MC.
MR = 150 – 10 × Q = MC = 3 × Q2 – 20 × Q + 73.
On reduction, this becomes: 3 × Q2 – 10 × Q – 77 = 0.
Only with Q = 7 will this equation be satisfied: 3 × 72 – 10 × 7 – 77 = 0
Q48-3 A local laundry and dry cleaner collects the following data on its workforce
productivity. Workers always work in teams of two, and the laundry earns $ of
revenue for each shirt laundered.
Quantity of Labor (L)
(Workers)
Total Product (TP)
(Shirts Laundered per Hour)
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0 0
2 20
4 36
6 50
8 62
The marginal revenue product ($ per worker) for hiring the fifth and sixth workers is
closest to: （mock83-34）
A. 14.
B. 21.
C. 42.
Solution: B.
The marginal product (MP) is the amount of additional output resulting from using one more
unit of input: ΔTP/ΔL, where ΔTP is the change in total product and ΔL is the change in total
labor. The marginal revenue product (MRP) is the marginal product of an input times the price
of the product: MP × Price = ΔTP/ΔL × Price.
In this problem, the marginal product of hiring the 5th and 6th workers (ΔL = 2) is 14 shirts per
hour/2 workers = 7 shirts per hour/worker. With each shirt resulting in $3 of revenue, the MRP
is 7 shirts per hour/worker × $3/shirt = $21 per worker.
Q49-3 ★A profit maximum is least likely to occur when: (原版书 R15-14)
A. average total cost is minimized.
B. marginal revenue equals marginal cost.
C. the difference between total revenue and total cost is maximized.
Solution: A.
The quantity at which average total cost is minimized does not necessarily correspond to a
profit maximum.
掌握边际利润递减规律、边际成本递增规律：
R42-3 The law of diminishing return: at some point, as one more resource is added to the
production process, holding the quantity of other inputs constant, the output
continues to increase, but at a decreasing rate.
R43-3 Marginal product of capital: increase in output from using one additional unit of
capital, holding the quantity of labor constant.
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R44-3 TP:total product，随投入增高，而增高，到达一定高度，减少。
MP: Marginal product, 先增加后减少
AP: Average product.
TC: total cost. TVC:total variable cost . TFC:total Fixed cost. MC: marginal cost.
ATC: average total cost. AVC: average variable cost. AFC: average fixed cost .
MC intersects AVC and ATC at their minimum points.
Vertical distance between ATC and AVC is AFC.
R45-3 Shutdown point & Breakeven point
Shutdown point:
If AR < AVC in the short run, the firm should shut down. This is its short-run
shutdown point.
If AR ＞ AVC in the short run, the firm should continue to operate, even if it
has losses.
In the long run the firm should shut down if AR < ATC. This is the long-run
shutdown point.
Breakeven point:
If AR = ATC, TR = TC (economic cost ), this is the firm's breakeven point.
If AR ≥ATC, firm stay in the market in both the short and long run
If AR ≥ AVC, but AR < ATC, the firm stay in market in the short run but will exit
the market in the long run
If AR < AVC, the firm shut down in the short run and exit the market in the
long run
Cost
TVC
TC
TFC
Cost
ATC=AFC+AVC
MC
ATC
AV
C
AFC
0 20 10 30
$6
$3
$1
X
X
TP曲线拐点与MP
曲线最高点横坐标
相同
MP曲线与AP相交于AP最高点
TP曲线最高点的横坐标与MP曲线和横轴的
交点横坐标相同
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对于短期，固定总成本不变，一根生产曲线，代表一种生产规模。
In the long run, everything is variable and the long run cost curves are known as
planning curves.
P14-3 Long-run industry supply
Q50-3 ★A firm engages in the development and extraction of oil and gas, the supply of
which is price inelastic. The most likely equilibrium response in the long run to an
increase in the demand for petroleum is that oil prices: (原版书 R15-18)
A. increase, and extraction costs per barrel fall.
B. increase, and extraction costs per barrel rise.
C. remain constant, and extraction costs per barrel remain constant.
Solution: B.
The development and extraction of scarce oil and gas is an increasing-cost industry. A positive
shift in demand will cause firms to increase supply, but at higher costs. The higher costs
associated with increasing supply will cause prices to rise
Q51-3 A firm develops and markets consumer electronic devices in a perfectly competitive,
decreasing-cost industry. The firm's products have grown in popularity. The most likely
equilibrium response in the long run to rising demand for such devices is for selling
prices to: (原版书 R15-19)
A. fall and per-unit production costs to decrease.
B. rise and per-unit production costs to decrease.
C. remain constant and per-unit production costs to remain constant.
Solution: A.
A positive shift in demand will cause firms to increase supply, but at decreasing costs. The
decreasing cost per unit will be passed on to consumers and cause prices to fall in the long run.
Diseconomy of scale Economy of scale
Cost
Q* Q
Constant returns to scale
LRATC
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R46-3 Long-Run Industry Supply Curves
成本递增行业：行业产量↑成本↑，产品价格与供给量成同方向变动
成本递减行业：行业产量↑成本↓，产品价格与供给量成反方向变动
成本不变行业：行业产量↑成本保持不变，以不变的均衡价格提供产量
P15-3 Cost minimization and profit maximization
Q52-3 A firm experiencing an increase in the marginal product of labor employed would
most likely: (原版书 R15-22)
A. allow an increased number of workers to specialize and become more adept at their
individual functions.
B. find that an increase in workers cannot be efficiently matched by other inputs that are
fixed such as property, plant, and equipment.
C. find that the supply of skilled workers is limited, and additional workers lack essential
skills and aptitudes possessed by the current workforce.
Solution: A.
Adding new workers in numbers sufficient for them to specialize in their roles and functions
should increase marginal product of labor.
Q53-3 For a manufacturing company to achieve the most efficient combination of labor and
capital, and therefore minimize total costs for a desired level of output, it will most
likely attempt to equalize the: (原版书 R15-23)
A. average product of labor to the average product of capital.
B. marginal product per unit of labor to the marginal product per unit of capital.
C. marginal product obtained per dollar spent on labor to the marginal product per dollar
spent on capital.
Solution: C.
Costs are minimized when substitution of labor for capital (or the reverse) does not result in
any cost savings, which is the case when the marginal product per dollarspent is equalized
across inputs.
Price
Quantity
Price
Quantity
(b) Decreasing-cost
industry (a) Increasing-cost industry
(c)Constant-cost industry
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Q54-3 ★A company uses three types of labor—unskilled, semiskilled, and skilled—in the
production of electronic components. The company's production plan allows for the
substitution of one type of labor for another. The marginal product and compensation
in . dollars is as follows:
Type of Labor Marginal Product per Day Compensation per Day (US$)
Unskilled 200 units 105
Semiskilled 300 units 160
Skilled 500 units 270
Assuming that the compensation of the unskilled labor increases by 4%, what labor
type should the company most likely hire when expanding output? (2014 Mock 99-34)
A. Skilled
B. Semiskilled
C. Unskilled
Solution: B.
The company should maximize output per monetary unit of input cost. So, it should look for
the labor type that has the highest ratio of marginal product to compensation cost
(MPinput/Pinput) .
Type of Labor Marginal Product (MP)
per Day
Compensation per
Day
MPinput/Pinput
Unskilled 200 units 105 × = 200/ =
Semiskilled 300 units 160 300/160 =
Skilled 500 units 270 500/270 =
The company minimizes costs and enhances profitability by adding semiskilled labor rather
than the other two types because it has the highest ratio of MP to input price.
R47-3 Profit-maximizing Utilization of an Input
For a firm with N productive inputs, cost minimization requires
1 2
1 2
N
N
MPMP MP
P P P
L
Based on the condition for the profit-maximizing utilization of each factor, MRPf =
Pf, for profit maximization, a firm must employ inputs in quantities
1 2
1 2
1
N
N
MRP MP MR
MRPMRP MRP
P P P
L
P16-3 Perfect competition
Q55-3 ★In which market structure(s) can a firm's supply function be described as its
marginal cost curve above its average variable cost curve?（Notes P115）
A. Oligopoly or monopoly.
B. Perfect competition only.
C. Perfect competition or monopolistic competition.
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Solution: B.
The supply function is not well defined in markets other than those that can be characterized
as perfect competition.
Q56-3 In perfectly competitive industries, what is the most likely long-run effect of a
permanent decrease in demand?
A. Price decreases.
B. Firms incur economic losses.
C. The number of firms decreases.
Solution: C.
A permanent decrease in demand in a perfectly competitive industry will in the short-run
cause the demand curve to shift to the left, causing prices to fall. However, in the long-run,
firms will leave the industry due to economic losses. As firms leave the industry, supply
decreases (., the supply curve shifts left-ward) thus increasing prices back to the equilibrium
where economic profit is zero.
Q57-3 In an industry comprised of three companies, which are small-scale manufacturers of
an easily replicable product unprotected by brand recognition or patents, the most
representative model of company behavior is:（原版书 Reading 16-18）
A. oligopoly.
B. perfect competition.
C. monopolistic competition.
Solution: B.
The credible threat of entry holds down prices and multiple incumbents are offering
undifferentiated products.
掌握几种市场（perfect competition, monopolistic competition, oligopoly and monopoly）的
特点和达到均衡时的条件：
R48-3 For perfect competition(also price taker market):
All the firms in the market produce identical products.
pure competition is price-taker, all others are price-searcher
There is a large number of independent firms.
Each seller is small relative to the size of the total market.
There is no barrier to entry or exit.
短期内：MR=MC，可能有 economic profit 或者 economic loss；在有 economic loss
时，当 AVC<P<ATC 时，可以继续生产，P<AVC 时，要关停.（shut down point）
Individual firm's demand schedule is perfectly elastic (horizontal).
长期内：无经济利润或损失（因为无进出壁垒）只有 normal return，均衡条件
是 P=MR=MC=ATC。
R49-3 Permanent increase in demand:
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External economies of scale: input prices fall because of the greater demand
P1<P0
External economies of scale: input prices rise because of the greater demand
P1>P0
短期供给曲线用 SMC 曲线上大于等于 AVC 曲线最低点的部分表示，即 SMC 上
大于等于 shutdown point 的部分来表示
P17-3 Monopoly
Q58-3 Collusion is less likely in a market when: (原版书 R16-11)
A. the product is homogeneous.
B. companies have similar market shares.
C. the cost structures of companies are similar.
Solution: B .
When companies have similar market shares, competitive forces tend to outweigh the benefits
of collusion.
Q59-3 A government entity that regulates an authorized monopoly will most likely base
regulated prices on: (原版书 R16-14)
A. marginal cost.
B. long-run average cost.
C. first-degree price discrimination.
Solution: B.
This allows the investors to receive a normal return for the risk they are taking in the market.
Q60-3 ★Upsilon Natural Gas, Inc. is a monopoly enjoying very high barriers to entry. Its
marginal cost is $40 and its average cost is $70. A recent market study has determined
the price elasticity of demand is . The company will most likely set its price at: (原
A. $ 40.
B. $ 70.
C. $120.
Solution: C.
Profits are maximized when MR = MC . For a monopoly, MR=P(1-1/Ep). Setting this equal to MC
and solving for P:
$40= P(1-1/)=
P=$120
Q61-3 Compared with perfect competition, a natural monopoly will most likely be associated
with a decrease in:
A. Deadweight loss.
B. Producer surplus.
C. Consumer surplus.
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Solution: C.
The consumer surplus under a monopoly will be less than if the same market were perfectly
competitive. And producer surplus can be increased by price discrimination.
R50-3 For monopoly:
Single seller, high barriers( legal barriers and natural barriers)
MC
MR
F ATC
D
Price
Q*
P*
QuantityO
ATC*
G
E
Monopolists are price searchers (face downwards sloping demand curves) and
have imperfect information about demand, so they must experiment with
different prices (search) to find the profit maximizing price/quantity with always be
in the elastic range of the demand curve for the firm's product.
★短期和长期的均衡条件都是 MR=MC（利润最大化的条件）,相比于完全竞争
市场，垄断市场的产量较少，价格较高，并且有 dead weight loss.
)
1
1(
P
PMR
Price discrimination reduces this inefficiency by increasing output toward the
quantity where marginal benefit equals marginal cost, and the dead weight loss is
smaller. An extreme case of price discrimination is perfect price discrimination. If it
were possible for the monopolist to charge each consumer the maximum they are
willing to pay for each unit, where would be no dead weight loss, since a
monopolist would produce the same quantity as under perfect competition. With
perfect price discrimination the consumer surplus would all be captured by the
monopolist.
For price discrimination to work the seller must:
Downward sloping demand curve
At least two identifiable groups of customers with different price elasticities
of demand for the product
Prevent the customers paying the lower price from reselling the product to
the customers paying the higher price
Government regulation:
Average cost pricing is the more common form of regulation at the point
where ATC=D. This will
Increase output and decrease price.
Increase social welfare (allocative efficiency).
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Ensure the monopolist a normal profit since price=ATC.
Marginal cost pricing forces the monopolist to reduce price to the point
where MC=D. this will: Increase output and reduce price. However, the price
may be lower than ATC, resulting subsidy by government.
P18-3 Monopolistic competition
Q62-3 Under monopolistic competition, a firm that introduces a new and differentiated
product is least likely to:
A. increase its price.
B. make an economic profit.
C. face a demand that is more elastic.
Solution: C.
A firm in a monopolistic competition that introduces a new and differentiated product is able
to better differentiate its products, and thus demand would be less elastic as close substitutes
would be less readily available. Thus the firm would be able to increase price and enjoy
economic profit in the short run.
R51-3 Monopolistic competition
The following market and product features define monopolistic competition:(1)
There are a large number of independent sellers. (2) Each seller produces a
differentiated product. (3) Firms compete on product quality, price and marketing.
(4) Firms are free to enter and exit. (5) Firms in monopolistic competition face
downward-sloping demand curves and the curves are highly elastic because
competing products are perceived by consumers as close substitutes
Short-run output decision for a firm Long-run output decision for a firm
Price Price
QuantityQuantity
D
DMR
MR
ATC
ATC
MC
MC
QQ
ATC* ATC*,P*
P*
短期内：MR=MC，可以 economic profit 或者 economic loss；
长期内：无经济利润或损失（因为无进出壁垒），均衡条件是 MC=MR & P=ATC，但
不是在 ATC 的最低点
P19-3 Oligopoly market
Q63-3 Oligopolistic pricing strategy most likely results in a demand curve that is: (原版书
R16)
A. kinked.
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B. vertical.
C. horizontal.
Solution: A.
The oligopolist faces two different demand structures, one for price increases and another for
price decreases. Competitors will lower prices to match a price reduction, but will not match a
price increase. The result is a kinked demand curve.
Q64-3 Over time, the market share of the dominant company in an oligopolistic market will
most likely: (原版书 R16-13)
A. increase.
B. decrease.
C. remain the same.
Solution: B.
The dominant company's market share tends to decrease as profits attract entry by other
companies.
Q65-3 Aquarius, Inc. is the dominant company and the price leader in its market. One of the
other companies in the market attempts to gain market share by undercutting the
price set by Aquarius. The market share of Aquarius will most likely: (原版书 R16-7)
A. increase.
B. decrease.
C. stay the same
Solution: A.
As prices decrease, smaller companies will leave the market rather than sell below cost. The
market share of Aquarius, the price leader, will increase.
Q66-3 ★SigmaSoft and ThetaTech are the dominant makers of computer system software.
The market has two components: a large mass-market component in which demand is
price sensitive, and a smaller performance-oriented component in which demand is
much less price sensitive. SigmaSoft's product is considered to be technically superior.
Each company can choose one of two strategies:
Open architecture (Open): Mass market focus allowing other software venders to
develop products for its platform.
Proprietary (Prop): Allow only its own software applications to run on its platform.
Depending upon the strategy each company selects, their profits would
ThetaTech - Prop ThetaTech - Open
SigmaSoft-Prop ( S 400, T 600) (S 650,T 700)
SigmaSoft-Open (S 800, T 300) (S 600, T 400)
The Nash equilibrium for these companies is: (原版书 R16-8)
A. proprietary for SigmaSoft and proprietary for ThetaTech.
B. open architecture for SigmaSoft and proprietary for ThetaTech.
C. proprietary for SigmaSoft and open architecture for ThetaTech.
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Solution: C.
In the Nash model, each company considers the other's reaction in selecting its strategy. In
equilibrium, neither company has an incentive to change its strategy. ThetaTech is better off
with open architecture regardless of what SigmaSoft decides. Given this choice, SigmaSoft is
better off with a proprietary platform. Neither company will change its decision unilaterally.
Q67-3 The natures of competitive environment to which the game of prisoners’ Dilemma
applies and the solution offered by Nash equilibrium, respectively, are:
nature of competitive environment solution from Nash equilibrium
A. Oligopoly Both prisoners deny
B. Oligopoly Both prisoners confess
C. Monopolistic competition Both prisoners deny
Solution: B.
The game of Prisoners’ Dilemma applies to oligopoly and the solution from Nash equilibrium is
that both prisoners would confess to the crime.
Q68-3 All else being equal, will the joint profit of an oligopolistic industry most likely be
maximized if the:
barriers to entry in the industry are
low?
demand for the industry's products is stable?
A. No No
B. No Yes
C. Yes No
Solution: B.
Joint profits in an oligopolistic industry are maximized when collusion is effective. The lower
the number of firms in the industry (higher barriers to entry), the more effective collusion will
be. Successful collusion is more likely when demand is stable because most firms will have
similar expectations for the future of the industry.
R52-3 For oligopoly:
Oligopoly is a form of market competition characterized by (1) small number of
sellers (2) interdependence among competitors (3) large economies of scale (4)
significant barriers to entry (5) either similar or differentiated products
Four traditional oligopoly models (1) The kinked demand curve model of oligopoly
is based (2)Cournot duopoly model (3)Nash equilibrium model (4 Stackelberg
dominant firm model
R53-3 The kinked demand curve model of oligopoly
Assumption: each firm believes that if it raises its price, others will not follow, but
if it cuts its price, other firms will cut theirs
Between range A and B, the optimum Q is constant, can’t determine price
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R54-3 Cournot model
only two firms competing (. a duopoly 双寡头模型)
both have identical and constant marginal costs of production
each firm knows the quantity supplied by the other firm in the previous period and
assumes that is what it will supply in the next period(两个厂商都准确地了解市场
需求曲线)
construct a demand curve and marginal revenue curve for its own production (共
同面临的市场需求曲线是线性的)
市场成本为零
R55-3 Dominant firm model
a single firm has a significantly large market share：greater scale & lower cost
structure
market price is essentially determined by the dominant firm
the other competitive firms take this market price as given.
The order of decision: 12 34
MR
DF
MC
CF
MC
DF
Market demand
Quantity
Price
Q
CF
Q
DF
1
2
3
4 MRDF
MC
CF
MC
DF
Market demand
Quantity
Price
Q
CF
Q
DF
Quantity
Price
Q
CF
Q
DF
1
2
3
4
R56-3 Game theory: Nash equilibrium: best payoff under which no best options for either.
B honors B cheats
A honors A 10% B 10% A -15% B 20%
A cheats A 20% B -15% A 0 B 0
P20-3 Market Concentration
Q69-3 An analyst gathered the following market share data for an industry comprised of six
firms:
Firm Market Share
More elastic
Kink
Less elastic
P K
Q K Max profit
Price
Quantity
MR 2
MR 1
MC 1
MC 2
MC
A
B
More elastic
Kink
Less elastic
P K
Q K Max profit
Price
Quantity
Price
Quantity
MR 2
MR 1
MC 1
MC 2
MC
A
B
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A 30%
B 20%
C 15%
D 15%
E 10%
F 10%
So, the industry’s four-firm concentration ratio and Herfindahl-Hirschman index are
closest to:
Four-firm concentration ratio HHI
A. 50% %
B. 90% %
C. 80% %
Solution: C.
The four-firm concentration ratio=30%+20%+15%+15%=80%
The Herfindahl-Hirschman index=30%2+20%2+15%2+15%2+10%2+10%2=%
Q70-3 Which of the following four-firm concentration ratios most likely would indicate an
oligopolistic market structure?
A. 25%
B. 55%
C. 75%
Solution: C.
A four-firm concentration ratio that exceeds 60% is regarded as indicative of an oligopoly.
Q71-3 ★★★One disadvantage of the Herfindahl-Hirschmann Index is that the index: (原
A. is difficult to compute.
B. fails to reflect low barriers to entry.
C. fails to reflect the effect of mergers in the industry.
Solution: B.
The Herfindahl-klirschmann Index does not reflect low barriers to entry that may restrict the
market power of companies currently in the market.
Market Concentration 计算：
R57-3 The N-Firm Concentration Ratio is the percentage of the value of sales accounted for by
the firms in an industry.
R58-3 The Herfindahl-Hirschman Index (HHI) suggested an index where the market shares of the
top N companies are first squared and then added. If one firm controls the whole market
(a monopoly), the Herfindahl-Hirschman index (HHI) equals 1.
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Suppose there are eight producers of a certain good in a market. The largest producer
has 35 percent of the market, the second largest has 25 percent, the third has 20
percent, the fourth has 10 percent, and the remaining four have percent each.
If we computed the concentration ratio of the top three producers, it would be 35 +
25 + 20 = 80 percent, while the concentration ratio of the top four producers would
be 35 + 25 + 20 + 10 = 90 percent.
If the two largest companies merged, the new concentration ratio for the top three
producers would be 60 (the sum of the market shares of the merged companies) + 20
+ 10 = 90 percent, and the concentration ratio for the four top producers would be
percent.
Therefore, this merger affects the concentration ratio very mildly, even though it
creates a substantial entity that controls 60 percent of the market.
The HHI for the top three companies in the example in the box above would be
+ + = before the merger, while after the merger, it would be +
+ = , which is substantially higher than the initial is why
the HHI is widely used by competition regulators.
R59-3 Limitation of measures
First, limitation of the N-firm concentration ratio is that it may be relatively insensitive
to mergers of two firms with large market shares. This problem is reduced by using
Herfindahl-Hirschman Index (HHI).
Second, both of our simple concentration measures is that barriers to entry are not
considered in either case. Even a firm with high market share may not have much
pricing power if barriers to entry are low and there is potential competition
P21-3 Basic concepts of GDP
Q72-3 The component least likely to be included in a measurement of gross domestic
product (GDP) is:(原版书 R17-2)
A. the value of owner occupied rent.
B. the annual salary of a local police officer.
C. environmental damage caused by production.
Solution: C. .
By-products of production processes that have no explicit market value are not included in
GDP.
Q73-3 Which of the following is least likely to result in an increase in potential GDP?
A. An advance in technology.
B. An increase in the money wage rate.
C. An increase in the quantity of capital.
Solution: B.
Potential GDP will not change in response to an increase in the money wage rate.
Q74-3 ★The following data apply to a country in its domestic currency units:（2013 mock
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156
afternoon session）
Consumer spending
on goods and
services
875,060 Government spending on
goods and services
305,600
Business gross fixed
investment
286,400 Government gross fixed
investment
84,120
Change in
inventories
-68,500 Capital consumption allowance 8,540
Transfer payments 9,300 Statistical discrepancy -2,850
Exports 219,800 Imports 250,980
Using the expenditures approach, the country’s gross domestic product (GDP) is
closest to:
A. 1,448,650
B. 1,451,500
C. 1,466,490
Solution: A.
Using the expenditures approach:
GDP = Consumer spending on goods and services + Business gross fixed investment + Change
in inventories + Government spending on goods and services + Government gross fixed
investment + Exports – Imports + Statistical discrepancy
Consumer spending on goods and services 875,060
Business gross fixed investment 286,400
Change in inventories (68,500)
Government spending on goods and services 305,600
Government gross fixed investment 84,120
Exports 219,800
Imports (250,980)
Statistical discrepancy (2,850)
GDP 1,448,650
Q75-3 Assuming the economy is operating at full employment, what is the most likely
long-run effect of an increase in government spending on the price level and real
GDP?
A. The price level and real GDP will both increase.
B. The price level will increase, but there will be no change in real GDP.
C. The price level will not change, but there will be an increase in real GDP.
Solution: B.
If an economy is operating at full employment, the long-run effect of an increase in
government spending is to increase the price level while real GDP will be unchanged at the full
employment level.
Q76-3 Consider the following data for 2010 for a hypothetical country: (原版书 R17-11)
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Account name Amount ($ trillions)
Consumption
Statistical discrepancy
Capital consumption
allowance
Government spending
Imports
Gross private domestic
investment
Exports
Based only on the data given, the gross domestic product and national income are
respectively closest to:
A. and .
B. and .
C. and .
Solution: B.
GDP = Consumption + Gross private domestic investment + Government Spending + Exports —
Imports = 15 + 4 + + — = . National income = GDP — CCA — Statistical
discrepancy = — — = .
Q77-3 The following data pertain to the total output in units and average selling prices in an
economy that produces only two products, X and Y: （2013 mock morning session）
Product X Product Y
Year
Output (units) Selling Price/unit Output
(units)
Selling Price/unit
2011 2,800 €9 2,000 €47
2012 3,000 €11 1,800 €52
If the implicit price deflator for GDP in 2011 was 100, for 2012 it is closest to:
A.
B.
C.
Solution: C.
Nominal GDP Real GDP
2011 2,800 × 9 + 2,000 × 47 = 119,200 119,200
2012 3,000 × 11 + 1,800 × 52 = 126,600 A 3,000 × 9 + 1,800 × 47 = 111,600 B
GDP deflator = nominal GDP/real GDP 100
value of current output at current prices
100
value of current output at base year prices
126,600
100
111,600
A Value of current output at current prices
B Value of current output at base year prices
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Q78-3 The nominal and real GDP for a country are provided below :（MOCK92-41）
2010 2011
GDP at market prices ( € millions ) 3,679,098 3,818,145
Real GDP (2001 € millions ) 3,163,330 3,342,570
For 2011, the inflation rate ( % ) in the country is closest to :
A.
B.
C.
Solution: A.
Inflation rate is calculated as the percentage change in the implicit GDP price deflator.
Implicit GDP price deflator= GDP at market prices ×100
Real GDP in base year prices
2010 2011
Implicit GDP price deflator
100
100
Inflation Rate =
( 1) 100 %
Q79-3 ★Assume that an economy is composed of two products, X and Y, with the following
details:
Product
Quantity
Produced
in 2012
Quantity
Produced
in 2013
Product
Unit Prices
in 2012
Product Unit
Prices in 2013
X
Y unknown
Assuming 2012 is the base year for measuring GDP and the GDP deflator for the
economy in 2013 is , the unit price of Y in 2012 is closest to(2014 Mock 98-38)
A. .
B. .
C. .
Solution: A.
Product
Quantity
Produced in
2012 (1)
Quantity
Produced in
2013 (2)
Product Unit
Prices in
2012 (3)
Product Unit
Prices in
2013 (4)
= (2) × (4)
X 4,
Y 2,
Nominal GDP in 2013 equals the sum of the last column: 6,
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2013 2013
2013 2012 2013 2012 2013
2012
2012
2012
Re min 100 / 100 /
Re
( )
deflator
x x y y
y
y
y
alGDP No alGDP GDP
alGDP P Q P Q
P
P
P
R60-3 Nominal and Real GDP and GDP deflator
N
t i,t i,t
i=1
N
i=1
nominal GDP = P Q
= (price of good in year ) (quantity of good produced in year )i t i t
N
t i,t-5 i,t
i=1
N
i=1
real GDP = P Q
= (price of good in year 5) (quantity of good produced in year )i t i t
N
i,t i,t
i=1
N
i,t-5 i,t
i=1
P Q
GDP deflator for year = 100
P Q
nominal GDP in year t
= 100
value of year t output at year 5 prices
t
t
R61-3 GDP 的计算
expenditure approach：GDP = C + I + G + (X - M)
income approach：GDP = national income + capital consumption allowance
+ statistical discrepancy
P22-3 National income
Q80-3 ★In a simple economy with no foreign sector, the following equations apply
Consumption function C = 2,500 + × (Y – T)
Investment function I = 500 + × Y – 25 × r
Government spending G = 1,000
Tax function T = –250 + × Y
Y: Aggregate income r: Real interest rate
If the real interest rate is 3% and government spending increases to 2,000, the
increase in aggregate income will be closest to: (MOCK83-39)
A. 1,000.
B. 1,163.
C. 7,143.
Solution: C.
With no foreign sector, the GDP identity is Y = C + I + G.
With substitution from the equations above,
Y = 2,500 + × (Y – T) + 500 + × Y – 25 × r + 1,000
= 2,500 + × (Y +250 – × Y) + 500 + × Y – 25 × r + 1,000.
Y = 4,200 + × Y – 25 × r.
Y = 30,000 – × r.
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At 3%, Y = 30,000 – × 3 = 29,464.
Alternatively, Y – = 4,200 – 25 × r
= 4,200 – 256 × r.
If government spending increased by 1,000 to 2,000, then Y = 5,200 + × Y – 25 × r.
Y = 37,142 – × r, which at 3% would be Y = 37,142 – × 3 = 36,607.
Representing an increase of 36,607 – 29,464 = 7,143.
Alternatively, at 5,200, Y – = 5,200 – 25 × r or Y = 5,200 – 25 × r.
Or more simply, ∆G ÷ (1 – c) = 1,000/(1 – ) = 7,143.
Q81-3 In calculating personal income for a given year, which of the following would not be
subtracted from national income? (原版书 R17-12)
A. Indirect business taxes.
B. Undistributed corporate profits.
C. Unincorporated business net income.
Solution: C.
Unincorporated business net income is also known as proprietor's income and is included in
personal income.
R62-3 National income, personal income, and personal disposable income
National income is the sum of the income received by all factors of production that
go into the creation of final output.
National income = compensation of employees (wages and benefits)
+corporate and government enterprise profits before taxes
+interest income
+unincorporated business net income (business owners' incomes)
+rent
+indirect business taxes - subsidies (taxes and subsidies that are
included in final prices)
Personal income= national income - indirect business tax - corporate business tax -
undistributed corporate profit
Personal disposable income= personal income - personal taxes
P23-3 Saving and investment
Q82-3 Because of a sharp decline in real estate values, the household sector has increased
the fraction of disposable income that it saves. If output and investment spending
remain unchanged, which of the following is most correct response(原版书 R17-14)
A. A decrease in the government deficit.
B. A decrease in net exports and increased capital inflow.
C. An increase in net exports and increased capital outflow.
Solution: C.
The fundamental relationship among saving, investment, the fiscal balance, and the trade
balance is S = I + (G — T) + (X —M). Given the levels of output and investment spending, an
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increase in saving (reduction in consumption) must be offset by either an increase in the fiscal
deficit or an increase in net exports. Increasing the fiscal deficit is not one of the choices, so an
increase in net exports and corresponding increase in net capita] outflows (increased lending
to foreigners and/or increased purchases of assets from foreigners) is the correct response.
Q83-3 Equality between aggregate expenditure and aggregate output implies that the
government's fiscal deficit must equal: (原版书 R17-13)
A. Private saving — Investment — Net exports.
B. Private saving — Investment + Net exports.
C. Investment — Private saving + Net exports.
Solution: A.
The fundamental relationship among saving, investment, the fiscal balance, and the trade
balance is S = I + (G — T) + (X — M). This form of the relationship shows that private saving
must fund investment expenditures, the government fiscal balance, and net exports (= net
capital outflows). Rearranging gives G — T = (S — I) — (X — M). The government's fiscal deficit
( G — T) must be equal to the private sector's saving/investment balance (S — I) minus net
exports.
R63-3 储蓄,投资,财政平衡与贸易平衡之间的关系
总收入：C + I + G + (X - M) →① 总支出：C+S+T →②
① = ② → S- I = (G - T) + (X - M)
(G - T)：财政平衡 (X - M)：贸易平衡
储蓄大于投资说明出现财政赤字或者贸易赤字
P24-3 IS & LM curve.
Q84-3 An increase in the price level would shift the:
A. IS curve.
B. LM curve.
C. aggregate demand curve.
Solution: B .
The LM curve represents combinations of income and the interest rate at which the demand
for real money balances equals the supply. For a given nominal money supply, an increase in
the price level implies a decrease in the real money supply. To decrease the demand for real
money balances, either the interest must increase or income must decrease. Therefore, at
each level of the interest rate, income (= expenditure) must decrease—a leftward shift of the
LM curve.
Q85-3 ★An increase in the nominal money supply would shift the: (原版书 R17-17)
A. IS curve and the LM curve.
B. IS curve and the aggregate demand curve.
C. LM curve and the aggregate demand curve.
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Solution: C.
The LM curve represents combinations of income and the interest rate at which the demand
for real money balances equals the supply. For a given price level, an increase in the nominal
money supply is also an increase in the real money supply. To increase the demand for real
money balances, either the interest must decline or income must increase. Therefore, at each
level of the interest rate, income (= expenditure) must increase—a rightward shift of the LM
curve. Since the IS curve is downward sloping (higher income requires a lower interest rate), a
rightward shift in the LM curve means that the IS and LM curves will intersect at a higher level
of aggregate expenditure/income. This implies a higher level of aggregate expenditure at each
price level—a rightward shift of the Aggregate Demand curve.
Q86-3 ★An increase in government spending would shift the：(原版书 R17-16)
A. IS curve and the LM curve.
B. IS curve and the aggregate demand curve.
C. LM curve and the aggregate demand curve.
Solution: B.
The IS curve represents combinations of income and the real interest rate at which planned
expenditure equals income. Equivalently, it represents combinations such that
S(Y) = I( r) + (G– T) + (X – M)
where S( Y) indicates that planned saving is a (increasing) function of income and l(r) indicates
that planned investment is a (decreasing) function of the real interest rate. To maintain this
relationship, an increase in government spending (G) requires an increase in saving at any
given level of the interest rate (r). This implies an increase in income ( Y) at each interest rate
level—a rightward shift of the IS curve.
Unless the LM curve is vertical, the IS and LM curves will intersect at a higher level of
aggregate expenditure/income. Since the LM curve embodies a constant price level, this
implies an increase in aggregate expenditure at each price level—a rightward shift of the
Aggregate Demand curve.
Q87-3 Which curve represents combinations of income and the real interest rate at which
planned expenditure equals income? (原版书 R17-15)
A. The IS curve.
B. The LM curve.
C. The aggregate demand curve.
Solution: A.
The IS curve represents combinations of income and the real interest rate at which planned
expenditure equals income.
R64-3 IS curves
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Real aggregate Income
The IS CurveThe IS CurveReal
interest
rate
C
B
A
Real aggregate Income
The IS CurveThe IS CurveReal
interest
rate
C
B
A
The IS CurveThe IS CurveReal
interest
rate
C
B
A
Real
interest
rate (r)
Real GDP (y)
LM curve
lower M/P
LM Curve
LM curve
higher M/P
Real
interest
rate (r)
Real GDP (y)
LM curve
lower M/P
LM Curve
LM curve
higher M/P
If income and expenditure are to remain in equilibrium, there must be an inverse
relationship between the real interest rate and income. In economics, this
relationship is called the IS curve, because investment (I) and savings (S) are the
primary variables that adjust to maintain the balance between expenditure and
income.
R65-3 LM curves
In equilibrium, there is a positive relationship between real income and the real
interest rate for a given level of the real money supply
P25-3 Aggregate Demand
Q88-3 ★In regard to the aggregate demand curve and an increase in one of its associated
factors, which of the following relationships is least accurate? (MOCK84-36)
Increase in factor Shifts the AD curve Reason
A Stock prices Rightward Lower investment
B Consumer confidence Rightward Higher consumption
C Exchange rate Leftward Lower exports and
higher imports
Exchange rate is foreign currency per unit of domestic currency
Solution: A.
If stock prices rise, the aggregate demand curve will shift to the right (increase in AD) because
of higher consumption (wealth effect), not lower investments.
Q89-3 As the price level declines along the aggregate demand curve, the interest rate is most
likely to: (原版书 R17-19)
A. decline.
B. increase.
C. remain unchanged.
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Solution: A.
A decrease in the price level increases the real money supply and shifts the LM curve to the
right. Since the IS curve is downward sloping, the IS and LM curves will intersect at a higher
level of income and a lower interest rate.
Q90-3 All else equal, aggregate demand is most likely to decrease in response to a decrease
in:
A. Interest rates.
B. Federal tax revenues.
C. Expected corporate profits.
Solution: C.
Aggregate demand is expected to decrease if corporate profits decrease because firms will
have less money to spend on investment in capital equipment.
Q91-3 Other things equal, aggregate demand is most likely to decrease as a result of a
decrease in: (MOCK88-34)
A. taxes.
B. the money supply.
C. the foreign exchange value of the domestic currency.
Solution: B.
A decrease in the money supply will cause short-term interest rates to increase, decreasing
investment and consumption spending and thereby decreasing AD. A decrease in taxes will
increase disposable incomes, consumption spending, and AD. If the foreign exchange value of
the domestic currency decreases, the country’s products become relatively less expensive to
foreign buyers, while foreign goods become relatively more expensive to domestic buyers. As a
result, net exports increase, which increases AD.
Aggregate Demand
R66-3 AD 曲线说明 Real GDP 与物价水平之间呈反向关系
原因：更高的物价水平降低了实际财富，提高了实际利率并使国内生产的产品
相比于国外产品更贵，所有这些因素使得国内产出下降
R67-3 ★Slope of AD
The slope of the AD curve depends on the relative sensitivities of investment,
saving; and money demand to income and the interest rate. The AD curve will he
flatter if
investment expenditure is highly sensitive to the interest rate;
saving is insensitive to income;
money demand is insensitive to interest rates; and
money demand is insensitive to income.
The first two conditions directly imply that income will have to move more to
induce a large enough change in saving to match the change in investment
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spending.
All else equal, each of the last two conditions implies that a larger change in the
interest rate is required to bring money demand in line with money supply. This, in
turn, implies a larger change in investment spending and a correspondingly larger
change in saving and incomes
从记忆的角度来说，AD 曲线更加平坦，I 对利率变化敏感，其他都不敏感
R68-3 Movement & shift
a change in the price level is represented as a movement along the AD curve
an increase in aggregate demand is shown by a shift to the right, indicating that
the quantity of goods and services demanded is greater at any given price level.
R69-3 ★The factors that affect aggregate demand:
Increase in consumers' wealth: households' wealth ↑→proportion of income
saved↓& spending↑→C↑
Consumer expectations of future income: 消费者预期未来收入增加从而会增加
当前消费
Business expectations: When businesses are more optimistic about future sales,
they tend to increase their investment in plant, equipment, and inventory, which
increases aggregate demand (I ↑).
High capacity utilization：资本效用提高从而 PPE 投资增加
Expansionary monetary policy：(a)rate of growth of the money supply↑→puts
downward pressure on interest rates→PPE 投资↑; (b) rate↓→credit↑→分期付
款消费↑
Expansionary fiscal policy ： taxes increases↓→disposable income and
consumption， government spending↑→AD directly ↑(C increases for tax cut, G
increases for spending increase)
Exchange rates：A decrease in the relative value of a country's currency will
increase exports and decrease imports. Both of these effects tend to increase
domestic aggregate demand (net X increases).
Global economic growth: GDP growth in foreign economies tends to increase the
quantity of imports (domestic exports) foreigners demand. By increasing domestic
export demand, this will increase aggregate demand (net X increases)
P26-3 Aggregate Supply Curve
Q92-3 ★If wages were automatically adjusted for changes in the price level, the short-run
aggregate supply curve would most likely be: (原版书 R17-22)
A. flatter.
B. steeper.
C. unchanged.
Solution: B.
The slope of the short-run aggregate supply curve reflects the extent to which wages and other
input costs adjust to the overall price level. Automatic adjustment of wages would mitigate the
impact of price changes on profitability. Hence, firms would not adjust output as much in
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response to changing output prices—the SRAS curve would be steeper.
Q93-3 Following a sharp increase in the price of energy, the overall price level is most likely
to rise in the short run: (原版书 R17-28)
A. and remain elevated indefinitely unless the central bank tightens.
B. but be unchanged in the long run unless the money supply is increased.
C. and continue to rise until all prices have increased by the same proportion.
Solution: B.
An increase in energy prices will shift the short-run aggregate supply curve (SRAS) to the left,
reducing output and increasing prices. If there is no change in the aggregate demand curve, in
particular if the central bank does not expand the money supply, slack in the economy will put
downward pressure on input prices, shifting the SRAS back to its original position. In the long
run, the price level will be unchanged.
Q94-3 Which of the following best describes the aggregate supply curve in the short run (.,
1 to 2 years)? The short-run aggregate supply curve is: (原版书 R17-21)
A. flat because output is more flexible than prices in the short run.
B. vertical because wages and other input prices fully adjust to the price level.
C. upward sloping because input prices do not fully adjust to the price level in the short run.
Solution: C.
Due to long-term contracts and other rigidities, wages and other input costs do not fully adjust
to changes in the price level in the short run. Given input prices, firms respond to output price
changes by expanding or contracting output to maximize profit. Hence, the SRAS is upward
sloping.
Q95-3 The most likely outcome when both aggregate supply and aggregate demand increase
is: (原版书 R17-26)
A. a rise in inflation.
B. higher employment.
C. an increase in nominal GDP.
Solution: B.
Higher aggregate demand (AD) and higher aggregate supply (AS) raise real GDP and lower
unemployment, meaning employment levels increase.
Aggregate Supply Curve
R70-3 Three aggregate supply curves with different time frames
(1) the very short-run aggregate supply (VSRAS) curve
(2) the short-run aggregate supply (SRAS) curve
(3) the long-run aggregate supply (LRAS) curve
R71-3 Factors can cause the SRAS curve to shifts:
(1) Labor productivity
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(2) Input prices
(3)Expectations of future output prices
(4)Taxes and government subsidies
(5)Exchange rates
An Increase in Shifts SRAS Shifts LRAS Reason
Labor productivity Rightward Rightward Increases resource base
Input prices Leftward No impact Increases cost of production
Expectations of
future output
prices
Rightward No impact Anticipation of higher costs
and/or perception of
improved pricing power
government
subsidies
Rightward No impact Lowers cost of production
Taxes Leftward No impact Increases cost of production
Exchange rates Rightward No impact Lowers cost of production
R72-3 Factors that will shift the LRAS curve are
(1) Increase in the supply and quality of labor
(2) Increase in the supply of natural resources
(3) Increase in the stock of physical capital
(4) Technology
R73-3 An investor expecting a decrease in aggregate demand that will result in a recessionary
gap should: （AD decreases, P decrease（利率水平也下降）, Y 小于充分就业的产出）
Increase investment in defensive companies and decrease investment in cyclical
companies, because cyclical companies are likely to experience greater declines in
earnings.
Increase investment in investment-grade and government fixed income securities
(which will benefit as interest rates decline) and decrease investment in
lower-quality fixed income securities.
Increase investment in long-maturity fixed income securities because their prices
react more to falling interest rates than do shorter-maturity securities.
Decrease investment in commodities and companies that produce commodities, in
anticipation of lower commodity demand and lower commodity prices.
R74-3 An investor expecting an increase in aggregate demand that will result in an inflationary
gap should:（AD 升高，价格上升，Y 大于充分就业的产出）
Increase investment in cyclical companies, which should see a large increase in
earnings, and decrease investment in defensive companies.
Increase investments related to commodities, which should benefit from higher
output in the economy.
Decrease exposure to fixed income securities in anticipation of higher interest
rates, but increase exposure to lower-quality fixed income securities in anticipation
of lower default risk in an expanding economy.
R75-3 ★Stagflation（最难以管理）
Stagflation：both high unemployment and increasing inflation
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Stagflation is generally associated with a sharp decrease in aggregate supply.即
supply shock 导致 AS 突然大幅下降从而使得 GDP 下降，物价上升，例如 1973
年的石油危机
An investor anticipating stagflation should:
Decrease investment in fixed income securities in anticipation of higher
inflation and nominal interest rates.
Decrease investment in equities as revenue and profit margins will decrease.
Increase investment related to commodities in anticipation of higher
commodity prices.
P27-3 Production function
Q96-3 An economic forecasting firm has estimated the following equation from historical
data based on the neoclassical growth model:
Potential output growth = + X Growth of labor + X Growth of capital
The intercept () in this equation is best interpreted as: (原版书 R17-33)
A. the long-run sustainable growth rate.
B. the growth rate of total factor productivity.
C. above trend historical growth that is unlikely to be sustained.
Solution: B.
The estimated equation is the standard Solow growth accounting equation. The intercept is
the growth rate of total factor productivity.
Q97-3 In the neoclassical or Solow growth model, an increase in total factor productivity
reflects an increase in: (原版书 R17-32)
A. returns to scale.
B. output for given inputs.
C. the sustainable growth rate.
Solution: B.
Total factor productivity (TFP) is a scale factor primarily reflecting technology. An increase in
TFP means that output increases for any level of factor inputs.
Q98-3 The sustainable growth rate is best estimated as: (原版书 R17-31)
A. the weighted average of capital and labor growth rates.
B. growth in the labor force plus growth of labor productivity.
C. growth in total factor productivity plus growth in the capital-to-labor ratio.
Solution: B.
Output growth is equal to the growth rate of the labor force plus the growth rate of labor
productivity, . output per worker. Unlike total factor productivity, output per worker is
observable, so this is the most practical way to approach estimation of sustainable growth.
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Q99-3 ★Long-term sustainable growth of an economy is least likely to result from growth in:
A. the supply of labor.
B. output per unit of labor.
C. capital per unit of labor.
Solution: C.
The sustainable rate of economic growth is a measurement of the rate of increase in the
economy's productive capacity. An economy's sustainable rate of growth depends on the
growth rate of the labor supply and the growth rate of labor productivity. Due to diminishing
marginal productivity, an economy generally cannot achieve long-term sustainable growth
through continually increasing the stock of capital relative to labor (., capital deepening).
Production function
R76-3 Five important sources of economic growth(1) Labor supply (2)Human
capital(3)Physical capital stock (4)Technology (5)Natural resources
R77-3 Production function
Y = A ×f (L, K)其中：A 代表技术，L 代表劳动力，K 代表资本
Y/L=A ×f (K/L) →人均增长
growth in potential GDP = growth in technology + WL(growth in labor) + WC
(growth in capital), WL and W C are labor's and capital's percentage share of
national income.
WL＞WC 说明国民收入中 labour 的贡献更大
growth in per-capita potential GDP =growth in technology + WC (growth in the
capital-to-labor ratio
P28-3 Business cycle pattern
Q100-3 Based on typical labor utilization patterns across the business cycle, productivity
(output per hours worked) is most likely to be highest：(原版书 R18-5)
A. at the peak of a boom.
B. into a maturing expansion.
C. at the bottom of a recession.
Solution: C.
At the end of a recession, firms will run "lean production" to generate maximum output with
the fewest number of workers.
Q101-3 In a recession, companies are most likely to adjust their stock of physical capital by:
A. selling it at fire sale prices.
B. not maintaining equipment.
C. quickly canceling construction activity.
Solution: B.
Physical capital adjustments to downturns come through aging of equipment plus lack of
maintenance.
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Q102-3 Business cycle analysis most commonly describes economic activity that is conducted
through: (原版书 R18-1)
A. state enterprises.
B. agricultural co-ops.
C. private corporations.
Solution: C.
Business cycles relate to fluctuations in national economic activity generated mainly through
business enterprises.
Q103-3 If relative to prior values of their respective indicators the inventory—sales ratio has
risen, unit labor cost is stable, and real personal income has decreased, it is most likely
that a peak in the business cycle: (原版书 R18-25)
A. has occurred.
B. is just about to occur.
C. will occur sometime into the future.
Solution: A.
Both inventory—sales and unit labor costs are lagging indicators that decline somewhat after a
peak. Real personal income is a coincident indicator that by its decline shows a slowdown in
business activity.
Q104-3 Which part of business cycle can be signaled by the decrease of inventory to sales
ratio and increase of equipment investment?（2012 年 12 月考题回顾）
A. Mature
B. The start of an economic recovery
C. The end of an economic recovery
Solution: B.
Because inventories accumulate as sales initially decline and then, once a business adjusts its
ordering, become depleted as sales pick up, this ratio tends to lag the cycle. The increase of
equipment investment indicate economic recovery.
Q105-3 ★The inventory/sales ratio is most likely to be rising: (原版书 R18-7)
A. as a contraction unfolds.
B. partially into a recovery.
C. near the top of an economic cycle.
Solution: C.
Near the top of a cycle, sales begin to slow before production is cut, leading to an increase in
inventories relative to sales.
Q106-3 Which of the following is not a problem with NARU and NAIRU?（原版书 P335）
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A. They only work in monetarist models.
B. They may change over time given changes in technology and economic structure.
C. They do not account for bottlenecks in segments of the labor market (., college
graduates).
Solution: A.
NARU and NAIRU are the unemployment rates at which the inflation rate will not use because
of a shortage of labor. This concept does not tie to a particular school of macroeconomic
models.
Q107-3 What is the most important effect of labor productivity in a cost-push inflation
scenario?（原版书 R18-22）
A. Rising productivity indicates a strong economy and a bias toward inflation.
B. The productivity level determines the economy's status relative to its "natural rate of
unemployment."
C. As productivity growth proportionately exceeds wage increases, product price increases
are less likely.
Solution: C.
For productivity, or output per hour, the faster that it can grow, the further that wages can rise
without putting pressure on business costs per unit of output.
Business cycle
R78-3 Business cycles have four phases: trough\expansion\ peak\contraction
Two consecutive quarters of growth in real GDP as the beginning of an expansion
and two declining as the beginning of a contraction
Only applies to the economies that consist of business, not the state-control and
agricultural society
R79-3 ★Inventory-sales ratio
经济扩张接近波峰时，sales 增加放缓，unsold 存货累积，从而 inventory-sales
ratio 高于正常水平
存货增加无论是计划还是非计划都计入 GDP
如果只看到 GDP 增加而没看到 inventory-sales ratio 增加，会错误认为 GDP 依
然强劲而不是开始衰退, lagging indicator
R80-3 NAIRU (non-accelerating inflation rate of unemployment)
It is the rate of unemployment at which inflationary pressures are stable, below
which inflation would accelerate
Analysis in this area recognizes that not all labor is alike
Structural factors related to training deficiencies, cultural patterns in all or some of
the population, inefficiencies in the labor market, and the like can mean that the
economy will effectively face labor shortages long before the unemployment rate
reaches very low figures.
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P29-3 Business cycle theory
Q108-3 The Austrian economic school attributes the primary cause of the business cycle to:
A. misguided government intervention.
B. the creative destruction of technological progress.
C. sticky price and wage expectations that exaggerate trends.
Solution: A.
Austrian economists see monetary policy mistakes as leading to booms and busts.
R81-3 Theories of the business cycle
Neoclassical theory:强调技术进步会同时影响 AD 与 AS, economy has strong
tendency toward 充分就业均衡，该学派的结论是经济周期是长期均衡的暂时
偏离
Keynesian cycle theory：投资的变动是由 fluctuation in business confidence
(animal spirits)，这是 AD 变化的主要原因。凯恩斯认为需要政府干预，新古典
和货币主义认为不需政府干预
In contrast to the New Classical school the Neo-Keynesian school assumes
slow-to-adjust (sticky) prices and wages. The Neo-Keynesian models show that
markets do not reach equilibrium immediately and seamlessly, but even small
imperfections may cause markets to be in disequilibrium for a long time.所以 Neo-
凯恩斯认为价格变化比新古典主义认为的更慢
New Keynesian cycle theory：工资是根据 past rational expectation 确定，所以
unexpected and currently expected fluctuation in AD 将使得经济周期出现。
New classical cycle theory（RBC）：rational expectation of price level 是由 potential
GDP and expected AD 决定。Only unexpected fluctuation in AD 将使得经济周期
出现。
奥地利学派:Believe cycles are caused by government intervention in the economy
Monetarist cycle theory: fluctuations in both investment and consumption
expenditure, driven by fluctuations in the growth rate of the quantity of money,
are the main source of fluctuations in AD，将使得经济周期出现。
P30-3 Unemployment
Q109-3 The discouraged worker category is defined to include people who:
A. are overqualified for their job.
B. could look for a job but choose not to.
C. currently look for work without finding it
Solution: B.
Discouraged workers are defined as persons who have stopped looking for work and are
outside the labor force.
Q110-3 The following information has been gathered for a hypothetical economy:（mock 85）
Total Population 1,100
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Working Age Population 975
Labor Force 750
Underemployed 120
Unemployed 95
Discouraged workers 80
Frictionally Unemployed 25
Voluntarily Unemployed 40
The unemployment rate is closest to:
A. %.
B. %.
C. %.
Solution: B.
Unemployment rate = Unemployed / Labor force×100 = 95/750×100 = %.
R82-3 Definition
Employed: number of people with a job. This figure normally does not include
people working in the informal sector (., unlicensed cab drivers, illegal workers,
etc.).
Labor force: number of people who either have a job or are actively looking for a
job. This number excludes retirees, children, stay-at-home parents, fulltime
students, and other categories of people who are neither employed nor actively
seeking employment.
Unemployed: people who are actively seeking employment but are currently
without a job. Some special subcategories include:
Long-term unemployed: people who have been out of work for a long time
(more than 3-4 months in many countries) but are still looking for a job.
Frictionally unemployed: people who are not working at the time of
filling out the statistical survey because they just left one job and are
about to start another job. That is, the frictionally unemployed have a job
waiting for them and are not 100 percent unemployed—it is just that
they have not started the new job yet.
Unemployment rate: ratio of unemployed to labor force.
number of unemployed
unemployment rate 100
labor force
Activity (or participation) ratio: ratio of labor force to total population of working
age (., those between 16 and 64 years of age).
labor force
labor force participation rate= 100
Working age population
Underemployed: person who has a job but has the qualifications to work a
significantly higher-paying job. For example, a lawyer who is out of work and takes
a job in a bookstore could call herself underemployed. This lawyer would count as
employed for the computation of the unemployment rate (she does have a job,
even if it may not be her highest paying job). Although the unemployment rate
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statistic is criticized for not taking the issue of underemployment into account, it
may be difficult to classify whether a person is truly underemployed—for example,
the lawyer may find legal work too stressful and prefers working at the bookstore.
However, data for part-time working is sometimes a good proxy.
Discouraged worker: person who has stopped looking for a job. Perhaps because
of a weak economy, the discouraged worker has given up seeking employment.
Discouraged workers are statistically outside the labor force (similar to children
and retirees), which means they are not counted in the official unemployment
rate. During bad recessions, the unemployment rate may actually decrease
because many discouraged workers stop seeking work, such as stay-at-home
mothers who ideally would prefer to work. It is important to observe the
participation rate together with the unemployment rate to understand if
unemployment is decreasing because of an improved economy or because of an
increase in discouraged workers. Discouraged workers and underemployed people
may be considered examples of "hidden unemployment."
Voluntarily unemployed: person voluntarily outside the labor force, such as a
jobless worker refusing an available vacancy for which the wage is lower than their
threshold or those who retired early.
P31-3 Inflation
Q111-3 Which of the following can lead to demand-pull inflation?
A. An increase in exports.
B. A decrease in government expenditures.
C. An increase in the prices of raw materials.
Solution: A.
An increase in exports reflects an increase in aggregate demand that causes inflation.
Q112-3 ★★An analyst gathered the following year-end price level data for an economy:
Year End Price Level
2000
2004
2005
The economy's annual inflation rate for 2005 and the compounded annual inflation
rate for the 2000-2005 period are closest to:
2005 Inflation 2000-2005 Inflation
A % %
B % %
C % %
Solution: A.
Inflation for 2005 = ( — 1 = — 1 = % or ( — )/ = %.
The compound annual inflation for 2000-2005 is found using a financial calculator. Inputs are
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PV = , FV= , N = 5, PMT = 0, and compute I/ Y = %.
Q113-3 ★The least likely consequence of a period of hyperinflation is the: (原版书 R18-16)
A. reduced velocity of money.
B. increased supply of money.
C. possibility of social unrest.
Solution: A.
In hyperinflation, consumers accelerate their spending to beat price increases and money
circulates more rapidly.
Q114-3 ★The term that describes when inflation declines but nonetheless remains at a
positive level is: (原版书 R18-14)
A. deflation.
B. stagflation.
C. disinflation.
Solution: C.
Disinflation is known as a reduction of inflation from a higher to lower, but still above zero,
level.
Q115-3 An economic peak is most closely associated with: (原版书 R18-4)
A. accelerating inflation.
B. stable unemployment.
C. declining capital spending.
Solution: A.
Inflation is rising at peaks.
Q116-3 The category of persons who would most likely be harmed by an increase in the rate
of inflation is: (原版书 R18-13)
A. homeowners with fixed 30-year mortgages.
B. retirees relying on a fixed annuity payment.
C. workers employed under contracts with escalator clauses.
Solution: B.
With inflation, a fixed amount of money buys fewer goods and services, thus reducing
purchasing power.
Q117-3 ★The following information Exhibit 1 relates to two following questions
Date November 2010 December 2010
Goods Quantity Price Quantity Price
Sugar 70kg € 120kg €
Cotton 60kg € 50kg €
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For the December consumption basket in Exhibit 1, the value of the Paasche index is
closest to:
A. 116.
B. 148.
C. 160.
Solution: A.
The Paasche index uses the current product mix of consumption combined with the variation
of prices. So for December, its value is:
(120 X 1 + 50 X )/ (120 X + 50 x ) =- (160/138) X 100=
Q118-3 ★The price index that best resolves the substitution bias is the:（MOCK92-42）
A. Fisher index.
B. Paasche index .
C. Laspeyres index.
Solution: A.
Both the Laspeyres index and the Paasche index ignore the substitution effect whereby people
may substitute higher-priced goods or services with cheaper ones. This situation causes the
Laspeyres index (which uses the historical composition of a basket of goods ) to be upward
biased relative to the true inflation rate , while the Paasche index ( which uses the current
composition of the basket with cheaper options replacing more expensive ones ) is downward
biased relative to the true inflation rate . The Fisher index is a geometric mean of the
Laspeyres and Paasche indices, and it will, therefore , display less of a substitution bias than
the other two .
Q119-3 ★The following information Exhibit 1 relates to two following questions
Date November 2010 December 2010
Goods Quantity Price Quantity Price
Sugar 70kg € 120kg €
Cotton 60kg € 50kg €
Assuming the base period for 2010 consumption is November and the initial price
index is set at 100, then the inflation rate after calculating the December price index
as a Laspeyres index is closest to: (原版书 R18-17)
A. %.
B. %.
C. %.
Solution: A.
The Laspeyres index is calculated with these inputs:
November consumption bundle: 70 X + 60 X = 99
December consumption bundle: 70 X 1 + 60 X = 118
December price index: (118/99) X 100 =
Inflation rate: ( — 1 = = %
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Q120-3 A new technology that reduces employee illness will most likely decrease: (2014
Mock)
A. demand-pull inflation.
B. cost-push inflation.
C. cost-pull inflation.
Solution: B.
By reducing employee illness, the new technology will increase the output per hour per worker,
which will decrease the unit labor cost. As the unit labor cost decreases, cost-push inflation
decreases. The technology does not affect demand and accordingly should not affect
demand-pull inflation.
Q121-3 Demand-pull inflation is least likely a result of the increase of：
A. Export
B. Money wage rate
C. Quantity of money
Solution: B.
Demand pull inflation result from an increase in the money supply, increased government
spending, or any other cause that increases aggregate demand.
Inflation
R83-3 Inflation rate
Inflation rate = [(Current CPI - year-ago CPI) / year - ago CPI] * 100
CPI = (cost of basket at current prices / cost of basket at base period prices) * 100
Core inflation:价格指数计算中剔除了食品与能源，因此更好的反映价格变化趋
势
R84-3 ★Laspeyres index
uses a constant basket of goods and services ,most countries calculate consumer
price inflation this way
Three factors cause a Laspeyres index of consumer prices to be biased upward as a
measure of the cost of living: new goods, quality changes, commodity substitution
R85-3 ★Paasche index
A Paasche index uses the current consumption weights, prices from the base
period, and prices in the current period.
R86-3 ★Fisher index.
A Fisher index the geometric mean of a Laspeyres index and a Paasche index
IndexFisher=(IP*IL)
1/2
can solve the substitution bias.
R87-3 Hedonic pricing
can be used to adjust a price index for product quality.
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R88-3 Inflation
Demand-pull inflation: (1) increase in the quantity of money, (2) Increase in
government purchases. (3)Increase in exports.
Cost-push inflation: (1)increase in money wage rates. (2) increase in the money
prices of raw materials
Non-accelerating inflation rate of unemployment (NAIRU), also called the natural
rate of unemployment
P32-3 Indicators
Q122-3 ★When the spread between 10-year . Treasury yields and the federal funds rate
narrows and at the same time the prime rate stays unchanged, this mix of indicators
most likely forecasts future economic: (原版书 R18-24)
A. growth.
B. decline.
C. stability.
Solution: B.
The narrowing spread of this leading indicator foretells a drop in short-term rates and a fall in
economic activity. The prime rate is a lagging indicator and typically moves after the economy
turns.
Q123-3 The characteristic of national consumer price indexes which is most typically shared
across major economies worldwide is:
A. the geographic areas covered in their surveys.
B. the weights they place on covered goods and services.
C. their use in the determination of macroeconomic policy
Solution: C.
Central banks typically use consumer price indexes to monitor inflation and evaluate their
monetary policies.
Q124-3 ★When the spread between 10-year . Treasury yields and the federal funds rate
narrows and at the same time the prime rate stays unchanged, this mix of indicators
most likely forecasts future economic: (原版书 R18-24)
A. growth.
B. decline.
C. stability.
Solution: B.
The narrowing spread of this leading indicator foretells a drop in short-term rates and a fall in
economic activity. The prime rate is a lagging indicator and typically moves after the economy
turns.
Q125-3 Of the following statements regarding the Producer Price Index (PPI), which is the
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least likely? The PPI: (原版书 R18-20)
A. can influence the future CPI.
B. category weights can vary more widely than analogous CPI terms.
C. is used more frequently than CPI as a benchmark for adjusting labor contract payments.
Solution: C.
The CPI is typically used for this purpose, while the PPI is more closely connected to business
contracts.
Q126-3 The unemployment rate is considered a lagging indicator because:
A. new job types must be defined to count their workers.
B. multi-worker households change jobs at a slower pace.
C. businesses are slow to hire and fire due to related costs.
Solution: C.
This effect makes unemployment rise more slowly as recessions start and fall more slowly as
recoveries begin.
Q127-3 Which of the following would be most useful as a leading indicator to signal the start
of an economic recovery? （Mock 89-43）
A. An increase in aggregate real personal incomes (less transfer payments).
B. A decrease in average weekly initial claims for unemployment insurance.
C. The narrowing of the spread between the 10-year Treasury yield and the federal funds
rate.
Solution: B.
Average weekly initial claims for unemployment insurance are a leading indicator of economic
activity and a decline is an indicator of rehiring at the start of a recovery.
R89-3 先行，同步与滞后经济指标
Leading indicators Reason
Average week
hours,
manufacturing
Because businesses will cut overtime before laying off workers
in a downturn and increase it before rehiring in a cyclical upturn,
these measures move up and down before the gene
l economy.
Average weekly initial claims
for unemployment insurance
This measure offers a very sensitive test of initial layoffs and
rehiring
Manufacturers' new orders
for consumer goods and
materials
Because businesses cannot wait too long to meet demands for
consumer goods or materials without ordering, these gauges
tend to lead at upturns and downturns. Indirectly, they capture
changes in business sentiment as well, which also often leads
the cycle.
Vendor performance, slower
deliveries diffusion index
By measuring the speed at which businesses can complete and
deliver an order, this gauge offers a clear signal of unfolding
demands on businesses.
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Manufacturers' new orders
for non-defense capital goods
In addition to offering a first signal of movement, up or down, in
an important economic sector, movement in this area also
indirectly captures business expectations.
Building permits for new
private housing units
Because most localities require permits before new building can
begin, this gauge foretells new construction activity.
S&P 500 Stock Index
Because stock prices anticipate economic turning points, both
up and down, their movements offer a useful early signal on
economic cycles.
Money supply, real M2
Because money supply growth measures the tightness or
looseness of monetary policy, increases in money beyond
inflation indicate easy monetary conditions and a positive
economic response, whereas declines in real M2 indicate
monetary restraint and a negative economic response.
Interest rate spread
between 10-year treasury
yields and overnight
borrowing rates (federal
funds rate)
Because long-term yields express market expectations about the
direction of short-term interest rates, and rates ultimately follow
the economic cycle up and down, a wider spread, by
anticipating short rate increases, also anticipates an economic
upswing. Conversely, a narrower spread, by anticipating short
rate decreases, also anticipates an economic downturn.
Index of Consumer
Expectations, University of
Michigan
Because the consumer is about two-thirds of the . economy
and will spend more or less freely according to his or her
expectations, this gauge offers early insight into future
consumer spending and consequently directions in the whole
economy.
Coincident indicators Reason
Employees on
non-agricultural payrolls
Once recession or recovery is clear, businesses adjust their
fulltime payrolls.
Aggregate real personal
income
(less transfer payments)
By measuring the income flow from non-corporate profits and
wages, this measure captures the current state of the economy.
Industrial Production Index
Measures industrial output, thus capturing the behavior of the
most volatile part of the economy. The service sector tends to
be more stable.
Manufacturing and trade sales
In the same way as aggregate personal income and the
industrial production index, this aggregate offers a measure of
the current state of business activity.
Lagging indicators Reason
Average Duration of
Unemployment
Because businesses wait until downturns look genuine to lay off,
and wait until recoveries look secure to rehire, this measure is
important because it lags the cycle on both the way down and
the way up.
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Inventory—sales ratio
Because inventories accumulate as sales initially decline and
then, once a business adjusts its ordering, become depleted as
sales pick up, this ratio tends to lag the cycle.
Change in unit labor costs
经济衰退初期，单位产品的
劳动成本上升
经济复苏后期，单位产品的
劳动成本上升
Because businesses are slow to fire workers, these costs tend to
rise into the early stages of recession as the existing workforce is
used less intensely.
Late in the recovery when the labor market gets tight, upward
pressure on wages can also raise such costs.
In both cases, there is a clear lag at cyclical turns.
Average bank prime lending
rate
Because this is a bank administered rate, it tends to lag other
rates that move either before cyclical turns or with them.
Commercial and industrial
loans outstanding
Because these loans frequently support inventory building, they
lag the cycle for much the same reason that the
inventory—sales ratio does.
Ratio of consumer installment
debt to income
Because consumers only borrow heavily when confident, this
measure lags the cyclical upturn, but debt also overstays cyclical
downturns because households have trouble adjusting to
income losses, causing it to lag in the downturn.
Change in consumer price
index for services
Inflation generally adjusts to the cycle late, especially the more
stable services area
Diffusion Index
Diffusion index reflects the proportion of the index's components that are moving in a
pattern consistent with the overall index.
A measure of the breadth of the change in a composite index.
In general, a diffusion index does not reflect outliers in any component (like a straight
arithmetic mean would do) but instead tries to capture the overall change common to
all components.
P33-3 Money supply and money demand
Q128-3 The proposition that the real interest rate is relatively stable is most closely associated
with: (原版书 R19-7)
A. the Fisher effect.
B. money neutrality.
C. the quantity theory of money.
Solution: A.
The Fisher effect is based on the idea that the real interest rate is relatively stable. Changes in
the nominal interest rate result from changes in expected inflation.
Q129-3 Which is the most accurate statement regarding the demand for money?
A. Precautionary money demand is directly related to GDP.
B. Transactions money demand is inversely related to returns on bonds.
C. Speculative demand is inversely related to the perceived risk of other assets.
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Solution: A.
Precautionary money demand is directly related to GDP. Precautionary money balances are
held to provide a buffer against unforeseen events that might require money. Precautionary
balances tend to rise with the volume and value of transactions in the economy, and therefore
rise with GDP.
Q130-3 ★A development country that maintains a fixed value for its currency relative to the
. dollar is experiencing a decline in its economic activity, and its inflation rate falls
below the Ievel in the United States. As a result of the developing country‘s actions to
maintain the fixed exchange rate target, its:（MOCK92-43）
A. money supply will contract.
B. short-term interest rates will fall.
C. foreign exchange reserves will decrease.
Solution: B.
With a decline in economic activity and domestic inflation, the currency of the developing
country would start to rise against the dollar. To protect the exchange rate target, the
developing country‘s monetary authority Will purchase foreign exchange reserves and Sell its
own currency. This action will increase the domestic money supply and decrease short-term
interest rates.
R90-3 Money has three basic functions:
Medium of exchange -facilitates transactions (liquidity). (2)Unit of account- used to
quote prices. (2) Store of value- transfer purchasing power to future
R91-3 Money Creation:
1
Potential deposit expansion multiplier=
r （r: the required reserve ratio）
★Fed definition: based on spendiabiliy. M1 includes all currency not held at banks,
travelers’ checks, and checking account deposits of individuals and firms (but not
government checking accounts); M2 includes all the components of M1, plus time
deposits, savings deposits, and money market mutual and fund balances.
R92-3 货币数量论
Money supply × Velocity= GDP = Price × Real output Monetarists believed that
money supply should be increased only at the growth rate of real output to
stabilize price level.
R93-3 ★货币需求
Transaction demand：与 real GDP 正相关
Precautionary demand 与 real GDP 正相关
Speculative demand It is inversely related to returns available in the market（(risk
higher, higher cash 即与风险正相关)
R94-3 Fisher effect
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Nom RealR R + E I
R95-3 Cost of inflation
Perfectly anticipated: The prices of all goods and wages could be indexed to this
inflation rate. Increased demand price increases more; decreased demand
price increases less.
One effect of high inflation: the cost of holding money rather than interest-bearing
securities is higher decrease the quantity of money that people willingly hold
and impose some costs of more frequent movement of money from
interest-bearing securities to cash
Unanticipated inflation:
Inflation > expected, borrowers gain
Inflation < expected, lenders gain
Volatile inflation rates, lenders require higher interest rates
Information about supply and demand from changes in prices becomes less
reliable.
Destabilizing effects: unexpected inflation can increase the magnitude or
frequency of business cycles, impose real costs on an economy.
R96-3 Inflation targeting
Most common is 2%, with a permitted deviation of ± 1 %
★Why not targeting 0%? Because variations would allow for negative inflation,
which is considered disruptive to the smooth functioning of an economy.
Central banks are not necessarily targeting current inflation, which is the result of
prior policy and events, but inflation in the range of two years in the future.
R97-3 Interest rate targeting
In the past, some have used interest rate targeting, increasing the money supply
when specific interest rates rose above the target band and decreasing the money
supply when rates fell below the target band.
R98-3 Exchange rate targeting
Many developing economies choose to operate monetary policy by targeting their
currency's exchange rate.
Such targeting involves setting a fixed level or band of values for the exchange rate
against a major currency, with the central bank supporting the target by buying
and selling the national currency in foreign exchange markets.
By tying a domestic currency to that of an economy with a good track record on
inflation, the domestic economy would effectively "import" the inflation of the
foreign economy.
Result: Interest rates and conditions in the domestic economy must adapt to
accommodate the target and domestic interest rates and money supply can
become more volatile.
Limitations: a country may run out of foreign reserves with which to purchase its
currency when the exchange value of its currency is still below the target exchange
rate
Net effect:
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The targeting country will have the same inflation rate as the targeted
currency
★the targeting country will need to follow monetary policy and accept
interest rates that are consistent with this goal, regardless of domestic
economic circumstances.
P34-3 Central bank
Q131-3 Which role is a central bank least likely to assume? (原版书 R19-11)
A. Lender of last resort.
B. Sole supervisor of banks.
C. Supplier of the currency.
Solution: B.
The supervision of banks is not a role that all central banks assume. When it is a central bank's
role, responsibility may be shared with one or more entities.
Q132-3 In theory, setting the policy rate equal to the neutral interest rate should promote: (原
版书)
A. stable inflation.
B. balanced budgets.
C. greater employment.
Solution: A.
The neutral rate of interest is that rate of interest that neither stimulates nor slows down the
underlying economy. The neutral rate should be consistent with stable long-run inflation.
Q133-3 Which action is a central bank least likely to take if it wants to encourage businesses
and households to borrow for investment and consumption purposes? (原版书 R19-1)
A. Sell long-dated government securities.
B. Purchase long-dated government treasuries.
C. Purchase mortgage bonds or other securities.
Solution: A.
Such action would tend to constrict the money supply and increase interest rates, all else
equal.
Q134-3 ★Which of the following is a limitation on the ability of central banks to stimulate
growth in periods of deflation? (原版书 R19-21)
A. Ricardian equivalence.
B. The interaction of monetary and fiscal policy.
C. The fact that interest rates have a minimum value (0%).
Solution: C.
Deflation poses a challenge to conventional monetary policy because once the central bank
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has cut nominal interest rates to zero to stimulate the economy, they cannot cut them further.
Q135-3 ★A central bank that decides the desired levels of interest rates and inflation and the
horizon over which the inflation objective is to be achieved is most accurately
described as being: (原版书 R19-15)
A. target independent and operationally independent.
B. target independent but not operationally independent.
C. operationally independent but not target independent.
Solution: A.
The central bank described is target independent because it set its own targets (., the target
inflation rate) and operationally independent because it decides how to achieve its targets
(., the time horizon).
中央银行的作用，政策目标，与政策工具
R99-3 Role of central bank:
Sole supplier of currency (发行货币)
Banker to the government and other banks （最终贷款）
Lender of last resort
Supervise banks (监管)
Holder of gold and foreign exchange reserves
Conductor of monetary policy
R100-3 Central banks manage money supply in order to
Maintain price stability
Promote full employment
Maximum sustainable long-term growth of the economy
Moderate long-term interest rate
R101-3 Three Policy Tools of the central bank
required reserve ratio: most powerful tool
open market operations: most frequently used tool
discount rate ：央行处于被动地位
R102-3 Central bank should be:
★Independent:
operational independence: allowed to independently determine the policy
rate
target independence: central bank define how inflation is computed, sets the
target inflation level, and determines the time horizon to achieve
ECB has both, while most central banks have only operational independence.
Credible: too much debt leads to incredible; self-fulling prophecies
Transparent
P35-3 Monetary policy
Q136-3 ★The current situation is as follows:
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Real trend rate=2%
Current inflation rate=3%
Long-run Expected inflation =2%
If the policy rate is 5%, which type of monetary policy is it?（2012 年 12 月考题回顾）
A. Expansionary
B. Contractionary
C. Neutral
Solution: B.
Neutral rate = real trend rate + long-run expected inflation (target inflation rate)= 2% + 2% =
4%
The central bank’s monetary policy is being contractionary when its policy rate is above 4%.
Q137-3 As a monetary policy tool, quantitative easing (QE) will most likely help revive an
ailing economy in which of the following environments?(2013 mock afternoon sessio)
A. Liquidity trap
B. Deflationary trap
C. Declining bank reserves and economic activity
Solution: C.
Quantitative easing (QE) is an “unconventional” approach to monetary policy and is
operationally similar to open market purchase operations but conducted on a much larger
scale. The additional reserves created by central banks in a policy of quantitative easing can be
used to buy any asset. The idea was that this additional reserve would kick-start lending,
causing broad money growth to expand, which would eventually lead to an increase in real
economic activity.
Q138-3 A country that maintains a target exchange rate is most likely to have which outcome
when its inflation rate rises above the level of the inflation rate in the target country?
A. An increase in short-term interest rates.
B. An increase in the domestic money supply.
C. An increase in its foreign currency reserves.
Solution: A.
Interest rates are expected to rise to protect the exchange rate target.
Q139-3 The primary monetary policy goal of most major central banks is best characterized
as:
A. containing inflation.
B. stimulating economic growth.
C. maintaining low interest rates.
Solution: A.
Most major central banks’ primary monetary policy goal is to contain inflation.
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Q140-3 According to the traditional theory，which is more difficult to control between
inflation and deflation?（2012 年 12 月考题回顾）
A. Inflation
B. Deflation
C. The same
Solution: B.
If the deflation is mindset and interest rate decrease to zero, the money expansion will not
take effect because the increase can’t decrease further.
Q141-3 As a monetary policy tool, quantitative easing (QE) will most likely help revive an
ailing economy in which of the following environments?（2013 mock afternoon）
A. Liquidity trap
B. Deflationary trap
C. Declining bank reserves and economic activity
Solution: C.
Quantitative easing (QE) is an “unconventional” approach to monetary policy and is
operationally similar to open market purchase operations but conducted on a much larger
scale. The additional reserves created by central banks in a policy of quantitative easing can be
used to buy any asset. The idea was that this additional reserve would kick-start lending,
causing broad money growth to expand, which would eventually lead to an increase in real
economic activity.
货币政策传导机制
R103-3 Money Supply 在长期和短期对经济的影响：
In the short run, decrease (increase) in the equilibrium interest rate from increase
(decrease) in the money supply will increase (decrease) aggregate demand, which
will increase (decrease) real GDP and the price level.
R104-3 In the long run, money supply growth has no effect on real GDP and, as the quantity
theory of money suggests, increases in the money supply, when the economy is
operating at potential (full-employment) GDP, will lead to a proportional increase in
prices
R105-3 Monetary policy’s transmission mechanism:
了解 FFR 的变化如何影响整个经济：
Rate↓ → Domestic currency depreciate↓ → Net exports(NX)↑ → More
investment↑ → Purchase of goods (consume)↑ → Aggregate demand↑ → Price,
real GDP↑
R106-3 The transmission mechanism for a decrease in interbank lending rates affects four
things simultaneously:
Market rates decrease due to banks adjusting their lending rates for the short and
long term.
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Asset prices increase because lower discount rates are used for computing present
values.
Firms and individuals raise their expectations for economic growth and
profitability. They may also expect the central bank to follow up with further
interest rate decreases.
The domestic currency depreciates due to an outflow of foreign money as real
interest rates decline
R107-3 ★Neutral rate of interest：the rate that neither spurs on nor slows down the
underlying economy
Neutral rate=Trend growth + Inflation target
Policy rate> Neutral rate: contractionary
Policy rate< Neutral rate: expansionary
R108-3 ★Limitation of money policy
如果公众相信央行通过降低 MS 以试图降低通胀是成功的，就会预期未来通胀
率将会下降，那么长期利率将会下降；
但是，尽管央行想通过提高短期利率来降低经济活力，如果公众认为会造成经
济衰退，公众都会去购买长期国债，将使得长期债券的价格上升，长期利率下
降，货币政策失效；
流动性陷阱：如果央行试图通过增加货币供给降低利率来治理通货紧缩，但是，
公众会完全吸收新增的货币供给，对利率水平根本没有影响。特别是，在通货
紧缩的前提下，利率水平已经达到零。
结论是，对于央行的扩张政策，公众和金融机构完全吸收其流动性，则货币政
策失效。
P36-3 Fiscal policy
Q142-3 ★Both indirect tax and direct tax are revenue tools of government, which of them
could be implementated quickly so that government revenues can be increased
without significant additional costs?（2012 年 6 月考题回顾）
A. Indirect tax
B. Direct tax
C. Both
Solution: A.
Quick implementation of indirect taxes also means that government revenues can be increased
without significant additional costs. Direct taxes and transfer payments take time to implement,
delaying the impact of fiscal policy.
Q143-3 The least likely explanation for why fiscal policy cannot stabilize aggregate demand
completely is that: (原版书 R19-27)
A. private sector behavior changes over time.
B. policy changes are implemented very quickly.
C. fiscal policy focuses more on inflation than on unemployment.
Solution: B.
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Fiscal policy is subject to recognition, action, and impact lags.
财政政策工具
R109-3 Fiscal Policy Tools: Spending Tools, Revenue Tools & Desirable attributes of tax policy
R110-3 Spending Tools:
Transfer payments: redistribute wealth, taxing some and making payments to
others, transfer payments are not included in GDP computations.
Current spending:government purchases of goods and services on an ongoing and
routine basis.
Capital spending: government spending on infrastructure such as roads, schools,
bridges, and hospitals
R111-3 Revenue Tools
Direct taxes are levied on income or wealth. These include income taxes, taxes on
income for national insurance, wealth taxes, estate taxes, corporate taxes, capital
gains taxes, and Social Security taxes
Indirect taxes are levied on goods and services. These include sales taxes,
value-added taxes (VATs), and excise taxes.
间接税的执行速度较快
R112-3 Advantages of fiscal policy tools
Social policies such as discouraging tobacco use can be implemented very quickly
via indirect taxes
Quick implementation of indirect taxes also means that government revenues can
be increased without significant additional costs
R113-3 Disadvantages of fiscal policy tools
Direct taxes and transfer payments take time to implement, delaying the impact of
fiscal policy
Capital spending also takes a long time to implement. The economy may have
recovered by the time its impact is felt.
P37-3 Effect of fiscal policy
Q144-3 ★★In an economy, consumption is 70% of pre-tax income and the average tax rate is
25% of total income. If planned government expenditures are expected to increase by
$ billion, the increase in total incomes and spending, in billions, is closest to:
A. $.
B. $.
C. $.
Solution: C.
Explain the implementation of fiscal policy and the difficulties of implementation.
The fiscal multiplier is 1/[1-c(1-T)]
where
c marginal propensity to consume = consumption ÷ disposable income
T the tax rate
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190
Assuming pre-tax income of $100
Disposable income $100×()=$75
Marginal propensity to consume $70÷$75=
The fiscal multiplier 1÷[×()]=
With government expenditure of $ Billion, total incomes and spending will rise by $
Billion×=$ Billion
Notes: MPC is based on disposable income.
简便方法：
, 0
10
, $
3
$
C Y I NX
Y C I G NX Y G
Y G
Y G G billion
Y billion
财政政策实施
R114-3 Fiscal multiplier: 1Fiscal multiplier =
1 MPC(1-t)
,MPC: 边际消费倾向
R115-3 The balance budget multiplier, 1
1 (1 )
B
Y b
K
T b t
R116-3 Debt ratio: Aggregate debt to GDP
If the real interest rate on the government's debt is higher than the real growth rate
of the economy, then the debt ratio will increase over time
debt ratio 衡量的是政府的赤字规模
R117-3 Discretionary fiscal policy：refers to government spending and taxing decisions designed
to stabilize the economy.
Crowding-out effect: Deficit→increase real interest→decrease Private investment.
Limitation: (1) Recognition lag (The forecast may be wrong), (2) Action lag, (3) Impact
lag
R118-3 Interaction of monetary and fiscal policies
P38-3 GDP and GNP
Q145-3 ★The income from a financial investment in Country P by a citizen of Country Q is
most likely included in:（Notes R20-1）
Monetary
policy
Fiscal
policy
Interest rate output Private
spending
Public
spending
Tight Tight higher lower lower lower
Easy Easy lower higher higher highe r
Tight Easy higher higher lower higher
Easy Tight lower varies higher lower
Monetary
policy
Fiscal
policy
Interest rate output Private
spending
Public
spending
Tight Tight higher lower lower lower
Easy Easy lower higher higher highe r
Tight Easy higher higher lower higher
Easy Tight lower varies higher lower
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191
A. Country P's GDP but not its GNP.
B. Country Q's GNP and GDP.
C. Country P's GOP and GNP
Solution: A.
The income from a financial investment in Country P of a citizen of Country Q is included in
Country P's GDP but not its GNP. It is included in Country Q's GNP but not its GDP.
GDP 和 GNP
R119-3 GDP measures the market value of all final goods and services produced by factors of
production located within a country/economy during a given period of time, generally a
year or a quarter.
GNP measures the market value of all final goods and services produced by factors
of production supplied by residents of a country, regardless of whether such
production takes place within the country or outside of the country.
Difference
GDP includes, and GNP excludes, the production of goods and services or
income to capital owned by foreigners within that country.
GNP includes, and GDP excludes, the production of goods and services or
income to capital owned by its citizens outside of the country.
GDP is more closely related to economic activity within a country and so to its
employment and growth.
P39-3 Comparable advantage
Q146-3 In the Ricardian trade model, a country captures more of the gains from trade if: (原版
书)
A. it produces all products while its trade partner specializes in one good.
B. the terms of trade are closer to its autarkic prices than to its partner's autarkic prices.
C. the terms of trade are closer to its partner's autarkic prices than to its autarkic prices.
Solution: C.
A country gains if trade increases the price of its exports relative to its imports as compared to
its autarkic prices, . the final terms of trade are more favorable than its autarkic prices. If the
relative price of exports and imports remains the same after trade opens, then the country will
consume the same basket of goods before and after trade opens, and it gains nothing from the
ability to trade. In that case, its trade partner will capture all of the gains. Of course, the
opposite is true if the roles are reversed. More generally, a country captures more of the gains
from trade the more the final terms of trade differ from its autarkic prices.
Q147-3 ★According to the Heckscher-Ohlin model, when trade opens: (原版书 R19-10)
A. the scarce factor gains relative to the abundant factor in each country.
B. the abundant factor gains relative to the scarce factor in each country.
C. income is redistributed between countries but not within each country.
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192
Solution: B.
As a country opens up to trade, it has a favorable impact on the abundant factor, and a
negative impact on the scarce factor. This is because trade causes the output mix to change
and therefore changes the relative demand for the factors of production. Increased output of
the export product increases demand for the factor that is used intensively in its production,
while reduced output of the import product decreases demand for the factor used intensively
in its production. Because the export (import) product uses the abundant (scarce) factor
intensively, the abundant factor gains relative to the scarce factor in each country.
Q148-3 ★Suppose Mexico exports vegetables to Brazil and imports flashlights used for mining
from Brazil. The output per worker per day in each country is as follows: (原版书 R19-)
Flashlights Vegetables
Mexico 20 60
Brazil 40 80
Which country has a comparative advantage in the production of vegetables and what
is the most relevant opportunity cost?
A. Brazil: 2 vegetables per flashlight.
B. Mexico: vegetables per flashlight.
C. Mexico: 1/3 flashlight per vegetable.
Solution: C.
While Brazil has an absolute advantage in the production of both flashlights and vegetables,
Mexico has a comparative advantage in the production of vegetables. The opportunity cost of
vegetables in Mexico is 1/3 per flashlight, while the opportunity cost of vegetables in Brazil is
1/2 per flashlight.
Q149-3 Consider two countries, A and B. Country A is a closed country with a relative
abundance of labor and holds a comparative advantage in the production of textiles.
Country B has a relative abundance of capital. When the textile trade is opened
between the two countries, Country A will most likely experience a favorable impact
on: （MOCK84-42）
A. labor.
B. capital.
C. both capital and labor.
Solution: A.
As a country opens up to trade, the benefit accrues to the abundant factor, which is labor in
Country A.
比较优势
R120-3 Absolute advantage & Comparative advantage
Absolute advantage refers to the lower absolute cost to produce a product.
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193
Comparative advantage refers to the lower opportunity cost to produce a product
The law of comparative advantage holds that trading partners can be made better
off if they specialize in the production of goods for which they are the
low-opportunity cost producer and trade for those goods for which they are the
high-opportunity cost producer.
R121-3 ★产生比较优势的原因
Ricardian model: comparative advantage and pattern of trade are determined by
differences in technology between countries.（技术差异）
Heckscher-Ohlin model: comparative advantage and pattern of trade are
determined by differences in factor (factor & labor) endowments between
countries. （生产要素禀赋区别）
A country has a comparative advantage in goods whose production is intensive in
the factor with which it is relatively abundantly endowed, and would tend to
specialize in and export that good.
Capital is relatively more (less) abundant in a country if the ratio of its endowment
of capital to labor is greater (less) than that of its trading partner.
A country having relatively abundant labor would export relatively labor-intensive
goods and import relatively capital-intensive goods.
It allows the possibility of income redistribution through trade：1）The price of the
relatively less scare (more available) factor of production in each country will
increase. 2）The good that a country imports will fall in price
P40-3 Trade barrier
Q150-3 ★Assuming its trading partner does not retaliate, which of the following conditions
must hold in order for a large country to increase its national welfare by imposing a
tariff?
A. It must have a comparative advantage in the production of the imported good.
B. The deadweight loss must be smaller than the benefit of its improving terms of trade.
C. It must auction the import licenses for a fee to offset the decline in the consumer surplus.
Solution: B.
The large country is able to cause the foreign exporter to reduce price in order to retain
market share. In the large country, domestic producers gain from higher volume and the
government gains from collecting the tariff. The sum of these two gains must exceed the
deadweight loss to domestic consumers to achieve a national welfare gain. The change in
terms of trade causes income redistribution from the foreign exporter to the domestic
producer
Q151-3 ★A large country can: (原版书 R19-13)
A. benefit by imposing a tariff.
B. benefit with an export subsidy.
C. not benefit from any trade restriction.
Solution: A.
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194
By definition, a large country is big enough to affect the world price of its imports and exports.
A large country can benefit by imposing a tariff if its terms of trade improve by enough to
outweigh the welfare loss arising from inefficient allocation of resources.
Q152-3 Which of the following trade restrictions is likely to result in the greatest welfare loss
for the importing country? (原版书 R19-12)
A. A tariff.
B. An import quota.
C. A voluntary export restraint.
Solution: A.
With a voluntary export restraint, the price increase induced by restricting the quantity of
imports (= quota rent for equivalent quota = tariff revenue for equivalent tariff) accrues to
foreign exporters and/or the foreign government.
贸易壁垒
R122-3 Trade restrictions
prevent free flow of goods and services among countries
reasons of trade barriers:Protecting infant industry, National security, Protecting
domestic jobs, Protecting domestic industries
R123-3 关税使得政府收入增加。如果政府卖出进口配额，则政府收入增加；如果进口配
额被进口国厂商直接获取，政府收入不会增加。
关税和进口配额对福利的影响是一样的：
对于小国来说，福利会减少。
而对于大国来说，福利可能会增加，因为大国能影响世界价格，迫使出口
国（小国）降价。世界价格下降带来的影响是收入从出口国到进口国的再
分配。但是这基于两个假设条件：贸易对手不报复；产生的 DWL 小于改
善 terms of trade 带来的好处
出口补贴会减少福利，但大国的福利减少更多，因为
In small country case, price rises in domestic market by the amount of
subsidy.
In large country case, world price declines as the large country increases
exports.
In both small and large country case, the net welfare will decrease, but with a
larger decline in large country case. Because in large country case, the decline
in world price implies that a part of subsidy is transferred to the foreign
country (Importer), unlike the small country case.
自动出口限制：对于政府是没有影响的。
Tariff Import Quota Export Subsidy VER
Impact on
Importing
county
Importing country
Exporting
country
Importing
country
Producer Increases Increases Increases Increases
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195
surplus
Consumer
surplus
Decreases Decreases Decreases Decrease
Government
revenue
Increases
Mixed (depends on
whether the quota rents
are captured by the
importing country through
sale of licenses or by the
exporters)
Falls
(government
spending rises)
No change (rent
to foreigners)
National
welfare
Decreases in
Small country
Could increase
in large
country
Decreases in small country
Could increase in large
country
Decreases
(a larger decline
in large
country)
Decreases
R124-3 Types of trade restrictions: tariffs, quotas, export subsidy voluntary export restraint,
minimum domestic content
Domestic (importing) country, import quotas, tariffs, and VERs 的效应:
Reduce imports.
Increase price.
Decrease consumer surplus.
Increase domestic quantity supplied.
Increase producer surplus.
R125-3 Capital restriction
Place control on foreigners’ ability to own domestic assets and/or control on
domestic residents’ ability to own foreign assets
Capital restriction: limit openness of financial market
Trade restriction: limit openness of goods market
P41-3 BOP
Q153-3 ★A country having a current account deficit most likely will still be able to consume
more output than it produces by: （MOCK83-43）
A. increasing its net foreign liabilities.
B. restricting foreign direct investment.
C. adjusting interest rates to stimulate higher domestic savings.
Solution: A.
A current account deficit must be offset by a capital account surplus. Only by borrowing money
from foreigners can a country have a current account deficit and consume more output than it
produces. An increase in net foreign liabilities is the result of borrowing from foreigners.
Q154-3 ★During the most recent quarter, a steel company in South Korea had the following
transactions: (原版书 R19-18)
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Bought iron ore from Australia for AUD50 million.
Sold finished steel to the United States for USD65
Borrowed AUD50 million from a bank in Sydney.
Received a USD10 million dividend from . subsidiary.
Paid KRW550 million to a Korean shipping company.
Which of the following would be reflected in South Korea's current account balance for
the quarter?
A. The loan.
B. The shipping.
C. The dividend.
Solution: C.
The current account includes income received on foreign investments. The Korean company
effectively "exported" the use of its capital during the quarter to its . subsidiary, and the
dividend represents payment for those services.
Q155-3 ★The sale of mineral rights would be captured in which of the following balance of
payments components? (原版书 R19-16)
A. Capital account.
B. Current account.
C. Financial account.
Solution: A.
The capital account measures capital transfers and sale and purchase of non-produced,
non-financial assets such as mineral rights and intangible assets
Q156-3 ★During the last month, a food company located in the United States had the
following transactions:
Transaction
Amount
(US$ millions)
Bought raw material from Indonesia
Sold food products to France
Received royalty fees from its branch in the United Kingdom
Donated to a charitable institution in Africa
Borrowed from a bank in Singapore
Paid legal fees to its German legal consultant company
Received interest coupon from its investment in Eurobonds
issued in Luxembourg
These transactions will most likely increase the . current account by: (2014 Mock)
A. $ million.
B. $ million.
C. $ million.
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197
Solution: C.
Note that the borrowing from a bank in Singapore is not a current account transaction.
Transaction
Current Account
(US$ millions)
Bought raw material from Indonesia –
Sold food products to France 65
Received royalty fees from its branch in the United Kingdom
Donated to charitable institution in Africa –
Borrowed from a bank in Singapore Omit
Paid legal fees to its German legal consultant company –
Received interest coupon from its investment in Eurobonds
issued in Luxembourg
Total 15
Q157-3 Which of the following organizations is the most focused on promoting economic
growth and reducing poverty by offering both monetary and technical assistance?
(Mock)
A. World Bank.
B. World Trade Organization.
C. International Monetary Fund.
Solution: A.
Promoting economic growth and reducing world poverty are among the primary goals of the
World Bank. The IMF primarily promotes the growth of international trade, supports exchange
rate stability, and provides a forum for cooperation on monetary problems internationally. The
WTO has a primary focus on reaching trade agreements and settling trade disputes.
国际收支平衡表
R126-3 Balance of Payments Components
The BOP equation is:
current account + capital account + financial account = 0
The current account measures the exchange of merchandise goods, services,
investment income, and unilateral transfers (gifts to and from other nations).
The current account balance equals the sum of exports minus imports, net
interest income, and net transfer. 在 BOP（国际收支平衡表）中，interest income
属于 current account
The capital account consists capital transfer（债务豁免，移民） and net sales of
non-produced\non-financial assets（版权，自然资源的买卖）.
The financial account measure net capital flows based on sales and purchases of
domestic and foreign financial assets. (financial assets aboard 在国外金融资产
and foreign-owned financial assets 国外拥有的在国内的金融资产)
R127-3 X-M≡private saving + government saving - investment
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198
Low private saving and/or high investment -> current account deficit ->net capital
imports（美国国内消耗多就要从国外进口，从国外吸收资本）
Government deficit-> current account deficit
Current account deficit(长期)->rise the risk premium in the deficit country
P42-3 Exchange rate
Q158-3 Over the past month, the Swiss Franc (CHF) has depreciated 12% against pound
sterling (GBP). How much has the pound sterling appreciated against the Swiss Franc?
A. 12%.
B. Less than 12%.
C. More than 12%.
Solution: C.
The appreciation of sterling against the Swiss franc is simply the inverse of the 12%
depreciation of the Swiss franc against Sterling:
[1/ (1 - )] - 1 = (1/) - 1 =- , or %
Q159-3 A BRL/MXN spot rate is listed by a dealer at . The 6-month forward rate is
. The 6-month forward points are closest to: （原版书 R21-11）
A. —.
B. +.
C. +.
Solution: B.
The number of forward points equals the forward rate minus the spot rate, or —
= , multiplied by 10,000: 10,000 X = points. By convention,
forward points are scaled so that ±1 forward point corresponds to a change of ±1 in the last
decimal place of the spot exchange rate.
Q160-3 A three-month forward exchange rate in CAD/USD is listed by a dealer at . The
dealer also quotes 3-month forward points as a percentage at %. The CAD/USD
spot rate is closest to: （原版书 R21-12）
A. .
B. .
C. .
Solution: A.
Given the forward rate and forward points as a percentage, the unknown in the calculation is
the spot rate. The calculation is as follows:
Spot rate X (1 + Forward points as a percentage) = Forward rate
Spot rate X (1 + ) =
Spot = =
Q161-3 ★★★The JPY/AUD spot exchange rate is , the JPY interest rate is %, and
the AUD interest rate is %. If the interest rates are quoted on the basis of a
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199
360-day year, the 90-day forward points in JPY/AUD would be closest to: （原版书
R21-15）
A. —.
B. —.
C. .
Solution: B.
The forward exchange rate is given by
90
1 .0015
1 360
.98815
901
1 .0495
360
JPY
JPY AUD JPY AUD
AUD
i
F S
i
The forward points are 100 X (F— S) =100 X ( — ) =100 X () =—. Note
that because the spot exchange rate is quoted with two decimal places, the forward points are
scaled by 100.
Q162-3 A large industrialized country has recently devalued its currency in an attempt to
correct a persistent trade deficit. Which of the following domestic industries is most
likely to benefit from the devaluation? （原版书 R21-20）
A. Luxury cars.
B. Branded prescription drugs.
C. Restaurants and live entertainment venues.
Solution: A.
A devaluation of the domestic currency means domestic producers are cutting the price faced
by their foreign customers. The impact on their unit sales and their revenue depends on the
elasticity of demand. Expensive luxury goods exhibit high price elasticity. Hence, luxury car
producers are likely to experience a sharp increase in sales and revenue due to the
devaluation.
Q163-3 ★A forward premium indicates: （原版书 R21-14）
A. an expected increase in demand for the base currency.
B. the interest rate is higher in the base currency than in the price currency.
C. the interest rate is higher in the price currency than in the base currency.
Solution: C.
To eliminate arbitrage opportunities, the spot exchange rate (S), the forward exchange rate (F),
the interest rate in the base currency (ib), and the interest rate in the price currency (ip) must
satisfy:
1
1
p
b
iF
S i
According to this formula, the base currency will trade at forward premium (F > S) if, and only if,
the interest rate in the price currency is higher than the interest rate in the base currency (ip >
ib).
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200
Q164-3 ★★In early 2011, the British pound (GBP) to New Zealand dollar (NZD) spot exchange
rate was . The UBOR interest rates, quoted on a 360-day year basis, were %
for the British pound and % for the New Zealand dollar. The 180-day forward
points (scaled up by four decimal places) in NZD/GBP would be closest to:（mock89-44）
A. -343.
B. -173.
C. 175
Solution: C.
1） 首先要正确理解外汇的标价方法。British pound (GBP) to New Zealand dollar (NZD) spot
exchange rate was 表示一个英镑相当于 个 NZD，即 NZD/GBP，相
当于 1GBP=。
2） 其次，正确的计算过程如下：
1
1
%
%
180
1 %
180
1 %
360
NZD
GBP
GBP
NZD
rF
S r
r
r
F
+
=
+
=
=
+ ?
= ?
+ ?
3） 关于远期与即期外汇常考两种形式，也是考纲的要求。
如果求 forward in points，计算方法是(Forward -Spot) × 10,000 = 175
如果求 forward in percentage，计算方法是(Forward -Spot)/Spot = %
Q165-3 The current spot rate for the USD/EUR is . The forward rate for the
EUR/Australian dollar (AUD) is , which represents a 400 point forward premium
to the spot rate (scaled up by four decimal places). The USD/AUD spot rate is closest
to: （mock84-44）
A. .
B. .
C. .
Solution: B.
Step 1 Find the spot rate for the EUR/AUD
Spot = Forward rate – Points Spot=− 400/10,000=
Step 2: Calculate cross-rate
*
USD USD EUR
AUD EUR AUD
=
USD
AUD
=*=
Q166-3 ★The Canadian dollar (CAD) exchange rate with the Japanese yen (JPY) changes from
JPY/CAD 75 to JPY/CAD 78. The CAD has:（Notes P237）
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201
A. depreciated by %, and the JPY has appreciated by %.
B. appreciated by , and the JPY has depreciated by %.
C. appreciated by %, and the JPY has depreciated by %.
Solution: C.
The CAD has appreciated because it is worth a larger number of JPY. The percent appreciation
is (78 - 75) / 75 = %. To calculate the percentage depreciation of the JPY against the CAD,
convert the exchange rates to direct quotations for Japan: 1 / 75 = CAD/JPY and 1 / 78 =
CAD/JPY. Percentage depreciation = ( - ) / = %
Q167-3 The spot CHF/GBP exchange rate is . In the 180-day forward market, the CHF is
at a forward premium of points to the GBP. The 180-day forward CHF/GBP
exchange rate is closest to:
A.
B.
C.
Solution: B.
“the CHF is at a forward premium of points to the GBP” indicate that CHF is base currency
and GBP is price currency. Because the spot CHF/GBP exchange rate is , the GBP/CHF is
1/ (= ).
The 180-day forward exchange rate is + = GBP/CHF .
The forward CHF/GBP is 1/ (=)
Q168-3 The EUR/USD spot exchange rate is , and 1-year interest rates are 3% in EUR
and 2% in USD. The forward USD/EUR exchange rate is closest to:（Notes P242）
A.
B.
C.
Solution: A.
* / = ; 1 / =
Q169-3 An investor examines the following rate quotes for the Brazilian real and the Australian
dollar:（2013 mock morning session）
Spot rate BRL/AUD BRL 1-year interest rate %
Forward rate BRL/AUD AUD 1-year interest rate %
If the investor shorts BRL500,000 he will achieve a risk-free arbitrage profit (in BRL)
closest to:
A. -6,327
B. 1,344
C. 6,405
Solution: B.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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202
If the right side of the following equation is greater than the left, an arbitrage opportunity
exists.
/ /(1 ) (1 ) / ( )d f d f f di S i F+ = +
The arbitrage profit is the right side of the equation minus the left side.
Right Side:
Step 1 BRL500,000 × (1/ = AUD236,653
Step 2 AUD236,653 × () = AUD243,989
Step 3 AUD243,989 × = BRL521,844
Arbitrage profit = BRL521,844 (right side above) – BRL520,500 (left side above) = 1,344.
汇率
R128-3 名义与实际汇率
FX real(d/f) = FX nominal (d/f) CPIf/CPId
R129-3 FX Appreciation and Depreciation
to USD appreciated therefore CHF depreciated
R130-3 Spot rates & Forward rates
Spot rates：exchange rates for immediate delivery of the currency
Forward rates ：exchange rates for currency transactions that will occur in the
future.（例如，现在约定一个月后以多少人民币买 1 美元）
R131-3 The spread on a forward foreign currency quotation
Consider a 6-month (180 days) forward exchange rate quote from a . currency
dealer of GBP:USD = / .
Percentage spread = ( – ) / = %
Spreads increase with greater exchange rate volatility, the term of the forward
contract, and decrease when trading volume is higher.
Forward currency spreads are typically greater than spot currency spreads
R132-3 Forward discount or premium
forward prmium F-S 360
=
or discount S t
P43-3 FX regime
Q170-3 ★In the classification of currency regimes, a currency board system (CBS) most likely
differs from a fixed-rate parity system in that: （mock83-44）
A. a CBS has a discretionary target level of foreign exchange reserves.
B. a CBS can peg to a basket of currencies but a fixed-rate system cannot.
C. the monetary authority within a CBS does not act as a traditional lender of last resort.
Solution: C.
In a CBS, the monetary authority has an obligation to maintain 100% foreign currency reserves
against the monetary base. It thus cannot lend to troubled financial institutions. As long as the
country under a fixed-parity regime maintains its exchange peg, the central bank can serve as a
lender of last resort.
金程教育 专业·领先·增值
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内部使用资料，严禁传播，否则追究法律责任
203
Q171-3 ★The monetary authority of The Stoddard Islands will exchange its currency for .
dollars at a one-for-one ratio. As a result, the exchange rate of the Stoddard Islands
currency with the . dollar is , and many businesses in the Islands will accept
. dollars in transactions. This exchange rate regime is best described as:（Notes
P238）
A. a fixed peg.
B. dollarization.
C. a currency board.
Solution: C.
This exchange rate regime is a currency board arrangement. The country has not formally
dollarized because it continues to issue a domestic currency. A conventional fixed peg allows
for a small degree of fluctuation around the target exchange rate.
R133-3 Exchange rate regimes
Countries That Do Not Have Their Own Currency
A country can use the currency of another country (formal dollarization) not
create money/currency.
A country can be a member of a monetary union in which several countries
use a common currency (. Euro)
Countries That Have Their Own Currency
A currency board arrangement is an explicit commitment to exchange
domestic currency for a specified foreign currency at a fixed exchange rate
（ notable example of such an arrangement is Hong Kong）
conventional fixed peg arrangement a country pegs its currency within
margins of ±1 percent versus another currency or a basket that includes the
currencies of its major trading or financial partners
Target zone : the permitted fluctuations in currency value relative to
another currency or basket of currencies are wider (., +/-2 %)
Crawling peg: the exchange rate is adjusted periodically, typically to adjust for
higher inflation
passive crawling peg : a series of exchange rate adjustments over time is
announced and implemented
active crawling peg: can influence inflation expectations, adding some
predictability to domestic inflation
Managed floating exchange rates: the monetary authority attempts to
influence the exchange rate in response to specific indicators such as the
balance of payments, inflation rates, or employment without any specific
target exchange rate or predetermined exchange rate path
Independently floating: the exchange rate is market-determined, and foreign
exchange market intervention is used only to slow the rate of change and
reduce short-term fluctuations, not to keep exchange rates at a certain target
level
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
204
P44-3 Elasticity approach
Q172-3 ★A country that wishes to narrow its trade deficit devalues its currency. If domestic
demand for imports is perfectly price-inelastic, whether devaluing the currency will
result in a narrower trade deficit is least likely to depend on:
A. the size of the currency devaluation.
B. the country's ratio of imports to exports.
C. price elasticity of demand for the country's exports.
Solution: A.
With perfectly inelastic demand for imports, currency devaluation of any size will increase
total expenditures on imports (same quantity at higher prices in the home currency). The trade
deficit will narrow only if the increase in export revenues is larger than the increase in import
spending. To satisfy the Marshall-Lerner condition when import demand elasticity is zero,
export demand elasticity must be larger than the ratio of imports to exports in the country's
international trade.
Q173-3 ★A large industrialized country has recently devalued its currency in an attempt to
correct a persistent trade deficit. Which of the following domestic industries is most
likely to benefit from the devaluation? (原版书 R21-20)
A. Luxury cars.
B. Branded prescription drugs.
C. Restaurants and live entertainment venues.
Solution: A.
Considering that this is a large industrialized country, the devaluation of its currency will
increase its exports of luxury cars.
R134-3 弹性论
Imports exports
imports exports imports exports
: elasticities as positive numbers of demand for imports
: elasticities as positive numbers of demand for emports
M X
M
X
Given Marshall-Lerner condition :
1 0X X M M
When import expenditures=export revenues 即 =
X M
Marshall-Lerner condition 简写为
1
X M
In general, elasticity of demand is greater for goods with close substitutes, goods
that represent a high proportion of consumer spending, and luxury goods in general.
Goods that are necessities, have few or no good substitutes, or represent a small
proportion of overall expenditures tend to have less elastic demand.
Thus, currency depreciation will have a greater effect on the balance of trade when
import or export goods are primarily luxury goods, goods with close substitutes,
and goods that represent a large proportion of overall spending.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
205
R135-3 The J-Curve 贬值效应的时滞
import and export contracts delivery and payment in the future , import and export
quantities may be relatively insensitive to currency depreciation in the short run
means currency depreciation may worsen a trade deficit in the short run
出口供给（主要原因）和进口需求作出相应调整后，贸易余额开始改善
调整过程用曲线描述呈 J 形
Marshall-Lerner condition 成立情况下，贬值对贸易余额的时滞效应
——J-Curve Effect
Shortcoming :ignores capital flows
R136-3 Absorption approach
BT = Y – E, 其中 Y = domestic production of goods and services or national
income, E = domestic absorption of goods and services, which is total
expenditure，BT = balance of trade
国民收入>总吸收：国际收支顺差，货币升值; 国民收入<总吸收：国际收支逆
差，货币贬值
0
Balance
Before
currency depreciates
Time
0
Balance of trade
Before
Trade restrictions
Time
currency
depreciates
金程教育 专业·领先·增值
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内部使用资料，严禁传播，否则追究法律责任
206
4-Financial Statement Analysis
P1-4 The role of financial reporting
Q1-4 Providing information about the performance and financial position of companies so
that users can make economic decisions best describes the role of:
A. Auditing
B. Finanical reporting
C. Financial statement analysis
Solustion: B.
The role of financial reporting by companies is to provide information about a company’s
performance, financial position, and changes in financial position that is useful to a wide range
of users in making economic decisions.
The role of financial statement analysis is to use financial reports prepared by companies,
combined with other information, to evaluate the past, current, and potential performance
and financial position of a company for the purpose of making investment, credit, and other
economic decisions.
R1-4 The role of financial reporting
The International Accounting Standards Board (IASB) definition:
Financial reporting refers to the way companies show their financial performance to
investors, creditors, and other interested parties by preparing and presenting financial
statements.
The role of financial reporting analysis is to use the information in a company’s financial
statements, along with other relevant information, to make economic decisions.
P2-4 Audits of Financial Statements
Q2-4 ★★Assume . GAAP applies unless otherwise noted. Which of the following
statements best describes the level of accuracy provided by a standard audit report?
A. There is reasonable assurance that the financial statements contain no errors.
B. There is full assurance that the financial statements are free of material errors.
C. There is reasonable assurance that the financial statements are fairly presented.
Solution: C.
Audits provide reasonable assurance that the financial statements are fairly presented,
meaning that there is a high degree of probability that they are free of material error, fraud or
illegal acts.
Q3-4 What type of audit opinion is preferred when analyzing financial statements?
A. Qualified.
B. Adverse.
C. Unqualified.
Solution: C.
An unqualified opinion is a “clean” opinion and indicates that the financial statements present
the company’s performance and financial position fairly.
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207
R2-4 Audits of Financial Statements 掌握概念及理解：
概念：Audit is an independent review of an entity’s financial statement by an
independent accounting firm.
理解：Audits provide reasonable assurance that the financial statements are fairly
presented, meaning that there is a high degree of probability that they are free of
material error, fraud or illegal acts.
Audit report 有四种种类型分别是, unqualified opinion, qualified opinion, adverse
opinion,disclaimer of opinion
★An unqualified audit opinion conveys that the financial statement report a “true
and fair view” or are “fairly presented” in accordance with applicable accounting
standards.
★The auditors must also express an opinion on the company’s internal control
systems according to Sarbanes-Oxley Act.(Under . Generally Accepted
Accounting Principles (GAAP), the auditor must express an opinion on the firm's
internal controls. )
P3-4 Other Information Sources of Financial Statements 的理解
Q4-4 Assume . GAAP applies unless otherwise noted. When an issue is going to be put
to a vote, by shareholders, at an annual general meeting the company prepares a (n):
A. annual report.
B. proxy statement.
C. management statement of responsibility.
Solution: B.
Proxy statements are prepared and distributed to shareholders on matters that are to be put
to a vote at shareholder meetings.
Q5-4 ★★Information about management and director compensation would least likely be
found in the:（原版书 Reading22）
A. auditor's report.
B. proxy statement.
C. notes to the financial statements.
Solution：A.
Information about management and director compensation is not found in the auditor's report.
Disclosure of management compensation is required in the proxy statement, and some aspects
of management compensation are disclosed in the notes to the financial statements.
Q6-4 Information about accounting estimates, assumptions, and methods chosen for
reporting is most likely found in: (NotesB3-17 3)
A. the auditor's opinion.
B. financial statement notes.
C. Management's Discussion and Analysis.
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208
Solution：B.
Information about accounting methods and estimates is contained in the footnotes to the
financial statements.
Q7-4 ★★Assume . GAAP applies unless otherwise noted. An analyst would find
information about significant uncertainties affecting a company's liquidity, capital
resources and results of operations in the:
A. Notes to the financial statements.
B. Balance sheet and income statement.
C. Management discussion and analysis.
Solution: C.
Management must highlight any favorable and unfavorable trends and identify significant
events and uncertainties that affect the company’s liquidity, capital resources and results of
operations in the MD&A.
Q8-4 ★Information about material events and uncertainties would best be found in:
A. footnotes.
B. the proxy statement.
C. management’s discussion and analysis
Solution: C.
This is a component of management’s discussion and analysis.
Q9-4 ★ Which of the following is least likely to appear in a company's proxy
statement?(MOCK-57)
A. Compensation arrangements for management and directors
B. Significant events and contingencies that may affect future operations
C. Potential conflicts of interest between management, directors, and shareholders
Solution: B.
Significant events, conditions, trends, and contingencies that may affect future operations are
contained in Management's Discussion and Analysis/ compensation agreements for directors
and management and their potential conflicts of interest are required in the proxy statement.
Other Information Sources of Financial Statements 掌握概念：
R3-4 ★Financial footnotes
includes information about account methods,assumptions, and estimates; businesss
acquistions or disposal, legal actions, employee benefit plans, significant customers,
related-party transactions and segments of the firm.
Footnotes 是被审计过的
R4-4 Supplementary schedule: provides explanatory information, such as operating
income or sales by region or business segment; reserves for an oil and gas company;
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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209
information about hedging activities and financial instruments
R5-4 ★MD&A (Management Discussion & Analysis): Providing an assessment of the
financial performance and condition of a company from the perspective of its
management
Results from operations, with a discussion of trends in sales and expense
Capital resource and liquidity, with a discussion of trends in cash flow
A general business overview based on known trends
R6-4 Material events and uncertainties that may affect the future★Proxy statement:
provides useful information regarding
Issued to shareholders when there are matters that require a shareholder vote
Providing information about the board members, managements, compensation and
the issuance of stock options.
R7-4 Annual filing (10-K) & quarterly report (10-Q): generally present the 4 key financial
statements and footnotes but are not audited.
R8-4 8-K: reported to SEC, which includes material corporate events on a more current basis,
such as M&A，and changes. SEC 没有题目
P4-4 Steps in the Financial Statement Analysis Framework
Q10-4 ★Ratios are an input into which step in the financial analysis framework?（原版书）
A. Process data.
B. Collect input data.
C. Analyze/interpret the processed data.
Solution: C.
Ratios are an output of the process data step but are an input into the analyze/interpret data
step.
R9-4 Steps in the Financial Statement Analysis Framework — 6 个步骤(目标-收集-处理-分析
-结论-回顾)
State the objective and context
Gather data：所有财务报表信息的搜集
Process the data：将财务报表搜集的信息做处理，如计算 ratio
Analyze and interpret the data：将分析出来的各种 ratio 进行分析
Report the conclusions or recommendations
Update the analysis
P5-4 The flow of information in an Accounting System
Q11-4 Assume . GAAP applies unless otherwise noted. An entry made to record an
accrual, such as bad debt expense, that is not yet reflected in the accounting system is
best described as a (n):
A. Ledger entry.
B. Adjusting entry.
C. Trial balance entry.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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210
Solution: B.
Adjusting entries are a type of journal entries typically made at the end of the accounting
period to record items such as accruals that are not yet reflected in the accounting system.
Q12-4 ★★The collection of all business transactions sorted by account in an accounting
system is referred to as:（原版书 Reading23）
A. a trial balance.
B. a general ledger.
C. a general journal.
Solution：B.
The general ledger is the collection of all business transactions sorted by account in an
accounting system. The general journal is the collection of all business activities sorted by date.
R10-4 ★报表制作几个步骤（从日记账到报表）
General Journal: list of entries sorted by date (order)
General ledger: sorted by account
Initial trial balance/Adjusted trial balance: balance, Trial balances are typically
prepared at the end of an accounting period as a first step in producing financial
statement.
Financial statements
P6-4 Accounting Equation
Q13-4 Assume . GAAP applies unless otherwise noted. An analyst gathered the following
information from a company’s accounting records:
Assets, December 31, 2007 $5,250,000
Liabilities, December 31, 2007 $2,200,000
Contributed capital, December 31, 2007 $1,400,000
Retained earnings, January 1, 2007 $800,000
Dividends declared during 2007 $200,000
The analyst’s estimate of net income for 2007 would be closest to:
A. $650,000.
B. $850,000.
C. $1,050,000.
Solution: C.
Owner’s equity = $5,250,000 - $2,200,000 = $3,050,000.
Owner's equity = contributed capital + ending retained earnings.
Ending retained earnings = 3,050,000 - 1,400,000 = 1,650,000.
Ending retained earnings = beginning retained earnings + net income - dividends.
1,650,000 = 800,000 + NI - 200,000; so Net income = $1,050,000.
金程教育 专业·领先·增值
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内部使用资料，严禁传播，否则追究法律责任
211
Q14-4 ★At the beginning of the year, a company had total shareholders' equity consisting of
￥50,000 in retained earnings, contributed capital at the start was ￥200,000.
During the year, the following events occurred: ￥
income reported . 42,000
paid 7,000
loss on available-for-sale investments 3,000
currency translation gain on foreign
subsidiaries
8,000
of company stock, to be held as
Treasury stock
6,000
The total shareholders' equity at the end of the year is closest to:(MOCK79-47)
A. ￥268,000
B. ￥284,000
C. ￥287,000
Solution: C.
List and explain the components of owners' equity.
Shareholders' Equity (￥)
Start-of-year share capital 200,000
Less treasury stock (6,000)
Beginning retained earnings 50,000
Plus net income 42,000
Less dividends paid (7,000)
Ending retained earnings 85,000 85,000
Accumulated other comprehensive income Foreign $8,000
currency translation adjustment gain
End-of-year shareholders' equity 287,000
The realized loss on the available-for-sale investments is already accounted for in net
income.
Q15-4 ★At the start of the year, a company's capital contributed by owners and retained
earnings accounts had balances of $10,000 and $6,000, respectively. During the year,
the following events took place:
Net income earned $4,000
Interest paid on debt $500
Repayment of long-term debt $1,000
Proceeds from shares issued $1,000
Dividends paid $600
The end-of-year owners' equity is closest to:(MOCK79-58)
A. $19,400
B. $19,900
C. $20,400
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
212
Solution: C.
Start-of-year capital contributed by owners $10,000
Additional shares issued 1,000
Initial retained earnings 6,000
Net income 4,000
Dividends paid (600)
Increase in retained earnings 3,400 3,400
Ending owners' equity $20,400
Q16-4 ★A group of individuals formed a new company with an investment of $500,000. The
most likely effect of this transaction on the company's accounting equation at the time
of the formation is an increase in cash and: （原版书 Reading23）
A. an increase in revenue.
B. an increase in liabilities.
C. an increase in contributed capital.
Solution：C.
This is a contribution of capital by the owners. Assets would increase by $500,000 and
contributed capital would increase by $500,000, maintaining the balance of the accounting
equation.
Q17-4 ★Which of the following elements represents an economic resource?（原版书 Read
A. Asset.
B. Liability.
C. Owners' equity.
Solution：A.
An asset is an economic resource of an entity that will either be converted into cash or
consumed.
Q18-4 ★An analyst has collected the following information regarding a company in advance
of its year-end earnings announcement (in millions):
Estimated net income $ 200
Beginning retained earnings $1,400
Estimated distributions to owners $ 100
The analyst's estimate of ending retained earnings (in millions) should be closest to:
A. $1,300.
B. $1,500.
C. $1,700.
Solution：B.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
213
Beginning retained earnings $1,400
+ Net income 200
－Distributions to owners (100)
= Ending retained earnings $1,500
Q19-4 ★The following information is available for a company ($):
December 31, 2011:
Total assets 100,000
Net income for the year 4,000
Dividends paid 0
Assets are equally financed with debt and equity
50% of the equity comes from contributed capital
December 31, 2012:
Total assets 92,000
Net income (loss) for the year (3,000)
No new debt or equity issued or repurchased
In 2012, the company most likely: (2014 Mock 98-50)
A. paid a dividend of $5,000.
B. did not pay a dividend because it incurred a loss.
C. paid a dividend of $1,000.
Solution：A.
2011($) 2012($)
Total assets (given) 100,000 92,000
Total debt (50% in 2011, no change in 2012) 50,000 50,000
Total equity
(Total assets – Total debt)
50,000 42,000
Equity Components
Contributed capital
(50% of Equity in 2011, no change in 2012)
25,000 25,000
Retained earnings (solved for)
(Total equity – Contributed capital)
25,000 17,000
Retained earnings = Opening RE + Net income – Dividends
2012 Retained earnings = 17,000 = 25,000 – 3,000 – Dividends
Dividends = 5,000
R11-4 Accounting Equation 掌握公式：
Assets = Liabilities + Owners’ equity
Assets = Liabilities + Contributed Capital + Ending retained Earnings
金程教育 专业·领先·增值
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内部使用资料，严禁传播，否则追究法律责任
214
Assets= Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue –
Expenses – Dividends
Owner's equity = contributed capital + ending retained earnings.
R12-4 四个报表之间的关系（需要新加知识点）
P7-4 Accruals and other adjustments in preparing financial statements
Q20-4 ★★Assume . GAAP applies unless otherwise noted. Walker Company received a
letter on November 31, 2001 indicating that Johnson, Inc. would purchase a specialty
machine priced at $4,000,000. On February 13, 2002, a binding contract was executed
for the machine’s construction. Materials costing $2,000,000 were ordered in
December 2001, arrived with an invoice in August 2002, and were used in the
manufacturing process in the first quarter of 2003. After a labor dispute, Walker
finally completed manufacture and delivered the machine in December 2004.
Johnson received the first invoice in 2005 and paid the $4,000,000 purchase price in
2005. Walker Company uses the accrual method of accounting. Walker should record
the materials used to construct the machine as expenses in the year:
A. 2005.
B. 2004.
C. 2003.
Solution: B.
Under the accrual concept, income is recognized when the earning activities are substantially
completed, risk of ownership has transferred from buyer to seller, and payment is realizable
and collectible. Under the matching principle, expenses incurred that directly relate to the sold
item are expensed in the same period as the revenue is recognized.
Q21-4 A decrease in assets would least likely be consistent with a(n): (NotesB3-28 4)
A. increase in expenses.
B. decrease in revenues.
C. increase in contributed capital.
Solution：C.
The expanded accounting equation shows that assets = liabilities + contributed capital +
beginning retained earnings + revenue- expenses- dividends. A decrease in assets is consistent
with an increase in expenses or a decrease in revenues but not with an increase in contributed
capital.
Q22-4 If a firm raises $10 million by issuing new common stock, which of its financial
statements will reflect the transaction? (NotesB3-28 6)
A. Income statement and statement of owners' equity.
B. Balance sheet, income statement, and cash flow statement.
C. Balance sheet, cash flow statement, and statement of owners' equity.
Solution：C.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
215
The $10 million raised appears on the cash flow statement as a cash inflow from financing and
on the statement of owners' equity as an increase in contributed capital. Both assets (cash)
and equity (common stock) increase on the balance sheet. The income statement is unaffected
by stock issuance.
Q23-4 An auditor needs to review all of a company's transactions that took place between
August 15 and August 17 of the current year. To find this information, she would most
likely consult the company's: (NotesB3-28 7)
A. general ledger.
B. general journal.
C. financial statements.
Solution：B.
The general journal lists all of the company's transactions by date. The general ledger lists
them by account.
Q24-4 Before adjusting accounting entries, a liability and a cash has been occurred in the
balance sheet. This process is most likely to be:
A. An unearned revenue.
B. A prepaid expense.
C. An accrued expense.
Solution: A.
Assets Liabilities Revenue Expense Equity
Unearned
revenue
No revenue
recognized
A liability
Accrued
revenue
Revenue
recognition
An asset
Prepaid
expenses
No expense
recognized
An asset
Accrued
expenses
Expenses
recognition
A liability
Q25-4 ★★ Which of the following statements about cash received prior to the recognition
of revenue in the financial statements is most accurate? The cash is recorded as:（原版
书）
A. deferred revenue, an asset.
B. accrued revenue, a liability.
C. deferred revenue, a liability.
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Solution：C.
Cash received prior to revenue recognition increases cash and deferred or unearned revenue.
This is a liability until the company provides the promised goods or services.
Q26-4 ★ An electrician repaired the light fixtures in a retail shop on October 24 and sent
the bill to the shop on November 3. If both the electrician and the shop prepare
financial statements under the accrual method on October 31, how will they each
record this transaction?(Notes B3-28 5)
Electrician Retail shop
A. Accrued revenue Accrued expense
B. Accrued revenue Prepaid expense
C. Unearned revenue Accrued expense
Solution: A.
The service is performed before cash is paid. This transaction represents accrued revenue to
the electrician and an accrued expense to the retail shop. Since the invoice has not been sent
as of the statement date, it is not shown in accounts receivable or accounts payable.
Q27-4 ★When, at the end of an accounting period, a revenue has been recognized in the
financial statements but no billing has occurred and no cash has been received, the
accrual is to: （原版书 Reading23）
A. unbilled (accrued) revenue, an asset.
B. deferred revenue, an asset.
C. unbilled (accrued) revenue, a liability.
Solution：A.
When cash is to be received after revenue has been recognized but no billing has actually
occurred, an unbilled (accrued) revenue is recorded. Such accruals would usually occur when
an accounting period ends prior to a company billing its customer. This type of accrual can be
contrasted with a simple credit sale, which is reflected as an increase in revenue and an
increase in accounts receivable. No accrual is necessary.
Q28-4 ★ When, at the end of an accounting period, cash has not been paid with respect to
an expense that has been incurred, the business should then record: （原版书
Reading）
A. an accrued expense, an asset.
B. a prepaid expense, an asset.
C. an accrued expense, a liability.
Solution：C.
When an expense is incurred and no cash has been paid, expenses are increased and a liability
("accrued expense") is established for the same amount.
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Q29-4 ★When, at the end of an accounting period, cash has been paid with respect to an
expense incurred but not yet recognized in the financial statements, the business
should then record: （原版书 Reading23）
A. an accrued expense, an asset.
B. a prepaid expense, an asset.
C. an accrued expense, a liability.
Solution：B.
Payment of expenses in advance is called a prepaid expense, which is classified as an asset.
掌握以下几种权责发生制（Accrual Basis）：
权责发生制是以权利和责任的发生来决定收入和费用归属期的一项原则。
R13-4 收入应与为取得该收入所发生的费用、成本相匹配，以正确计算在该会计期间所获
得的净损益。
R14-4 ★除了基本概念以外还需要掌握几个名词
unearned revenue 或 deferred revenue (liability): The firm receives cash before it
provides a good or service to customers，等到货物 delivery 之后，B/S 表中 liability
会减少一部分，cash 增加一部分
unbilled revenue 或 accrued revenue (asset): If the revenue is earned, and it is just
that the billing dept has not raised the bill, then you should take up the revenue
under accrued receivables and for most purposes, they should be the same as
accounts receivables.（未开票前，称为 unbilled；开票后，从 unbilled 转为 A/R）
prepaid expenses(asset): The firm pays cash ahead of time for unanticipated
expense.
accrued expenses(liability): An expense that is incurred, but not yet paid for, during a
given accounting period.
Assets Liabilities Revenue Expense Equity
Unearned
revenue
No revenue
recognized
A liability
Accrued
revenue
Revenue
recognition
An asset
Prepaid
expenses
No expense
recognized
An asset
Accrued
expenses
Expenses
recognition
A liability
P8-4 IASB conceptual framework
Q30-4 Assume . GAAP applies unless otherwise noted. Which of the following is least
likely to be classified as a financial statement element?
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A. Revenue
B. Liability
C. Net income
Solution: C.
Net income is not an element of the financial statements, but the net result of revenues less
expenses. The elements are: assets, liabilities, owners’ equity, revenue and expenses.
Q31-4 ★★Which of the following principle requires faithful representation of the effects of
transactions in accordance with the standards without material errors?
A. Fair presentation
B. Materiality
C. Consistency
Solution: B.
Materiality means that the financial statements should be free of misstatements or omissions
that could influence the decisions of users of financial statements.
R15-4 IASB conceptual framework 里面的内容
Objectives
Qualitative characteristics(2+4)
Elements (performance+position)
Contrainits (cost & benefits)
Underlying assumptions
Requirements (general features+structures and contents)
R16-4 Qualitative characteristics of financial statement under IASB, relevance 和 Faithful
representation （two fundamental characteristics）
Relevance: Financial statements are relevant if the information in them can
influence user’s economic decisions. To be relevant, information should have
predictive value, confirmatory value, or both.
Faithful representation. Information that is faithfully representative is complete,
neutral (absence of bias), and free of error.
R17-4 ★Four characteristics enhance relevance and faithful presentation
Understandability：Users should be able to readily understand the information .
Timeliness. Information is available to decision makers before the information is
stale.
Verification：Independent observers, using the same methods, obtain similar
results.
Comparability
R18-4 Constraints on financial statement
Relevant vs. Timely：There is a tradeoff between relevant and timely.
Cost vs. benefits：The benefit users gain from the information should be greater
than the cost of presenting it.
Non-quantifiable：Non-quantifiable information (reputation, brand loyalty, capacity
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for innovation, etc.) cannot be captured directly in financial statements.
R19-4 IASB general requirements for financial statements (general features+structures and
contents)
Required Financial Statements
Statement of financial position (B/S)
Statement of comprehensive income (Single statement or income statement
+ Statement of comprehensive income)
Statement of changes in equity
Statement of cash flows
Notes, summarizing accounting policies and disclosing other items
In certain cases, Statement of financial position from earliest comparative
period
General Features
Fair presentation
Going concern
Accrual basis
Materiality and aggregation
No offsetting
Frequency of reporting
Comparative information
Consistency of presentation
Structure and Content
Classified Statement of Financial Position (Balance Sheet): IAS No. 1 requires
the balance sheet to distinguish between current and non-current assets, and
between current and non-current liabilities unless a presentation based on
liquidity provides more relevant and reliable information (., in the case of a
bank or similar financial institution).
Minimum Information on the Face of the Financial Statements: IAS No. 1
specifies the minimum line item disclosures on the face of, or in the notes to,
the financial statements. For example, companies are specifically required to
disclose the amount of their plant, property, and equipment as a line item on
the face of the balance sheet. The specific requirements are listed below.
Minimum specified note disclosure
Comparative information
P9-4 Requirements of financial statement’s prepareation and presentation under US
GAAP and IFRS
Q32-4 ★★Which of the following statements is most accurate with respect to financial
reporting requirements? （2012mock85）
A. Regulatory authorities are typically private sector, self-regulated organizations.
B. Standard-setting bodies have authority because they are recognized by regulatory
agencies.
C. The requirement to prepare financial reports in accordance with specified accounting
standards is the responsibility of standard-setting bodies.
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Solution：B.
Without the recognition of the standards by the regulatory authorities, such as the .
Securities and Exchange Commission, the private sector standard-setting bodies, such as .
FASB, would have no authority.
Q33-4 Which of the following is least likely to be a general feature underlying the preparation
of financial statements within the IFRS Conceptual Framework?
A. Matching
B. Materiality
C. Accrual basis
Solution：A.
The IFRS Conceptual Framework specifies a number of general features underlying the
preparation of financial statements, including materiality and accrual basis. Matching is not
one of those general features; it is a general principle of expense recognition.
Q34-4 Under the IASB Conceptual Framework, one of the qualitative characteristics of useful
financial information is that different knowledgeable users would agree that the
information is a faithful representation of the economic events that it is intended to
represent. This characteristic is best described as:
A. verifiability.
B. comparability.
C. understandability.
Solution：A.
Under the International Accounting Standards Board’s Conceptual Framework, verifiability is
the qualitative characteristic that means that different knowledgeable and independent users
would agree that the information presented faithfully represents the economic events that it is
intended to represent.
Q35-4 ★★International Accounting Standard (IAS) No. 1 least likely requires which of the
following? (NotesB3-44 6)
A. Neither assets and liabilities, nor income and expenses, may be offset unless required or
permitted by a financial reporting standard.
B. Audited financial statements and disclosures, along with updated information about the
firm and its management, must be filed at least quarterly.
C. Fair presentation of financial statements means faithfully representing the firm's events
and transactions according to the financial reporting standards.
Solution：B.
According to IAS No. 1, financial statements must be presented at least annually. Fair
presentation is one of the IAS No. 1 principles for preparing financial statements. The ban
against offsetting is one of the IAS No. 1 principles for presenting financial statements.
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Q36-4 According to the IASB Conceptual Framework, the fundamental qualitative
characteristics that make financial statements useful are: (NotesB3-44 4)
A. verifiability and timeliness.
B. relevance and faithful representation.
C. understandability and relevance.
Solution：B.
The fundamental qualitative characteristics are relevance and faithful representation.
Verifiability, timeliness, and understandability are enhancing qualitative characteristics.
Q37-4 Which of the following statements about the FASB conceptual framework, as
compared to the IASB conceptional framework, is most accurate? (NotesB3-45 7)
A. The FASB framework allows for upward revaluations of tangible, long-lived assets.
B. The FASB framework and IASB framework are now fully converged.
C. The FASB framework lists revenue, expenses, gains, losses, and
comprehensive income related to financial performance.
Solution：C.
The FASB framework lists revenues, expenses, gains, losses, and comprehensive income. The
IASB framework only lists income and expenses.
Q38-4 According to the Conceptual Framework for Financial Reporting (2010), which of the
following is not an enhancing qualitative characteristic of information in financial
statements?(原版书 Reading24)
A. Accuracy.
B. Timeliness.
C. Comparability.
Solution：A.
Accuracy is not an enhancing qualitative characteristic. Faithful representation, not accuracy, is
a fundamental qualitative characteristic.
Q39-4 Which of the following is not a constraint on the financial statements according to the
Conceptual Framework (2010)? （原版书 Reading24）
A. Understandability.
B. Benefit. versus cost.
C. Balancing of qualitative characteristics.
Solution：A.
Understandability is an enhancing qualitative characteristic of financial information—not a
constraint.
Q40-4 ★★The valuation technique under which assets are recorded at the amount that
would be received in an orderly disposal is: （原版书 Reading24）
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A. current cost.
B. present value.
C. realizable value.
Solution：C.
The amount that would be received in an orderly disposal is realizable value.
R20-4 美国准则与国际准则
Standard-setting bodies: make the rules, such as FASB——. GAAP;
IASB——IFRS
Regulatory authorities: enforce the rules, such as SEC——美国；FSA——英国;
IOSCO—国际的
Barriers of universally accept standard (两个准则制定机构；三个监管机构；
business groups 的施压)
R21-4 Differences between IFRS and US GAAP
Elements 的个数
关于 Asset 的定义
FASB 不允许大部分资产的上调
Reconciliation 报表，基于不同的 reporting system
Industries 的不同
R22-4 ★Coherent of financial reporting framework (underlying logic)
Transparency：Full disclosure and fair presentation create transparent.
Comprehensiveness：An effective financial reporting framework is based on
principles that are universal enough to provide guidance for recording both
existing and newly developed transactions.
Consistency：Similar transactions should be accounted for in a similar manner
regardless of industry company size, geography, or other characteristics.
Barriers to Coherent of financial reporting framework
Valuation—不同的 measurement bases（. 相比较下， Historical cost 比
较客观，Fair value method 需要多一些的 judgement）
Standard-setting approach
(a) Principles-based: require the prepares of financial reports and auditors to
exercise considerable judgment in financial reporting — IFRS
(b) Rules-based: establishes specific rules for each element or transaction —
. GAAP
(c) The common conceptual framework is moving toward an
objectives-oriented approach.
R23-4 Disclosures of significant accounting policies
Companies that prepare financial statements under IFRS or . GAAP must
disclose their accounting policies and estimates in the footnotes.
Significant policies and estimates that require management judgment are also
addressed in Management's Discussion and Analysis.
Another disclosure that is required for public companies is the likely impact of
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implementing recently issued accounting standards.
Management can discuss the impact of adopting a new standard, conclude that
the standard does not apply or will not affect the financial statements materially,
or state that they are still evaluating the effects of the new standards.
Minimum Information in the Notes (or on the face of financial statements):
IAS No. 1 specifies disclosures about information to be presented in the
financial statements. This information must be provided in a systematic
manner and cross-referenced from the face of the financial statements to the
notes. The required information is summarized below.
Comparative Information: For all amounts reported in a financial statement,
comparative information should be provided for the previous period unless
another standard requires or permits otherwise. Such comparative
information allows users to better understand reported amounts.
P10-4 Revenue recognize criteria: general principal
Q41-4 ★★Which of the following is not a requirement to recognize revenues under US
GAAP?
A. Price is determinable
B. Goods have been delivered to clients
C. Cost can be estimated reliably
Solution: C.
Cost can be estimated reliably is the principal made by IFRS. And four criteria to determine
whether revenue should be recognized in GAAP is :
There is evidence of an arrangement between the buyer and seller.
The product has been delivered or the service has been rendered.
The price is determined or determinable.
The seller is reasonably sure of collecting money.
R24-4 IFRS 对 sale of goods 进行收入确认的方法：
the entity has transferred to the buyer the significant risks and rewards of
ownership of the goods;
the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow
to the entity; and
the costs incurred or to be incurred in respect of the transaction can be measured
reliably.
R25-4 IFRS 对 rendering of service 进行收入确认的方法：
the amount of revenue can be measured reliably
it is probable that the economic benefits associated with the transaction will flow
to the entity
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the stage of completion of the transaction at the balance sheet date can be
measured reliably
the costs incurred for the transaction and the costs to complete the transaction
can be measured reliably
US GAAP specify that revenue should be recognized when it is "realized or
realizable and earned”
There is evidence of an arrangement between buyer and seller.
The product has been delivered, or the service has been rendered
The price is determined, or determinable
The seller is reasonably sure of collecting money.
R26-4 According to the Financial Accounting Standards Board (FASB), revenue is recognized
in the income statement when
realized or realizable and
earned.
R27-4 The Securities and Exchange Commission (SEC) provides additional guidance by
listing four criteria to determine whether revenue should be recognized:
There is evidence of an arrangement between the buyer and seller.
The product has been delivered or the service has been rendered.
The price is determined or determinable.
The seller is reasonably sure of collecting money.
Q42-4 For a nonfinancial firm, are depreciation expense and interest expense included or
excluded from operating expenses in the income statement? (NotesB3-79 1)
Depreciation expense Interest expense
A. Included Included
B. Included Excluded
C. Excluded Included
Solution: B.
Depreciation is included in the computation of operating expenses. Interest expense is a
financing cost. Thus, it is excluded from operating expenses.
Q43-4 ★Are income taxes and cost of goods sold examples of expenses classified by nature
or classified by function in the income statement? (NotesB3-80 2)
Income taxes Cost of goods sold
A. Nature Function
B. Function Nature
C. Function Function
Solution: A.
Income taxes are expenses grouped together by their nature. Cost of goods sold includes a
number of expenses related to the same function, the production of inventory.
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Q44-4 ★★ An example of an expense classification by function is:（原版书 Reading25）
A. tax expense.
B. interest expense.
C. cost of goods sold.
Solution：C.
Cost of goods sold is a classification by function. The other two expenses represent
classifications by nature.
Q45-4 Changing an accounting estimate: (NotesB3-81 12)
A. is reported prospectively.
B. requires restatement of all prior-period statements presented in the current financial
statements.
C. is reported by adjusting the beginning balance of retained earnings for the cumulative
effect of the change.
Solution: A.
A change in an accounting estimate is reported prospectively. No restatement of prior period
statements is necessary.
Q46-4 Which of the following transactions would most likely be reported below income
from continuing operations, net of tax? (NotesB3-82 13)
A. Gain or loss from the sale of equipment used in a firm's manufacturing operation.
B. A change from the accelerated method of depreciation to the straight-line method.
C. The operating income of a physically and operationally distinct division that is currently
for sale, but not yet sold.
Solution: C.
A physically and operationally distinct division that is currently for sale is treated as a
discontinued operation. The income from the division is reported net of tax below income
from continuing operations. Changing a depreciation method is a change of accounting
principle, which is applied retrospectively and will change operating income.
Q47-4 ★★Which of the following statements about nonrecurring items is least accurate?
A. Gains from extraordinary items are reported net of taxes at the bottom of the income
statement before net income.
B. Unusual or infrequent items are reported before taxes above net income from continuing
operations.
C. A change in accounting principle is reported in the income statement net of taxes after
extraordinary items and before net income.
Solution: C.
A change in accounting principle requires retrospective application; that is, all prior period
financial statements currently presented are restated to reflect the change.
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Q48-4 ★★Under US GAAP, a company which is planning to change one of its accounting
policies has to adjust the financial statements most likely in a manner:
A. Retrospective
B. Prospective
C. Cumulative
Solution: A.
Change accounting policies need to Retrospect. (To LIFO, no need to adjust retrospectively)
Financial Statement Elements 掌握 . GAAP 和 IFRS 的区别：知识点与题目不匹配
R28-4 US GAPP: Assets，Liabilities，Equity or Net Assets， Investments by owners，
Distributions to owners，Comprehensive income，Revenues，Expenses，Gains，Losses
R29-4 IFRS: Assets、Liabilities、Equity or Net Assets、Revenues，Expenses （ Income
statements；by nature or function; discountinued operation; changes in estimates）
income statement format and components
P11-4 Revenue Recognition in special cases: long-term contract and installment sales
Q49-4 Under IFRS, income includes increases in economic benefits from
A. increases in owners' equity related to owners' contributions.
B. increases in liabilities not related to owners' contributions.
C. enhancements of assets not related to owners' contributions.
Solution: C.
Under IFRS, income includes increases in economic benefits from increases in assets,
enhancement of assets, and decreases in liabilities.
Q50-4 ★If the outcome of a long-term contract can be measured reliably, the preferred
accounting method under both IFRS and . GAAP is: （原版书 Reading25）
A. the cost recovery method.
B. the completed contract method.
C. the percentage-of-completion method.
Solution：C.
The preferred method is the percentage-of-completion method. The completed contract
method should be used under . GAAP only when the outcome cannot be measured reliably.
A method similar to, but not referred to as, the cost recovery method is used under IFRS when
the outcome cannot be measured reliably.
Q51-4 ★Under US GAAP, Argo Company sold 10 acres of prime commercial zoned land to a
builder for $5,000,000 in 2009. The builder gave Argo a $1,000,000 down payment
and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the
land in 2002 for $2,000,000. Using the installment method, how much profit will Argo
report for 2009? （原版书 Reading25）
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A. $600,000.
B. $1,000,000.
C. $3,000,000.
Solution：A.
Installment method with certainty of collection, profit is equal to cash collected during the
period multiplied by total expected profit as a percentage of sales.
(., $3,000,000 = $5,000,000 = 60 percent). Argo will, therefore, recognize $600,000 in profit
for 2009 ($1,000,000 cash received X 60 percent).
Q52-4 ★If the outcome of a long-term contract can be measured reliably, the preferred
accounting method under both IFRS and . GAAP is:
A. the installment method.
B. the completed contract method.
C. the percentage-of-completion method.
Solution: C.
The preferred method is the percentage-of-completion method. The completed contract
method should be used only when the outcome cannot be measured reliably.
Q53-4 ★★A company uses the percentage-of-completion method to recognize revenue
from its long-term construction contracts and estimates percent completion based on
expenditures incurred as a percentage of total estimated expenditures. A three-year
contract for €10 million was undertaken with a 30% gross profit anticipated. The
project is now at the end of its second year, and the following end-of-year information
is available:
Year 1 Year 2
Costs incurred during year €3,117,500 €2,582,500
Estimated total costs €7,250,000 €7,600,000
The gross profit (in €) recognized in year 2 is closest to:
A. 617,500.
B. 880,000.
C. 960,000.
Solution: A.
Percentage of
Completed
Costs Incurred / Total Costs Anticipated × 100%
Gross Profit %Complete × Future Anticipated Profit – Profit Already Recognized
Year 1 Year2
Percent Completed 3,117,500 / 7,250,000 = % 5,700,000 / 7,600,000 = %
Gross Profit % × (10,000,000–7,250,000)
= 1,182,500
% × (10,000,000
–7,600,000) – 1,182,500 =
617,500
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Q54-4 ★★During 2010, Company A sold a piece of land with a cost of $6 million to
Company B for $10 million. Company B made a $2 million down payment with the
remaining balance to be paid over the next 5 years. It has been determined that there
is significant doubt about the ability and commitment of the buyer to complete all
payments. Company A would most likely report a profit in 2010 of:
A. $4 million using the accrual method.
B. $ million using the installment method.
C. $2 million using the cost recovery method.
Solution: B.
Under the installment method, the portion of the total profit that is recognized in each period
is determined by the percentage of the total sales price for which the seller has received cash.
For Company A 2/10 x 4 = $ million. Note, cost recovery method could be used in this case,
but the reported profit would be $0.
Q55-4 Assume . GAAP applies unless otherwise the beginning of 2008, Florida
Road Construction entered into a contract to build a road for the government
Construction will take four years. The following information as of 31 December 2008 is
available for the contract:
Total revenue according to contract $10,000,000
Total expected cost $8,000,000
Cost incurred during 2008 $1,200,000
Under the completed contract method, how much revenue will be reported in 2008?
A. None.
B. $300,000.
C. $1,500,000.
Solution: A.
Under the completed contract method, no revenue would be reported until the project is
completed. B is incorrect. This is the profit under the percentage-of-completion method. C is
incorrect. This is the revenue under the percentage-of-completion method.
Q56-4 Under IFRS, if the cost of a long-term contract cannot be estimated reliably, which of
the following methods is preferred to recognize revenue?
A. Recognize revenue up to the extent of cost incurred.
B. Recognize revenue after the completeness of the contract.
C. Recognize revenue as proportionate to cost incurred.
Solution: B.
The completed-contract method is used when the outcome of a project cannot be reliably
measured or the project is short-term.
Q57-4 According to International Financial Reporting Standards, which of the following
conditions should be satisfied in order to report revenue on the income statement?
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A. Payment has been received.
B. Costs can be reliably measured.
C. Goods have been delivered to the customer.
Solution：B.
The IFRS conditions that should be met include that the costs incurred can be reliably
measured, and it is likely that the economic benefits will flow to the entity, not the actual
receipt of any payment, and that the significant risks and rewards of ownership have been
transferred, which is normally when the goods have been delivered, but not always.
Q58-4 A company entered into a three-year construction project with a total contract price
of $ million and an expected total cost of $ million. The following table
provides cash flow information relating to the contract: （2012-mock83）
All figures in millions Year 1 Year 2 Year 3
Costs incurred and paid $ $ $
Amounts billed and payments received $ $
If the company uses the percentage-of-completion method, the amount of revenue
recognized (in millions) in Year 2 is closest to:
A. $.
B. $.
C. $.
Solution：C.
The revenue reported is equal to the percentage of the contract that is completed in that
period, where percentage completion is based on costs.
In Year 2: ( ÷ ) × = .
Q59-4 ★★Which of the following would most likely result in a current liability? （NotesB3）
A. Possible warranty claims.
B. Future operating lease payments.
C. Estimated income taxes for the current year.
Solution: C.
Estimated income taxes for the current year are likely reported as a current liability. To
recognize the warranty expense, it must be probable, not just possible. Future operating lease
payments are not reported on the balance sheet.
Q60-4 Which of the following transactions would most likely be reported below income
from continuing operations, net of tax? (NotesB3-82 13)
A. Gain or loss from the sale of equipment used in a firm's manufacturing operation.
B. A change from the accelerated method of depreciation to the straight-line method.
C. The operating income of a physically and operationally distinct division that is currently
for sale, but not yet sold.
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Solution: C.
A physically and operationally distinct division that is currently for sale is treated as a
discontinued operation. The income from the division is reported net of tax below income
from continuing operations. Changing a depreciation method is a change of accounting
principle, which is applied retrospectively and will change operating income.
Q61-4 ★★An e-commerce company Sells hotel room nights on its Website Under
agreement from a large number of major hotel chains. The hotel chains grant the
company flexibility for the rooms they supply to the Company's website and for the
prices charged. These major chains bear the responsibility for providing all services
once a customer books a room from the website. During 2011, the company received
$5 million in payments from the sale of hotel rooms. The cost of these rooms was $
million, which does not include $250,000 in direct selling costs. Under U. S. GAAP, the
company’s cost of Sales is closest to:（MOCK92-58）
A. $250, 000.
B. $4,500, 000.
C. $4,750, 000.
Solution：A.
To report cost of sales under gross reporting (and include the cost of rooms), the company
must meet four criteria:
Criteria Met / Not Met
The company must:
Be the primary obligor under the contract. Not Met
Bear the inventory risk and credit risk. Met
Be able to choose its supplier. Met
Also have reasonable latitude to establish pricing Met
The first criterion is not met. The major hotel chains have the obligation of fulfilling the room
contract once it is entered into. Because not all of these conditions are met, the company must
use net reporting, where revenue is $ 500,000 and cost of sales is $250, 000.
Q62-4 ★Apex Consignment sells items over the internet for individuals on a consignment
basis. Apex receives the items from the owner, lists them for sale on the internet, and
receives a 25 percent commission for any items sold. Apex collects the full amount
from the buyer and pays the net amount after commission to the owner. Unsold items
are returned to the owner after 90 days. During 2009, Apex had the following
information:
Total sales price of items sold during 2009 on consignment was €2,000,000.
Total commissions retained by Apex during 2009 for these items was €500,000.
How much revenue should Apex report on its 2009 income statement?（原版书）
A. €500,000.
B. €2,000,000.
C. €1,500,000.
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Solution：A.
Apex is not the owner of the goods and should only report its net commission as revenue.
Q63-4 Under IFRS, a project with a ten-year contract promises to receive $300 at the end of
each year. The discounted present value of the project is $2,800. The revenue
recognized in the first year is closest to:
A. 0
B. 3,000
C. 2,800
Solution: C.
Installment
contract
(a firm
finances a
sale and
payments
are expected
to be
received over
an extended
period)
GAAP
Collectability
cannot be
reasonably
estimated.
Installment
sales method
(Similar to
percentage of
completion
method)
Profit is recognized as cash is
collected
Profit is equal to cash collected
during the period multiplied by the
total expected profit as a percentage of
sales
Used in limited circumstances, eg.
sale of estate or other firm assets
Collectability
is highly
uncertain.
Cost recovery
method
(Similar to the
completed
contract method)
Sales are recognized when cash is
received
Profit is recognized only when cash
collected exceeds costs incurred.
IFRS
Outcome
can be
reliably
estimated
The discounted present value of the installment
payments is recognized at the time of sale.
The difference between the installment payments and
the discounted present value is recognized as interest
over time
Outcome
cannot be
reliably
estimated
Revenue recognition under IFRS is similar to cost recovery
method
Revenue Recognition 掌握概念及理解：
R30-4 Revenue Recognition criteria 一般性条件 for IFRS & USGAAP
R31-4 ★Revenue RecognitionLong-term contract
结果可以确认时
US GAAP & IFRS 都用 Percentage of completion（ Costincured%=
Totalcostexpected
）
结果不可以确认时
US GAAP 用 Completed contract 方法，即完工时才记账
IFRS 记 revenue=costs，profit 在完工时才记
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R32-4 ★Revenue Recognition Installment contract
USGAAP
不能合理确定结果时（Collectability cannot be reasonably estimated）：
Installment sales methods（profit
=
Expectedprofit
%=cash collected
sales
）
高度不确定时（Collectability is highly uncertain）:Cost recovery method,只有
当 Cash 完全覆盖住成本时才能记 profit
IFRS
结果可以合理确认时：比较 Discount PV 和 Intallment payment，差额
recognized as interest over time
当结果不可以合理确认时：Cost recovery method,只有当 Cash 完全覆盖住成
本时才能记 profit
P12-4 Revenue Recognition in special cases: others
Q64-4 ★Assume IFRS applies unless otherwise noted. Revenue from barter transactions
should be measured based on the fair value of revenue from:
A. Similar barter transactions with related parties.
B. Similar barter transactions with unrelated parties.
C. Similar non-barter transactions with unrelated parties.
Solution: C.
Under IFRS, revenue for barter transactions should be measured based on the fair value of
revenue from similar non-barter transactions with unrelated parties. Under . GAAP, revenue
for barter transactions can be recognized at fair value only if a company has historically
received cash payments for such services and can thus use this historical experience as a basis
for determining fair value.
Income Statement 相关其它特殊交易的会计处理：
R33-4 ★Barter transaction
USGAAP
Fair value（以前买过同样的，历史上做过类似的交易）
Carrying value of 被放弃的资产
IFRS
Fair value abserable 可以观察到的其他非相关方的 non-barter transaction
R34-4 Round Trip：
barter transactions 的一种形式，比如 A 公司有一项服务卖给 B 公司，立刻又
从 B 公司购入了等额的产品，此时 A 公司的收入等于费用，这样的交易不影
响 NI，也不影响 CF
R35-4 Agency
Gross revenue: 公司分开记录收入和支出. Under gross revenue reporting, the
selling firm reports sales revenue and cost of goods sold separately. （需要满足
四个条件）
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233
the company is the primary obligor under the contract, b
ears risk,
can choose the supplier, and
has reasonable latitude to establish price
Net revenue: 公司只记录收入和支出的差额.Under net revenue reporting, only
the difference in sales and cost is reported. While profit is the same, sales are
higher using gross revenue reporting.
P13-4 Non-recurring items
Q65-4 ★Assume IFRS (international financial reporting standard) applies unless otherwise
noted. A loss from the destruction of property in a fire would most likely be classified
as:
A. Continuing operations.
B. An extraordinary item.
C. Discontinued operations.
Solution: A.
A fire may be infrequent, but it would still be part of continuing operations. IFRS does not
permit classification of an item as extraordinary. Discontinued operations relate to a decision
to dispose of an operating division.
Q66-4 ★ Assume . GAAP applies unless otherwise 2007 Nagano
Incorporated, a manufacturing company reported the following items on their income
statement:
Loss on disposal of fixed assets $60,000
Interest expense $73,400
The correct classification of each of these items on the income statement would be
as a(n):
Loss on disposal of fixed assets Interest expense
A. Non-operating item operating item
B. operating item non-operating item
C. operating item operating item
Solution: B.
The loss on the disposal of fixed assets is an unusual or infrequent item, but it is still part of
normal operating activities. The interest expense is the result of financing activities and would
be classified as a non-operating expense by nonfinancial service companies.
Q67-4 ★Which of the following is least likely considered a non-operating transaction from
the perspective of a manufacturing firm? (Notes B3-81 11)
A. Dividends received from available-for-sale securities.
B. Interest expense on subordinated debentures.
C. Accruing bad debt expense for goods sold on credit.
金程教育 专业·领先·增值
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234
Solution: C.
Bad debt expense is an operating expense. The other choices are non-operating items from
the perspective of a manufacturing firm.
Q68-4 A company suffered a substantial loss when its production facility was destroyed in
an earthquake against which it was not insured. Geological scientists were surprised
by the earthquake as there was no evidence that one had ever occurred in that area in
the past. Which of the following statements is most accurate? The company should
report the loss on its income statement: （2012-mock83）
A. net of taxes if it reports under . GAAP.
B. as an extraordinary item if it reports under IFRS.
C. as an unusual item if it reports under . GAAP.
Solution：A.
To qualify as an extraordinary item, an item must be both unusual in nature and infrequent in
occurrence: The description of the earthquake meets these criteria. Extraordinary items are
only allowed under . GAAP and are reported on the income statement net of tax.
Q69-4 Under US GAAP, the gain of bond which was early redeemed should be included in:
A. Extraordinary items
B. Unusual or infrequent items
C. Discontinued operations
Solution: A.
Extraordinary items Discontinued opertaions Accounting changes
Both unusual and infrequent
Examples:
Losses from an
expropriation assets
Gains or losses from
early retirement of debt
Uninsured losses from
natural disasters
The time between
Measurement date and
Disposal date
phase out period
Change in accounting principle
retrospective application
Change in accounting estimate
prosepective application(and not a
below line item)
Errors
Restate financial statement
Notes disclosure
Income Statement 的线下项目
R1-4 FASB 要求，在一份基本的 Income Statement 中，为了得到 Net Income，必须包含
net income from continuing operations 和 non-recurring items.
R2-4 ★Non-operating income:
For non-financial service company： 在 equity or debt securities issued 的投资，any
dividend, interest (including amortization discount or premium) or profits from sales
都视为 non-operating income；
For financial service firms, interest income and expense are likely components of
operating activities.
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235
R3-4 ★Non-recurring items 分为三种
分别叫做：Unusual or infrequent items, Extraordinary items, Discontinued
operations.
Unusual or infrequent items 指 Transactions or events that are either unusual in
nature or infrequent in occurrence but not both.唯有它列示于 net income from
continuing operations 之上.包括：(1) gains or losses from the sale of assets or part
of a business. (2) impairments, write-offs, write-downs and restructuring costs.
Extraordinary items 指性质高度异常的重大损益项目，该项目因企业日常业务活
动以外的交易或事项产生，并预期不会再度发生，包含了灾难带来的损失，对
于国外没收，及提前赎回债券的损失（美国准则有这项，但是国际准则没有这
一项）
R4-4 ★Discontinued Operations：the business line in disposal of or intended to dispose
generate the income (earnings or loss net of tax); during the phase period (since
measurement date to disposal date), should recognize the loss but not the gain.
R5-4 ★Accounting changes 包括 changes in accounting principles, changes in accounting
estimates。
changes in accounting principles 需要追溯调整，即 retro prospective，放在 R/E
beginning（在美国准则下这一条已经不再显示了，现在来自于这里的变动全部
直接调整期初留存收益）。
changes in accounting estimates 一般是由于有了新的信息所导致的估计调整。不
需要追溯调整，只考虑以后，即 prospective。
error adjustment is recorded in Prior Period Adjustment,也要求追溯调整
P14-4 Basic EPS and Diluted EPS
Q70-4 ★Assume . GAAP applies unless otherwise noted. An analyst gathered the
following information about a company:
Shares of common stock $1,000,000
Net income for the year $1,500,000
Par value of convertible bonds with a 4% coupon rate $10,000,000
Par value of cumulative preferred stock with a 7% dividend rate $2,000,000
Tax rate 30%
The bonds were issued at par and can be converted into 300,000 common shares. All
securities were outstanding for the entire year. Diluted earnings per share for the
company are closest to:
A. $
B. $
C. $
Solution: B.
Preferred stock dividends of $140,000 (* 2,000,000) should be deducted from net income
to derive amount available for common shareholders: $1,360,000 = (1,500,000 - 140,000).
Basic EPS = $1,360,000/1,000,000 or $ per share.
Diluted EPS would consider the convertible bonds if they were dilutive. Interest on the bonds
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236
would be $400,000 and the after-tax add back to net income would be $400,000 () or
$280,000. Diluted EPS would be $1,640,000/1,300,000 shares assuming conversion = $ per
share.
Q71-4 ★An analyst collected data about a company as follows:
Net income $1,000,
Debt outstanding with a coupon rate of 4% $5,000,
Preferred stocks with dividend rate of 4% $1,000,
Tax rate 35%
Average weighted number of shares issued 500,000
The preferred stock can be converted to 10,000 common stocks, while the debt is not
convertible. The diluted earnings per share is closest to:
A.
B.
C.
Solution: A.
If the convertible preferred shares were converted to common stocks, there would be no
preferred dividends paid. Thus, we should add back the convertible preferred dividends that
had previously been subtracted from net income in the numerator.
Basic EPS = (net income – dividend from preferred stocks) / average weighted number of
shares issued = (1,000,000 – 1,000,000×) / 500,000=
Diluted EPS = (net income – dividend from preferred stocks+ dividend from preferred stocks) /
(average weighted number of shares issued + shares from conversion of preferred stocks) =
(1,000,000 – 1,000,000× + 1,000,000×) / (500,000+10,000) =
> , diluted EPS is .
Q72-4 Cell Services (CSI) had 1,000,000 average shares outstanding during all of 2007. During
2007, CSI also had 10,000 options outstanding with exercise price of $10 each. The
average stock price of CST during 2007 was $15. For purposes of computing diluted
earnings per share, how many shares would he used in the denominator?
A. 1,000,000.
B. 1,003,333.
C. 1,010,000.
Solution : B.
With stock options, the treasury stock method must be used. Under that method, the
company would receive $100,000 (10,000 × $10) and would repurchase 6,667 shares
($100,000/$15). The shares for the denominator would be:
Shares outstanding 1,000,000
Options exercised 10,000
Treasury shares purchased (6,667)
Denominator 1,003,333
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Q73-4 ★★What is least likely to cause a distortion in the true free cash flow of a company
assuming that a large stock buyback has taken place to offset the dilutions from
options exercised?
A. Stock bought back on the open market.
B. Classifying the cash expended to buy back stock as a financing activity.
C. Classifying the tax benefit of option exercises as an operating cash flow.
Solution：A.
Most stock buy backs occur in the open market and do not result in any distortion of cash flow.
Q74-4 ★★Which of the following is the least important reason why an analyst should
review the cash flow statement, the stockholders' equity statement, and the notes to
the financial statements for information regarding stock options? To determine:
A. the volume of options exercised in the period.
B. the extent to which cash flows are affected by the tax benefit on stock options.
C. whether the company follows APB No. 25 or SFAS 123(R) to account for stock options.
Solution：C.
Since 2005, . GAAP require all companies to follow SFAS 123(R) which requires options to
be expensed.
R6-4 EPS 掌握计算：
1) 公式：
Net income-preferred dividednds
Basic EPS=
Weighted average number of common shares outstanding
convertible convertible
preferred debtpreferred
Adjusted income available for common shares
Diluted EPS=
Weighted avg. common & potential common shares outstanding
NI
div interest (1
- div
conversion of conversion of issuable from
conv. pfd. shares conv. debt stock opt.
)
shares shares shares
t
WACSO
Diluted EPS:如果存在 Stock option 时，如果平均的市场价格>执行价 X，则用此
公式。
2) 步骤：firstly, Calculate basic EPS; then，to identify dilutive securities; in the end, to
calculate diluted EPS
3) 关键
★考试中经常出现的是 weighted average number of common shares
outstanding，要记得 stock dividend 和 stock split 要追溯处理，stock new issue
和 repurchase 只要时间加权
Diluted EPS 的计算，就是 convertible bond，convertible preferred stock 和 stock
option，warrant 是否会让 basic EPS 稀释。对于各自可稀释性债券分子，分母
金程教育 专业·领先·增值
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需要考虑什么，一定要记熟
★如果公司有 option 或者 warrant 的情况下，计算的 Diluted EPS 用的是
treasury stock method，如果在考试中遇到这个称法不要觉得陌生，其实不影
响计算的过程。事实上，treasury stock method 的意思是假设公司使用收入
的期权实行费用来回购股票，抵消一部分稀释。 当期权执行价格低于股票市
场平均价格，该期权是稀释的。
★注意，在计算可转债带来的稀释时，不要忽略税盾。
Treasury stock 投票权问题：Treasury stock has no voting rights and does not
receive dividends.
P15-4 Comprehensive Income
Q75-4 Assume . GARP applies unless otherwise noted. For financial assets classified as
available for sale, how are unrealized gains and losses reflected in shareholders’
equity?
A. They are not recognized.
B. They flow through retained earnings.
C. As a separate line item (other comprehensive income).
Solution: C.
For financial assets classified as available for sales, unrealized gains and losses are not recorded
on the income statement but do appear on the balance sheet. Shareholders’ equity is adjusted
through a separate line item for valuation gains and losses termed “other comprehensive
income.
Q76-4 ★Which of the following transactions affects owners' equity but does not affect net
income?(NotesB3-83 19)
A. Foreign currency translation gain.
B. amount on a bond issued at par.
C. Dividends received from available-for-sale securities.
Solution: A.
A foreign currency translation gain is not included in net income but the gain increases owners'
equity. Dividends received are reported in the income statement. The repayment of principal
does not affect owners' equity.
Q77-4 Which of the following is not included in other comprehensive income?
A. Adjustments for minimum pension liability.
B. Unrealized gains and losses from cash flow hedging derivatives.
C. Unrealized gains and losses from hold-for-maturity securities.
Solution: C.
OCI includs:
Foreign currency translation gains and losses.
金程教育 专业·领先·增值
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Adjustments for minimum pension liability.
Unrealized gains and losses from cash flow hedging derivatives.
Unrealized gains and losses from available-for-sale securities.
（Unrealized gains and losses from hold-for-maturity securities is reported in income
statement as holding period gains and losses.）
Q78-4 Selected information for a company and the common size data for its industry are
provided below.
Company(￡)
Common Size Industry Data
(% of sales)
EBIT 76,000 28,0
Pretax profit 66,400
Net income 44,488
Sales 400,000
Total assets 524,488
Total equity 296,488
ROE % %
The main driver of the company's inferior ROE compared to that of the industry is
most likely the result of its lower:(MOCK79-49)
A. EBIT margin
B. tax burden ratio
C. Interest burden ratio
Solution: A.
Q79-4 Unrealized gain or loss of available-for-ale should be recognized in：
A. Income statement
B. Balance sheet
C. Cash flow statement
Solution: B.
Available-for-sale securities are debt and equity securities that are not expected to be held to
maturity or traded in the near term. Like trading securities, available-for-sale securities are
reported on the balance sheet at fair value. However, any unrealized gains and losses are not
Calculation Company Industry
EBIT Margin EBIT/Sales 76,000/400,000=
Tax Burden ratio Net Inc/EBT 44,488/66,400=
Interest Burden ratio EBT/EBIT 66,400/76,000=
The company has a higher interest burden ratio bur a lower EBIT margin than the industry, and the
same tax burden ratio; the lower EBIT margin relative to the industry is the cause of the company's
poor relative performance
EBT: Pretax profit (earnings before tax) Net Inc: Net Income
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recognized in the income statement, but are reported in other comprehensive income as a
part of shareholders' equity.
Q80-4 ★★★At the beginning of the year, Company P purchased 1,000 shares of Company S
for $80 per share. During the year, Company S paid a dividend of $4 per share. At the
end of the year, Company S's share price was $ amount of investment income
should Company P recognize in its income statement if the investment in Company S is
considered trading, and what amount should be recognized if the investment is
considered available-for-sale?(NotesB3-107)
Trading Available-for-sale
A. ($,1000) ($,1000)
B. ($,1000) $4,000
C. ($5,000) $4,000
Solution: B.
A loss of $1,000 is recognized if the securities are considered trading securities ($4 dividend x
$1,000 shares) — ($5 unrealized loss x 1,000 shares). Income is $4,000 if the investment in
Company S is considered available-for-sale [$4 dividend x $1,000].
Q81-4 ★Selected data from Alpha Company's balance sheet at the end of the year follows:
Investment in Beta Company, at fair value $150,000
Deferred taxes $86,000
Common stock, $1 par value $550,000
Preferred stock, $100 par value $175,000
Retained earnings $893,000
Accumulated other comprehensive income $46,000
The investment in Beta Company had an original cost of $120,000. Assuming the
investment in Beta is classified as available-for-sale, Alpha's total owners' equity at
year-end is closest to:
A. $1,618,000.
B. $1,664,000.
C. $1,714,000.
Solution: B.
Total stockholders' equity consists of common stock of $550,000, preferred stock of $175,000,
retained earnings of $893,000, and accumulated other comprehensive income of $46,000, for
a total of $1,664,000. The $30,000 unrealized gain from the investment in Beta is already
included in accumulated other comprehensive income.
Comprehensive Income 的基本了解
R7-4 全面综合收益 Comprehensive Income：all changes in equity except for owner
contributions and distributions, 单列在 NI 后面的，不放在 I/S 中。
R8-4 ★CI=NI + other comprehensive income（在股东权益变动表中也包含这些项目, IFRS
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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下没有 CI，但有 OCI）
R9-4 ★Other comprehensive Income 4 项内容
Foreign currency translation adjustment on a foreign subsidiary
Unrealized G/L on derivatives contracts accounted for as cash flow hedges
Unrealized G/L on available for sale securities
Certain costs of a company’s defined benefit post-retirement plans that are not
recognized in the current periodt
R10-4 Accumulated other comprehensive income aggregates past and current OCI 并显示在
B/S 中的 equity 中（ IFRS 没有明确规定在 B/S 中列出 Accumulated other
comprehensive income 的数额）
R11-4 The statement of changes in equity
A summary of all transactions within the equity accounts
Capital a Additional
paid – in
capital b
Retained
earnings c
Other
comprehensive
income d
Total
(explanation)
Beginning balance 100 100 100 100 400 (=a+b+c+d)
Net income 50 50(=c)
Other Comprehensive
income
20 20(=d)
Comprehensive income 70 (subtotal)
Issuance of common
stock
25 5 30 (= a+b)
Repurchased of
common stock
(20) (4) (24) (= a+b)
Dividend (15) (15) (= c )
Ending balance 105 101 135 120 461(subtotal =
a+b+c+d)
P16-4 Understanding balance sheet
Q82-4 ★The carrying value of inventories reflects:
A. their original cost.
B. their current value.
C. the lower of original cost or net realizable value.
Solution: C.
Inventories are carried at historical cost, unless the current replacement cost of the inventory
is less.
Q83-4 Resources controlled by a company as a result of past events are:
A. equity.
B. assets.
C. Liabilities.
Solution: B.
Assets are resources controlled by a company as a result of past events.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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Q84-4 ★Under IFRS, the minority interest in consolidated subsidiaries is presented on the
balance sheet:
A. as a long-term liability.
B. separately, but as a part of shareholders' equity.
C. as a mezzanine item between liabilities and shareholders' equity.
Solution: B.
IFRS requires that minority interest in consolidated subsidiaries be classified as shareholders'
equity.
Q85-4 ★Miller Corporation has 160,000 shares of common stock authorized. There are
92,000 shares issued and 84,000 shares outstanding. How many shares of treasury
stock does Miller own?(NotesB3-107 12)
A. 8,000
B. 68,000
C. 76,000
Solution：A.
The difference between the issued shares and the outstanding shares is the treasury shares.
Except the solution is A rather than B, all other explanation is correct.
R12-4 掌握 Balance Sheet 里面的知识点：
Assets :
Provide probable future economic benefits controlled by an entity as a result of
previous transactions.
Current and Non – current assets (Long – lived assets)
Liabilities :
Are obligations owed by an entity from previous transactions that are expected to
result in an outflow of economic benefits in the future.
Current and Non – current liabilities (Long – term liabilities)
Stockholders’ equity :
Is the residual interest in assets that remains after subtracting a firm’s liabilities.
A financial statement item should be recognized if a future economic benefit from the
item (flowing to or from the firm) is probable and the item's value or cost can be
measured reliably.
R13-4 Usesand limitations of the balance sheet in financial analysis.
The balance sheet can be used to assess a firm's liquidity, solvency, and ability to make
distributions to shareholders.
From the firm's perspective, liquidity is the ability to meet short-term obligations.
Solvency is the ability to meet long-term obligations
R14-4 Shareholders equity
Capital Common stock, preferred stock
Additional paid-in-capital Capital in excess of par . premium
Treasury stock Stock has been reacquired by the issuing firm but not yet
retired
No voting rights, no dividend
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Retained earnings Net Income–Dividend
Accumulated other
comprehensive income
Adjustments for minimum pension liability.
Unrealized gains and losses from cash flow hedging
derivatives.
Unrealized gains and losses from available-for-sale
securities
Minority
interest/Non-controlling
interest
Group accounting
P17-4 Accounting Treatment to Marketable Securities
Q86-4 ★ Which of the following is the least appropriate accounting treatment for
marketable securities under IAS No. 39?
Category Measurement Method Realized Gains &Losses Reported In
A. Trading Fair Value Income Statement
B. Available for sale Fair Value Equity
C. Held to Maturity Amortized Cost Income Statement
Solution: B.
All categories have realized gains or losses treated in the same way; they are reported on the
income statement. It is the unrealized gains and losses that are included in other
comprehensive income (in equity) for available-for-sale securities carried at market value.
Q87-4 ★Assume . GAAP applies unless otherwise noted. A company issued bonds in 2006
that mature in 2016. The measurement basis used for the bonds on the 2008 balance
sheet will be:
A. Market value.
B. Historical cost.
C. Amortized cost.
Solution: C.
Bonds payable issued by a company are financial liabilities measured at amortized cost.
Q88-4 ★The following information is from a company’s investment portfolio:
Investment Classification Held-to-maturity
Market value, 31 Dec 2009 $ 17,000
Cost/Amortized cost 31 Dec 2009 22,000
Market value, 31 Dec 2010 10,000
Cost/Amortized cost 31 Dec 2010 20,000
If the investment is reclassified as Available-for-sale as of 31 December 2010, the
balance sheet carrying value of the company’s investment portfolio would most
likely:
A. remain the same.
B. decrease by $10,000.
C. decrease by $12,000.
金程教育 专业·领先·增值
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Solution: B.
Held-for-trading and available-for-sale securities are carried at market value, whereas held-to-
-maturity securities are carried at amortized cost. If the investment is reclassified as
available-for-sale in 2010, the carrying amount should be adjusted to its market value, which is
$10,000. Compared with the amortized cost of $20,000, it’s a decrease of $10,000.
Q89-4 Assume a company has the following portfolio of marketable securities which was
acquired at the end of 2009:
Category Original Cost in €
as at the Year End, 2009
Fair Market Value in €
as at the Year End, 2010
Held for trading 12,000,000 12,500,000
Available for sale 17,000,000 16,000,000
If the company reports under IFRS instead of . GAAP, its net income will most
likely be:
A. the same.
B. €500,000 lower.
C. €500,000 higher.
Solution: A.
Whether securities are classified as held for trading or available for sale, they are measured at
their fair value on the balance sheet, but all gains/losses on held for trading securities are
reported on income statements. The unrealized gains/losses on available for sale securities are
reported in equity. This treatment is the same for both IFRS and . GAAP reporting.
Q90-4 ★★Which of the following statements is most accurate regarding cash flow
statements prepared under IFRS and . GAAP?
A. Under . GAAP, bank overdrafts should be classified as a financing cash flow.
B. Under IFRS, interest paid can be reported either as an operating or an investing cash flow.
C. Both the direct and indirect formats of cash flow statements are allowed under IFRS and
. GAAP, but indirect is encouraged under IFRS only.
Solution: A.
Under . GAAP, bank overdrafts are not considered part of cash and cash equivalents and are
classified as financing cash flows.
Q91-4 ★★When comparing financial statements prepared under IFRS with those prepared
under . generally accepted accounting principles, analysts may need to make
adjustments related to:（原版书 Reading35）
A. realized losses.
B. unrealized gains and losses for trading securities.
C. unrealized gains and losses for available-for-sale securities.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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Solution：C.
IFRS makes a distinction between unrealized gains and losses on available-for-sale debt
securities that arise due to exchange rate movements and requires these changes in value to
be recognized in the income statement., whereas . GAAP does not make this distinction.
Q92-4 ★★Oil Exploration LLC paid $45,000 in printing, legal fees, commissions, and other
costs associated with its recent bond issue. It is most likely to record these costs on its
financial statements as:
A. an asset under . GAAP and reduction of the carrying value of the debt under IFRS.
B. a liability under . GAAP and reduction of the carrying value of the debt under IFRS.
C. a cash outflow from investing activities under both . GAAP and IFRS.
Solution: A.
Under . GAAP, expenses incurred when issuing bonds are generally recorded as an asset and
amortized to the related expense (legal, etc.) over the life of the bonds. Under IFRS, they are
included in the measurement of the liability. The related cash flows are financing activities.
Q93-4 The realized gain of available-for-sales should be calculated in:
A. Income statement
B. Equity
C. Balance sheet
Solution: A.
Category Measurement Unrealized/Realized Gains or Losses
Held-to-maturity Amortized cost
Unrealized: not reported
Realized: reported in income statement
Trading Fair value
Unrealized: reported in income statement
Realized: reported in income statement
Available-for-sale Fair value
Unrealized: reported in equity
Realized: reported in income statement
Q94-4 For financial assets classified as available for sale, how are unrealized gains and losses
reflected in shareholders' equity? （原版书 Reading26）
A. They are not recognized.
B. They flow through retained earnings.
C. They are a component of accumulated other comprehensive income.
Solution：C.
For financial assets classified as available for sale, unrealized gains and losses are not recorded
on the income statement and instead are part of other comprehensive income. Accumulated
other comprehensive income is a component Of shareholders' equity.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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Q95-4 The initial measurement of goodwill is most likely affected by:（原版书 Reading26）
A. an acquisition's purchase price.
B. the acquired company's book value.
C. the fair value of the acquirer's assets and liabilities.
Solution: A.
Initially, goodwill is measured as the difference between the purchase price paid for an
acquisition and the fair value of the acquired, not acquiring, company's net assets (identifiable
assets less liabilities).
金融资产和负债的计量
R15-4 ★判断证券所属的种类，Held-to-maturity、Trading securities 还是 Available-to-sale，
并了解这三种证券不同的 accounting treatment（考试常考）：
Category Measurement Unrealized/Realized Gains or Losses
Held-to-maturity Amortized cost Unrealized: not reported
Realized: r
orted in income statement
Trading
securities
Fair value Unrealized: reported in income
statement and B/S
Realiz
d: reported in income
statement
Available-to-sale Fair value Unrealized: reported in equity and
B/S
Realized: reported in income
statement
★Dividend and interest income and realized gains and losses are recognized in the
income statement for all three classifications of securities.
三种 marketable securities 在 与 IFRS 下基本一致：对于 Realized gain/loss
在 I/S 中确认；对于 AFS，Unrealized G/L 在 OCI 中确认；对于 trading，Unrealized
G/L 在 I/S 中确认。两者唯一的差别是，对于 Debt AFS，在 IFRS 下，对于汇率变化
的影响在 I/S 中确认；在 GAAP 下，对于汇率变化的影响全部在 OCI 中确认。
R16-4 金融资产和负债的计量（需要了解）：
Measu
ed at fair value Measured at cost or
amortized cost
Financial assets:
A. TS(stocks and bonds)
B. AFS(stocks and bonds)
C. Derivatives whether stand-alone or embedded in
non-derivative instruments
D. Non-derivative instru
ments with fair value
exposures hedged by derivative(A)
Financial assets:
A. Loans and
receivable
B. HTM(bonds)
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Financial liabilities:
A. Derivatives
B. Financial liabilities held for trading
C. Non-derivative instruments with fair value
exposures hedged by derivative(L)
Financial liabilities:
All other
liabilities(such as
bonds payables, notes
payable)
P18-4 Calculation of bad debt
Q96-4 ★★Based on the following information about a company, the bad debt expense (in
millions) for 2011 is closest to: （2012-mock85-49）
￡millions 2011 2010
Accounts receivables, gross 6,620 4,840
Allowance for doubtful
accounts
92 56
Write-offs during the year 84 42
A. £36.
B. £84.
C. £120.
Solution: C.
The allowance for doubtful accounts increases by the bad debt expense recognized for the
year and decreases by the amounts written off during the year.
Beginning balance allowance 56
Plus bad debt expense ?
Less write-offs (84)
Ending balance allowance 92
Therefore Bad debt expense =120
R17-4 掌握 bad debt 的计算：
Beginning balance allowance
+ Bad expenses
— write-offs
= Ending balance allowance
Bad debt 会增加 allowance for debtful accounts（contra-assets accounts）
Bad debt 注销会减少 gross receivable and allowance account
P19-4 Classification of different activities in cash flow statement
Q97-4 Assume . GAAP applies unless otherwise noted. The sale of a building for cash
would be classified as what type of activity on the cash flow statement?
A. Operating.
B. Investing.
C. Financing.
Solution: B.
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Purchases and sales of long-term assets are considered investing activities. Note: Absent
information to the contrary, it is assumed that the sale of a building involves cash. If, for
example, the transaction had involved the exchange of a building for common stock or the
exchange of a building for a long-term note payable, it would have been considered a
significant non-cash activity.
Q98-4 ★★An analyst has gathered the following information about a company: （2012）
Cdn $ millions
Cash flow from operating activities
Cash flow from investing activities ()
Cash flow from financing activities
Net change in cash for the year
Interest paid(included in CFO)
Taxes pa id(tax rate of 30％)
Total debt，end of year
The cash flow debt coverage ratio for the year is closest to:
A. %.
B. %.
C. %.
Solution: A.
Cash flow debt coverage ratio = CFO ÷ Total debt.
÷ = %
同时，还有比较重要的一个 coverage ratio 的公式是：
Cash flow interest coverage ratio= (CFO+Interest paid+Taxes paid)/Interest paid
Other cash flow ratio 的公式总结如下：
Other cash flow ratios
Performance ratios Calculation
Cash flow to revenue CFO/ Revenue
Cash return on assets CFO/ Average total assets
Cash return on equity CFO / Average total equity
Cash to income CFO/ Operating income
Cash flow per share (CFO – Preferred dividends) / Weighted average NO. of common shares
Other cash flow ratios
Coverage ratio Calculation
Debt coverage CFO / Total debt
Interest coverage (CFO+Interest paid+Taxes paid)/Interest paid
Reinvestment CFO / Cash paid for long-term assets
Debt payment CFO / Cash long-term debt repayment
Dividend payment CFO/ dividend paid
Investing and financing CFO / Cash outflows from investing and financing activities
金程教育 专业·领先·增值
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Q99-4 Which of the following is an example of a financing activity on the cash flow statement
under . GAAP?
A. Payment of dividends.
B. Receipt of dividends.
C. Payment of interest.
Solution: A.
Answers B and C are items that are included in operating cash flows. Note: International
accounting standards allow companies to include receipt of interest and dividends as either
operating or investing cash flows, and international accounting standards allow companies to
include payment of interest and dividends as either operating or financing cash flows
Q100-4 ★★A company recorded the following events in 2010: （2012-mock85-61）
$’000s
Purchase of securities for trading purposes 240
Proceeds from the sale of trading securities 300
Proceeds from issuance of bonds 500
Purchase of 30% of shares of an affiliated
company
275
On the 2010 statement of cash flows, the company’s cash flow from investing
activities (in ‘000s) is closest to:
A. -$275.
B. -$215.
C. $285.
Solution: A.
Only the cash flows for the purchase of the shares in an affiliated company are cash from
investing activities; therefore the net amount is - $275,000. Cash flows from trading securities
are operating activities.
Q101-4 ★Which of the following is least likely a change in cash flow from operations under
. GAAP? (NotesB3-134 8)
A. A decrease in notes payable.
B. An increase in interest expense.
C. An increase in accounts payable.
Solution：A.
A change in notes payable is a financing cash flow.
Q102-4 Which of the following would be least likely to cause a change in investing cash flow?
A. The sale of a division of the company.
B. The purchase of new machinery.
C. An increase in depreciation expense.
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Solution：C.
Depreciation does not represent a cash flow. To the extent that it affects the firm's taxes, an
increase in depreciation changes operating cash flows, but not investing cash flows.
Q103-4 Martin, Inc. had the following transactions during 20X7:
Purchased new fixed assets for $75,000.
Converted $70,000 worth of preferred shares to common shares.
Received cash dividends of $12,000. Paid cash dividends of $21,000.
Repaid mortgage principal of $17,000.
Assuming Martin follows . GAAP, which of the following amounts represents
Martin's cash flows from investing and cash flows from financing in 20X7,
respectively?)
Cash flows from investing Cash flows from financing
A. ($5,000) ($21,000)
B. ($75,000) ($21,000)
C. ($75,000) ($38,000)
Solution：C.
Purchased new fixed assets for $75,000 — cash outflow from investing Converted $70,000 of
preferred shares to common shares — noncash transaction Received dividends of $12,000 —
cash inflow from operations
Paid dividends of $21,000 — cash outflow from financing
Mortgage repayment of $17,000 — cash outflow from financing
CFI = —75,000
CFF = —21,000 — 17,000 = —$38,000
Q104-4 In preparing a common-size cash flow statement, each cash flow is expressed as a
percentage of: (NotesB3-137 25)
A. total assets.
B. total revenues.
C. the change in cash.
Solution：B.
The cash flow statement can be converted to common-size format by expressing each line item
as a percentage of revenue.
Q105-4 ★Which of the following transactions is least likely to increase reported operating
cash flow for the period?
A. Financing of payables.
B. Securitization of receivables.
C. Exercise of employee stock options.
Solution：A.
Financing payables actually reduces operating cash flow as payables are reclassified as
金程教育 专业·领先·增值
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short-term debt. Companies may decrease operating cash flows reported under the indirect
method by using this strategy. Securitization of receivables increases operating cash flows as
the funds received are treated as an operating cash inflow. Exercise of employee stock options
increases operating cash flows due to tax benefits associated with exercise.
Q106-4 ★★Two firms are identical except that the first pays higher interest charges and
lower dividends, while the second pays higher dividends and lower interest charges.
Both prepare their financial statements under . GAAP. Compared to the first, the
second will have cash flow from financing (CFF) and earnings per share (EPS) that are:
CFF EPS
A. The same Higher
B. Lower Higher
C. Lower The same
Solution：B.
Interest paid is an operating cash flow, and dividends paid are a financing cash flow, so the
firm that pays higher dividends will have lower CFF. The firm with lower interest expense will
have higher EPS.
Q107-4 Where are dividends paid to shareholders reported in the cash flow statement under
. GAAP and IFRS? (NotesB3-132 9)
. GAAP IFRS
A. Operating or financing activities Operating or financing activities
B. Financing activities Operating or financing activities
C. Operating activities Financing activities
Solution：B.
Under . GAAP, dividends paid are reported as financing activities. Under IFRS, dividends
paid can be reported as either operating or financing activities.
Q108-4 Purchasing other companies’ long-term bonds should be classified as:
A. Operating activities
B. Investing activities
C. Financing activities
Solution: B.
Puchasing other companies’ long-term bond generally should be classified as investing
activities, which should be classified as operating activities for financial institutions.
Q109-4 ★Interest expense may be classified as an operating cash flow
A. Under . GAAP, but may be classified as either operating or investing cash flows under
IFRS.
B. Under . GAAP, but may be classified as either operating or financing cash flows under
IFRS.
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C. Under IFRS, but may be classified as either operating or investing cash flows under .
GAAP
Solution: B.
Interest expense is always classified as an operating cash flow under . GAAP but may be
classified as either an operating or financing cash flow under IFRS.
理解各种 Activities 的区分：
R18-4 三种 activities
Operating activities 和每天的运营相关的现金流的流进流出
Investing activities 和由于投资引起的购买或出售相关
Financing activities 包含长期借钱，还钱，发新股，回购，分红（不包括付息）,
但是对于金融公司，这些都属于 operating activities.
Item . GAAP IFRS
Interest received CFO CFO or CFI
Interest paid CFO CFO or CFI
Dividend received CFO CFO or CFI
Dividend paid CFF CFO or CFF
Taxes paid CFO CFO, CFI or CFF
R19-4 ★特别注意公司的主营业务和投资产品的主要性质
如果是银行，存款和贷款就是 Operating activities，因为本身就是银行的主营业
务
如果投资的产品持有期很短，高流动性，或者本身就是以交易为目的，就不考
虑在 Investing activities 当中
P20-4 Calculation of CFO: direct method and indirect method
Q110-4 ★★Assume . GAAP applies unless otherwise noted. An analyst gathered the
following information from a company’s 2005 financial statements ($ millions):
Balances as of year ended 31 December 2004 2005
Retained earnings 120 145
Accounts receivable 38 43
Inventory 45 48
Accounts payable 36 29
The company declared and paid cash dividends of $10 million in 2005 and recorded
depreciation expense in the amount of $25 million for 2005. The company’s 2005 cash
flow from operations ($ millions) was closest to
A. 25.
B. 35.
C. 45.
Solution: C.
Net income (NI) for 2005 can be computed as the change in retained earnings, $25, plus the
dividends paid in 2005, $10. NI can also be calculated from the formula: beginning retained
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earnings + NI — dividends paid = ending retained earnings. Depreciation of $25 would be
added back to net income while the increases in accounts receivable, $5, and in inventory, $3,
would be subtracted from net income because they are uses of cash. The decrease in accounts
payable is also a use of cash and, therefore, a subtraction from net income. Thus, cash flow
from operations for 2005 is $25 + $10 + $25 — $5 — $3 — $7 = $45 ($ millions).
Q111-4 ★★Using the following information, what is the firm's cash flow from operations?
Net income $120
Decrease in accounts receivable 20
Depreciation 25
Increase in inventory 10
Increase in accounts payable 7
Decrease in wages payable 5
Increase in deferred tax liabilities 15
Profit from the sale of land 2
A. $158
B. $170
C. $174
Solution: B.
Net income — profits from sale of land + depreciation + decrease in receivables — increase in
inventories + increase in accounts payable — decrease in wages payable + increase
in deferred tax liabilities = 120 — 2 + 25 + 20 — 10 + 7 — 5 + 15 = $170. Note that the profit on
the sale of land should be subtracted from net income to avoid double counting the gain in net
income and investing activities.
Q112-4 ★★The following items are from a company’s cash flow statement.
Classification of cash flow Description Amount (£000s)
Operating activities Cash received from customers 55,000
Investing activities Interest and dividends received 10,000
Financing activities
Net repayment of revolving credit
loan
12,000
Which of the following standards and formats did the company most likely use in the
preparation of its financial statements? (Mock84-51)
A. IFRS, direct format
B. IFRS, indirect format
C. Either IFRS or . GAAP, direct format
Solution: A.
The direct method of cash flow statement presentation shows the specific cash inflows and
outflows that result in reported cash flow from operating activities (cash from customers, cash
to suppliers, etc.). Companies using IFRS can decide to report interest and dividend receipts as
either an investing or operating activity, whereas under . GAAP, they must report such
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income as an operating activity. The listed operating and investment activities indicate that
the company reports under IFRS, using the direct method.
Q113-4 ★If a nonfinancial company securitizes its accounts receivables for less than their
book value, the most likely effect on the financial statements is to increase:
A. net income.
B. cash from operations.
C. cash from financing activities.
Solution: B.
The securitization of accounts receivables for less than book value would result in a loss on the
income statement, but an increase in the cash from operations, reflecting the proceeds
received.
Q114-4 ★★Assume . GAAP applies unless otherwise noted. In 2008, a company reported
net income of $200 million and cash flow from operations of $120 million. All else
equal, the most likely explanation for the difference between net income and cash
flow from operations in 2008 is that the company:
A. Tightened credit policies and increased collection efforts during the year.
B. Sold a long-term investment for an amount equal to book value at the end of the year.
C. Increased raw materials inventory in anticipation of increased sales at the end of the year.
Solution: C.
NI=$200 million and CFO=$120, so NI>CFO, and CFO=NI + dep./amor. - gain + loss - changes in
current assets + changes in current liabilities.
Tightened credit policies and increased collection efforts will increase CFO; and to sell a
long-term investment for an amount equal to book value at the end of the year is an
investment activity, so increased raw materials inventory in anticipation of increased sales at
the end of the year will lead to CFO decreased, and less than NI.
Q115-4 ★★An analyst gathered the following information from a company's 2010 financial
statements (in $ millions): （原版书 reading27）
Year Ended 31 December 2009 2010
Net sales
Cost of goods sold (D&A excluded)
Accounts receivable
Inventory
Accounts payable
Based only on the information above, the company's 2010 statement of cash flows in
the direct format would include amounts (in $ millions) for cash received from
customers and cash paid to suppliers, respectively, that are closest to:
cash received from customers cash paid to suppliers
A.
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B.
C.
Solution：C.
Cash received from customers = Sales + Decrease in accounts receivable = + = .
Cash paid to suppliers = Cost of goods sold + Increase in inventory - Increase in accounts
payable = + - = .
Q116-4 ★ Interest paid is classified as an operating cash flow under:（原版书 reading27）
A. . GAAP but may be classified as either operating or investing cash flows under IFRS.
B. IFRS but may be classified as either operating or investing cash flows under . GAAP.
C. . GAAP but may be classified as either operating or financing cash flows under IFRS.
Solution：C.
Interest expense is always classified as an operating cash flow under . GAAP but may be
classified as either an operating or financing cash flow under IFRS.
Q117-4 Interest payable decreased during a company’s fiscal year. Compared with the amount
of cash interest payments made, interest expense is most likely: (MOCK92-
A. lower.
B. higher.
C. the same.
Solution：A.
If the interest payable decreases during the year, then the interest expense on an accrual basis
will be lower than the amount of cash interest payments. The cash paid would be the full
amount of the expense plus the amounts paid to reduce the interest payable. For example:
Interest expense 100
Plus decrease in interest payable +12
Cash paid for interest 112
Q118-4 ★An analyst gathered the following information from a company's 2010 financial
statements (in $ millions):
Balances as of Year Ended 31 December 2009 2010
Retained earnings 120 145
Accounts receivable 38 43
Inventory 45 48
Accounts payable 36 29
In 2010, the company declared and paid cash dividends of $10 million and recorded
depreciation expense in the amount of $25 million. The company considers dividends
paid a financing activity. The company's 2010 cash flow from operations (in $ millions)
was closest to: （原版书 reading27）
A. 25.
B. 45.
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C. 75.
Solution：B.
All dollar amounts are in millions. Net income (NI) for 2010 is $35. This amount is the increase
in retained earnings, $25, plus the dividends paid, $10. Depreciation of $25 is added back to
net income, and the increases in accounts receivable, $5, and in inventory, $3, are subtracted
from net income because they are uses of cash. The decrease in accounts payable is also a use
of cash and, therefore, a subtraction from net income. Thus, cash flow from operations is $25 +
$10 + $25 — $5 — $3 — $7 = $45.
CFO 掌握概念及公式：
R20-4 CFO 计算方式：直接法和间接法，熟练掌握 2 种方法 (公式)
R21-4 Both IFRS and US GAAP 都鼓励使用直接法，但都可以使用间接法。在 GAAP 下，直
接法下必须披露间接法，IFRS 没有这样的要求；如果用间接法，没有要求披露直
接法。
R22-4 CFO 理解：firstly, 考题中会出现计算是无疑的；secondly，考题中会考核考生对 CFO
和 NI 之间关系的掌握；lastly，CFO 和 working capital 之间的关系，有时也会成为
考核点
R23-4 ★CFO 间接法
Calculation of CFO by Indirect method
Net income
+ Non-cash expenses or losses Income statement items
- Non-cash revenues or gains
+/- Non-operating items
-Increase in non-cash operating asset accounts Balance sheet items (working capital)
(Inventory, A/R)
+Increase in operating liability accounts (A/P)
=CFO
R24-4 CFO 直接法
Calculation of CFO by Direct method
Cash received from
customers
Opening A/R + net sales – Closing A/R=Net sales-ΔA/R
- Cash paid to suppliers Opening A/P + COGS – Closing A/P
= - COGS –Δinventory+ΔA/P+Depreciation included in
COGS (COGS = Opening Inventory + purchase – Closing
Inventory)
- Cash paid to employees Opening wage payables + wage expense – Closing wage
payables =-wage expense+Δwage payables
- Interests paid Opening interest payables + interest expense – Closing
interest payables=- interest expense +ΔInterest payables
- Tax paid Opening tax payables + income tax expense – Closing tax
payables = - income tax expense +Δtax payables
= CFO
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P21-4 Calculation of CFI and CFF
Q119-4 Assume . GAAP applies unless otherwise noted. At the end of the year, a company
sold equipment for $40,000 cash. The company paid $100,000 for the equipment
several years ago and had accumulated depreciation of $60,000 for the equipment at
the time of sale. All else equal, the equipment sale will result in the company's cash
flow from:
A. investing activities decreasing by $10,000.
B. investing activities increasing by $40,000.
C. operating activities being $40,000 more than net income.
Solution: B.
The increase in inventory (working capital investment) would reduce CFO relative to net
income.
Q120-4 Assume . GAAP applies unless otherwise noted. Jaderong Plinkett Stores reported
net income of $25 million, which equals the company’s comprehensive income. The
company has no outstanding debt. Using the following information from the
comparative balance sheets (in millions), what should the company report in the
financing section of the statement of cash flows?
Balances sheet item 12/31/2005 12/31/2006 change
Common stock $100 $102 $2
Additional paid-in capital
common stock
$100 $140 $40
Retained earnings $100 $115 $15
Total stockholders’ equity $100 $357 $57
A. Issuance of common stock $42 million; dividends paid of $10 million.
B. Issuance of common stock $38 million; dividends paid of $10 million.
C. Issuance of common stock $42 million; dividends paid of $40 million.
Solution: A.
The increase of $42 million in common stock and additional paid-in capital indicates that the
company issued stocks during the year. The increase in retained earnings of $15 million
indicates that the company paid $10 million in cash dividends during the year, determined as
beginning retained earnings of $100 million plus net income of $25 million, minus ending
retained earnings of $115, which equals $10 million in cash dividends.
R25-4 CFI 和 CFF 掌握理解及公式：理解：CFI consist of the inflows and outflows of cash
resulting from the acquisition or disposal of long-term assets and certain investments.
Inflows Outflows
Sale proceeds from fixed assets Acquisition of fixed assets
Sale proceeds from debt & equity
investments
Acquisition of debt & equity investments
Principal received from loans made to
others
Loans made to others
Gain or loss = proceeds received – disposal NBV
BV end = BV Begin + Purchase – Disposal BV – Depreciation
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R26-4 理解：CFF resulting from transaction that affect a firm’s capital structure；CFF consist of
the inflows and outflows of borrowing, repayment, new issue, repurchase, div paid
Dividend paid = - Dividend declared + Δdividend payables
Opening R/E + Net Income – Dividend declared = Ending R/E
Inflows Outflows
Principal amounts of debt issued Principal paid on debt
Proceeds from issuing stocks Payments to reacquire stock
Dividends paid to shareholders
P22-4 FCFE and FCFF
Q121-4 ★Assume . GAAP applies unless otherwise noted. An analyst gathered the
following annual information ($ millions) about a company that pays no dividends and
has no debt:
Net income
Depreciation
Loss on sale of equipment
Decrease in accounts receivable
Increase in inventories
Increase in accounts payable
Capital expenditures
Proceeds from sale of stock
The company's annual free cash flow to equity ($ millions) is closest to:
A. .
B. .
C. .
Solution: C.
CFO = net income + depreciation + loss on sale of equipment + decrease in accounts receivable
- increase in inventories + increase in accounts payable. (The loss on sale of equipment is
added back when calculating CFO.)
It would have been deducted in the calculation of net income but the loss is not the cash
impact of the transaction (the proceeds received, if any, would be the cash effect) and cash
flows related to equipment transactions are investing activities, not operating activities.)
CFO = + + + – + = $ million; so FCFE = $ - $ = $ million.
Q122-4 ★★An analyst is planning to make a valuation on a privately held company by using a
FCF Model. In order to determine the free cash flow to all capital suppliers, he
collected the following data (in million):
Operating cash flow 500
Interest paid 30
Investment in working capital 80
Investment in fixed asset 60
Tax rate 30%
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The free cash flow the analyst is planning to determine is closest to:
A. 440.
B. 381.
C. 461.
Solution: C.
Free cash flow = CFO + interest paid (1 - tax rate) – investment in fixed asset = 500 + –
60 = 461
Q123-4 Which of the following is an appropriate method of computing flee cash flow to the
firm?
A. Add operating cash flows plus capital expenditures and deduct after-tax interest
payments.
B. Add operating cash flows plus after-tax interest payments and deduct capital
expenditures.
C. Deduct both after-tax interest payments and capital expenditures from operating cash
flows.
Solution: B.
Free cash flow to the firm can be computed as operating cash flows plus after-tax interest
expense less capital expenditures.
R27-4 ★FCFE&FCFF 掌握概念及公式：（需要重点掌握，经常考到）
公式：FCFF= EBIT*(1-tax rate) + NCC – FCInv - WCInv
公式：FCFF = NI + NCC + [ Int* (1 - tax rate) ] – FCInv – WCInv 公式：FCFF＝CFO- FCInv
＋Int*(1-t)
公式：FCFE = CFO – FCInv + Net borrowing
为什么 FCFF 会小于 FCFE？因为 Net borrowing 较大
计算公司价值的时候，用 FCFF，并且折现率使用 WACC(二级内容）
计算股东价值的时候，用 FCFE，并且折现率用 re
( )1
1
t
t
t
FCFF
Firm value
WACC
¥
=
=
+
å
( )1
1
t
t
t
FCFE
Equity value
r
¥
=
=
+
å
( )01 1
FCFF gFCFF
Firm value
WACC g WACC g
+
= =
- -
( )01 1
FCFE gFCFE
Equity value
r g r g
+
= =
- -
P23-4 Financial Analysis Techniques
Q124-4 ★An analyst has calculated a ratio using as the numerator the sum of operating cash
flow, interest, and taxes, and as the denominator the amount of interest. What is this
ratio, what does it measure, and what does it indicate?
A. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest
obligations and indicating a company's solvency.
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B. This ratio is an effective tax ratio, measuring the amount of a company's operating cash
flow used for taxes, and indicating a company's efficiency in tax management.
C. This ratio is an operating profitability ratio, measuring the operating cash flow generated
for taxes and interest and indicating a company's liquidity.
Solution: A.
This is the interest coverage ratio using operating cash flow rather than earnings before
interest, tax, depreciation, and amortization (EBITDA).
Q125-4 In order to assess a company's ability to fulfill its long-term obligations, an analyst
would most likely examine:
A. activity ratios.
B. liquidity ratios.
C. solvency ratios.
Solution: C.
Solvency ratios are used to evaluate the ability of a company to meet its long-term obligations
Q126-4 ★Which of the following ratio is solvency ratio?
A. return on assets
B. interest coverage
C. return on equity
Solution: B.
Solvency ratios measure the firm's ability to satisfy its long-term obligations. Solvency ratios
include the long-term debt-to-equity ratio, the total debt-to-equity ratio, the debt ratio, and
the financial leverage ratio.
Q127-4 Which of the following ratio is activity ratio？
A. cash ratio
B. net profit margin
C. inventory turnover
Solution: C.
Activity ratios includes several ratios also referred to asset utilization or turnover ratios (.,
inventory turnover, receivables turnover, and total assets turnover). They often give
indications of how well a firm utilizes various assets such as inventory and fixed assets.
Q128-4 ★Marcus Lee is examining the solvency of Apex Manufacturing and has collected the
following data (in millions of euros):
2005 2004 2003
Total debt €2,000 €1,900 €1,750
Total equity €4,000 €4,500 €5,000
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Which of the following would be the most appropriate conclusion for Lee?
A. The company is becoming increasingly less solvent, as evidenced by the increase in its
debt-to-equity ratio from to from 2003 to 2005.
B. The company is becoming less liquid, as evidenced by the increase in its debt-to-equity
ratio from to from 2003 to 2005.
C. The company is becoming increasingly more liquid, as evidenced by the increase in its
debt-to-equity ratio from to from 2003 to 2005.
Solution: A.
The company is becoming increasingly less solvent, as evidenced by its debt-to-equity ratio
increasing from to from 2003 to 2005. B is incorrect because it incorrectly interprets
the debt-to-equity ratio as a measure of liquidity. C is incorrect because it incorrectly interprets
the direction of the trend and misinterprets the ratio as an indicator of liquidity.
Debt to equity:
2005: 2,000/4,000 =
2004: 1,900/4,500 =
2003: 1,750/5,000 =
Q129-4 An analyst who is interested in a company's long-term solvency would most likely
examine the: (NotesB3-175 3)
A. return on total capital.
B. defensive interval ratio.
C. fixed charge coverage ratio.
Solution: C.
Fixed charge coverage is a solvency ratio. Return on total capital is a measure of profitability
and the defensive interval ratio is a liquidity measure.
Q130-4 Paragon Co. has an operating profit margin (EBIT / revenue) of 11%; an asset turnover
ratio of ; a financial leverage multiplier of times; an average tax rate of 35%;
and an interest burden of . Paragon's return on equity is closest to: (Not
A. 9 %
B. 10%.
C. 11%.
Solution: A.
Tax burden = 1 - = .
ROE = x x x x = .
Q131-4 ★If a firm's inventory turnover and number of days of payables both increase, the
effect on a firm's cash conversion cycle is:
A. to shorten it.
B. to lengthen it.
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C. uncertain.
Solution: A.
Cash conversion cycle = collection period + inventory period — payables period.
An increase in inventory turnover will decrease the inventory period and shorten the cash
conversion cycle. An increase in the payables period will also shorten the cash conversion
cycle.
Q132-4 ★A firm has a dividend payout ratio of 40%, a net profit margin of 10%, an asset
turnover of times, and a financial leverage multiplier of times. The firm's
sustainable growth rate is closest to: (NotesB3-177 17)
A. %.
B. %.
C. %.
Solution: B.
g = (retention rate)(ROE)
ROE = net profit margin x asset turnover x equity multiplier = ()()() = g = (1 —
)() = %
Q133-4 Assuming no changes in other variables, which of the following would decrease ROA?
A. A decrease in the effective tax rate.
B. A decrease in interest expense.
C. An increase in average assets.
Solution: C.
Assuming no changes in other variables, an increase in average assets (an increase in the
denominator) would decrease ROA. A decrease in either the effective tax rate or interest
expense, assuming no changes in other variables, would increase ROA.
Q134-4 ★Which of the following choices best describes reasonable conclusions an analyst
might make based on this ROE decomposition?
A decomposition of ROE for Integra SA is as follows:
2005 2004
ROE. % %
Tax burden
Interest burden
EBIT margin % %
Asset turnover
Leverage
A. Profitability and the liquidity position both improved in 2005.
B. The higher average tax rate in 2005 offset the improvement in profitability, leaving ROE
unchanged.
C. The higher average tax rate in 2005 offset the improvement in efficiency, leaving ROE
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此预测为考点预测，考题仅为复习参考
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unchanged.
Solution: C.
The increase in the average tax rate in 2005, as indicated by the decrease in the value of the
tax burden (the tax burden equals one minus the average tax rate), offset the improvement in
efficiency indicated by higher asset turnover); as a result, ROE remained unchanged at
percent. Statement A is not correct because the EBIT margin, measuring profitability, was
unchanged in 2005; furthermore, no information is given on liquidity. Statement B is not
correct because profitability was unchanged in 2005.
Q135-4 ★★Selected information for a company and the common size data for its industry are
provided below.
Company
(£)
Common Size Industry Data
(% of sales)
EBIT 76,000
Pretax profit 66,400
Net income 44,500
Sales 400,000
Total assets 524,488
Total equity 296,488
ROE % %
Which of the following is most likely a contributor to the company’s inferior ROE
compared to that of the industry? The company’s: (Mock83)
A. tax burden ratio.
B. interest burden ratio.
C. financial leverage ratio.
Solution: C.
Calculation Company Industry
Tax burden
ratio
Net Inc/EBT 44,500/66,400 = =
Financial
leverage
Total assets/Equity 524,488/296,488 = 140/74 =
Interest
burden ratio
EBT/EBIT 66,400/76,000 = =
The company has a lower financial leverage ratio relative to the industry, which is one of the
causes of the company’s lower relative ROE performance. The tax burden ratio is the same as
the industry and the interest burden ratio is higher, which would increase ROE.
EBT: Pretax profit (earnings before tax) Net Inc: Net income
Q136-4 In general, a creditor would consider a decrease in which of the following ratios to be
positive news?
A. Interest coverage (times interest earned).
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B. Debt to total assets.
C. Return on assets.
Solution: B.
In general, a creditor would consider a decrease in debt to total assets as positive news. A
higher level of debt in a company's capital structure increases the risk of default and will result
in higher borrowing costs for the company to compensate lenders for assuming greater credit
risk.
R28-4 Financial Analysis Techniques
Common-size statement 了解 income statement 和 balance sheet 的 common-size statement
构建方法的不同.
★Liquidity ratio (measure liquidity，这些比率越高，公司的短期偿债能力越好):
sliabilitiecurrent
assetscurrent
ratioCurrent
sliabilitiecurrent
sreceivable securities marketablecash
ratioQuick
sliabilitiecurrent
securities marketablecash
ratioCash
paybales of
days ofnumber
handon
inventory of days
goutstandin
sales days
cycle convertionCash
如果 cash conversion cycle 提高，说明存货与 A/R 周转期较长，A/P 较短（重点掌握）
★Solvency ratio (measure leverage，这些比率越高，公司风险越大)
equity total
debt term-long total
ratiodebt termLong
equity total
debt total
ratioDebt
equity total
debt total
ratiodebt Total
equity total
assets total
leverage Financial
paymentsinterest
EBIT
coverageInterest
★Activity ratio (measure asset utilization 这些比率最好与行业平均标准接近)
sreceivable average
sales annual
turnoverRceivable
turnoversreceivable
365
goutstandin sales of Days 收回账款的平均时间
inventory average
COGS
turnoverInventory
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turnoverinventory
365
handon inventory of Days 存货循环的平均时间
average
purchases
turnoverPayable
assets totalaverage
revenue
overasset turn Total
assets fixednet average
revenue
turnoverassets Fixed net fixed assets 需要减去累计折旧
capital workingaverage
revenue
turnovercapital Working
★Profitability ratios
revenue
incomenet
marginprofit Net
revenue
profit gross
marginprofit Gross
revenue
EBIT
marginprofit Operating
assets total
incomenet
assetson Return
equity average
incomenet
equityon Return
equitycommon average
dividends preferred-incomenet
equitycommon on Return
★DuPont system of analysis 杜邦分因素分析法是十分重要的，3 因素和 5 因素都要
掌握，尤其是 5 因素分析。
equity
assets
assets
sales
sales
incomenet
equityon Return
leverage financialoverasset turnmarginprofit equityon Return 3 因素分析
equity
asset
assets
revenue
revenue
EBIT
EBIT
EBT
EBT
incomenet
equityon Return
leverage
financial
turover
asset
margin
EBIT
burden
interst
burden
tax
equityon Return 5 因素分析
杜邦分析的内容有可能和权益里的内容一起考，通过 ROE retention rate, 来计算 g，
进而使用 DDM 进行估值。
P24-4 Credit analysis
Q137-4 ★Assume . GAAP applies unless otherwise noted. Which of the following would be
the most useful to an analyst trying to assess the credit worthiness of a company?
A. Return measures related to net income.
B. Return measures related to operating cash flow.
C. Information related to the scale and diversity of a company's operations.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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Solution: B.
Credit analysis is concerned with a company’s debt-paying ability. As returns to creditors are
normally paid in cash, the company’s ability to generate cash internally is the most important
factor in credit analysis.
Credit Analysis 掌握理解：
R1-4 Credit analysis is based on many ratios, such as interest coverage ratio, return on capital,
and D/E.
另外EBITDA也是一个很重要的数据，与EBITDA有关的一些 ratio都可以做 credit
analysis
R2-4 ★Indicators of a firms’ creditworthiness
Scale and diversification: more different product lines and greater geographic
diversification are better credit risks.
Operational efficiency: high operating efficiency is associated with better debt
ratings.
Margin stability: stability of margin indicates a higher probability of repayment.
Use of financial leverage: Firm with greater earnings in relation to their debt and
in relation to their interest expense are better credit risks.
P25-4 Inventory
Q138-4 ★A company incurs the followings costs related to its inventory during the year:
Cost ¥ millions
Purchase price 100,000
Trade discounts 5,000
Import duties 20,000
Shipping of raw materials to manufacturing facility 10,000
Manufacturing conversion costs 50,000
Abnormal costs as a result of waste material 8,000
Storage cost prior to shipping to customers 2,000
The amount charged to inventory cost (in millions) is closest to:
A. ¥175,000.
B. ¥177,000.
C. ¥185,000.
Solution: A.
The costs to include in inventories are all costs of purchase, costs of conversion, and
other costs incurred in bringing the inventories to their present location and condition.
Cost ¥ millions
Purchase price 100,000
Less Trade discounts (5,000)
Import duties 20,000
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Shipping of raw materials to manufacturing facility 10,000
Manufacturing conversion costs 50,000
Total inventory costs 175,000
Q139-4 ★The following information (in millions) on a company is available:
Cost of goods sold $ 500
Increase in total assets 250
Increase in total liabilities 200
Change in inventory (30)
Change in accounts payable (25)
The amount of cash (in millions) that the company paid to its suppliers is closest to:
A. $445.
B. $495.
C. $505.
Solution: B.
Cost of goods sold $500
Less: Decrease in inventory (30)
Equals purchases from suppliers $470
Plus: Decrease in accounts payable 25
Cash paid to suppliers $495
Q140-4 ★A . pulp brokerage firm which prepares its financial statements according to .
GAAP and uses a periodic inventory system had the following transactions during the
year:
Date Activity Beginning inventory Tons (000s) $ per Ton
February Purchase 5 650
May Sale 2 700
August Purchase 3 680
November Sale 4 750
The cost of sales (in ‘000s) is closest to:
A. $3,990 using FIFO.
B. $3,930 using LIFO.
C. $3,968 using weighted average.
Solution: C.
FIFO cost of sales is $3,930 as per the table. LIFO cost of sales is $3,990 as per the table. 3,968
using weighted average.
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Q141-4 ★A review of a company’s inventory records for the year indicates that the
following costs were incurred:
Fixed production overhead: $500,000
Direct material and direct labor: 300,000
Storage costs incurred during production: 25,000
Abnormal waste costs: 30,000
If the company operated at full capacity during the year, the total capitalized inventory
cost is closest to:
A. $800,000.
B. $825,000.
C. $855,000.
Solution: B.
The total capitalized costs include fixed production costs, the direct conversion costs of
material and labor, storage costs required as part of production but not abnormal waste costs.
$500,000 + 300,000 + 25,000 = $825,000
Q142-4 ★A snowmobile manufacturer that uses LIFO begins the year with an inventory of
3,000 snowmobiles, at a carrying cost of $4,000 each. In January, the company sells
2,000 snowmobiles at a price of $10,000 each. In July, the company adds 4,000
snowmobiles to inventory at a cost of $5,000 each. Compared to using a perpetual
inventory system, using a periodic system for the firm's annual financial statements
would:
A. increase COGS by $2 million.
B. leave ending inventory unchanged.
C. decrease gross profit by $4 million.
Solution: A.
Under a perpetual inventory system, the snowmobiles sold in January are associated with the
$4,000 cost of the beginning inventory. Cost of sales is $8 million, gross profit is $12 million,
and end-of-year inventory is $24 million. Under a periodic inventory system, the snowmobiles
sold in January would be associated with the $5,000 cost of the snowmobiles manufactured in
July. Cost of sales would be higher by $2 million, gross profit would be lower by $2 million, and
ending inventory would be lower by $2 million.
Q143-4 Which inventory valuation has the same results under periodic and permanent
system?
A. FIFO
B. LIFO
C. weighted average method
Solution: A.
FIFO has the same results under periodic and permanent system.
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Q144-4 ★★Assume the price increases and many times of sales and purchasement during
the period, which inventory valuation will surely have the different results under
periodic and permanent system?
A. FIFO
B. LIFO
C. weighted average method
Solution: C.
Weighted average method will surely result in different results, while LIFO may have same
results as long as purchase will be sold out immediately.
Q145-4 In a period of rising prices, when compared with a company that uses weighted
average cost for inventory, a company using FIFO will most likely report higher values
for its:
A. return on sales.
B. inventory turnover.
C. debt-to-equity ratio.
Solution: A.
in periods of rising prices FIFO results in a higher inventory value and a lower cost of goods
sold and therefore a higher net income. The higher net income increases return on sales. The
higher reported net income also increases retained earnings, and therefore results in a lower
debt-to-equity ratio. The combination of higher inventory and lower cost of goods sold
decreases inventory turnover (COGS/inventory).
Q146-4 An investor collected a company’s inventory data as follows:
2009 2008
COGS 1200 1430
LIFO Reserve 800 820
If the company used FIFO method to recognize, what would the cost of goods sold be?
A. 1220
B. 1200
C. 1180
Solution: A.
COGS(FIFO) = COGS(LIFO) – (ending LIFO reserve – beginning LIFO reserve) = 1200 – (800-820)
= 1220
Q147-4 ★Carrying inventory at a value above its historical cost would most likely be
permitted if: （原版书 Reading 29）
A. the inventory was held by a producer of agricultural products.
B. financial statements were prepared using . GAAP.
C. the change resulted from a reversal of a previous write-down.
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Solution：A.
IFRS allow the inventories of producers and dealers of agricultural and forest products,
agricultural produce after harvest, and minerals and mineral products to be carried at net
realizable value even if above historical cost. (. GAAP treatment is similar.)
Q148-4 ★Carrying inventory at a value above its historical cost would most likely be
permitted if: （原版书 Reading 29）
A. the inventory was held by a producer of agricultural products.
B. financial statements were prepared using . GAAP.
C. the change resulted from a reversal of a previous write-down.
Solution：A.
IFRS allow the inventories of producers and dealers of agricultural and forest products,
agricultural produce after harvest, and minerals and mineral products to be carried at net
realizable value even if above historical cost. (. GAAP treatment is similar.)
Q149-4 Which of the following is most likely for a firm with high inventory turnover and lower
sales growth than the industry average? The firm: (NotesB3-202 8)
A. is managing its inventory effectively.
B. may have obsolete inventory that requires a write-down.
C. may be losing sales by not carrying enough inventory.
Solution：C.
High inventory turnover coupled with low sales growth relative to the industry may be an
indication of inadequate inventory levels. In this case, the firm may be losing sales by not
carrying enough inventory.
Q150-4 Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down in
2008. Compared to the results the company would have reported if the write-down
had never occurred, reported 2008: （原版书 Reading 29）
A. profit was overstated.
B. cash flow from operations was overstated.
C. year-end inventory balance was overstated.
Solution：A.
The reversal of the write-down shifted cost of sales from 2008 to 2007. The 2007 cost of sales
was higher because of the write-down, and the 2008 cost of sales was lower because of the
reversal of the write-down. As a result, the reported 2008 profits were overstated. Inventory
balance in 2008 is the same because the write-down and reversal cancel each other out. Cash
flow from operations is not affected by the non-cash write-down, but the higher profit in 2008
likely resulted in higher taxes and thus lower cash flow from operations.
Q151-4 ★Zimt AG wrote down the value of its inventory in 2007 and reversed the write-down
in 2008. Compared to the ratios that would have been calculated if the write-down
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had never occurred, Zinn's reported 2007:（原版书 Reading 29）
A. current ratio was too high.
B. gross margin was too high.
C. inventory turnover was too high.
Solution：C.
The write-down reduced the value of inventory and increased cost of sales in 2007. The higher
numerator and lower denominator mean that the inventory turnover ratio as reported was too
high. Gross margin , and the current ratio were both too low.
Q152-4 ★Compared to using the weighted average cost method to account for inventory,
during a period in which prices are generally rising, the current ratio of a company
using the FIFO method would most likely be: （原版书 Reading 29）
A. Lower.
B. Higher.
C. Dependent upon the interaction with accounts payable.
Solution：B.
In a rising price environment, inventory balances will be higher for the company using the FIFO
method. Accounts payable are based on amounts due to suppliers, not the amounts accrued
based on inventory accounting.
Q153-4 Carey Company adheres to . GAAP, whereas Jonathan Company adheres to IFRS. It
is least likely that: （原版书 Reading 29）
A. Carey has reversed an inventory write-down.
B. Jonathan has reversed an inventory write-down.
C. Jonathan and Carey both use the FIFO inventory accounting method.
Solution：A.
. GAAP do not permit inventory write-downs to be reversed.
Q154-4 ★★In the notes to its financial statements, Gilbert Company discloses a €400,000
reversal of an earlier write-down of inventory values, which increases this inventory's
carrying value to €2,000,000. It is most likely that:
A. the reasons for this reversal are also disclosed.
B. a gain of €400,000 appears on the income statement.
C. the net realizable value of this inventory is €2,000,000.
Solution：A.
Required disclosures related to inventories under IFRS include the amount of any reversal of
previous write-downs and the circumstances that led to the reversal. Under IFRS, the reversal
of an inventory write-down is not recognized as a gain, but instead as a reduction in the cost
of sales for the period. From only the information given, we cannot conclude that the net
realizable value of the inventory is €2,000,000. This value may be the original cost of the
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inventory.
Q155-4 A retailer that prepares its financial statements in accordance with IFRS has 100 office
chairs in its inventory with a suggested retail price of $240 each. It paid on average
$200 each to a supplier for these for office chairs has been low for
quite a while and the retailer estimates it can sell those chairs for $180 each if it offers
free shipping to its customers at an average cost of $10 per supplier has also
lowered its price to $160 in response to the low total carrying amount of
these 100 office chairs on the retailer’s balance sheet would be closest to: (2014 Moc)
A. $16,000.
B. $18,000.
C. $17,000.
Solution：C.
IFRS measures inventory at the lower of cost and net realizable value.
Under IFRS, net realizable value (NRV) is defined as the estimated selling price less the
estimated costs necessary to get the inventory ready for sale and make the sale:
Selling price $180
Costs to get ready to sell $10 (Free shipping is required to sell the chairs at $180.)
NRV per chair $170
For 100 chairs $17,000
Q156-4 A company selected LIFO method for its financial reports, and some information about
its financial report is given below (in million):
Net revenue 120
COGS 70
Fixed cost 25
Change in LIFO reserve 15
Tax rate 30%
The company’s net profit margin under FIFO method is closest to:
A. %
B. %
C. %
Solution: B.
△NI = △LIFO reserve (1-t) = 15 * (1 – 30%) =
NILIFO = (120 – 70 -25) * (1- 30%) =
NIFIFO = + = 28
Net profit margin = 28 / 120 = %
Q157-4 ★Assume . GAAP applies unless otherwise Corporation uses the LIFO
inventory method, but most of the other companies in Sipex industry use FIFO. Which
of the following best describes one of the adjustments that would be made to Sipex's
financial statements to compare that company with other companies in the industry?
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To adjust Sipex's ending inventory to the FIFO method, the amount reported for
Sipex's ending inventory should be:
A. increased by the ending balance in Sipex's LIFO reserve.
B. decreased by the ending balance in Sipex's LIFO reserve.
C. increased by the change in Sipex's LIFO reserve for that period.
Solution: A.
Adding the ending balance in the LIFO reserve to the LIFO inventory would equal the ending
balance for inventory on FIFO basis.
Q158-4 A firm incurred the following costs related to production during the past year:
$ millions
Fixed production overhead costs
Raw materials costs
Labor costs
Freight-in costs for raw materials
Warehousing costs for finished goods
The total capitalized inventory cost (in US$ millions) for the year is closest to: (2014
A. .
B. .
C. .
Solution：C.
Total Capitalized Inventory Cost $ millions
Fixed production costs
Raw materials
Labor costs
Freight-in
Total capitalized inventory cost
Q159-4 ★Assume . GAAP applies unless otherwise noted. Sauerbraten Corp. reported
2007 sales ($ in millions) of $2,157 and cost of goods sold of $1,827. Inventories at
year-end 2007 and 2006, respectively, were $553 and $562. The company uses the
LIFO method for inventory valuation and discloses that if the FIFO inventory valuation
method had been used, inventories would have been $ million and $ million
higher in 2007 and 2006, respectively. Compared to the inventory turnover ratio
reported, if Sauerbraten had exclusively used the FIFO method its inventory turnover
ratio would have been closest to
A. .
B. .
C. .
Solution: A.
Inventory turnover is cost of goods sold divided by average inventory. As reported, this was
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$1,827 / $ = . Under FIFO, cost of goods sold would have been $1, and
inventory would have been $ and $ (average $). Adjusted inventory turnover
would thus be .
Inventory 掌握公式及两种方法的比较：
R29-4 Cost capitalization and expense
★Capitalized cost (product cost) include: （重点掌握，很有可能考）
Purchase cost.
Conversion cost.
Allocation of fixed production overhead based on normal capacity levels.
Other costs necessary to bring the inventory to its present location and
condition.
★Expensed cost (period cost)
Unallocated portion of fixed production overhead
Abnormal waste of materials, labor, or overhead.
Storage costs ( unless required as part of the production process).
Selling cost.
Administrative overhead
R30-4 四种计价方法 Inventory accounting/ The cost flow method
Specific identification
Last in first out (LIFO)
First in first out (FIFO)
Weighted average (AVCO)
R31-4 LIFO and FIFO 之间的转换
LIFO reserve
The difference between the reported LIFO inventory carrying amount and
the inventory amount that would have been reported if the FIFO method
had been used.
LIFO reserve = FIFO inventory – LIFO inventory
LIFO to FIFO Conversion
INVF = INVL + LIFO reserve
COGSF = COGSL - △ LIFO reserve
△LIFO reserve= LIFO reserve
1- LIFO reserve
0
△NI = △LIFO reserve *(1-t)
R3-4 ★了解在两种不同的会计准则下存货的减值计价方式：
. GAAP:
Lower of cost or market
NRV-normal profit margin < market (replacement cost) < NRV
no write-up allowed under and no reversal after devaluation
IFRS:
Lower of cost or NRV
NRV = sales price-selling cost
inventory can be written up but only limited to the loss recognized
previously
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Reporting inventory above the historical cost is only permitted under IFRS
and . GAAP in certain industries such as agricultural and forest products,
mineral ores, and precious metals.
R4-4 LIFO liquidation
A LIFO liquidation incurs when purchased volume is less sales volume.
Or, the decrease in volume or quantity of inventory
In this case, the prices for goods being sold are no longer recent prices.
Under LIFO liquidation, and if price is rising
COGS does not reflect current costs;
LIFO reserve may decline;
An analyst should adjust COGS for decrease in LIFO reserve.
Inventory adjustment：
Under IFRS：the firm must demonstrate that the change will provide
reliable and more relevant information.
Under . GAAP：the firm must explain why the change in cost flow
method is preferable
An exception to retrospective application：when a firm changes to LIFO
from FIFO，no adjustments are made to the prior periods. With prospective
application, the carrying value of inventory under the old method simply
becomes the first layer of inventory under LIFO in the period of the change.
P26-4 Long-lived asset: Capitalized . Expensed
Q160-4 ★★Assume . GAAP applies unless otherwise noted. Two companies are identical
except for their accounting treatment of R&D costs. One company expenses all such
costs immediately, while the other capitalizes a portion of the costs. Compared with
the company that capitalizes costs, the company that expenses immediately will most
likely:
A. Earn a lower return on assets.
B. Have lower financial leverage.
C. Report lower cash flow from operations in the statement of cash flows.
Solution: C.
Companies that capitalize R&D costs report those expenditures in CFI; companies that expense
R&D costs report those expenditures in CFO.
Q161-4 Under . GAAP, firms are required to capitalize:
A. any asset with a useful economic life of more than one year.
B. interest paid on loans to finance construction of a long-lived asset.
C. research and development costs for a drug that will almost certainly provide a revenue
stream of five years or more.
Solution: B.
Interest on loans that specifically fund construction of long-lived assets must be capitalized
under . GAAP. Assets of insignificant value (., metal waste basket) are typically expensed
even when their useful lives are many years. R&D costs are expensed under . GAAP.
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Q162-4 ★During 2010, the following events occurred at a company. The company:
1. purchased a customer list for $100,000, which is expected to provide equal
annual benefits for the next 4 years.
2. recorded $200,000 of goodwill in the acquisition of a competitor. It is
estimated that the acquisition would provide substantial benefits for the
company for at least the next 10 years.
3. spent $300,000 on media placements announcing the company had donated
products and services to the community. The CEO believes the firm’s
reputation was enhanced substantially and the company will likely benefit
from it for the next 5 years.
Based on those events, the amortization expense that the company should report
in 2011 is closest to: (Mock-84-50)
A. $25,000.
B. $45,000.
C. $85,000.
Solution：A.
The customer list is the only identifiable intangible asset, and it should be amortized on a
straight-line basis over its expected future life: $100,000 ÷ 4 = $25,000/year. Goodwill is an
unidentifiable intangible and should be tested for impairment but not amortized. All
advertising and promotion costs, such as the media placements, are typically expensed. If the
reputation of the company has been enhanced as the CEO suggests, this is an internally
generated intangible that is not recorded on the balance sheet and is therefore not amortized.
Q163-4 After reading the financial statements and footnotes of a company that follows IFRS,
an analyst identified the following intangible assets:
product patent expiring in 40 years;
copyright with no expiration date; and
goodwill acquired 2 years ago in a business combination.
Which of these assets is an intangible asset with a finite useful life?
Product Patent Copyright Goodwill
A. Yes Yes No
B. Yes No No
C. No Yes Yes
Solution: B.
A product patent with a defined expiration date is an intangible asset with a finite useful life. A
copyright with no expiration date is an intangible asset with an indefinite useful life. Goodwill
is no longer considered an intangible asset under IFRS and is considered to have an indefinite
useful life.
Q164-4 ★Train Company paid $8 million to acquire a franchise at the beginning of 20X5 that
was expensed in 20X5. If Train had elected to capitalize the franchise as an intangible
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asset and amortize the cost of the franchise over eight years, what effect would this
decision have on Train's 20X5 cash flow from operations (CFO) and 20X6
debt-to-assets-ratio?(NotesB3-323 10)
A. Both would be higher with capitalization.
B. Both would be lower with capitalization.
C. One would be higher and one would be lower with capitalization.
Solution: C.
If the cost were amortized rather than expensed, the $8 million cost of the franchise would be
classified as an investing cash flow rather than an operating cash flow, so CFO would increase
(and CFI decrease). The asset created by capitalizing the cost would increase assets, so the
debt-to-assets ratio would decrease.
Q165-4 ★★On 1 January, a company, which prepares its financial statements according to
IFRS, arranged financing for the construction of a new plant. The company: （mock8）
• borrowed NZ$5,000,000 at an interest rate of 8%,
• issued NZ$5,000,000 of preferred shares with a cumulative dividend rate of 6%, and
• during the first year of construction the company was able to temporarily invest
NZ$2,000,000 of the loan proceeds for the first six months and earned 7% on that
amount.
The amount of financing costs to be capitalized (NZ$) to the cost of the plant in the first
year is closest to:
A. 330,000.
B. 400,000.
C. 630,000.
Solution: A.
The interest costs can be capitalized.
Under IFRS any amounts earned by temporarily investing the funds are deducted from the
capitalized amount．
The costs related to the preferred shares cannot be capitalized.
Capitalized costs
Interest costs ×5,000,000=400,000
Less interest income ×2,000,000×=(70,000)
Total capitalized costs 330,000
Q166-4 ★★If a company chooses to capitalize an expenditure related to capital assets
instead of expensing it, ignoring taxes, the company will most likely report:
（2012-mock85-56）
A. a lower cash flow per share in that period.
B. a higher earnings per share in future periods.
C. the same free cash flow to the firm in that period.
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Solution: C.
Example Capitalizing delivery cost as opposed to expensing it.
FCFF CFO + interest ×(1-t)—capital expenditures
Capital expenditures If capitalized，the amount capitalized increases capital
expenditures and is recorded as a cash outflow from
investing activities．
CFO The CFO will be higher by amount capitalized, ., the
amount not expensed.
Since capital expenditures and CFO increase by the same amount, FCFF is unchanged.
Q167-4 SF Corporation has created employee goodwill by reorganizing its retirement benefit
package. An independent management consultant estimated the value of the goodwill
at $2 million. In addition, SF recently purchased a patent that was developed by a
competitor. The patent has an estimated useful life of five years. Should SF report the
goodwill and patent on its balance sheet?
Goodwill Patent
A. Yes No
B. No Yes
C. No No
Solution: B.
Goodwill developed internally is expensed as incurred. The purchased patent is reported on
the balance sheet.
Q168-4 ★A company recently purchased a warehouse property and related equipment
(shelving, forklifts, etc.) for €50 million, which were valued by an appraiser as follows:
Land €10 million, building €35 million, and equipment €5 million. The company
incurred the following additional costs in getting the warehouse ready to use:）
• € million for repairs to the building’s roof and windows
• € million to modify the interior layout to meet their needs (moving walls and
doors, inserting and removing partitions, etc.)
• € million on an orientation and training session for employees to familiarize
them with the facility
The cost to be capitalized to the building account (in millions) for accounting
purposes is closest to:
A. €.
B. €.
C. €.
Solution：B.
The capitalized cost of the building would include the other costs that are directly attributable
to the building and are involved in extending its life or getting it ready to use:
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Initial cost €
Repairs to roof and windows
Modifications to interiors
Total cost € million
Q169-4 ★ JOOVI Inc. has recently purchased and installed a new machine for its
manufacturing plant. The company incurred the following costs:
Purchase price $12,980
Freight and insurance $1,200
Installation $700
Testing $100
Maintenance staff training costs $500
The total cost of the machine to be shown on JOOVI's balance sheet is closest to:
A. $14,180.
B. $14,980.
C. $15,480.
Solution：B.
Only costs necessary for the machine to be ready to use can be capitalized. Therefore, Total
capitalized costs = 12,980 + 1,200 + 700 + 100 = $14,980.
Q170-4 The following data are available for a company and its industry: （2012mock84
Company
Common-Size Balance Sheet
As at 31 December 2010
Assets (%)
Cash & Short-Term Investments
Accounts Receivable
Inventory
Total Current Assets
Net Property, Plant, and Equipment
Goodwill
Other Long-Term Assets
Total Assets
Liabilities and Shareholders’ Equity
Short-Term Debt
Accrued Liabilities and Accounts Payable
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities
Total Liabilities
Total Stockholders’ Equity
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Total Liabilities & Shareholders’ Equity
Data for comparison Industry
Current ratio
Debt-to-equity %
Long-term debt-to-equity %
Which of the following statements about the company is most appropriate? The
company:
A. operates in the manufacturing industry.
B. has made significant acquisitions in the past.
C. has higher financial leverage than the industry.
Solution：B.
Goodwill makes up 40% of total assets; therefore, the company has made significant
acquisitions at some point because goodwill is only recognized during acquisitions. Leverage is
below the industry average for both the debt-to-equity ratio of 40% [( + ) ÷ 54] versus
the industry average of 50% and long-term debt-to-equity ratio of 37% [ ÷ 54] versus the
industry average of 40%. The low PP&E and inventory levels also indicate the company is not
likely a manufacturer.
Q171-4 ★★Under IFRS, BAURU, ., a Brazilian corporation, borrows capital from a local
bank to finance the construction of its manufacturing plant. The loan has the following
conditions:
Borrowing date 1 January 2009
Amount borrowed 500 million Brazilian real (BRL)
Annual interest rate 14 percent
Term of the loan 3 years, Annual payment of interest only.
Payment method Principal amortization is due at the end of the loan term.
The construction of the plant takes two years, during which time BAURU earned BRL
10 million by temporarily investing the loan proceeds. Which of the following is the
amount of interest related to the plant construction (in BRL million) that can be
capitalized in BAURU's balance sheet?（原版书 Reading30）
A. 130.
B. 140.
C. 210.
Solution：A.
Borrowing costs can be capitalized under IFRS until the tangible asset is ready for use. Also,
under IFRS, income earned on temporarily investing the borrowed monies decreases the
amount of borrowing costs eligible for capitalization. Therefore, Total capitalized interest =
(500 million X 14% X 2 years) — 10 million = 130 million.
Q172-4 Which is most accurate about revaluation?
A. must be used in all assets if elected
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B. must be used in all intangible asset if elected
C. can be used in a part of assets
Solution：C.
Under IFRS，同类资产采用同样的方式，不同类的资产可以选择 Cost 或者 Revaluation。
Q173-4 ★★MARU . de CAT., a Mexican corporation that follows IFRS, has elected to use
the revaluation model for its property, plant, and equipment. One of MARU's
machines was purchased for 2,500,000 Mexican pesos (MXN) at the beginning of the
fiscal year ended 31 March 2010. As of 31 March 2010, the machine has a fair value of
MXN 3,000,000. Should MARU show a profit for the revaluation of the machine?）
A. Yes.
B. No, because this revaluation is recorded directly in equity.
C. No, because value increases resulting from revaluation can never be recognized as a
profit.
Solution：B.
In this case, the value increase brought about by the revaluation should be recorded directly in
equity. The reason is that under IFRS, an increase in value brought about by a revaluation can
only be recognized as a profit to the extent that it reverses a revaluation decrease of the same
asset previously recognized in the income statement.
Q174-4 According to IFRS, all of the following pieces of information about property, plant, and
equipment must be disclosed in a company's financial statements and footnotes
except for: (原版书 Reading30)
A. useful lives.
B. acquisition dates.
C. amount of disposals.
Solution: B.
IFRS do not require acquisition dates to be disclosed.
Q175-4 Which of the following expenses could be capitalized？
A. Advertising
B. R&D
C. Software development costs.
Solution: C.
Costs incurred to develop software for sale to others are expensed as incurred until the
product's technological feasibility has been established, after which costs are capitalized under
both IFRS and . GAAP.
Q176-4 According to IFRS, all of We following pieces of information about intangible assets
must be disclosed in a company's financial statements and footnotes except for: (原版
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A. fair value.
B. impairment loss.
C. amortization rate.
Solution: A.
IFRS do not require fair value of intangible assets to be disclosed.
Q177-4 Which of the following characteristics is most likely to differentiate investment
property from property, plant, and equipment? (原版书 Reading30)
A. It is tangible.
B. It earns rent.
C. It is long-lived.
Solution: B.
Investment property earns rent. Investment property and property, plant, and equipment are
tangible and long-lived.
R5-4 Capitalized 和 Expensed 的理解：
资本化： 准备用于长时间生产的设备、厂房的建造和购买费用。（耕牛）
费用化：准备在短时间内出售的资产的费用。（肉牛）
Product costs should be capitalized in the inventories account; Period costs
should be expensed in the period occurred
R6-4 利息的资本化和费用化：
Capitalized expenditures are classified as CFI. Expensed expenditures are
classified as CFO；The asset you capitalized today will be expensed in the future.
Under IFRS：Income earned by temporarily investing borrowed funds reduces
the interest that is eligible for capitalization.
under . GAAP：no such reduction of capitalized interest
R7-4 ★资本化和费用化对财务报表的影响（重点掌握，经常考）
Net income: 费用化的 NI 当期较低，以后较高；资本化的 NI 当期高，以后
稍低，利润表随时间波动小。
Shareholder's equity 与 Net Income 的变化趋势相同。
Cash flow: 费用化的现金流支出归入 CFO，因而费用化的 CFO 低；资本化的
现金流归入 CFI，所以资本化 CFI 低。
Financial ratios: ROA/ROE 与 NI 同向变化，费用化当期 ROA/ROE 比较低，以
后比较高，资本化当期 ROA/ROE 高，以后比较低，资本化 ROA/ROE 比较平
稳。
Interest coverage ratio (EBIT/ interest expense): 资本化前期 Interest coverage
ratio 比较大，因为 interest expense 小，后期比较小，因为 EBIT 小；费用化
前期 Interest coverage ratio 比较小，因为 interest expense 比较大，后期比较
大，因为 EBIT 后期比较大。
如果问哪一种财务处理较保守、激进，相对应地，应该是资本化激进，费
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用化保守。
R8-4 ★Tangible asset：折旧就是一种将资产资本化的方式
Tangible asset not used in the operations of the firm should be classified as
investment assets.
Land 不必折旧
Land improvement 需折旧
Lease Improvement 需折旧
Long-lived assets held for sale: tested for impairment immediately, no longer
depreciate; NRV>carrying value, impaired and can be reversed up to the total
loss
R9-4 ★Component depreciation
IFRS requires to depreciate the components of an asset separately.
GAAP allows but is seldom used
R10-4 ★Intangible asset：amortize 摊销
Finite-lived intangible assets are amortized over their useful lives.
一般的讲，企业本身开发的无形资产的费用应该费用化。例外：R&D，
software.
GAAP, R&D 的费用要费用化；IFRS, research 的费用应该费用化 development
的费用应该资本化。
Software: GAAP 要求在技术可行性确立完成之前的费用费用化（研发费用），
之后的费用资本化（光盘费用）。But companies expense costs related to the
development of software for internal use until it is probable that the project
will be completed and that the software will be used as intended. Thereafter,
development costs are capitalized.
Infinite-lived intangible asset values are not amortized but are tested for
impairment at least annually.
Goodwill 不折旧，不摊销，只做 annual impairment test（还要掌握 goodwill
的定义）
Under IFRS, good will 的减值，直接将帐面价值与 Implied value 进行比较。
Gas and oil reserve 是资源，需要 Depletion
R11-4 Upward revaluation
★upward revaluation of assets 在 IFRS 下是允许的，但 . GAAP 是不允许的.
★reversal of impairment is permitted under IFRS for inventory (回转到原来的
值), not permitted under . GAAP unless for held for sale 的资产
P27-4 Depreciation methods
Q178-4 Assume . GAAP applies unless otherwise noted. All else equal, the net profit
margin for a company will be highest if, for new depreciable assets, that company
uses:
A. Low salvage value estimates and long average lives.
B. High salvage value estimates and long average lives.
C. High salvage value estimates and short average lives.
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Solution: B.
A high salvage value estimate reduces the depreciable base and thus depreciation expense;
long average lives reduce the annual depreciation expense for any given depreciable base. The
combination of the two would result in the lowest depreciation expense, which leads to the
highest net income and profit margins.
Q179-4 Which of the following statements about indefinitely lived intangible assets is most
accurate?(NotesB3-227 2)
A. They are amortized on a straight-line basis over a period not to exceed 40 years.
B. They are reported on the balance sheet indefinitely.
C. They never appear on the balance sheet unless they are internally developed.
Solution: B.
Indefinite-lived intangible assets are not amortized; rather, they are reported on the balance
sheet indefinitely unless they are impaired.
Q180-4 ★A US-based company wrote down its inventories last year because it thought that
the target market was shrinking and the resale price was declining sharply. This year, it
estimated that emerging markets would have more demand than expected and cause
the market value to rise over the original cost. Which of the following measures can
the company take to respond the changing market conditions?
A. Reversing the writing-down to the initial cost.
B. Revaluing the inventories up to the market value.
C. No action can be taken.
Solution: C.
Based on US GAAP, if the current cost exceeds the original cost, it’s not permitted for reversal
of inventory writing-down.
Q181-4 ★Assume . GAAP applies unless otherwise noted. Which of the following
adjustments to the assumed useful life and assumed salvage value of a company’s
assets would most likely decrease the company’s total asset turnover ratio?
Assumed useful life Assumed salvage value
A. Longer Lower
B. Longer Higher
C. Shorter Lower
Solution: B.
A longer useful life and higher salvage value are consistent with lower depreciation expense,
which results in a higher net asset value. Asset turnover (Sales/Total assets) would decrease
because sales would be constant while assets would be higher due to smaller depreciation
charges.
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Q182-4 In the early years of an asset's life, a firm using the a double-declining balance method,
as compared to a firm using straight-line depreciation, will report lower: (NotesB3-227
3)
A. depreciation expense.
B. operating cash flow.
C. retained earnings.
Solution: C.
In the early years, accelerated depreciation will result in higher depreciation expense; thus,
lower net income. Lower net income will result in lower retained earnings.
Q183-4 ★Assume . GAAP applies unless otherwise noted. An analyst gathered the
following information ($ millions) about four companies operating in the same
industry:
Company Annual Depreciation Expense Accumulated Depreciation
1
2
3
4
Although the companies have different levels of sales and assets, they are all
experiencing sales growth at about the same rate and use the same type of
equipment in the manufacturing process. All four companies also use the same
depreciation method. Based only on the information above, which company is least
likely to require major capital expenditures in the near future?
A. Company 1
B. Company 2
C. Company 3
Solution: C.
Average life of F/A= Accumulated depreciation/ annual depreciation expense, choose the least,
which is least likely to require major capital expenditure in the near future.
Q184-4 ★At the beginning of the year, Triple W Corporation purchased a new piece of
equipment to be used in its manufacturing operation. The cost of the equipment was
$25,000. The equipment is expected to be used for 4 years and then sold for $4,000.
Depreciation expense to be reported for the second year using the
double-declining-balance method is closest to: (NotesB3-81 10)
A. $5,250.
B. $6,250.
C. $7,000.
Solution: B.
Year 1: (2 / 4) x 25,000 = $12,500. Year 2: (2 / 4) x (25,000 — 12,500) = $6,250.
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Q185-4 ★★An analyst in the finance department of BOOLDO ., a French corporation, is
computing the amortization of a customer list, an intangible asset, for the fiscal year
ended 31 December 2009. She gathers the following information about the asset:
Acquisition cost €2,300,000
Acquisition date 1 January 2008
Expected residual value at time of acquisition €500,000
The customer list is expected to result in extra sales for three years after acquisition.
The present value of these expected extra sales exceeds the cost of the list.
If the analyst uses the straight-line method, the amount of accumulated amortization
related to the customer list as of 31 December 2009 is closest to:（2012 原版书后
Reading30）
A. €600,000.
B. €1,200,000.
C. €1 ,533,333.
Solution：B.
Using the straight-line method, accumulated amortization amounts to
Accumulated amortization = [(2, — 500,000) / 3 years] x 2 years
= 1,200,000.
Q186-4 ★★A financial analyst at BETTO . is analyzing the result of the sale of a vehicle for
85,000 Argentine pesos (ARP) on 31 December 2009. The analyst compiles the
following information about the vehicle:
Acquisition cost of the vehicle ARP 100,000
Acquisition date 1 January 2007
Estimated residual value at acquisition date ARP 10,000
Expected useful life 9 years
Depreciation method Straight-line
The result of the sale of the vehicle is most likely:（2012 原版书后 Reading30）
A. a loss of ARP 15,000.
B. a gain of ARP 15,000.
C. a gain of ARP 18,333.
Solution：B.
The result on the sale of the vehicle equals
Gain or loss on the sale = Sale proceeds – Carrying amount
=Sale proceeds – (Acquisition cost – Accumulated depreciation)
= 85,000 – [100,000 – 1((100,000 – 10,000)/9 years) X 3 years]
= 15,000.
Q187-4 All else being equal and ignoring tax effects, compared with using the straight-line
method of depreciation, the use of an accelerated method of depreciation in the early
years of an asset's life would most likely result in a decrease in the firm's: (2014 Mock)
A. cash flow from operations.
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B. asset turnover ratio.
C. shareholders' equity.
Solution：C.
An accelerated method of deprecation produces greater expenses in the early years and
lowers net income, which in turn lowers the retained earnings resulting in a decrease in
shareholders' equity.
Q188-4 A company acquired a customer list for $300,000 and a trademark for $5,000,000.
Management expects the customer list to be useful for three years, and it expects to
use the trademark for the foreseeable future. The trademark must be renewed every
10 years with the Patent and Trademark office for a nominal amount; otherwise it
expires. If the company uses straight-line depreciation for all its intangible assets, the
annual amortization expense for these two assets will be closest to: (2014 Mock
A. $100,000.
B. $600,000.
C. $0.
Solution：A.
The trademark can be renewed at a minimal cost; therefore, it is considered to have an
indefinite life, and amortization expense is not required.
Annual amortization expense on the customer list = $300,000 / 3 = $100,000.
R12-4 Depreciation 掌握计算及灵活运用：
Most firms use the ST depreciation method for financial reporting purposes. It
results that most assets generate more benefits in the early years of their
economic life and fewer benefits in the later years. 所以直线法折旧，随时间增
加，ROA 是不断增加的
★Accelerated depreciation method is more appropriate for matching the
expenses to revenues.
Residual value
Amortization
P28-4 Impairment under . GAAP and IFRS
Q189-4 ★★Assume . GAAP applies unless otherwise noted. An analyst determined the
following information concerning Franklin, Inc.’s stamping machine:
Acquired January 1, 1998
Cost $22 million
Depreciation straight line method
Estimated useful life 12 years
Salvage value $4 million
As of December 31, 2004, the stamping machine is expected to generate $1,500,000
per year for five more years and will then be sold for $1,000,000. The stamping
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machine is:
A. impaired because its carrying value exceeds expected future cash flows.
B. impaired because expected salvage value has declined.
C. Not impaired because annual expected revenue exceeds annual depreciation.
Solution: A.
The carrying value of the stamping machine is its cost less accumulated depreciation.
Depreciation taken through 2004 was (($22,000,000 - $4,000,000) / 12*7 =) $10,500,000 so
carrying value is ($22,000,000 - $10,500,000 =) $11,500,000. Because the $11,500,000 carrying
value is more than expected future cash flows of ((5*$1,500,000) + $1,000,000 =) $8,500,000,
the stamping machine is impaired.
Q190-4 ★★A Canadian printing company which prepares its financial statements according
to IFRS has experienced a decline in the demand for its products. The following
information relates to the company’s printing equipment as of 31 December 2010.
C$
Carrying value of equipment (net book value) 500,000
Undiscounted expected future cash flows 550,000
Present value of expected future cash flows 450,000
Fair Value 480,000
Costs to sell 50,000
Value in use 440,000
The impairment loss (in C$) is closest to:
A. 0.
B. 60,000.
C. 70,000.
Solution: B.
Under IFRS, an asset is considered to be impaired when its carrying amount exceeds
its recoverable amount (the higher of fair value less cost to sell or value in use).
Fair value less costs to sell: 480,000 – 50,000 = 430,000
Value in use = 440,000
Recoverable amount (higher value) = 440,000
Impairment loss under IFRS = Carrying value – recoverable amount = 500,000 – 440,000 =
60,000
Q191-4 ★Assume . GAAP applies unless otherwise noted. All else equal, will a company's
implementation of the accounting standard (SFAS 143) related to asset retirement
obligations incurred because of environmental damage most likely increase or
decrease that company's:
Return on assets Net income
A. Increase Increase
B. Increase Decrease
C. Decrease Decrease
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Solution: C.
Implementation of SFAS 143 requires that companies record an asset and related liability for
costs involved in the remedy of environmental damage. The increase in assets will decrease
return on assets and the increase in depreciation and accretion expense will reduce net
income.
Q192-4 ★★Two years ago, Metcalf Corp. purchased machinery for $800,000. At the end of
last year, the machinery had a fair value of $720,000. Assuming Metcalf uses the
revaluation model, what amount, if any, is recognized in Metcalf's net income this year
if the machinery's fair value is $810,000? (NotesB3-228 7)
A. $0
B. $80,000
C. $90,000
Solution：B.
Under the revaluation method, Metcalf reports the equipment on the balance sheet at fair
value. At the end of last year, an $80,000 loss was recognized (from $800,000 to $720,000) in
the income statement. Any recovery is recognized in the income statement to the extent of
the loss. Any remainder is recognized in shareholders' equity as revaluation surplus. Thus, at
the end of this year, an $80,000 gain is recognized in the income statement, and a $10,000
revaluation surplus is recognized in shareholders' equity.
Q193-4 ★★Due to significant changes in the marketplace, the demand for a company’s
product has fallen and is not expected to recover to previous levels. The following
information is related to the patent under which the product is produced:（MOCK92）
Item Description $ (thousands)
Carrying value amount 36,000
Undiscounted expected future cash flows 38,000
Present value of expected future cash flows 32,000
Fair value if sold 34,000
Costs to sell 4,000
Which of the following statements is most accurate? The patent is impaired under:
A. IFRS only.
B. . GAAP only.
C. both IFRS and . GAAP.
Solution：A.
Under IFRS, first you must determine the recoverable amount that is the higher of:
Value in use, which is the present value of the future cash flows: $32,000.
Fair value less costs to sell: $34,000 - 4,000 = $30,000.
The recoverable amount ($32,000) is lower than the carrying value ($36,000).
Therefore, the asset is impaired and should be written down to that amount.
Under . GAAP, to assess impairment the carrying value ($36,000) is compared with the
undiscounted expected future cash flows ($38,000).
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In this case, the carrying value is lower, so the patent is not impaired.
Q194-4 ★★An analyst is studying the impairment of the manufacturing equipment of WLP
Corp. a .-based corporation that follows IFRS. He gathers the following information
about the equipment:
Fair value £16,800,000
Costs to sell £800,000
Value in use £14,500,000
Net carrying amount £19,100,000
The amount of the impairment loss on WLP Corp.'s income statement related to its
manufacturing equipment is closest to:（2012 原版书后 Reading30）
A. £2,300,000.
B. £3,100,000.
C. £1,600,000.
Solution：B.
The impairment loss equals £3,100,000.
Impairment = max(Recoverable amount; Value in use) – Net carrying amount
= max(16,800,000 – 800,000; 14,500,000) – 19,100,000 = –3,100,000.
Q195-4 A firm recently recognized a $15,000 loss on the sale of machinery used in its
manufacturing operation. The original cost of the machinery was $100,000 and the
accumulated depreciation at the date of sale was $60,000. What amount did the firm
receive from the sale? (NotesB3-228 9)
A. $25,000.
B. $45,000.
C. $85,000.
Solution：A.
Gain or loss is equal to the sale proceeds minus the carrying value (cost minus accumulated
depreciation) at the time of sale. Given the loss of $15,000 and carrying value of $40,000
($100,000 — $60,000), we can solve for the proceeds of $25,000 (-15,000 + 40,000).
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R13-4 ★Impairment under US GAAP
Recoverability 的度量标准：carrying value> undiscounted cash flow
Loss measurement: carrying value- fair market value/discounted cash flow
Cannot reverse the recognized loss
R14-4 ★Impairment under IFRS
Carrying value> max [Fair Value- selling cost, PV(value in use)]
Can reverse the loss, the revaluation will be recognized in equity. Revaluing the
asset's value upward is even permitted under IFRS.
R15-4 ★Impairment effect
PP&E cost (asset) decrease & NI decrease (due to impairment expenses)
But NI of next year will higher caused by lower PP&E level
impairment 对 ratio 的影响：在确认减值的当期，ROA，ROE 较小。在以后的
几期，ROA, ROE 变大（decreased depreciation)。
The impact of Valuing asset upward to financial ratios: low leverage (high
asset),high ROA/ROE in the period of revaluation and low ROA/ROE in
subsequent periods.
Tangible assets Intangible asset
Held for use
Impairment indicators
Impairment test
Held for sale
No depreciation
Immediate impairment test
If Carrying value > NRV
Held for use
Goodwill
&
Other IA with indefinite useful life
Annual impairment test
Held for sale
No amortization
Immediate impairment test
If Carrying value > NRV
R16-4 Recovery of impairment-Held for sale (same under US GAAP and IFRS)
Once an asset is written down
Under
Held for use recoveries are not allowed
Held for sale recoveries are allowed
Under IFRS, recoveries are allowed except for goodwill
Q196-4 ★A company, which prepares its financial statements in accordance with IFRS uses
the revaluation model to value land. At the end of the current year the land value of
the land has increased and will be adjusted on the balance sheet. Which of the
following statements is most accurate? In the current period the revaluation of the
land will:
A. increase return on sales.
B. increase return on assets.
C. decrease the debt to equity ratio.
Solution: C.
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The increase in the value of the land bypasses the income statement and goes directly to a
revaluation surplus account in equity. Equity increases thereby decreasing the debt to equity
ratio.
P29-4 Investment property
Q197-4 ★★A company, which prepares its financial statements according to IFRS, owns
several investment properties on which it earns income. It values the properties using
the fair value model based on prevailing rental markets. A summary of the properties’
valuations is as follows: （2012-mock85-64）
Original cost (acquired in 2009) €50 million
Fair value valuation as at 31 December 2009 € million
Fair value valuation as at 31 December 2010 € million
Fair value valuation as at 31 December 2011 € million
Which of the following best describes the impact of the revaluation on the 2011
financial statements?
A. € million charge to net income.
B. € million charge to revaluation surplus.
C. € million charge to revaluation surplus and € million charge to net income.
Solution: A.
For investment properties, when using the fair value model of revaluing assets, all increases
and decreases affect the net income. Here, it is — = .
Q198-4 When a firm value its investment property, the unrealized gain is recognized in its
income statement, which of the following model is the company used in valuation？
A. Cost model
B. Fair value model
C. Revaluation
Solution: B.
Investment property. Under IFRS, investment property includes assets that generate rental
income or capital appreciation. . GAAP does not have a specific definition of investment
property. Under IFRS, investment property can either be reported at amortized cost (just like
PP&E) or fair value. Under the fair value model, any change in fair value is recognized in the
income statement.
Q199-4 ★★If a company uses fair value model to value investment property, changes in the
fair value of the asset arc least to affect:
A. net income.
B. net operating income.
C. other comprehensive income.
Solution: C.
When a company uses the fair value model to value investment property, changes in the fair
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value of the property are reported in the income statement—not in other comprehensive
income.
Q200-4 ★★A company is most likely to:（2012 原版书后 Reading30）
A. use a fair value model for some investment property and a cost model for other
investment property.
B. change from the fair value model when transactions on comparable properties become
less frequent.
C. change from the fair value model when the company transfers investment property to
property, plant, and equipment.
Solution：C.
A company will change from the fair value model to either the cost model or revaluation
model when the company transfers investment property to property, plant, and equipment.
Q201-4 ★★A firm that purchases a building that it intends to rent out for income would
report this asset as investment property using the cost model under: (NotesB3-324
18)
A. . GAAP only.
B. IFRS only.
C. both . GAAP and IFRS.
Solution：B.
Under IFRS, a firm may value investment property using either the cost model or the fair value
model. . GAAP does not distinguish investment property from other types of long-lived
assets
R17-4 Investment property（新增考点；注意 IFRS 和 GAAP 下的区别，重点掌握）
IFRS：includes assets that generate rental income or capital appreciation. either
be reported at amortized cost (just like PP&E) or fair value（Under the fair value
model, any change in fair value is recognized in the income statement）.
. GAAP：does not have a specific definition of investment property. Under
IFRS
. GAAP does not distinguish investment property from other kinds of
long-lived assets.
注意：（原版书 volume3-478）investment property 的转换
Transfer From Transfer To Financial Statement Treatment
Owner-occupied Investment property Treat as revaluation: recognize
gain through I/S only if it rev
rses previously
recogn
ed loss
Inventory Investment property Recognize gain or loss if
fair value is different from carrying amount
Investment property Owner-occupied or
inventory
Fair value of asset at date of transfer will be
its cost under new classification
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P30-4 Debt Security
Q202-4 ★A company issues €1 million of bonds at face value. When the bonds are issued, the
company will record a: (原版书 Reading32)
A. cash inflow from investing activities.
B. cash inflow from financing activities.
C. cash inflow from operating activities
Solution: B.
The company receives €1 million in cash from investors at the time the bonds are issued, which
is recorded as a financing activity.
Q203-4 ★Fairmont Golf issued fixed rate debt when interest rates were 6 percent. Rates have
since risen to 7 percent. Using only the carrying amount (based on historical cost)
reported on the balance sheet to analyze the company's financial position would most
likely cause an analyst to:
A. overestimate Fairmont's economic liabilities.
B. underestimate Fairmont's economic liabilities.
C. underestimate Fairmont's interest coverage ratio.
Solution: A.
When interest rates rise, bonds decline in value. Thus, the carrying amount of the bonds being
carried on the balance sheet is higher than the market value. The company could repurchase
the bonds for less than the carrying amount, so the economic liabilities are overestimated.
Because the bonds are issued at a fixed rate, there is no effect on interest coverage.
Q204-4 ★ A company had the following events related to $5 million of 10-year bonds with a
coupon rate of 8% payable semiannually on 30 June and 31 December:
• Issued on 1 January 2005, when the market rate of interest was 6%.
• Bought back in an open market transaction on 1 January 2011, when the market
rate of interest was 8%.
Which of the following statements best describes the effect of the bond repurchase
on the financial statements for 2011? If the company uses the indirect method of
calculating the cash from operations, there will be a: (Mock84-54)
A. $346,511 gain on the income statement.
B. $743,873 gain on the income statement.
C. $350,984 decrease in the cash from operations.
Solution: C.
The book value of the bonds on 1 January 2011 is equal to the present value of the remaining
coupon payments and principal discounted at the market rate at time of issue (3% per period).
Coupon = ××5,000,000 = 200,000; there are 4 years remaining or 8 coupon payments.
Book value = 200,000 PV Annuity (n = 8; i = 3%) + ,000 PV (n = 8; i = 3%)
= 1,403,938 + 3,947,046
= 5,350,984
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Using a financial calculator PMT = 200,000; FV = 5,; (I % = 3%; N = 8);
Compute PV = 5,350,984
Because the market interest rate when the bonds are bought back（8%）is equal to the coupon
rate, the company can buy back the bonds at par $5,000,000.
Cost of repurchase $5000,000
Book value 5,350,984
Gain on retirement 350,984
On the cash flow statement the gain would be deducted from net income in calculating the
cash from operations under the indirect method, and the cash paid to repurchase the bonds
would be a cash outflow in the financing section.
Q205-4 ★★Princeton Company calls its $1,000,000, 9% bonds for $1,010,000. On the call
date, the bonds have a book value of $980,000 and unamortized issue costs of
$24,000. Under . GAAP, Princeton should report a: (NotesB3-325 22)
A. $54,000 loss.
B. $30,000 loss.
C. $10,000 gain.
Solution: A.
Under . GAAP, unamortized issue costs are reported on the balance sheet as an asset and
are not included in the book value of the bond liability. Thus, the remainder of the issue costs
must be written off when the bond is called.
Gain or loss on redemption = book value — reacquisition price — unamortized issue costs
= $980,000 — $1,010,000 — $24,000 = $54,000 loss.
Q206-4 ★★Assume . GAAP applies unless otherwise noted. Madison Inc. is planning a
bond issue. They are considering issuing either a straight coupon bond or a coupon
bond with warrants attached. The proceeds from either Issue would be the same.
What will be the effect on their interest expense and balance sheet liability if they
issue the bonds with warrants as compared to the straight bonds? For the bonds with
warrants the:
interest expense will be balance sheet liability will be
A. lower Lower
B. lower Higher
C. higher Lower
Solution: A.
The portion of the proceeds attributable to the warrants would be classified as equity, thus the
portion classified as a liability would be smaller (lower). The lower balance sheet value would
lead to a lower interest expense when it is calculated. The interest expense is based on the
liability at the beginning of the period. Not the coupon payment.
Q207-4 ★On 1 January 2010 the market rate of interest on a company's bonds is 5 percent
and it issues a bond with the following characteristics: (MOCK 79-65)
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Face value €50 million
Coupon rate, paid annually 4%
Maturity date December 31,2019 (10 years)
Issue price
If the company uses IFRS, its interest expense (in millions) in 2010 is closest to:
A. €
B. €
C. €
Solution: B.
IFRS recommends the effective interest method for the amortization of bond
discounts/premiums. The bond is issued for million= .
Interest expense=%=
Debt Security 的理解：
R18-4 ★报表记录：对于 discount bond，premium bond 的报表记录，特别掌握如何用实际
利率法计算 int. exp（用 mkt. rate at issuance date）
Step 1：计算 bond 的 PV
Step 2：计算 bond 第一期真正的 int. exp；then 计算第一期结束的 carrying value
Step 3：根据第一期结束的 carrying value，计算 bond 第二期真正的 int. exp
如此推导下去
R19-4 ★amortization 对 CFO 间接法的影响 (premium 是减去，discount 是加上)
For premium bonds, the total portion of coupon is treated as CFO in accounting
basis. For analytical purpose, CFO have to be the real interest expense, CFF have to
be the coupon payment minus the interest expense
For discount bond, the total portion of coupon is treated as CFO in accounting basis.
Fro analystical purpose, CFO have to be the real interest expense, CFF have to be
the difference between coupon payment and interest expense, but here CFF treated
as a inflow instead.
R20-4 ★Disclose in footnotes as bond: The nature of liabilities；Maturity dates；Stated and
effective interest rates；Call provisions and conversion privileges；Restrictions imposed by
creditors；Assets pledged as security；The amount of debt maturing in each of the next
five years
R21-4 Bond redemption. When bond is redeemed, a gain or loss is recognized by subtracting the
redemption price from the book value of the bond liability, which is reported in the
income statement. In the CF statement, it is treated as CFF.
R22-4 ★注意 conventional bond 与 bond with warrants，convertible bond 的比较：. GAAP：
bond with warrants 分拆为 liability 和 equity 两部分确认计量；但是 conventional bond
不需要拆分；IFRS：conventional bond 和 bond with warrants 都需要拆.
R23-4 For analytical purpose, if the stock price is significantly higher than the conversion price,
the convertible bond should be treated as equity, in contrast, if the stock price is vastly
lower than the conversion price, convertible bond should be treated as liability.
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R24-4 该表格需要重点掌握，考到的几率很大
P31-4 Derecognition of debt
Q208-4 ★★Oil Exploration LLC paid $45,000 in printing, legal fees, commissions, and other
costs associated with its recent bond issue. It is most likely to record these costs on its
financial statements as:
A. an asset under . GAAP and reduction of the carrying value of the debt under IFRS.
B. a liability under . GAAP and reduction of the carrying value of the debt under IFRS.
C. a cash outflow from investing activities under both . GAAP and IFRS.
Solution: A.
Under . GAAP, expenses incurred when issuing bonds are generally recorded as an asset and
amortized to the related expense (legal, etc.) over the life of the bonds. Under IFRS, they are
included in the measurement of the liability. The related cash flows are financing activities.
Q209-4 ★Under a defined contribution pension plan, which of the following is recognized as a
pension expense? (NotesB3-325 21)
A. Actuarial gains and losses.
B. Periodic contributions to the plan.
C. Service costs incurred during the period.
Solution：B.
Under a defined contribution pension plan, a company's only pension expenses are the
predetermined contributions required to be made to the plan for the period.
R25-4 ★Early repayment of Bond：
Under . GAAP：any remaining unamortized bond issuance costs must be written
off and included in the gain or loss calculation. Writing off the cost of issuing the
bond will reduce a gain or increase a loss.
under IFRS ：No write-off is necessary
gain or loss from redeeming debt：is reported in the income statement, usually as a
part of continuing operations, and additional information is disclosed separately.
Redeeming debt： is usually not a part of the firm's day-to-day operations; thus,
analysts
often eliminate the gain or loss from the income statement for analysis and
forecasting.
When presenting the cash flow statement using the indirect method, any gain
Par bonds Premium bonds Discount bonds
Market rate=coupon rate
Cash paid=CR.*Par
Market rate<coupon rate
Interest expense = cash paid
- amortization of premium
Market rate>coupon rate
Interest expense = cash paid
+ amortization of discount
Interest expense is constant Interest decreases over time Interest increases over time
CFO 低估；CFF 高估 CFO 高估；CFF 低估
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(loss) is subtracted from (added to) net income in calculating cash flow from
operations. The redemption price is reported as an outflow from financing
activities.
R26-4 Issuance cost of bond
Issuance cost of debt includes printing, legal fees directly related to the issuance of
bond
Under IFRS, the amount of issuance cost is deducted from the total proceeds of
bond issuance, and recalculate the effective interest rate.
Under GAAP, the amount of issuance cost is recorded as long-term unamortized,
which will be amortized during the period of maturity.
P32-4 Lease for lessor and lessee
Q210-4 ★Assume . GAAP applies unless otherwise noted. At the beginning of the year, a
lessee company enters into a new lease agreement that is correctly classified as a
finance lease, with the following terms:
Annual lease payments due at the end of the year $100,000
Lease term 5 years
Appropriate discount rate 12%
Depreciation method straight-line basis
Estimated salvage value $0
With respect to the effect of the lease on the company’s financial statements in the
first year of the lease, which of the following is most accurate? The reduction in the
company’s:
A. Pretax income is $72,096.
B. Cash flow from financing is $56,742.
C. Cash flow from operations is $72,096.
Solution：B.
The present value of the lease is $360,. (n = 5, I = 12%, PMT = $100,000) 12% of the
original PV is $43, and represents the interest component of the payment in the first
year. The difference between the annual payment and the interest is the amortization of the
lease obligation included in cash flow from financing. $100,000 – 43, = $56,.
Depreciation is $360, / 5 or $72, so the total reduction in pretax income would
be interest plus depreciation or $115,. Cash flow from operations would be reduced by
the amount of the interest only because the depreciation would be added back to determine
cash flow from operations.
Q211-4 ★If Lizard Inc., a lessee, treats a 5-year lease as a finance lease with straight line
depreciation rather than as an operating lease: (NotesB3-324 13)
A. it will have greater equity at lease inception.
B. its operating income will be less in the first year of the lease.
C. its CFO will be greater and CFF will be less in the second year of the lease.
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Solution: C.
With a finance lease, only the interest portion of the lease payment is classified as CFO, so CFO
will be greater than it would be with an equivalent operating lease. CFF will be less for a
finance lease because the principal portion of each lease payment is classified as a financing
cash outflow. Operating income, EBIT, will be reduced only by the (equal) annual depreciation
expense with a finance lease, so operating income will be greater for a finance lease than for
an operating lease (for which the entire lease payment will be an operating expense). At
inception, a finance lease will increase assets and liabilities by the same amount so there is no
effect on equity.
Q212-4 ★★A company prepares its financial statements according to . GAAP and leased a
piece of equipment on 1 January 2012. Information relevant to the transaction is as
follows: (MOCK92-67)
1. Five annual lease payments of $25,000, with the first payment due 1 January
2012.
2. Interest rate on similar company debt is currently 8%.
3. The fair value of the equipment is $115,000.
4. Useful life of the equipment is seven years.
5. The company depreciates other equipment in the same asset class on a
straight-line basis.
The total expense related to the lease on the company’s 2012 income statement will
be closest to:
A. $22,024.
B. $25,000.
C. $28,185.
Solution: C.
The lease would qualify as a finance (capital) lease under . GAAP because the present value
of the lease payments is more than 90% of the fair value.
Using a financial calculator for an annuity due at the beginning of the period:
PV of lease payments: PMT = 25,000, i = 8%, N = 5, BGN Compute PV.
PV = $107,803, 90% of the fair value: x 115,000 = $103,500.
Therefore, the lease is greater than 90% and would be capitalized at $107,803. With the first
payment made immediately, the outstanding balance in 2012 = 107,803 -25,000 = 82,803.
Interest expense in 2012 x 82,803 6,
Amortization expense for the year using the
lease term as the useful life (no indication that
the lease will be renewed beyond the initial
term)
107,803 / 5 21,
Total expense in 2012 28,
Q213-4 ★Compared with a capital lease, which impact will an operating lease have on a
company’s financial statements?
A. Interest coverage ratio will deteriorate.
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B. Leverage ratio will improve.
C. Profitability will deteriorate in the first years.
Solution: B.
Compared with capital lease, operating lease will result in higher operating expense but higher
net income, thus, profitability will increase in the first year.
Q214-4 Compared with a capital lease, which impact will an operating lease have on a
company’s CFO?
A. CFO will be higher
B. CFO will remain the same
C. CFO will be lower
Solution: C.
Compared with capital lease, operating lease will result in higher operating expense and lower
CFO.
Q215-4 ★Assume . GAAP applies unless otherwise noted. On January 1, 2008, InTec
Products Inc. entered into a lease agreement to lease a piece of machinery as the
lessor. The annual lease payments are $50,000, due December 31, the lease term is
for 5 years, the machine has an estimated useful life of 6 years, and Peoria currently
records the machine on its balance sheet at its cost of $160,000. The incremental rate
of the lease is 8% and they are reasonably assured of the collection of the lease
payments. Which of the following best describes the classification and effect of the
lease on Peoria's income statement for 2008?
A. Direct financing lease. Gross profit of $39,635 plus interest income of $15,971.
B. Direct financing lease. Interest income of $15,971.
C. Sales type lease. Gross profit of $39,635 plus interest income of $15,971.
Solution: C.
先判断对于出租人是什么类型的lease: the lease period covers more than 75% of its useful
life (5/6), and Peoria currently records the machine on its balance sheet at its cost of $160,000.
所以是一个capital lease；之后因为InTec Products Inc.是一个manufacturer，而且cost可以确
认，被视为出租人方capital lease中的sales-type：PV of the lease payments ($199,635) (PMT =
$50,000, N=5, i=8%). 之后确认the gross profit: PV of series of lease payment- cost of goods
sold (cost of goods sold=租赁资产的帐面价值-残值现值, 题目中没有提到残值, 就不用考
虑了) (199,635 - 160,000 = 39,635，如果残值高估，则成本低估，经营利润高估)。所以Interest
income on the net investment in the lease: x 199,635 = 15,971.
Q216-4 ★Under . GAAP, a lessor's reported revenues at lease inception will be highest if
the lease is classified as a(n):
A. sales-type lease.
B. operating lease.
C. direct financing lease.
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Solution: A.
sales-type lease treats the lease as a sale of the asset, and revenue is recorded at the time of
sale equal to the present value of future lease payments. Under a direct financing lease, only
interest income is reported as earned. Under an operating lease, revenue from rent is reported
when collected.
Q217-4 ★A company has announced that it is going to distribute a group of long-lived assets
to its owners in a spin-off. The most appropriate way to account for the assets until
the distribution occurs is to classify them as:
A. held for sale with no depreciation taken.
B. held for use until disposal with no depreciation taken.
C. held for use until disposal with depreciation continuing to be taken.
Solution: C.
Long-lived assets that will be disposed of other than by sale (such as a spin-off, an exchange for
other assets, or abandonment) are classified as held for use until disposal and continue to be
depreciated until that time.
关于承租人和出租人的 Lease：
R27-4 承租人（常考）
Operating lease vs. Capital lease (capital lease also can be called as finance
lease)
R28-4 ★Under IFRS, capital lease when transfer from lessor to lessee substantially all the
risks and rewards incidental to ownership of an asset.
Title transfer
Bargain purchase option
The lease term is for the major part of the economic life of the asset
At the inception of the lease the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset
A specialized nature
R29-4 ★Capital lease 的条件 under US GAAP with specific conditions：
The title to the leased asset is transferred to the lessee at the end of the lease
period.
A bargain purchase option exists: to permit the lessee to purchase the leased
asset for a price that is significantly lower than the fair market value of the asset
on the exercisable date.
The lease period is at least 75% of the asset’s economic life.
The present value of the lease payments is equal to or greater than 90% of the
fair value of the leased asset. The discount rate used is the lower of the lessee’s
incremental borrowing rate or the interest rate implicit in the lease (the
discount rate that the lesser used to determine the lease payment.)
R30-4 ★两种 lease 的方式对于报表呈现各项和 ratio 的影响（凡是 capital 的处理，都
会引起 A 和 L 的增加, CFO 被高估，在 capital lease 中 Dep., Int.也会同时增加，所
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以 NI 低；但是 dep.不会大于 lease payment，所以相对 operating lease，EBIT 高。
Remember, all the financial ratios deteriorate with financial lease, except EBIT and
CFO)
R31-4 在 Capital lease 中，增加的 Liability 部分包含 ST 和 LT，其中 ST 是利息—即为 CFO；
LT 是本金—即为 CFF
R32-4 ★Capital lease 的计算：和 bond 的计算相似
先将 MLP 折现，然后 A 和 L 都会增加 PV of MLP
Dep.：按照在 A 上确认的 PV of MLP，用直线折旧法
Int.：每期的都用 carrying value，carrying value=carrying value（上期）-principal
repaid（考试会考第二年或第三年的利息）
R33-4 ★出租人(lessor)：只要能区分 direct financing & sales type under US GAAP
判断是什么类型的 lease：对于出租人，lease 也分为两类—operating lease
和 capital lease。
对于 lessor，判断 capital lease 的判断条件：
Firstly, 满足对于 lessee 是 capital lease；Secondly，collectability of the MLPs is
reasonably predictable and there are no significant uncertainties regarding the
amount of unreimbursable costs yet to be incurred by the lessor under the
provisions of the lease agreement
Lessor 的 capital lease 又分为两种：sales-type (PV> Fair Value of leased asset)
和 direct-financing
记账区别：sales-type在期初会确认一笔毛利gross profit= PV of MLP – (Cost of
assets – PV of salvage)；但是 direct-financing 不确认毛利，而是把 PV of MLP
当做一笔借款借给承租人，将来收利息
期初现金流区别：sales-type 在期初有现金流；而 direct-financing 没有现金
流
期中现金流区别：sales-type和direct-financing有CFO inflow，都是 int. revenue
R34-4 ★Disclose in footnotes as lease: 特别是 lease payment that are due in each of the
next five years and after five-year aggregate (can be); but interest rate is not always
disclosed
R35-4 Take-or-pay commitment&sale of receivable with recourse
Take or pay commitment: the liability should be increased by amount of the
commitment.
Sale of receivable with recourse : should be treated as borrowing collateralized
by receivable. To specific, add receivables back and treat the proceeds of the
sale as debt. CFO of the amount of the proceeds of sale should be treated as
CFF.
Thus, leverage ratio are higher with off-balance sheet items without
adjustment.
P33-4 Off-balance sheet financing
Q218-4 ★A retail company that leases the majority of its space has total assets of $4,500
million and total long-term debt of $2,125 million bearing an average interest rate of
10 percent. Note 8 to the 2010 financial statements contains the following
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information about the company's leases:
Note 8: Operating leases
Year Millions
2011 $140
2012 140
2013 140
2014 140
2015 140
2016 and thereafter 1,260
Total $1,960
After adjustment for the off-balance sheet financing, the debt-to-total-assets ratio
for the company is closest to:
A. 58%
B. 62%
C. 72%
Solution: A.
The present value of the operating leases should be added to both the total debt and the total
assets. To estimate the present value it is appropriate to estimate the number of years of lease
payments reflected in the 2016 and thereafter figure. Based on the constant expense shown in
the first 5 years, there are 9 (1,260/140) more payments for a total of 14 payments.
N=14, I/Y=10, PMT=140, FV=0, CPT(PV)=
Adjusted debt to total assets=(2,125+1,031)/(4,500+1,031)=57%
Q219-4 ★Assume . GAAP applies unless otherwise noted. Charles McKinmon, CFA is
analyzing the financial statements of Computers On Credit, Inc. (COC). COC has sold
$60 million of accounts receivable for proceeds of $50 million, and McKimmon wishes
to treat the transaction as collateralized borrowing. McKimmon’s financial statement
adjustments will most likely include adding
A. $50 million to accounts receivable.
B. $50 million to cash flows from financing activity.
C. $50 million to cash flows from operating activity
Solution: B.
McKinnon should add $60 million to accounts receivable, reduce cash from operating activities
by $50 million, and increase cash from financing activities by $50 million.
Off-balance Sheet 的理解：
R36-4 ★Take-or-pay contracts 调整：Should add the PV of minimum future commitments
to both property and debt.
R37-4 Sales of receivable 调整：当 A/R 还没有收回时，A/R 和 current liability 增加，CFO
降低
R38-4 卖 A/R 的 gain 或者是 loss 是要移走的，loss 会使得 EBIT 变大在没有摊销之前，
和 discount bond 的道理是相通的
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Pension Plans
A pension is a form of deferred compensation earned over time through
employee service. The most common pension arrangements are defined
contribution plans and defined benefit plans.
R39-4 A defined contribution plan is a retirement plan in which the firm contributes a sum
each period to the employee's retirement account. The firm's contribution can be
based on any number of factors, including:years of service, the employee's age,
compensation, profitability, or even a percentage of the employee's contribution.
R40-4 In a defined benefit plan, the firm promises to make periodic payments to employees
after retirement. The benefit is usually based on the employee's years of service
and the employee's compensation at, or near, retirement.
R41-4 A defined contribution plan: the employee assumes all the investment risk. Defined
benefit plan: the employer assumes all the investment risk.
P34-4 Deferred Tax
Q220-4 ★ Using the straight-line method of depreciation for reporting purposes and
accelerated depreciation for tax purposes would most likely result in a (原版书
Reading31)
A. valuation allowance.
B. deferred tax asset.
C. temporary difference.
Solution: C.
Because the differences between tax and financial accounting will correct over time, the
resulting deferred tax liability, for which the expense was charged to the income statement but
the tax authority has not yet been paid, will be a temporary difference. A valuation allowance
would only arise if there was doubt over the company's ability to earn sufficient income in the
future to require paying the tax
Q221-4 ★Deferred tax liabilities should be treated as equity when:(原版书 Reading31)
A. they are not expected to reverse.
B. the timing of tax payments is uncertain.
C. the amount of tax payments is uncertain.
Solution: A.
If the liability will not reverse, there will be no required tax payment in the Future and the
"liability" should be treated as equity
Q222-4 ★When accounting standards require recognition of an expense that is not permitted
under tax laws, the result is a:
A. deferred tax liability.
B. temporary difference.
C. permanent difference.
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Solution: C.
Accounting items that are not deductible for tax purposes will not be reversed and thus result
in permanent differences.
Q223-4 ★Victory Corp. received interest income from federally tax exempt bonds of $40,000
in the year 20X0. Its statutory tax rate is 40%. The effect of this difference between
taxable and pre-tax income is most likely a(n): (NotesB3-325 20)
A. decrease in its effective tax rate to below 40%.
B. increase in its deferred tax asset of $16,000.
C. increase in its deferred tax liability of $16,000.
Solution: A.
The receipt of the tax-exempt interest income will create a permanent difference between
pretax income and taxable income. Since the tax-free interest increases pre-tax income, but
not income tax expense, the effective tax rate will be less than 40%. No deferred tax liability is
created because the difference between pretax and taxable income will never reverse.
Q224-4 ★In its first year of operations, a firm produces taxable income of —$10,000. The
prevailing tax rate is 40%. The firm's balance sheet will report a deferred tax:
A. asset of $4,000.
B. asset of $10,000.
C. liability of $4,000.
Solution: A.
The tax loss carryforward results in a deferred tax asset equal to the loss multiplied by the tax
rate.
Q225-4 ★★An analyst gathered the following information about a company: (NotesB3-249)
Taxable income is $40,000.
Pretax income is $50,000.
Current tax rate is 50%.
Tax rate when the reversal occurs will be 40%.
What is the company's deferred tax liability at the end of year 1?
A. $3,500.
B. $4,000.
C. $5,000.
Solution: B.
The tax rate that should be used is the expected tax rate when the liability reverses. The
deferred tax liability will be $10,000 x 40% = $4,000.
Q226-4 While reviewing a company, an analyst identifies a permanent difference between
taxable income and pretax income. Which of the following statements most accurately
identifies the appropriate financial statement adjustment? (NotesB3-253
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A. The amount of the tax implications of the difference should be added to the deferred tax
liabilities.
B. The present value of the amount of the tax implications of the difference should be added
to the deferred tax liabilities.
C. The effective tax rate for calculating tax expense should be adjusted.
Solution: C.
If a permanent difference between taxable income and pretax income is identifiable, the
effective tax rate for calculating tax expense should be adjusted.
Q227-4 ★★An analyst is reviewing a company with a large deferred tax asset on its balance
sheet. She has determined that the firm has had cumulative losses for the last three
years and has a large amount of inventory that can only be sold at sharply reduced
prices. Which of the following adjustments should the analyst make to account for the
deferred tax assets? (NotesB3-253 16)
A. Record a deferred tax liability to offset the effect of the deferred tax asset on the firm's
balance sheet.
B. Recognize a valuation allowance to reflect the fact that the deferred tax asset is unlikely
to be realized.
C. Do nothing. The difference between taxable and pretax income that caused the deferred
tax asset is likely to reverse in the future.
Solution: B.
A valuation allowance is used to offset deferred tax assets if it is unlikely that those assets will
be realized. Because the company has a history of losses and inventory that is unlikely to
generate future profits, it is unlikely the company will realize its deferred tax assets in full.
Q228-4 Analysts should treat deferred tax liabilities that are expected to reverse as:
A. equity.
B. liabilities.
C. neither liabilities nor equity.
Solution：B.
If the liability is expected to reverse (and thus require a cash tax payment) the deferred tax
represents a future liability.
Q229-4 When both the timing and amount of tax payments are uncertain, analysts should
treat deferred tax liabilities as:
A. equity.
B. liabilities.
C. neither liabilities nor equity.
Solution: C.
The deferred tax liability should be excluded from both debt and equity when both the
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amounts and timing of tax payments resulting from the reversals of temporary differences are
uncertain.
Q230-4 ★★Zimt presents its financial statements in accordance with . GAAP. In 2007,
Zimt discloses a valuation allowance of $1,101 against total deferred tax assets of
$19,201. In 2006, Zimt disclosed a valuation allowance of $1,325 against total
deferred tax assets of $17,325. The change in the valuation allowance most likely
indicates that Zimt's:
A. Deferred tax liabilities were reduced in 2007.
B. Expectations of future earning power has increased.
C. Expectations of future earning power has decreased.
Solution: B.
The valuation allowance is taken against deferred tax assets to represent uncertainty that
future taxable income will be sufficient to fully utilize the assets. By decreasing the allowance,
Zimt is signaling greater likelihood that future earnings will be offset by the deferred tax asset.
Q231-4 ★★According to IFRS, the deferred tax consequences of revaluing held-for-use
equipment upward is reported on the balance sheet: (NotesB3-253 18)
A. as an asset.
B. as a liability.
C. in stockholders' equity.
Solution: C.
The deferred tax consequences of revaluing an asset upward under IFRS are reported in
stockholders' equity.
Q232-4 KLH Company reported the following:
Gross DTA at the beginning of the year $10,500
Gross DTA at the end of the year $11,250
Valuation allowance at the beginning of the year $2,700
Valuation allowance at the end of the year $3,900
Which of the following statements best describes the expected earnings of the firm?
Earnings are expected to: (NotesB3-253 19)
A. increase.
B. decrease.
C. remain relatively stable.
Solution: B.
The valuation allowance account increased from $2,700 to $3,900. The most likely explanation
is the future earnings are expected to decrease, thereby reducing the value of the DTA.
Q233-4 Which of the following events will most likely result in a decrease in a valuation
allowance for a deferred tax asset under . GAAP? A(n): (2014 Mock 99-60)
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A. reduction in tax rates
B. extension in the tax loss carry-forward period
C. decrease in interest rates
Solution: B.
Under . GAAP, deferred tax assets must be assessed at each balance sheet date. If there is
any doubt whether the deferral will be recovered, the carrying amount should be reduced to
the expected recoverable amount. The asset is reduced by increasing the valuation allowance.
Should circumstances change so that it is more probable that the deferred tax benefits will be
recovered, the deferred asset account will be increased (and the valuation allowance
decreased). An increase in the carry-forward period for tax losses extends the possibility that
benefits will be realized from the deferred tax asset and would likely result in a decrease in the
valuation allowance and an increase in the deferred tax asset.
Q234-4 Using the straight-line method of depreciation for reporting purposes and accelerated
depreciation for tax purposes would most likely result in a:
A. valuation allowance.
B. deferred tax asset.
C. deferred tax liability.
Solution: C.
Because the differences between tax and financial accounting will correct over time, the
resulting deferred tax liability, for which the expense was charged to the income statement but
the tax authority has not yet been paid, will be a temporary difference. A valuation allowance
would only arise if there was doubt over the company's ability to earn sufficient income in the
future to require paying the tax.
Q235-4 The following information is about a company equipment, which was purchased on 1
January 2007:
Accounting Purposes Tax Purposes
2007 Acquisition cost $100,000 $100,000
Depreciation method Straight-line
Double-declining balance
method
Useful life 10 years 8 years
Salvage value $20,000 $0
Tax rate 30% 30%
At the end of 2007, the balance sheet should occurs:
A. $3,600 deferred tax liability
B. $5,100 deferred tax asset
C. $5,100 deferred tax liability
Solution: C.
Straight line depreciation expense = (100,000 – 20,000) / 10 = 8,000
DDB depreciation expense = (2/8) * 100,000 = 25,000
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DTL = 30% * (25,000 – 8,000) = 5,100
Q236-4 Valuation allowance is most likely to occur when:
A. The likelihood of realizing the deferred tax asset is very low
B. There is difference between company’s accounting method and government’s tax method
C. The deferred tax liability is unlikely to be reserved
Solution: A.
Valuation allowance: A reserve created against deferred tax assets, based on the likelihood of
realizing the deferred tax assets in future accounting periods.
Q237-4 ★Assume . GAAP applies unless otherwise noted. Which of the following best
describes taxes payable?
A. Total liability for current and future taxes
B. Expense based on current period pre-tax income
C. Tax return liability resulting from current period taxable income
Solution: C.
Taxes payable is the current liability resulting from the current period taxable income based on
taxable income.
Q238-4 ★★A company has recently revalued one of its depreciable properties and estimated
that its remaining useful life would be another 20 years. The applicable tax rate for all
years is 30% and the revaluation of the property is not recognized for tax purposes.
Details related to this asset are provided in the table below, with all £-values in
millions.
Accounting
Purposes
Tax Purposes
Original values and estimates, start of 2007
2007 Acquisition cost £8,000 £8,000
Depreciation, straight-line 20 years 8 years
Accumulated depreciation end of 2009 £1,200 £3,000
Net balance end of 2009 £6,800 £5,000
Re-estimated values and estimates, start of 2010
Revaluation balance start of 2010 £10,000 Not applicable
New estimated life 20 years
The deferred tax liability (in millions) as at the end of 2010 is closest to:
A. £690.
B. £960.
C. £1,650.
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Solution: A.
Accounting
Purposes
Tax Purposes
Revaluation surplus
(10,000 – 6,800)
=3,200
no revaluation
allowed
Depreciation, straight-line 20 years 5 years remaining
2009 start of year balance after
revaluation
10,000 5,000
Depreciation 2009 500 1,000
Net balance end of 2009 9,500 4,000
Less revaluation surplus (3,200) _____
Carrying value for purposes of
deferred taxes
6,300 4,000
Deferred tax liability = x (6,300 – 4,000) = 690
Q239-4 ★★Assume . GAAP applies unless otherwise noted. Fred Company has a deferred
tax liability balance of $1,200,000 at the end of 2005. Tax rates increased from 30
percent to 40 percent in 2005. Fred Company should increase its tax liability account
and also increase its:
A. 2005 income tax expense by $120,000.
B. 2005 income tax expense by $400,000
C. Income taxes payable by $400,000.
Solution: B.
The change in Fred’s rates causes its deferred tax liability account to increase ((40 – 30) / 30)
$1,200,000 =) $400,000. The corresponding increase is to current income tax expense.
Q240-4 ★The following information is available about a company:
(all figures in $ thousands) 2010 2009
Deferred tax assets 200 160
Deferred tax liabilities (450) (360)
Net deferred tax liabilities (250) (200)
Earning before taxes 4,000 3,800
Income taxes at the statutory rate 1,200 1,140
Income tax payable (Current income
tax expense)
1,000 900
The company's 2010 income tax expense (in thousands) is closest to:(MOCK79-51)
A. $1,000
B. $1,050
C. $1,250
Solution: B.
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Income tax expense reported on the income statement=income tax payable+ net changes in
the deferred tax assets and deferred tax liabilities. The change in the net deferred tax liability is
a $50 increase (indicating that the income tax expense is $50 in excess of the income tax
payable (or current income tax expense)) and representing an increase in the expense.
Therefore, the income tax expense= $1,000+50=. $1,050
Q241-4 ★★★A company purchased equipment in 2009 for £25,000; the year-end values for
accounting purposes and tax purposes are as follows: （2012-mock85-65）
2010 2009
Carrying amount for accounting purposes £20,000 £22,500
Tax base for tax purposes £16,000 £20,000
Tax rate 25% 30%
Which of the following statements best describes the effect of the change in the
tax rate on the company’s 2010 financial statements? The deferred tax liability:
A. increased by £250.
B. decreased by £200.
C. decreased by £800.
Solution: B.
Evaluate the impact of tax rate changes on a company’s financial statements and ratios.
Deferred tax liability=taxable temporary difference×tax rate
In 2010 if the rates had not changed, and deferred
tax liability would be:
×4,000= £1200
But with the lower tax rate, the deferred tax liability
will be:
×4,000= £1000
Effect of the change in rate therefore is a decrease in
the liability
£(200)
Alternative calculation=change in rate×taxation
difference
-5%×4,000 £(200)
Q242-4 ★★When certain expenditures result in tax credits that directly reduce taxes, the
company will most likely record:
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.
Solution: C.
Tax credits that directly reduce taxes are a permanent difference, and permanent differences
do not give rise to deferred tax.
Q243-4 ★★When accounting standards require an asset to be expensed immediately but tax
rules require the item to be capitalized and amortized, the company will most likely
record:
A. a deferred tax asset.
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B. a deferred tax liability.
C. no deferred tax asset or liability.
Solution: A.
The capitalization will result in an asset with a positive tax base and zero carrying value. The
amortization means the difference is temporary. Because there is a temporary difference on an
asset resulting in a higher tax base than carrying value, a deferred tax asset is created.
Q244-4 The author of a new textbook received a $100,000 advance from the publisher this
year. $40,000 of income taxes were paid on the advance when received. The textbook
will not be finished until next year. Determine the tax basis of the advance at the end
of this year.(NotesB3-253 17)
A. $0.
B. $40,000.
C. $100,000.
Solution: A.
For revenue received in advance, the tax base is equal to the carrying value minus any
amounts that will not be taxed in the future. Since the advance has already been taxed,
$100,000 will not be taxed in the future. Thus, the textbook advance liability has a tax base of
$0 ($100,000 carrying value - $100,000 revenue not taxed in the future).
Q245-4 If a company has a deferred tax asset reported on its statement of financial position
and the tax authorities reduce the tax rate, which of the following statements is most
accurate concerning the effect of the change? The existing deferred tax asset will:
A. not be affected.
B. increase in value.
C. decrease in value.
Solution: C.
A decrease in the tax rate will result in a decrease in the previously reported amounts of
deferred tax assets. That is, the value of the future tax assets, based on the new lower rate, is
reduced for offsetting future tax payments.
Q246-4 ★★A company purchased equipment for $50,000 on 1 January 2009. It is
depreciating the equipment over a period of 10 years on a straight-line basis for
accounting purposes, but for tax purposes, it is using the declining balance method at
a rate of 20%. Given a tax rate of 30%, the deferred tax liability as at the end of 2011 is
closest to: （2012mock84-66）
A. $420.
B. $2,820.
C. $6,720.
Solution：B.
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The deferred tax liability is equal to the tax rate times the difference between the carrying
amount of the asset and the tax base.
Value for accounting purposes after 3 years: 50,000 – [3 x (50,000 ÷ 10)] $35,000
Value for tax purposes:
Carrying amount =
Start of year balance × (1 – )
After three years:
50,000 × × × 25,600
Difference between accounting and tax values 9,400
Deferred tax liability @ 30%: 30% × 9,400 2,820
Q247-4 An analyst is analyzing two companies in the same industry and believes that they
have similar strategies regarding the use of property, plant, and equipment (PP&E). He
also thinks that the PP&E assets of the two companies are roughly of the same age
and have the same expected useful lives remaining. Company A uses the LIFO method
of inventory valuation, and Company B uses the FIFO method. The following additional
information is available from the companies’ financial statements:
($ millions)(2012mock84-67）
Company A Company B
Current assets 5,800 6,300
Inventory LIFO reserve 1,100 N/A
Current liabilities 4,300 4,200
Gross PP&E 2,500 3,000
Accumulated depreciation 1,250 1,200
Depreciation expense 125 120
In the analyst’s opinion, which of the following conclusions is most appropriate?
Compared with Company A, Company B:
A. is more liquid.
B. has a higher quality of earnings.
C. uses more aggressive accounting estimates related to PP&E.
Solution: C.
Company A Company B
Current ratio as reported (CA ÷ CL)
Current ratio adjusted to FIFO for
Company A
(5,800 + 1,100) ÷ 4,300
Co A is more liquid
Net PPE 1,250 1,800
Estimated average remaining useful life
(Net PPE ÷ Depreciation expense)
10 years 15 years
The analyst believes the two companies’ PP&E are of the same age; however, the useful life
remaining for Company B’s assets is 15 years compared with 10 for Company A, implying B is
using a longer useful life or more aggressive accounting policies.
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The more aggressive PP&E estimates combined with the use of FIFO indicate that Company B
has a lower quality of earnings, not higher. The adjusted current ratio for Company A (adjusted
to include the LIFO reserve to convert the balance sheet to FIFO for comparison) is higher than
the current ratio for B, indicating that A is more liquid.
Deferred Tax 的理解：
R42-4 DTA 和 DTL 的理解：凡是产生 deferred tax 都是由于会计处理和税务处理的暂时性差
异（Temporal difference）引起的，比如折旧、计提准备金、保修费等;
R43-4 ★Revenue/Expense approach：Profit Before Tax > Taxable Income，就产生 DT expense
(DTL)；PBT < 就产生 DT benefit (DTA)；
R44-4 ★Asset/Liability approach（asset tax base）：
（Asset）Asset tax base = deductible asset in the future (from the taxing)
（Asset）Accounting base = Carrying value of asset (from the accounting)
=BV-accumulated depreciation-impairment
Accounting base < tax base asset, treat as DTA
Accounting base > tax base asset, treat as DTL（会计多记资产，必须增加负债）
R45-4 ★Asset/Liability approach（asset tax base）：
(Liability) Liability tax base = carrying value of the liability - any amounts that will be
deductible on the tax return in the future 或者 carrying value - any amounts of the
revenue that will not be taxable in the future
(Liability) Accounting base= carrying value of the liability
(Liability) Accounting base- Liability tax base＝be deductible on the tax return in the
future 或者 not be taxable in the future
Accounting base < tax base liability, treat as DTL
Accounting base > tax base liability, treat as DTA（会计多记负债，必须增加资产）
Tax credit is permanent difference which will not affect tax expense.
R46-4 ★计算由于税率改变引起的 income tax expense 变化
New-DTL = Old-DTL / Old-Rate New-Rate
Income tax expense = tax payable + △ DTL - △ DTA
Tax rate ↑ DTL↑ DTA↑
Tax rate↓ DTL↓ DTA↓
R47-4 一般在题目中，dep.形成 DTL；impairment，warranty 确认为 DTA
R48-4 . GAAP business combination 时确认的 goodwill 不在报表上确认递延税
R49-4 . GAAP vs. IFRS（相对重要的几个部分）
IFRS . GAAP
Ta
payable
将所得
资产和所得税负债
与其他资产和负债分开列
报；
FAS109 要求，Tax pa
able 在
B/S 中确认为流动负债
Classificatio
n of DTA or
DTL
Always non-current (Net) non-current /current
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Tax rate for
measuring
DTL or DTA
Use enacted or su
s
antively
enacted tax rate.
Use enacted tax rate
Recogni
ion
of def
rred
tax assets
Recognize the p
robable
por
ion.
Recognize in full and then
reduce by a valuation
allowance, for the
non-probable portion.
DTA
valuation
Reverse is allowed Reverse is prohibited
R50-4 Valuation allowance for DTA:
当由于企业经营状况恶化，从而可能导致 DTA 未来无法回转时，要确认 Valuation
allowance.
Increasing the valuation allowance can decrease DTA, increase income tax expense
and decrease net income. The net DTA can be reversed by decreasing valuation
allowance, resulting in higher earing.
R51-4 在分析时，当分析师认为 DTL 不会回转时，DTL 全额视为 equity；会反转时，现值作
为负债，剩余部分计入到 Equity，再计算 D/E。
P35-4 Financial ratios
Q248-4 ★When analyzing a company that prepares its financial statements according to .
GAAP, calculating the price/tangible book value ratio instead of the price/book value
ratio is most appropriate if it:
A. grows primarily through acquisitions.
B. develops its patents and processes internally.
C. invests a substantial amount in new capital assets.
Solution: A.
A company growing primarily through acquisition will usually record large amount of goodwill,
which is intangible asset.
Q249-4 ★An analyst who is projecting a company's net income and cash flows is least likely to
assume a constant relationship between the company's sales and its:
A. interest expenses.
B. cost of goods sold.
C. noncash working capital.
Solution：A.
Projections of net income and cash flows are typically based on assumptions that cost of
goods sold, operating expenses, and noncash working capital remain a constant percentage of
sales. The projections then show whether additional borrowing is needed during the forecast
period. If so, the analyst will adjust the interest expense to reflect the additional debt.
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Q250-4 ★A company reports that to maintain good relations with its suppliers, it has entered
into a financing arrangement with a bank whereby it will periodically have the bank
pay its suppliers the amounts owed and it will then repay the bank in the following
period. The motivation for the company’s behavior is most likely to:
A. improve its current ratio.
B. improve its relations with its suppliers.
C. manage the timing of operating cash flows.
Solution: C.
The company can choose when to enter into the short-term borrowing with the bank and
reclassify its accounts payable into short-term financing. It will likely do so when cash flows are
seasonally strong, thereby reducing operating cash flows but increasing financing cash flows.
On repayment, the cash outflow is treated as a financing activity (loan repayment) instead of
an operating cash flow. The result is that the company can manipulate the timing of reported
cash flows since the timing and extent of vendor financing is at management’s discretion.
Q251-4 ★A company which prepares its financial statements in accordance with IFRS incurred
and capitalized €2 million of development costs during the year. These costs were fully
deductible immediately for tax purposes, but the company is depreciating them over
two years for financial reporting purposes. The company has a long history of
profitability which is expected to continue. Which is the most appropriate way for an
analyst to incorporate the differential tax treatment in his analysis? He should include
it in:
A. liabilities when calculating the company’s current ratio.
B. equity when calculating the company’s return on equity ratio.
C. liabilities when calculating the company’s debt-to-equity ratio.
Solution: C.
The different treatment for tax purposes and financial reporting purposes is a temporary
difference and would create a deferred tax liability. Deferred tax liabilities should be classified
as debt if they are expected to reverse with subsequent tax payments. The long history of
profitability implies that the company will likely be paying taxes in the following years and
hence an analyst could reasonably expect the temporary difference to reverse. Under IFRS all
deferred tax liabilities are non-current and therefore do not affect the current ratio.
Ratio 的理解：
R52-4 Common-sized
Common-sized I/S ratios ---- item in the income statement account / revenues
( net sales)
Common-sized B/S ratios ---- item in the balance sheet account / total assets
Common-sized CF/S ratio ----
item in the CF statement account / revenues
OR CF outflow / total outflows OR CF inflow / total inflows
Common-size 一般有横向比较（公司间），纵向比较（年份间），体现公司的 trend
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R53-4 其它的 Ratio 掌握公式的核心含义；常考的有 current ratio, quick ratio, cash ratio, A/R
turnover, A/P turnover, inventory turnover, cash conversion cycle, asset turnover,
operating margin, net profit margin, ROE, D/E, interest coverage…
R54-4 一般关于 ratio 的考题会和 inventory，long-term asset，capitalization & expensing；
lease 等之间联系起来，由于会计方法引起的 ratio 的变化，一定要理解其中的原理。
P36-4 Cash Flow Manipulations
Q252-4 Assume . GAAP applies unless otherwise noted. Which of the following
transactions is least likely to increase a company’s reported cash from operations?
A. Securitizing accounts receivable.
B. Delaying payments made to suppliers.
C. Using short-term debt to reduce an existing account payable.
Solution: C.
A 选项是 A/R 证券化并没有 recourse 的情况，那么 A/R 将会降低，CFO 上升；B 选项是延
长付 A/P 的时间，那么相对 A/P 是增加，CFO 上升；C 选项是用 short-term debt 去 reduce
an existing account payable，那么 A/P 是减少，那么 CFO 减少。直观来讲，只要看一个主
体是不是付现金流，对于 A，提前收回现金流了，CFO 增加；对于 B，不付钱给供应商，
CFO 上升；对于 C，用融资的方式，将供应商的钱还了，CFO 减少
Q253-4 ★According to Statement on Auditing Standards No. 99, Consideration of Fraud in a
Financial Statement Audit, which of the following is least likely to be a risk factor
related to opportunities to commit fraudulent accounting? (NotesB3-300 5)
A. Significant related-party transactions.
B. High turnover among accounting and information systems personnel.
C. Aggressive or unrealistic profitability expectations from third parties.
Solution：C.
Unrealistic profitability expectations from third parties is a risk factor related to incentives and
pressures. The other choices are risk factors related to management's opportunities to
commit fraud.
Q254-4 ★Accounting fraud risk factors related to attitudes and rationalizations are least likely
to include: (NotesB3-300 6)
A. management has a strained relationship with the current or previous auditor.
B. the firm does not effectively communicate an appropriate set of ethical standards.
C. a high proportion of management's compensation depends on the firm exceeding targets
for earnings or the stock price.
Solution：C.
Significant threats to the personal wealth of managers and board members due to the firm
not meeting its financial targets are a risk factor related to incentives and pressures. The other
choices are risk factors related to attitudes and rationalizations.
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Q255-4 ★Over the past two years, a firm reported higher operating cash flow as a result of
securitizing its accounts receivable and from increasing income tax benefits from
employee stock options. The tax benefits are solely the result of higher tax rates. What
should an analyst conclude about the sustainability of these two sources of operating
cash flow? (NotesB3-306 4)
A. Both sources are sustainable.
B. Neither source is sustainable.
C. Only one of these sources is sustainable.
Solution：B.
Accelerating operating cash flow by securitizing receivables is not sustainable because the firm
only has a limited amount of accounts receivable. An increase in tax benefits as a result of
higher tax rates is not sustainable. Tax rates could also decrease in the future.
Q256-4 ★An analyst has made three observations in his worksheets about a company that he
is reviewing. Which of the observations most likely reduces the quality of earnings of
the company? The company: （2012mock84-68）
A. reported for the first time an asset titled “Deferred customer acquisition costs.”
B. has reduced its estimate of the expected useful life of computer equipment from 8 years
to 5 years.
C. entered into long-term leases for its manufacturing equipment instead of purchasing it
and recorded the leases as capital leases.
Solution：A.
An asset such as “deferred acquisition costs” could indicate the company is deferring current
period expenses to future periods, which is a warning sign and an indication of lower quality
earnings.
掌握会计操纵：
R55-4 ★四种现金流操纵的方式，并了解其对于 CF/S 的影响：
Stretching accounting payable: delay pmt → CFO↑
Financing accounts payable: manage timing of CFO
Securitizing accounts receivable: sale A/R → CFO↑
Repurchasing stock to offset dilution: option exercise → CFF↑; repurchase →
CFO↑& CFF↓
R56-4 Incentives that might induce a company management to over-report or underreport
earnings
overstate net income
understating net income
manage balance sheet
R57-4 ★Fraud triangle
incentive/pressure: the motive to commit fraud
opportunity: the firm has a weak internal control system
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attitudes/rationalization: the mindset that fraud is justified Common accounting
warning sign and methods of detecting
R58-4 ★掌握几种财务警示信号及如何发现它们
Aggressive revenue recognition
Different growth rates of CFO and earnings
Abnormal sales growth as compared to the economy, industry, or peers
Abnormal inventory growth as compared to sales grow
Boosting revenue with non-operating income and nonrecurring gains
Delaying expense recognition
Abnormal use of operating leases by lessees
Hiding expenses by classifying them as extraordinary or nonrecurring
P37-4 . GAAP vs. IFRS
Q257-4 ★Assume . GAAP applies unless otherwise noted. Where are the unrealized gains
and losses arising from changes in the market value of available-for-sale securities
reported under . GAAP and IFRS? They are reported in:
. GAAP IFRS
A. equity Equity
B. equity income statement
C. income statement Equity
Solution: A.
Under both . GAAP and IFRS, the unrealized gains and losses arising from carrying available
for sale securities at market value are reported in equity as part of accumulated other
comprehensive income.
Q258-4 ★★The following information is available about a manufacturing company:
$ million
Cost of ending inventory computed using
FIFO
Net realizable value
Current replacement cost
Compared to . GAAP, the company's gross profit ($ millions) computed under
International Financial Reporting Standards (IFRS) is most likely:( Mock88-63)
A. the same
B. lower
C. higher
Solution: C.
Under IFRS, the inventory would be written down to its net realizable value ($ million)
whereas, under . GAAP, market is defined as current replacement cost and hence would be
written down to its current replacement cost ($). The smaller write-down under IFRS will
reduce the amount charged to the cost of goods sold, as compared to . GAAP, and result in
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a higher gross profit of $ million.
R59-4 ★国际与美国准则对比思路
特别注意：HTM、AFS、TS 的处理；
关于固定资产和存货的 reversal of revaluation；
递延税的确认；
convertible bond 的拆分；
存货方法的使用；
收入确认原则；
利息和股利收付的现金流确认
P38-4 Comprehensive view
Q259-4 ★★Assume . GAAP applies unless otherwise noted. Lazlo Ltd, a European-based
telecommunications provider, follows IFRS and capitalizes new product development
costs. During 2007 they spent €25 million on new product development and reported
an amortization expense related to a prior year’s new product development of €10
million. Other Information related to 2007 is as follows:
in € millions
Net income 225
Average assets 1,875
Cash flow from operations 290
An analyst would like to compare Lazlo with a .-based telecommunications provider
and has decided to adjust their financial statements to . GAAP. Under . GAAP,
and ignoring tax effects, the return on assets (ROA) and cash flow from operations
(CFO) for Lazlo would be closest to (millions):
ROA CFO
A. % €265
B. % €275
C. % €265
Solution: C.
If all development costs had been expensed, net income would be reduced by the amount
spent, and increased by the amortization of the previously capitalized amounts: 225 - 25 + 10 =
210 million. ROA= 210 / 1,875 = %. (注意：average asset 需要 adjustment 的, 应该减去资
产的增加部分). CFO would be lower by the amount spent on development 290 - 25 = 265
million.
Note: The amortization of previous development costs is a non-cash expense so does not
affect cash flow.
Q260-4 ★★On 1 January 2010, Elegant Fragrances Company issues £1,000,000 face value,
five-year bonds with annual interest payments of £55,000 to be paid each 31
December. The market interest rate is percent. Using the effective interest rate
method of 'amortization, Elegant Fragrances is most likely to record:
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A. an interest expense of £55,000 on its 2010 income statement.
B. a liability of 982,674 on the 31 December 2010 balance sheet.
C. a £58,736 cash outflow from operating activity on the 2010 statement of cash flows.
Solution: B.
The bonds will be issued at a discount because the market interest rate is higher than the
stated rate. Discounting the future payments to their present value indicates that at the time
of issue, the company will record £978,938 as both a liability and a cash inflow from financing
activities.
P39-4 New rules in revenue recognition
Q261-4 Builder Co. enters into a contract with Customer Co. to construct a commercial
building. Builder Co. identifies various goods and services to be provided, such as
pre-construction engineering, construction of the building’s individual components,
plumbing, electrical wiring, and interior finishes. With respect to “Identifying the
Performance Obligation,” Builder Co. should most likely treat each specific item?
A. as a separate performance obligation to which revenue should be allocated.
B. as a combined output and each specific item should be accounted together as a single
performance obligation.
C. either A or B depending on the contract.
Solution: B.
The standard provides two criteria, which must be met, to determine if a good or service is
distinct for purposes of identifying performance obligations. First, the customer can benefit
from the good or service either on its own or together with other readily available resources.
Second, the seller’s “promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.” In this example, the second criterion is not
met because it is the building for which the customer has contracted, not the separate goods
and services. The seller will integrate all the goods and services into a combined output and
each specific item should not be treated as a distinct good or service but accounted for
together as a single performance obligation.
Q262-4 Assume that Builder Co.’s contract with Customer Co. to construct the commercial
building specifies consideration of $1 million plus a bonus of $200,000 if the building is
completed within 2 years. Builder Co. has only limited experience with similar types of
contracts and knows that many factors outside its control (., weather, regulatory
requirements) could cause delay. Builder Co.’s expected total costs are $700,000. The
Builder incurs $420,000 in costs in the first year. Assuming that costs incurred provide an
appropriate measure of progress toward completing the contract, how much revenue
should Builder Co. recognize for the first year?
A. $420,000.
B. $600,000.
C. $720,000.
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Solution: B.
The standard states that for performance obligations satisfied over time, revenue is recognized
over time by measuring progress toward satisfying the obligation. In this case, the Builder has
incurred 60% of the total expected costs ($420,000/$700,000) and will thus recognize
$600,000 (60% × $1 million) in revenue for the first year.
This is the same amount of revenue that would be recognized using
“percentage-of-completion,” but that term is not used in the converged standard. Instead, the
requirement is to measure progress toward complete satisfaction of the performance
obligation.
The new standard addresses so-called “variable consideration” as part of determining the
transaction price. A company is only allowed to recognize variable consideration if it can
conclude that it will not have to reverse the cumulative revenue in the future. In this case,
Builder Co. does not recognize any of the bonus in year one because it cannot reach the
non-reversible conclusion given its limited experience with similar contracts and potential
delays from factors outside its control.
R60-4 The core principle of the converged standard is that revenue should be recognized to
“depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in an exchange
for those goods or services.” To achieve the core principle, the standard describes the
application of five steps in recognizing revenue:
Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
Recognize revenue when (or as) the entity satisfies a performance obligation
P40-4 Cash flow problem
Q263-4 Silverago Incorporated, an international metals company, reported a loss on the sale
of equipment of $2 million in 2010. In addition, the company’s income statement
shows depreciation expense of $8 million and the cash flow statement shows capital
expenditure of $10 million, all of which was for the purchase of new equipment. Using
the following information from the comparative balance sheets, how much cash did
the company receive from the equipment sale? (CFA Level 1 Curriculum, Volume 3)
Balance Sheet Item 12/31/2009 12/31/2010 Change
Equipment $100 million $105 million $5 million
Accumulated
depreciation—equipment
$40 million $46 million $6 million
A. $1 million.
B. $2 million.
C. $3 million.
Solution: A.
Selling price (cash inflow) minus book value equals gain or loss on sale; therefore, gain or loss
on sale plus book value equals selling price (cash inflow). The amount of loss is given—$2
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million. To calculate the book value of the equipment sold, find the historical cost of the
equipment and the accumulated depreciation on the equipment.
Beginning balance of equipment of $100 million plus equipment purchased of $10 million
minus ending balance of equipment of $105 million equals the historical cost of
equipment sold, or $5 million.
Beginning accumulated depreciation of $40 million plus depreciation expense for the
year of $8 million minus ending balance of accumulated depreciation of $46 million
equals accumulated depreciation on the equipment sold, or $2 million.
Therefore, the book value of the equipment sold was $5 million minus $2 million, or $3
million.
Because the loss on the sale of equipment was $2 million, the amount of cash received
must have been $1 million.
Q264-4 Based on the following information for Star Inc., what are the total net adjustments
that the company would make to net income in order to derive operating cash flow?
(CFA Level 1 Curriculum, Volume 3)
Year Ended
Income Statement Item 12/31/2010
Net income $20 million
Depreciation $2 million
Balance Sheet Item 12/31/2009 12/31/2010 Change
Accounts receivable $25 million $22 million ($3 million)
Inventory $10 million $14 million $4 million
Accounts payable $8 million $13 million $5 million
A. Add $2 million.
B. Add $6 million.
C. Subtract $6 million.
Solution: B.
To derive operating cash flow, the company would make the following adjustments to net
income: Add depreciation (a non-cash expense) of $2 million; add the decrease in accounts
receivable of $3 million; add the increase in accounts payable of $5 million; and subtract the
increase in inventory of $4 million. Total additions would be $10 million, and total subtractions
would be $4 million, which gives net additions of $6 million.
Q265-4 A company recorded the following in Year 1:
Proceeds from issuance of long-term debt €300,000
Purchase of equipment €200,000
Loss on sale of equipment €70,000
Proceeds from sale of equipment €120,000
Equity in earnings of affiliate €10,000
On the Year 1 statement of cash flows, the company would report net cash flow from investing
activities closest to: (CFA Level 1 Curriculum, Volume 3)
A. (€150,000).
B. (€80,000).
C. €200,000.
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Solution: B.
The only two items that would affect the investing section are the purchase of equipment and
the proceeds from sale of equipment: (€200,000) + €120,000 = (€80,000). The loss on sale of
equipment and the equity in earnings of affiliate affect net income but are not cash flows. The
issuance of debt is a financing cash flow.
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5-Corporate Finance
P1-5 Classification of Capital Project
Q1-5 ★A large corporation accepts a project which generates no revenue and has a
negative net present value. The project is most likely classified in which of the
following categories?
A. Replacement project
B. New product or service
C. Regulatory or environmental project
Solution: C.
Regulatory, safety, and environmental projects are often mandated by governmental agencies.
They may generate no revenue and might not be undertaken by a company maximizing its own
private interests. For example, a corporation may be required to install equipment to meet a
regulatory standard, and the cost of satisfying the standard is born by the corporation. In this
case, the corporation selects the lowest cost alternative that meets the requirement, ., the
alternative with the least negative net present value.
R1-5 掌握以下几种 Capital Projects：
Replacement projects
Replacement decision to maintain the business: equipment breaks down or
wears out.
Replacement decision for cost reduction purpose: purchase more efficient
equipment instead of the old one
Extension projects
★Expansion projects for existing product: increase the size of business
★Expansion projects for new product or new services
Uncertainties的排序：replacement project（最小）< expansion project < new products
(最大的不确定性)
Mandatory investment: regulatory, safety, and environmental project (NPV<0)
Other projects: such as CEO buying a new aircraft
P2-5 Key principals of capital budgeting
Q2-5 ★Which of the following is least likely classified as an opportunity cost?
A. The cash flows generated by an old machine that is to be replaced
B. The cash savings related to adopting a new production process
C. The market value of vacant land used for a distribution center
Solution: B.
The cash savings related to adopting a new production process is an incremental cash flow, not
an opportunity cost.
Q3-5 With regard to capital budgeting, an appropriate estimate of the incremental
cash flows from a project is least likely to include:
A. Cannibalization.
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B. Interest costs.
C. Opportunity costs.
Solution: B.
Capital budgeting decisions are based on incremental after-tax cash flows discounted at the
opportunity cost of funds and cannibalization. Financing costs are ignored because both the
cost of debt and the cost of other capital are captured in the discount rate.
R2-5 ★The capital budgeting process involves five key principles:
Decisions are based on the incremental cash flows.
不包含 Suck cost: costs that cannot be avoided even if the project is not
undertaken, such as consulting fee.
不包含 Financing costs / interest cost: financing costs are included in the project
cost of capital or WACC
包含 Externality: the effects of acceptance of a project may have on other firm
CFs
CF are based on the opportunity costs.
The timing of the CF is important.
CFs are analyzed on an after-tax basis.
Financing costs are reflect in the project’s required rate of return
R3-5 Incremental Cash Flow 掌握概念及理解
概念：cash flow 应该是差额，该差额是由于不同 decision 造成的。
理解:需要考虑在增量现金流时，需要考虑 opportunity costs 和 externality（比
如：negative externality: cannibalization）；不需要考虑的是 sunk cost 和 finance cost
（interest costs）
R4-5 Opportunity Cost 掌握概念
概念：Opportunity costs are cash flows that a firm will lose by undertaking the project
under analysis. It is actually the CFs that are generated by undertaking the second best
alternative.
理解：Opportunity cost 在做 capital budgeting 的时候被视为增量现金流
P3-5 Project evaluation methods：NPV, IRR, PI and DBP
Q4-5 An analyst determined the following cash flows for a capital project:
Year 0 1 2 3 4 5
Cash flow (€) -100 35 30 40 30 20
The required rate of return for the project is 13%. The internal rate of return (IRR) and
the discounted payback period for the project, respectively, are closest to:
IRR period Discounted payback period
A. %
B. %
C. %
Solution: C.
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Using a calculator, the IRR is %. The discounted payback period is the number of years
(and fractional part of a year) that it takes to recover the initial investment in terms of
discounted future cash flows discounted at the project’s required rate of return. The
discounted cash flows for the first four years are: €, €, €, and €. The
cumulative sum through year three is €. The portion of year four required to recover the
initial investment is € / € = . Therefore, the discounted payback period is
years.
Q5-5 Given the following cash flow for a capital project, calculate payback period and
discounted payback period. The required rate of return is 8%.
Year 0 1 2 3 4 5
Cash flow -50,000 15,000 15,000 20,000 10,000 5,000
The discounted payback period is:（原版书 R36-2）
A. years longer than the payback period.
B. years longer than the payback period.
C. years longer than the payback period.
Solution: C.
As the table shows, the cumulative cash flow offsets the initial investment in exactly three
years. The payback period is years. The discounted payback period is between four and
five years. The discounted payback period is 4 years plus = of the fifth
year cash flow, or = years. The discounted payback period is - = years
longer than the payback period.
Year 0 1 2 3 4 5
Cash flow -50,000 15,000 15,000 20,000 10,000 5,000
Cumulative
cash flow
-50,000 -35,000 -20,000 0 10,000 15,000
Discounted
cash flow
-50,000 13, 12, 15, 7, 3,
Cumulative
DCF
-50,000 -36,111 -23,251 -7, -24
Q6-5 ★★Consider the two projects below. The cash flows as well as the NPV and IRR for
the two projects are given. For both projects, the required rate of return is 10
percent.
Cash Flow
Year 0 1 2 3 4 NPV IRR (%)
Project 1
Project 2
—100
—100
36
0
36
0
36
0
36
175
What discount rate would result in the same NPV for both projects? （原版书 R36-13）
A. A rate between percent and percent.
B. A rate between percent and percent.
C. A rate between percent and percent.
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Solution: B.
For these projects, a discount rate of percent would yield the same NPV for both (an
NPV of ).
Q7-5 ★★Wilson Flannery is concerned that this project has multiple IRRs.
Year 0 1 2 3
Cash flows —50 100 0 —50
How many discount rates produce a zero NPV for this project? （原版书 R36-14）
A. One, a discount rate of 0 percent.
B. Two, discount rates of 0 percent and 32 percent.
C. Two, discount rates of 0 percent and 62 percent.
Solution: C.
Discount rates of 0 percent and approximately percent both give a zero NPV.
Rate 0% 20% 40% 60% % 80% 100%
NPV — —
Q8-5 ★Which of the following statements is least accurate? The discounted payback
period: （Notes P29）
A. frequently ignores terminal values.
B. is generally shorter than the regular payback.
C. is the time it takes for the present value of the project's cash inflows to equal the initial
cost of the investment.
Solution: B.
The discounted payback is longer than the regular payback because cash flows are discounted
to their present value.
Q9-5 Hermann Corporation is considering an investment of €375 million with expected
after-tax cash inflows of €115 million per year for seven years and an additional
after-tax salvage value of €50 million in Year 7. The required rate of return is 10
percent. What is the investment's PI?
A.
B.
C.
Solution: C.
7
7
1
115 50
PV
375
PI
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Q10-5 ★Which of the following statements about the payback period method is least
accurate? The payback period:（Notes P29）
A. provides a rough measure of a project's liquidity.
B. considers all cash flows throughout the entire life of a project.
C. is the number of years it takes to recover the original cost of the investment.
Solution: B.
The payback period ignores cash flows that go beyond the payback period.
R5-5 NPV, IRR, PI, DPB 的计算
计算：NPV, IRR, PI, DPB 的计算必须要掌握，PB 的计算比较简单，但是也需要掌
握，考到机率不比其它几个大。
NPV: sum of the present value of expected CFs
n
t 0
t
t
k)(1
CF
NPV
NPV>0, increase the firm value, accept the project; NPV<0 decrease the firm value,
do not accept the project.
IRR: the discount rate that makes NPV equal to zero.
IRR> the required rate of return, accept the project; IRR<the required rate of return,
reject the project.
★Payback period: the number of years it takes to recover the initial cost.
(undiscounted cash flow), liquidity but not profitability.
Discounted payback period: use the discounted cash flow to calculate the payback
period. It fails to consider the cash flows after the payback period and ignores the
profit.
To conventional cash flow（正常的现金流，第一个为负，后面都为正）, Discounted
Pay-back period > pay-back period
R6-5 Profitability Index (PI):
00
1
CF
CFs future theof PV
PI
CF
NPV
PI>1, accept the project; PI<1, reject the project.
WACC 可以用于 NPV 计算的折现率，但是有 2 个假设条件。一般来说，公司的
风险和项目的风险是肯定不一样的，如果没有这 2 个假设条件，就不能用 WACC
折现 CF 计算 NPV。如果公司的风险小于项目的风险，就会使得 NPV 的结果被高
R7-5 ★Evaluation of a Capital Project 掌握一些概念的解释：
Independent Projects：Accepting or rejecting one project does not affect the decision
of other projects.独立项目未必互斥
Mutually Exclusive: Only one of several potential projects can be chosen.互斥项目一
定不独立
Project Sequencing: Some projects must be undertaken in a certain order, so that
investing in a project today creates the opportunity to invest in other projects in the
future.
R8-5 Capital Rationing：Many firms have constraints on the amount of capital they can raise
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P4-5 NPV & IRR
Q11-5 ★★Two mutually exclusive projects have conventional cash flows, but one project
has a larger NPV while the other has a higher IRR. Which of the following is least likely
responsible for this conflict?
A. Reinvestment rate assumption
B. Size of the projects' initial investments
C. Risk of the projects as reflected in the required rate of return
Solution: C.
Conflicting decision rules based on the NPV and IRR methods are related to the reinvestment
rate assumption, the timing of the cash flows, or the scale of the projects. Differing required
rates of return are not related to conflicting NPV and IRR decisions.
Q12-5 ★★An investment has an outlay of 100 and after-tax cash flows of 40 annually for
four years. A project enhancement increases the outlay by 15 and the annual after-tax
cash flows by 5. As a result, the vertical intercept of the NPV profile of the enhanced
project shifts: （原版书R36-11）
A. up and the horizontal intercept shifts left.
B. up and the horizontal intercept shifts right.
C. down and the horizontal intercept shifts left.
Solution: A.
The vertical intercept changes from 60 to 65 (NPV when cost of capital is 0%), and the
horizontal intercept (IRR, when NPV equals zero) changes from percent to percent.
Q13-5 Erin Chou is reviewing a profitable investment project that has a conventional cash
flow pattern. If the cash flows for the project, initial outlay, and future after-tax cash
flows all double, Chou would predict that the IRR would
A. increase and the NPV would increase.
B. stay the same and the NPV would increase.
C. stay the same and the NPV would stay the same.
Solution：B.
The IRR would stay the same because both the initial outlay and the after-tax cash flows
double, so that the return on each dollar invested remains the same. All of the cash flows and
their present values double. The difference between total present value of the future cash
flows and the initial outlay (the NPV) also doubles.
Q14-5 With regard to net present value (NPV) profiles, the point at which a profile crosses
the horizontal axis is best described as:
A. the point at which two projects have the same NPV.
B. the sum of the undiscounted cash flows from a project.
C. a project’s internal rate of return when the project’s NPV is equal to zero.
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Solution C.
The horizontal axis represents an NPV of zero. By definition, the project’s IRR equals an NW of
zero.
R9-5 NPV, IRR 掌握两个指标的矛盾及理解：
理解：十分熟悉 NPV, IRR 的优缺点
NPV Advantage:
Shows the amount of gains as currency amount
The NPV of project increases the value of shareholders instead of creditors.
Realistic discount rate – opportunity cost of funds
NPV disadvantage:
Size effect ignored
IRR Advantage: Reflect the profitability of the project
IRR Disadvantage
Assume the reinvestment rate is IRR
No IRR & multiple IRR (unconventional CFs)
Conflicting ranking results of mutually exclusive projects with NPV
R10-5 Crossover rate
An NPV profile plots a project's NPV as a function of the discount rate, and it
intersects the horizontal axis (NPV = 0) at its IRR. If two NPV profiles intersect at
some discount rate, that is the crossover rate, and different projects are preferred
at discount rates higher and lower than the crossover rate.
估；反之，则低估。
R11-5 ★重点理解：
NPV 方法假设以折现率再投资，IRR 方法假设以 IRR 再投资
NPV 优点：与股东利益最大化的目标一致；收益用 currency amount 的方式表现
出来；NPV 缺点：不能体现 project 的规模；不反应收益率
IRR 优点：体现收益率；IRR 缺点：由于不正常的现金流分布（比如正负相间的
现金流），会引起没有 IRR 和多个 IRR；
R12-5 ★NPV profile:
R13-5 请大家熟记这张图里的 IRR，crossover rate, 考试中有可能出现基于这张图的题目
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R14-5 ★矛盾：出发点是 IRR 自身存在缺点
原因：1)different project’s size; 2)different timing of CF; 3)reinvestment rate
assumption different;
决策：当 IRR 与 NPV 发生矛盾时，选用 NPV
Criteria preference: European countries prefer PB over NPV and IRR; larger public
companies prefer NPV&IRR; managers with higher education level prefer NPV&IRR.
P5-5 Impact of NPV Rule and Stock Price
Q15-5 Fullen Machinery is investing $400 million in new industrial equipment. The present
value of the future after-tax cash flows resulting from the equipment is $700 million.
Fullen currently has 200 million shares of common stock outstanding, with a current
market price of $36 per share. Assuming that this project is new information and is
independent of other expectations about the company, what is the theoretical effect
of the new equipment on Fullen's stock price? The stock price will:（Notes P32）
A. decrease to $
B. increase to $
C. increase to $
Solution B.
The NPV of the new equipment is $700 million - $400 million = $300 million. The value of this
project is added to Fullen's current market value. On a per-share basis, the addition is worth
$300 million / 200 million shares, for a net addition to the share price of $. $ + $
= $
P6-5 WACC
Q16-5 An analyst gathered the following Information about the capital structure and
before-tax component costs for a company. The company’s marginal tax rate is 40%.
Capital component Book Value (000) Market Value(000) Component cost
Debt $100 $80 8%
Preferred stock $20 $20 10%
Common stock $100 $200 12%
The company’s weighted average cost of capital (WACC) is closest to:
A. %.
B. %.
C. %.
R15-5 Impact of NPV Rule and Stock Price
When the NPV is positive, firm value is increased and shareholder wealth is
increased
An NPV of zero means the project does not increase shareholder wealth
A negative NPV means decrease shareholder wealth
The NPV of the project = change of the market value of the stocks
In theory, when the NPV is positive, Pstock is increased, vice versa.
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Solution: B.
As the target capital weights are not given, you can use market value weights to compute the
WACC. The market value weights for debt, preferred stock and equity are , , and
respectively.
WACC=Wd * rd (1 -t) + Wp * rp + Wce * rce
= * 8%(1 - ) + * 10% + * 12% = %
Q17-5 ★★★Frank Merlo, a researcher analyst, gathered the following data in order to
estimate the cost of capital of a drug company:
Cost of 6-month T-bills %
Cost of 10-year treasury bonds 4%
Cost of 10-year corporate bonds %
Beta
Market risk premium 7%
Target D/E ratio
Marginal tax rate 34%
The company’s cost of capital estimated closest to:
A. %.
B. %.
C. %.
Solution: B.
63%,
1
1- 63% 37%,
4% 7% %
(1- ) 63% % (1-34%) 37% % %
d
e
e f
d d e e
w
w
k r b rp
WACC w k t w k
★Notes: should use the risk-free rate with comparable period, that is, the maturity of risk
free rate equals to the duration of CF.
Q18-5 Rhonaldinho Inc., a Brasil-based listed company with great reserve of nickel ores, is
declaring its target capital structure of 40% debt and 60% capital. However, as it has
few financing sources, it is estimating that it cannot maintain this target by taking on
more projects. The actual target structure is as follows:
Carrying value Market value Before-tax cost
Debt 48 million 78 million 8%
Equity 72 million 52 million 15%
As the company’s tax rate is 40%, the cost of capital of the company is closest to:
A. 10%.
B. 9%.
C. 7%.
Solution: B.
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You should use the market value of debt and equity to calculate the percentage of debt and
equity in the capital structure. And then use the WACC formula to calculate the WACC.
Q19-5 ★★Fran McClure of Alba Advisers is estimating the cost of capital of Frontier
Corporation as part of her valuation analysis of Frontier. McClure will be using this
estimate, along with projected cash flows from Frontier's new projects, to estimate
the effect of these new projects on the value of Frontier. McClure has gathered the
following information on Frontier Corporation:
Current
Year ($)
Forecasted for
Next Year ($)
Book value of debt 50 50
Market value of debt 62 63
Book value of shareholders' equity 55 58
Market value of shareholders' equity 210 220
The weights that McClure should apply in estimating Frontier's cost of capital for debt
and equity are, respectively: （原版书 R37-9）
A. wd = ; we = .
B. wd = ; we = .
C. wd =- ; we = .
Solution: C.
wd = $63/($220 + 63) =
we = $220/($220 + 63) =
R16-5 WACC 计算
Where:
t is the firm's marginal tax rate
w is the proportion of each type of capital, all the components are using market value
when computing weightings.
Outside analysts can estimate target capital structure using one of the approaches:
Assume the company’s current capital structure
Use the company’s target capital structure
Examine trends in capital structure to infer the target structure.
Use average of comparable company’s capital structure as the target structure
k is the current cost of each type of capital (debt, preferred stock and common stock)
P7-5 Cost of Debt
Q20-5 ★Waynesboro Industries is considering issuing a 10-year, option-free, semiannual
coupon bond with a 9% coupon rate. The bond is expected to sell at 95% of par value.
If the company’s marginal tax rate is 30%, then the after-tax cost of debt is closest to:
1d d ps ps ce sWACC w k t w k w k
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A. %.
B. %.
C. %.
Solution: B.
Using a financial calculator: N = 20, PMT = 45, PV = - 950, FV = 1000; solve for %I/Y= %. The
annual yield is twice the semiannual yield = % * 2 = %. The after-tax cost of debt =
annual yield * (1 - t) = % * (1 - ) = %.
Q21-5 ★★ has determined that it could issue $1,000 face value bonds with an 8
percent coupon paid semi-annually and a five-year maturity at $900 per bond. If
's marginal tax rate is 38 percent, its after-tax cost of debt is closest to: （原
版书R37-4）
A. percent.
B. percent.
C. percent.
Solution: C.
FV = $1,000; PMT = $40; N = 10; PV = $900
Solve for i. The six-month yield, i, is %
YTM = % x 2 = %
rd (1 — t) = %(1 — ) = %
R17-5 Cost of Debt 计算
一般出题的方式给定一个 bond，让考生计算一个 yield。
注意一：计算 yield 的时候，看清楚题目是如何分期的（一般是半年付息一 次）。
注意二：PV 和 FV（PMT）现金流的方向相反，所以一定有一个在计算器上需要按“-”
键。
注意三：如果承租人采用融资租赁，那么需要确认一部分负债，也需要考虑在 cost
of debt 里面。
P8-5 Cost of Equity
Q22-5 An analyst gathered the following information about a manufacturing company:
• Expected cash dividends one year from today $
• Expected growth rate 7%
• Common stock (current market price) $
• Company tax rate 34%
The company’s after-tax cost of retained earnings is closest to:
A. %
B. %
C. %
Solution: A.
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1
0
$
%
$
re
D
k g
P
= +
= + =
Q23-5 Which of the following is the least appropriate to discount cash flows of a project?
A. Marginal cost
B. Sunk cost
C. Opportunity cost
Solution: B.
Marginal cost and opportunity cost can be used as the discount rate of calculating a project’s
NPV.
Q24-5 ★★Using the dividend discount model, what is the cost of equity capital for Zeller
Mining if the company will pay a dividend of C$ next year, has a payout ratio of
30 percent, a return on equity (ROE) of 15 percent, and a stock price of C$45?（原版书
R37-3）
A. percent.
B. percent.
C. percent.
Solution: C.
First calculate the growth rate using the sustainable growth calculation, and then calculate the
cost of equity using the rearranged dividend discount model:
g = (1 —Dividend payout ratio) (Return on equity) = (1 —) (15%) = %
re = (D1 / P0) + g = ($ / $45) + % = %
Q25-5 ★★An analyst gathered the following information about a company and the market:
Current market price per share of common stock
Most recent dividend per share paid on common stock (D0) $
Expected dividend payout rate 40%
Expected return on equity (ROE) 15%
Beta for the common stock
Expected rate of return on the market portfolio 13%
Risk-free rate of return 4%
Using the discounted cash flow (DCF) approach, the cost of retained earnings for the
company is closest to: （原版书 R37-24）
A. %.
B. %.
C. %.
Solution: C.
The expected return is the sum of the expected dividend yield plus expected growth. The
expected growth is (1 - )15% = 9%. The expected dividend yield is 28 =%. The sum
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is %.
Q26-5 A company intends to issue new common stock with flotation costs of % per share.
The expected dividend next year is $, and the dividend growth rate is expected to
be 10% in perpetuity. Assuming the shares are issued at a price of $, the cost (%)
of external equity for the firm is closest to:（MOCK92-70）
A. .
B. .
C. .
Solution: B.
Using Equation:
1
0
( )
(1 )
$
( )
$(1 )
e
D
r g
P f
Q27-5 ★★The DuPont system allows us to break down the return on equity into: （原版书
R41-8）
A. return on assets and the financial leverage ratio.
B. profit margin, the tax retention ratio, and inventory turnover.
C. gross profit margin, total asset turnover, and the debt–to–equity ratio.
Solution: A.
Net income Revenues Total asets
Return on equity=
Revenues Total asets Shareholders' equity
Total asets
Return on equity=Return on assets
Shareholders' equity
Q28-5 A company is planning a new issue of $100 par preferred stock with a 12% dividend.
The preferred stock can be sold for $95 per share and the company must pay flotation
costs of 5% of the market price. Assuming a marginal tax rate of 40%, the after-tax
cost of the preferred stock is closest to:
A. %.
B. %.
C. %.
Solution: C.
The component cost of preferred stock is calculated as: (100 × ) / ﹝95 × ()﹞=
or %.
Note that preferred stock is not tax advantaged.
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R18-5 ★计算 Cost of Equity：
计算 Cost of Equity 的方法有 3种，分别是 DDM (GGM）；CAPM和 Bond yield plus risk premium
DDM
注意一：dividend 在题目中的表述，看清楚是 current (D0)还是 expected (D1)，公式是
kre = D1/ P0 + g，所以题目表述的是 D0，就需要用 D0(1+g)先算出 D1
注意二：这个公式有一个假设，即公司有 stable dividend policy，并且 without issuing
additional common stock，这样 g=(1-D/EPS)ROE
注意三：D1/ P0叫做 forward annual dividend yield
Bond yield plus risk premium：这个 premium 指的是 cost of equity 与 this
company’s cost of debt 之间的区别
R19-5 计算 Cost of preferred stock：
计算 Cost of preferred stock 比较简单，就等于 D/P
preferred stock 没有 tax advantaged
P9-5 Flotation cost
Q29-5 Black Pearl Yachts is considering a project that requires a $180,000 cash outlay and is
expected to produce cash flows of $50,000 per year for the next five years. Black
Pearl's tax rate is 25%, and the before-tax cost of debt is 8%. The current share price
for Black Pearl's stock is $56 and the expected dividend next year is $ per share.
Black Pearl's expected growth rate is 5%. Assume that Black Pearl finances the project
with 60% equity and 40% debt, and the flotation cost for equity is %. The
appropriate discount rate is the weighted average cost of capital (WACC). Which of
the following choices is closest to the dollar amount of the flotation costs and the
NPV for the project, assuming that flotation costs are accounted for properly?（Notes
P57）
Dollar amount of flotation costs NPV of project
A. $4320 $17548
B. $4320 $13228
C. $7200 $17548
Solution: B.
Because the project is financed with 60% equity, the amount of equity capital raised is x
$180,000 = $108,000.
Flotation costs are %, which equates to a dollar cost of $108,000 x = $4,320.
After-tax cost of debt = % ( 1 - ) = %
Cost of equity = ( / 56) + = 10%
WACC = () + () = %
2 5
$50,000 $50,000 $50,000
NPV $180,000 $4,320 ... $13,228
= - - + + + + =
R20-5 ★考虑 flotation cost：
计算 Cost of preferred stock 比较简单，就等于 D/P。
如果有 flotation costs，就需要在分母 P 上进行衡量，P 需要乘以（1-flotation costs）;
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但是，如果 capital budgeting, Floatation cost should be considered as an initial out
payment。
如果有 flotation costs，在计算 NPV 时以 CFA 协会的观点认为应该作为 initial CF，
不需要在分母上进行调整。
P10-5 Pure play method
Q30-5 ★★Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell,
CFA, an analyst for a pension plan managing a global large-cap fund internally. Sandell
is concerned about one of the fund’s larger holdings, auto parts manufacturer Kruspa
AB Kruspa currently operates in 80 countries, with the previous year’s global revenues
at € billion. Recently, Kruspa’s CFO announced plans for expansion into China.
Sandell worries that this expansion will change the company’s risk profile and
wonders if he should recommend a sale of the position. For the new project,
D/E=80/20
Additional information:
Equity risk premium, Sweden %
Risk-free rate of interest, Sweden %
Industry debt-to-equity ratio
Market value of Krista’s debt €900 million
Market value of Kruspa’s equity € billion
Kruspa’s equity beta
Kruspa’s before-tax cost of debt %
China credit A2 country risk premium %
Corporate tax rate %
Sandell would like to use the asset beta of Kruspa as a base in his calculations. The
China project’s weighted average cost of capital (WACC) calculated using the equity
beta without and with the country risk premium is, respectively,
A. 9% and 10%
B. 10% and %
C. % and %
Solution: C.
Asset β = Un-levered β= = for prior to China project.
Projectβ= { 1+ [(1 — ) (€80/€20)] = {} = for China project.
Cost of equity without the country risk premium: re = + () = %
Cost of equity with the country risk premium: re = + ( + ) = %
Weighted average cost of capital without the country risk premium:
WACC = [ () (1 — ) + [ ()] = + = %
Weighted average cost of capital with the country risk premium:
WACC = [ () (1 — ) + [ ()] = + = %
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Q31-5 The following information is available for a firm.
Market Risk Premium %
Risk-free Rate %
Comparable Firm Return %
Comparable Firm Debt-to-Equity Ratio
Comparable Firm Tax Rate %
The firm’s unlevered beta is closest to:
A. .
B. .
C. .
Solution: A.
Find the comparable firm’s beta: (% - %) ÷ % = .
Un-lever the comparable firm’s beta: βL=comparable ÷ (1 + (1 – tax rate) x
debt-to-equity ratio) = ÷ (1 + (1 – 40%) x ) =.
Q32-5 Wang Securities had a long-term stable debt-to-equity ratio of . Recent bank
borrowing for expansion into South America raised the ratio to . The increased
leverage has what effect on the asset beta and equity beta of the company?
A. The asset beta and the equity beta will both rise.
B. The asset beta will remain the same and the equity beta will rise.
C. The asset beta will remain the same and the equity beta will decline.
Solution: B.
Asset risk does not change with a higher debt-to-equity ratio. Equity risk rises with higher
debt.
Q33-5 ★★An analyst gathered the following information about the capital markets in the
. and in Paragon, a developing country.
Selected Market Information (%)
Yield on . 10-year Treasury bond
Yield on Paragon 10-year government bond
Annualized standard deviation of Paragon stock index
Annualized standard deviation of Paragon dollar
denominated government bond
Based on the analyst's data, the estimated country equity premium for Paragon is
closest to: （原版书 R37-27）
A. %.
B. %.
C. %.
Solution: C.
The country equity premium can be estimated as the sovereign yield spread times the volatility
of the country's stock market relative to its bond market. Paragon's equity premium is (%
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— %) X (35%/25%) =- 6% x = %.
Q34-5 ★★Jay Company has a debt-to-equity ratio of . Jay is evaluating the cost of equity
for a project in the same line of business as Cass Company and will use the pure-play
method with Cass as the comparable firm. Cass has a beta of and a debt-to-equity
ratio of . The project beta most likely:
A. Will be less than Jay’s beta .
B. Will be greater than Jay’s beta.
C. Could be greater than or less than Jay’s beta.
Solution: C.
The project beta calculated using the pure-play method is not necessarily related in a
predictable way to the beta of the firm that is performing the project.
R21-5 掌握 β 的概念及其计算：
Project’s β is a measure of its systematic or market risk.
For nonpublic company, using pure-play method to find β.
★Pure play method 的计算步骤
1. 在行业内找一家与此非上市公司(X)在经营风险上相似的上市公司(Y)，此公司
equity β 已知
2. 用公式计算出上市公司(Y)的 assetβ, 这是去公司杠杆化的过程。
3.
E
D
t
equityasset
)1(1
1
4. 用计算出上市公司(Y)的 assetβ，用被估值的非上市公司的的资本结构，重新
杠杆化 β。就得到非上市公司的 β。
5.
E
D
tassetequity )1(1
6. 注意以上两个公式的形式是相同的，，只是注意在不同公司的时候，用不同
公司的 D/E ratio；如去杠杆化上市公司(Y)就用 Y 公司的 D/E ratio。
7. 最后通过 CAPM 模型来估算非上市公司的 cost of equity.
★Country risk premium (CRP):
It is used to estimate the cost of equity in developing countries.
CRP]R-)[E(RR k FMKTfce
Annualized standard deviation of equity index of
developing country
Sovereign yield spread (
Annualized standard deviation of sovereign bond market
in terms of the developed
CRP )
market currency
Sovereign spread= difference between the yields of government bonds in the
developing country and Treasury bonds of similar maturities.
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P11-5 MCC
Q35-5 ★Which of the following statements regarding the weighted average cost of capital
and the marginal cost of capital is TRUE?
A. The marginal cost of capital is likely to fall as the company raises additional capital due to
economies of scale in financing
B. The breakeven point where a firm runs out of retained earnings and must raise outside
equity capital typically results in a decrease in the marginal cost of capital schedule
C. The optimal capital budget occurs when the weighted average cost of capital is equal to
the marginal cost of capital
Solution: C.
When the WACC is greater (or lower) than the marginal cost of capital, the company should
increase (decrease) the investing capital.
Q36-5 ★A company’s optimal capital budget is best described as the amount of new capital
required to undertake all projects with an internal rate of return greater than the:
A. Marginal cost of capital.
B. Cost of new debt capital.
C. Weighted average cost of capital.
Solution: A.
The optimal capital budget is the amount of new capital required to undertake all investment
projects with an IRR greater than the marginal cost of capital.
Q37-5 ★An analyst gathered the following information about a company:
If thecompany raises $150 million in new capital, the company marginal cost of capital
is closest to:
A. %
B. %
C. %
Solution: A.
Given the company dividend payout ratio, the amount of the expected addition to retained
Target (optimal)capital structure:
Long-term debt 50%
Preferred stock 10%
Common equity 40%
After-tax component costs:
Long-term debt 6%
Preferred stock 10%
Retained earnings 14%
New common stock 15%
Expected total earnings (net income) for the year in millions $120
Target dividend payout ratio 45%
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earning is $120m×(1-45%) = $66 million; the amount of new capital that could be raised
without issuing new common stock is $66 / = $165 million. But $150 million is less than the
break point for retained earnings, the component cost of equity is the cost of retained
earnings.
The marginal cost of capital for the company is percent:
(×6%) + (×10%) + (×14%)
Notes: from another point of view, we only have to compare the R/E with new capital from
Equity.
Q38-5 ★An analyst gathered the following information about a company:
If the company raises $100 million in new capital, the company’s marginal cost of
capital is closest to:
A. %
B. %
C. %
Solution: B.
*6%+*10%+*15%=10%. We should first decide whether or not new issue of common
stock is required when the retention of R/E is less than the common stock computed according
to the target capital structure. If new issue, we use the cost of capital of new issue; if not, we
the cost of capital of Retained earnings.
R22-5 MCC，WACC 和 optimal capital structure，optimal capital budgeting：
概念：MCC is the cost of the last new dollar of capital a firm raises.
首先当公司 R/E 不够用于发展的时候，有两种方式增加 capital，一个是 debt，
一个是 equity。我们都知道发债具有税盾作用，所以公司一开始都采用发债，rd
和 re 都是增加的，但是由于借债的成本低且有税盾作用，所以 MCC 先下降后
上升，下降的原因是 debt 和 equity 的 trade-off，也就是 balance。（不是由于
economies of scale）
★Optimal capital structure：首先 WACC 是最小，而且此刻 MCC=WACC，就会达
到最优资本结构.
Target (optimal)capital structure:
Long-term debt 50%
Preferred stock 10%
Common equity 40%
After-tax component costs:
Long-term debt 6%
Preferred stock 10%
Retained earnings 14%
New common stock 15%
Expected total earnings (net income) for the year in millions $120
Target dividend payout ratio 70%
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★IOS 是资金的需求曲线，是企业将所有的投资项目按 IRR 从大向小排，就形成
了需求；而 MCC 是资金的供给曲线，一般来讲，融资越多，成本越高。企业在
选择时，肯定时选 IRR>MCC 的项目，最后当 MCC 和 investment opportunity
schedule 的交点，就形成了 optimal capital budgeting。
P12-5 Calculation of Leverage and Breakeven Points
Q39-5 Degree of operating leverage is best described as a measure of the sensitivity of:
A. net earnings to changes in sales.
B. fixed operating costs to changes in variable costs.
C. operating earnings to changes in the number of units produced and sold.
Solution: C.
The degree of operating leverage is the elasticity of operating earnings with respect to the
number of units produced and sold. As an elasticity, the degree of operating leverage
measures the sensitivity of operating earnings to a change in the number of units produced
and sold.
Q40-5 ★Consider two companies that operate in the same line of business and have the
same degree of operating leverage: the Basic Company and the Grundlegend
Company. The Basic Company and the Grundlegend Company have, respectively, no
debt and 50 percent debt in their capital structure. Which of the following statements
is most accurate? Compared to the Basic Company, the Grundlegend Company has:
A. a lower sensitivity of net income to changes in unit sales.
B. the same sensitivity of operating income to changes in unit sales.
C. the same sensitivity of net income to changes in operating income.
Solution: B.
Cost
MCC IOS
New capital raise
Optimal capital
Budget
Cost
MCC
WACC
New capital raise
Optimal capital
Structure
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Grundlegend's degree of operating leverage is the same as Basic Company's, whereas
Grundlegend's degree of total leverage and degree of financial leverage are higher.
Q41-5 Which of the following is a key determinant of operating leverage?（Notes P71）
A. Level and cost of debt.
B. The competitive nature of the business.
C. The trade-off between fixed and variable costs.
Solution: C.
The extent to which costs are fixed determines operating leverage.
Q42-5 If Jayco's sales increase by 10%, Jayco's EBIT increases by 15%. If Jayco's EBIT
increases by 10%, Jayco's EPS increases by 12%. Jayco's degree of total leverage (DTL)
are closest to: （Notes P71）
A. .
B. .
C. .
Solution: C.
15%
10%
DOL = =
12%
10%
DFL = =
DOL DFL
R23-5 Business Risk & Financial Risk
Sales risk: uncertainty with respect to the price and quantity of goods and services;
Operating risk is attributed to the use of fixed costs in operations; Financial risk is
associated with the use of debt.
R24-5 ★Leverage
Leverage is associated with the use of fixed costs.注意：financial expenses 也包括在
fixed costs 里，要区分 operating 和 financial。
Degree of operating leverage: Δ% EBIT / Δ% units sold。代表 Operating income 变化
1％，净利润变化的百分比
( )
( )
Q P V
DOL
Q P V F
Degree of financial leverage: Δ% net income / Δ% EBIT
( )
( )
Q P V F
DFL
Q P V F I
Degree of total leverage: Δ% net income / Δ% units sold
( )
( )
Q P V
DTL DOL DFL
Q P V F I
P13-5 Calculation of Breakeven Points
Q43-5 Freitag Company currently has assets on its balance sheet that are financed with 60%
equity and 40% debt. The company can issue debt at the yield of 8% when the value
of the debt doesn’t exceed 1 million. If larger amounts of debt are issued by the
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company, the yield of the debt will be 9%.Calculate the break points for the company.
A. 1 million
B. million
C. million
Solution: C.
When the value of the debt exceeds 1 million, the yield of the bonds issued changed. So the
break point for the company occurs when 40% of the whole capital exceeds 1 million. Break
point = 1million/40% = .
Q44-5 ★Alavanca is evaluating the risk of two companies in the machinery industry: The
Gearing Company and Hebelkraft, Inc. Alavanca used the latest fiscal year's financial
statements and interviews with managers of the respective companies to gather the
following information:
The Gearing Company Hebelkraft, Inc.
Number of units produced and
sold
1 million 1. 5 million
Sales price per unit $200 $200
Variable cost per unit $120 $100
Fixed operating cost $40 million $90 million
Fixed financing expense $20 million $20 million
Based on this information, the breakeven points for The Gearing Company and
Hebelkraft, Inc. are:
A. million and million units, respectively.
B. 1 million and million units, respectively.
C. million and million units, respectively.
Solution: A.
$40 $20
750,000
- $200 - $120
, .,
$90 $20
1,100,000
- $200 - $100
BE
BE
For The Gearing Company
F C million million
Q
P V
ForHebelkraft Inc
F C million million
Q
P V
+ +
= = =
+ +
= = =
Q45-5 ★★Myundia Motors now sells 1 million units at Y3,529 per unit. Fixed operating
costs are Y1,290 million and variable operating costs are Y1,500 per unit. If the
company pays Y410 million in interest, the levels of sales at the operating breakeven
and breakeven points are, respectively: （原版书R38-6）
A. ￥1,500,000,000 and ￥2,257,612,900.
B. ￥2,243,671,760 and ￥2,956,776,737.
C. ￥2,975,148,800 and ￥3,529,000,000.
Solution: B.
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1290 million
Operating breakeven units = =635, units
( 3 529- 1,500)
Operating breakewn sales = 3 529 635, units= 2 ,243,671,760
1290 million+ 410 million
Total breakeven= 837,
3 529- 1,500
￥
￥ ， ￥
￥ ， ￥
￥ ￥
￥ ， ￥
units
Breakeven sales= 3 529 837, units= 2,956,776,737￥ ， ￥
R25-5 ★Breakeven point & Operating breakeven point
Breakeven point: point at which revenue equals costs; Operating breakeven point:
point at which revenue equals operating costs
BEQ
P V
Fixed operating cost+Fixed financial cost
(break-point)
OBEQ
P V
Fixed operating cost
(operating break-point)
P14-5 Cash Dividends, Stock Dividends & Stock Split
Q46-5 The payment of a 10 percent stock dividend by a company will result in an increase in
that company's:
A. current ratio.
B. financial leverage.
C. contributed capital.
Solution: C.
A stock dividend is accounted for as a transfer of retained earnings to contributed capital.
Q47-5 Which of the following is equivalent to cash dividend?
A. Stock dividends
B. Stock splits
C. share repurchase
Solution: C.
Because shares are repurchased using a company’s own cash, a share repurchase can be
considered an alternative to a cash dividend as a way of distributing earning to shareholder.
Q48-5 In a recent presentation, Doug Pearce made two statements about dividends:
Statement 1: "A stock dividend will increase share price, all other things being equal."
Statement 2: "One practical concern with a stock split is that it will reduce the
company's price-to-earnings ratio."
Are Pearce's two statements about the effects of the stock dividend and stock split
correct?
A. No for both statements.
B. Yes for Statement 1 and no for Statement 2.
C. No for Statement 1 and yes for Statement 2.
Solution: A.
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Both statements are incorrect. A stock dividend will decrease the price per share, all other
things being equal. A stock split will reduce the price and earnings per share proportionately,
leaving the price-to-earnings ratio the same.
R26-5 Cash dividend
Reduces both the value of the company’s assets and the market value of equity. And
no effect on shareholder wealth
Comes in the form of:
Regular dividends (a portion of profits on a consistent schedule)
Special dividends (a one-time cash payment, irregular)
Liquidating dividends (distributes the proceeds when a company goes out)
R27-5 Stock dividends & stock splits
Both create more shares
A proportionate drop in the price per share
No effect on shareholder wealth
R28-5 Reverse stock splits
Fewer shares outstanding
Higher stock prices
Shareholder wealth unchanged
P15-5 Payment Chronology
Q49-5 ★Mary Young intends to take a position in Megasoft Industries once Megasoft begins
paying dividends. A dividend of C$4 is payable by Megasoft on 2 December The
ex-dividend date for the dividend is 10 November, and the holder-of-record date is 12
November. What is the last possible date for Young to purchase her shares if she
wants to receive the dividend?
A. 9 November.
B. 10 November.
C. 12 November.
Solution: A.
To receive the dividend, one must purchase before the ex-dividend date.
Q50-5 ★Which date in the chronology of a dividend payment is most likely determined by a
security exchange? The:（mock 85）
A. declaration date.
B. ex-dividend date.
C. holder-of-record date.
Solution: B.
The ex-dividend date is normally determined by the security exchange on which the shares are
listed. The corporation determines the holder-of-record date and declaration date.
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R29-5 Payment Chronology
★Chronology
Ex-Dividend date is usually two business days before Holder-of-Record Date.
P16-5 Share Repurchase
Q51-5 ★★A company has 1 million shares outstanding and earnings are £2 million. The
company decides to use £10 million in idle cash to repurchase shares in the open
market. The company's shares are trading at £50 per share. If the company uses the
entire £10 million of idle cash to repurchase shares at the market price, the
company's earnings per share will be closest to:
A. £.
B. £.
C. £.
Solution: C.
At the current market price, the company can repurchase 200,000 shares (10 million/150 =
200,000 shares). The company would have 800,000 shares outstanding after the repurchase (1
million shares —200,000 shares = 800,000 shares). EPS before the buyback is £ (2
million/1 million shares = £). Total earnings after the buyback are the same because the
company uses idle (nonearning) cash to purchase the shares, but the number of shares
outstanding is reduced to 800,000. EPS increases to £ (£2 million/800,000 shares = £).
Q52-5 ★★Crozet Corporation plans to borrow just enough money to repurchase 100,000
shares. The following information relates to the share repurchase:
Shares outstanding before buyback million
Earnings per share before buyback $
Share price at time of buyback $50
After-tax cost of borrowing 6%
Crozet's earnings per share after the buyback will be closest to: （原版书 R39-11）
A. $.
B. $.
C. $.
Solution: A.
Total earnings before buyback: X 3,100,000 shares = $12,400,000
Total amount of borrowing: $50 X 100,000 shares = $5,000,000
After-tax cost of borrowing the amount of funds needed:
$5,000,000 X = $300,000
Number of shares outstanding after buyback: 3,100,000 — 100,000 = 3,000,000
Declaration
Date
Holder-of-
Record
Date
Ex-Dividend
Date
Payment
Date
2 工作日
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EPS after buyback: ($12,400,000 — $300,000)/3,000,000 shares = $
The P/E before the buyback is $50/$4 = ; thus, the E/P is 8 percent. The after-tax cost of
debt is 6 percent; therefore, EPS will increase.
Q53-5 ★★An analyst gathered the following information about a company:
Number of shares outstanding 10 million
Earnings per share $
P/E 20
Book value per share $30
If the company repurchases 1 million shares at the prevailing market price, the
resulting book value per share will he closest to: （原版书 R39-13）
A. 26.
B. 27.
C. 29.
Solution: C.
The prevailing market price is $(20) =$ per share; thus, the buyback would reduce
equity by S40 million. Book value of equity before the buyback is $300 million. Book value of
equity after the buyback would be $300 million — $40 million = $260 million. The number of
shares outstanding after the buyback would be 9 million. Thus, book value per share after the
buyback would be $260 million/9 million = $.
Q54-5 ★A share repurchase that begins with a company communicating to shareholders a
specific number of shares and a range of acceptable prices is most likely to be a (n) :
A. open market repurchase.
B. fixed price tender offer.
C. Dutch auction.
Solution: C.
Dutch auctions begin with the company communicating to shareholders a specific number of
shares and a range of acceptable prices. When companies repurchase shares in the open
market, they buy at market prices and in quantities as conditions warrant. In a fixed price
tender offer, the company announces a fixed number of shares to be repurchased and a fixed
price.
Q55-5 ★Which of the following share repurchase methods will most likely take the longest
amount of time to execute?
A. Dutch auction.
B. fixed price tender offer.
C. open market repurchase.
Solution: C.
Of the methods listed, open market repurchases take the longest time to execute.
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Q56-5 ★The market price of a company's share is $22 per share with a price-to-book value
of . It has 40 million shares outstanding and announces a buyback of 10% of its
shares. If the buyback is done at $22 per share, the post-buyback book value per
share is closest to:（2014 Mock98-73）
A. $.
B. $.
C. $.
Solution: C.
The pre-buyback book value per share (BVPS) is $22/ = $.
Because the market price per share is less than BVPS, its BVPS should increase after the share
buyback.
Pre-buyback book value of equity 40 million × $ = $1,100 million
Post-buyback book value of equity $1,100 million – (4 million × $22) = $1,012 million
Post-buyback shares outstanding: 36 million shares outstanding (10% less)
Post-buyback BVPS = $1,012 million/36 million shares = $
As per the calculation, the post-buyback BVPS is $.
Q57-5 A company is deciding to repurchase 5 million shares of stock that has a current price
of $. Below is the forecasted information of shares available for purchase. Which
of the following repurchase methods will most likely result in the average repurchased
cost being $? (2014 Mock 99-72)
Price Number of Shares Available for Purchase (in millions)
$
$
$
$
$
$
A. Open market repurchase
B. Dutch auction
C. Fixed-price tender offer
Solution: B.
A Dutch auction uncovers the minimum price at which the company can buy back the desired
number of shares with the company paying that price to all qualifying bids. Here the qualifying
bids are from $ to $ to satisfy the required 5 million share requirement. Under a
Dutch auction, 5 million shares can be purchased for $ because at that price point,
sufficient volume is available in the shares.
The fixed-price tender offer cannot be completed at the $ price because there is
insufficient volume available at that price.
Using an open market share repurchase process, shares are bought at prices that vary between
$ and $. The open market share repurchase will result in the average cost per share
of $.
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Price Volume Price × Volume
$ 3,000,000 $149,400,000
$ 1,000,000 $49,700,000
$ 500,000 $24,800,000
$ 500,000 $24,750,000
Total Cost $248,650,000
Average repurchased cost per share $
R30-5 Repurchased with excess cash (internal financing)
I/S:
EPS will increase (fewer shares outstanding)
EPS will decrease (lost interest income and earnings)
Compare earnings yield and after-tax yield of company fund
B/S:
Assets and equity will decline
Leverage (D/E) will increase
R31-5 Repurchased with debt (external financing)
I/S:
EPS will increase (fewer shares outstanding)
EPS will decrease (Incur interest cost and reduce earnings)
Compare earnings yield and after-tax cost of debt
B/S:
Assets and equity will decline
Leverage (D/E) will increase even more
R32-5 A share repurchase may:
Increase EPS
With cash: Earnings yield (E/P) > after tax cost of fund
With debt: Earnings yield (E/P) > after tax cost of debt
Decrease EPS
With cash: Earnings yield (E/P) < after tax cost of fund
With debt: Earnings yield (E/P) < after tax cost of debt
Constant EPS
With cash: Earnings yield (E/P) = after tax cost of fund
With debt: Earnings yield (E/P) = after tax cost of debt
Increase BVPS
Market price (repurchase price) < original BVPS
Constant BVPS
Market price (repurchase price) = original BVPS
Decrease BVPS
Market price (repurchase price) > original BVPS
P17-5 Liquitidy Measures and Management
Q58-5 An example of a primary source of liquidity is:（Notes P102）
A. liquidating assets
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B. negotiating debt contracts
C. short-term investment portfolios
Solution: C.
Primary sources of liquidity include ready cash balances, short-term funds (., short-term
investment portfolios), and cash flow management. Secondary sources of liquidity include
negotiating debt contracts, liquidating assets, and filing for bankruptcy protection and
reorganization.
Q59-5 ★★Which is most likely considered a “pull” on liquidity?
A. Obsolete inventory.
B. Reduction in a line of credit.
C. Increased difficulty in collecting receivables.
Solution: B.
A “pull” on liquidity occurs when disbursements are made too quickly (., current liabilities
are paid instead of being held or when credit availability is reduced or limited). A “drag’ on
liquidity occurs when receipts lag (., non-cash current assets do not convert to cash quickly).
Consequently, a reduction in a credit line is a “pull” on liquidity.
Q60-5 ★Other factors held constant, the reduction of a company’s average accounts
payables due to suppliers offering less trade credit will most likely:
A. reduce the operating cycle.
B. increase the operating cycle.
C. not affect the operating cycle.
Solution: C.
Payables are not part of the operating cycle calculation. Operating cash cycle includes
inventory and accounts receivable.
Q61-5 ★★Given the following financial statement data, calculate the net operating cycle
for this company.
In Millions ($)
Credit sales 40,000
Cost of goods sold 30,000
Accounts receivable 3,000
Inventory–Beginning
balance
1,500
Inventory–Ending
balance
2,000
Accounts payable 4,000
The net operating cycle of this company is closest to: （原版书 R40-3）
A. days.
B. days.
C. days.
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Solution: A.
Number of days of inventory = $2,000/ ($30,000/365) = days
Number of days of receivables = $3,000/(S40,000/365) = days
Operating cycle = + days = days
Purchases = $30,000 + $2,000–$1,500 = $30,500
Number of days of payables = $4,000/ ($30,500/365) = days
The net operating cycle is – = days
Q62-5 ★★Assuming a 365-day year and the following information for a company:
Current
Year
Previous Year
Sales $12,000 $10,000
Cost of goods sold $6,000 $5,000
Inventory $1,200 $1,000
Accounts payable $600 $500
The firm’s days in payables for the current year is closest to:
A. .
B. .
C. .
Solution: B.
Accounts payable Accounts payable
The days in payables = =
Purchases 365 (Change in inventory + Cost of goods sold) 365
$600
= =
($1200-$1000 + $6000) 365
R33-5 了解 Working Capital 的管理采用哪个策略比较保守，哪个策略比较激进
★Passive strategy is characterized by one or two decision rule for making daily
investment; place top priority on safety and liquidity; less aggressive
Active strategy:
matching: more conservative than mismatching strategy; 常常和 passive
strategy 一起使用
mismatching: riskier than matching strategy
laddering strategies: entails scheduling maturities on a systematic basis
within the investment portfolio such that investments are spread out equally
over the term of the ladder; 介于 matching strategy 和 passive strategy 之间
Short-term IPS: 投资品种一般包含信用等级比较高的或者是国债
Cash flow transactions—that is, cash receipts and disbursements—have significant
effects on a company's liquidity position. We refer to these effects as drags and
pulls on liquidity.
1. A drag on liquidity is when receipts lag, creating pressure from the decreased
available funds;
2. a pull on liquidity is when disbursements are paid too quickly or trade credit
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355
availability is limited, requiring companies to expend funds before they
receive funds from sales that could cover the liability.
P18-5 Cash management and ST funding
Q63-5 The cash manager for Wicker Enterprises is investigating the purchase of a banker’s
acceptance (BA). The $1,000,000 face value BA has 150 days to maturity and is quoted
at % on a discount-basis yield. If Wicker’s marginal tax rate is 25%, then the
money market yield on the BA is closest to:
A. %.
B. %.
C. %.
Solution: C.
Discount-Basis Yield=(F-P)/F (360/t), and we know F and t, so we can calculate the purchase
price.
Purchase price = face value - [face value *discount-basis yield * (days to maturity / 360)]
= $1,000,000 - [$1,000,000 * * (150 / 360)] = $983,125
Money market yield =(F-P)/P (360/t)= %
Q64-5 ★★Boyle, Inc., just purchased a banker's acceptance for $25,400. It will mature in 80
days for $26,500. The discount-basis yield and the bond equivalent yield for this
security are closest to:（Notes P102）
Discount-basis Bond equivalent
A. % %
B. % %
C. % %
Solution: B.
The actual discount on the acceptance is (26,500 - 25,400) / 26,500 = %. The annualized
discount, or discount-basis yield, is (360 / 80) = %.
The holding period yield is (26,500 - 25,400) / 25,400 = %. The bond equivalent yield is
(365 / 80) = %.
Q65-5 ★You are asked to select one of the following choices as the best offer for borrowing
$5,000,000 for one month:
Drawing down on a line of credit at percent with a 1/2 percent commitment
fee on the full amount. Notes: One-twelfth of the cost of the commitment fee
(which gives an option to borrow any time during the year) is allocated to the
first month.
A banker’s acceptance at percent, an all-inclusive rate.（注：是折扣率）
Commercial paper at % （注：这是折扣率）with a dealer’s commission of
1/8 percent and a backup line cost of 1/4 percent, both of which would be
assessed on the $5 million of commercial paper issued.（后两个费用的收取是
根据最后的面值来确定）
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Which is the best offer for borrowing for one month?
A. Line of credit
B. Banker’s acceptance
C. Commercial paper
Solution: C.
Line of credit cost：
12
interest+commitment fee
Line cost= 12
usable loan amount
( $5,000,000 1/12)+( $5,000,000 1/12)
=
$5,000,000
Banker’s acceptance cost:
interest
BA cost= 12
net proceeds
$5,000,000 1/12
= 12=
$5,000,000-( $5,000,000 1/12)
Commercial paper cost (quoted as nominal rate at a discount):
interest+dealer's commissions+back-up costs
CP cost= 12
net proceeds
( $5,000,000 1/12)+((1/8)% $5,000,000 1/12)+((1/4)% $5,000,000 1/12)
= 12
$5,000,000-( $5,000,000 1/12)
=
公式是这样的：
如果是 line of credit，这个成本就是
int
12
erest commitment fee
Cost
loan amount
如果是 banker’s acceptance，这个成本就是
int
12
erest
Cost
net proceeds
如果 commercial paper 有 dealer’s fee 和有 backup fee，这个成本就是
int ' - cos
12
- int
erest dealer s commissions back up ts
Cost
Loan amount erest
其中 total amount of loan you received 叫做 net proceeds
注：所有的计算方法中，分子上是费用（利息费用，交易费用，Back-up 费用），分母是
融资总金额（借到钱）。这个内容在 2010 年 12 月考试中出现过，请大家注意。
Q66-5 ★★Based on a need to borrow $2 million for one month, which of the following
alternatives has the least expensive effective annual cost?
A. A banker's acceptance with an all-inclusive annual rate of %
B. A credit line at % annually with a % annual commitment fee
C. Commercial paper at % annually with a dealer's commission of $3,000 (or %) and
a backup line cost of $4,000 (or %)
Solution: A.
BA: [(% /12) /(%/12)]12=%
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Credit Line: %
CP: (% /12+% /12+% /12) /(%/12)]12=%
Q67-5 ★★William Jones is evaluating three possible means of borrowing $1 million for one
month:
Drawing down on a line of credit at percent with a 1/2 percent commitment
fee on the full amount with no compensating balances.
A banker's acceptance at percent, an all–inclusive rate.
Commercial paper at percent with a dealer's commission of 1/4 percent and a
backup line cost of 1/3 percent, both of which would be assessed on the $1
million of commercial paper issued.
Which of these forms of borrowing results in the lowest cost of credit?（原版书 R40-7）
A. Line of credit.
B. Banker's acceptance.
C. Commercial paper.
Solution: B.
Interest + Commitment fee
Line cost= 12
Net Proceeds
( $1,000,000 1/12) + ( $1,000,000 1/12)
12
$1,000,000
$6,000
12=
$1,000,000
Interest
Banker's acceptance cost= 12
Net proceeds
1 $1,000,000 1/12
12
$1,000,000-( $1,000,000 1/12)
$5,916,67
12
$994,
interest+Dealer's commission +Backup costs
Commercial paper cost
Νet proceed
$1,000,000 $1,000,000 $1,000,000
$1,000,000 ( $1,000,000
5,750 20
%
1,000,000 5,750
R34-5 Money market yield 及 Discount basis yield，Bond equivalent yield 掌握公式：
- 360
( )( )
F P
discount basis yield
F t
360 360-
( )( ) ( )mm
F P
R HPR
P t t
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- 365 365
( )( ) ( )
F P
BEY HPR
P t t
R35-5 ★补充：如何知道短期是 cash surplus，可以投资还是 shortage the cash，需要融
资，那就要做现金流的管理和预测。
Short-term Medium-term Long-term
D
ta
f
req
enc
Daily/weekly for 4-6
weeks
Monthly for one
year
Annually for
3-5years
Format
Receipt and
disbur
emen
s
Receipts a
d
disbursements
Projected
financial
statements
Techniques Simple
projections
Pro
tection
models and
averages
Statistical models
Accuracy Very high Moderate Lowest
Reliability Very high Fairly high Not as high
Uses Daily cash management
Planning
financial
transactions
Long-range financial
position
P19-5 Trade Discounts
Q68-5 ★A company is offered trade credit terms of 2/10, net 45. The implicit cost of failing
to take the discount and instead paying the account in 45 days is closest to:
A. %.
B. %.
C. %.
Solution: C.
The cost of trade credit if paid on day
365/35(1 2 / 98) -1 %.
Q69-5 ★★A company increasing its credit terms for customers from 1/10, net 30 to 1/10,
net 60 will most likely experience: （原版书R40-5）
A. an increase in cash on hand.
B. a higher level of uncollectible accounts.
C. an increase in the average collection period.
Solution: C.
A higher level of uncollectible accounts may occur, but a longer average collection period will
certainly occur.
R36-5 Trade discounts cost 计算：
实际上表现的 Effective annualized return 的概念。比如：2/20 net 60，在第二十天时候的成
本是多少？
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40
(1 ) 1EAR
365
402%
1 -1
1- 2%
EAR
P20-5 Corporate Governance
Q70-5 An investment fund, AFC Investments (AFC), owns 8% of the outstanding voting
shares of a public company. There are several larger voting blocks of shares such that
AFC is not assured of being able to elect representation on the Board of directors. The
shareholder voting right that would be most beneficial in allowing AFC to ensure their
interests are represented on the Board is:
A. Proxy voting.
B. Cumulative voting.
C. Confidential voting.
Solution: B.
Cumulative voting allows shareholders to cast the cumulative number of votes allotted to their
shares for one or a limited number of Board nominees, thus increasing the likelihood that their
interests are represented on the Board.
Q71-5 ★Which of the following conditions represents the best practice of corporate
governance?
A. The company prevents shareholder to trade the company’s shares prior to the annual
meetings.
B. The company requires shareholders’ attendance to cast votes.
C. The company permits confidential and cumulative voting.
Solution: C.
Requirement of shareholders’ attendance to cast votes is a mechanism to prevent proxy voting.
Prevention of proxy will weaken shareholder’s rights. Preventions of shareholders to trade the
company’s shares prior to the annual meetings, is called share blocking, which can also weaken
shareholder’s rights.
Q72-5 ★Cumulative voting is best described as:
A. a mechanism for suppressing hostile takeovers.
B. a means of offsetting the negative consequences of super-voting rights shares.
C. enhancing the likelihood that shareowners' interests are represented on the Board.
Solution: C.
Cumulative voting enhances the likelihood that shareowner interests are represented on the
Board.
Q73-5 Regarding corporate governance, which of the following most likely would be a
reason for concern when evaluating a board member's qualifications? The board
member:
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A. has served on the board for 14 years.
B. is a college professor and a certified public accountant.
C. has formerly served on the boards of several successful companies.
Solution: A.
Members who serve on the board for a long time (more than ten years) may become too
closely aligned with management to be considered independent.
Q74-5 Which of the following is lease likely classified as a takeover defence?
A. Greenmail
B. Cumulative voting
C. Golden parachutes
Solution: B.
The ability to use cumulative voting enables shareowners to vote in a manner that enhances
the likelihood that their interests are represented on the board. It is a valuable shareowner
right.
Q75-5 Two analysts are discussing shareholder defenses against hostile takeovers. Alice
states, "It is positive for shareholders that the board has shown a willingness to buy
back shares from holders who may be in a position to effect a hostile takeover of the
firm at less than its long-term value to shareholders." Bradley states, "Firms that are
likely takeover targets should offer valuable exit packages in the event of a hostile
takeover because they are necessary to recruit highly talented top executives, such as
the CEO." From the perspective of good corporate governance, are these statements
correct?
A. Both statements are correct.
B. Neither statement is correct.
C. Only one of the statements is correct.
Solution: B.
Defenses against hostile takeovers such as greenmail (Alice) or golden parachutes (Bradley)
tend to protect entrenched or poorly performing managements and typically decrease share
values. Shareholders as a group always have the choice not to sell when a takeover offer is not
in their long-term interests.
R37-5 Corporate Governance 掌握概念：
如何定义有效的 board：独立董事独立，独立董事懂事（最主要明白独立的概念）
3 个委员会分别的责任
审计委员会特别注意：与内审部门要无缝沟通
薪酬委员会不要忘记除了正常的薪酬之外，还考虑 stock compensation
提名委员会除了提名以外，还对 board 和 management 的 performance 定期
评 估
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了解 frequency of board elections: annual elections & staggered multiple-year
terms 的特点
board --- independence
A majority of the board of directors is comprised of independent members;
The board meets regularly outside the presence of management;
Board members are not closely aligned with a firm supplier, customer,
share-option plan or pension adviser;
board --- qualification
Regularly attend meetings;
Are committed to shareholders;
Have other board experience;
Have served on board for more than 10 years;
Voting rules
Confidential Voting：保密，can encourage unbiased voting
Cumulative Voting:是一个好的公司治理
Voting for other corporate Changes: 公司发生重大事件后，shareholders 需要
进 行投票
Vote blocking：to prevents investors who wish to vote their shares from trading
their shares during prior to the annual meeting，不是一个好的公司治理。
R38-5 Notes：
一般题目是给定场景，让考生分析，不会纯考概念。类似于 ethics
注意几个关键词：independence，experience，compensation，resources（有几个
专业的 committee）external consultants。
Corporate governance 部分内容繁琐，但是必考，要认真看。
Takeover Defenses: include golden parachutes ( rich severance packages for top
managers who lose their jobs as a result of a takeover), poison pills (对现有股东低价
发行股票，稀释恶意收购）， and greenmail（允许被收购公司过一定时间高价买
回股票）
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6-Equity
P1-6 Overview of financial market: function & regulation
Q1-6 ★The government of a country whose financial markets are in an early stage of
development has hired you as a consultant on financial market regulation. Your first task
is to prepare a list of the objectives of market regulation. Which of the following is least
likely to be included in this list of objectives? （原版书 R47-28）
A. Minimize agency problems in the financial markets.
B. Ensure that financial markets are fair and orderly.
C. Ensure that investors in the stock market achieve a rate of return that is at least equal to
the risk-free rate of return.
Solution: C.
Ensure that investors in the stock market achieve a rate of return that is at least equal to the
risk-free rate of return is least likely to be included as an objective of market regulation. Stocks
are risky investments and there would be occasions when a stock market investment would
not only have a return less than the risk-free rate but also a negative return. Minimizing agency
costs and ensuring that financial markets are fair and orderly are objectives of market
regulation.
R1-6 ★金融市场的三种主要功能：
Fulfill different entities’ requirements
Determine the returns (. interest rates)
Allocate capital to its most efficient uses
R2-6 ★Achievement of Purposes in the Financial System
Saving
Borrowing
Issuing equity
Risk management
Exchanging assets
Utilizing information
R3-6 Market Regulation: Problems when there are no regulations
Fraud and theft
Insider trading
Costly information
Defaults
R4-6 When they fail to address the problems mentioned above, financial markets do not
function well.
Liquidity declines
Firms avoid risky projects
New ideas go unfunded
Economic growth slows
R5-6 ★Characteristics of a good market:
Timely and accurate information
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Liquidity( marketability, price continuity, depth )
Internal efficiency (low transaction cost)
Informational efficiency.
P2-6 Intermediaries of financial markets
Q2-6 If a trader buy and sell identical or essentially similar instruments at different price in
different market, which type will the trader most likely be?（2012 年 12 月真题）
A. Information motivator
B. Arbitrageurs
C. Securitizers
Solution: B.
Arbitrageurs trade when they can identify opportunities to buy and sell identical or essentially
similar instruments at different prices in different markets. They profit when they can buy in
one market for less than they sell in another market.
R6-6 ★Brokers and Dealers, Exchanges
Brokers: Help their clients buy and sell securities by finding counterparties to trade
in a cost efficient manner.
Dealers: Facilitate trading by buying for or selling from their own inventory. Dealers
provide liquidity in the market and profit primarily from the spread (difference)
between the price at which they will buy (bid price) and the price at which they will
sell (ask price) the security or other asset.
Exchanges: provide a venue where trades can meet and sometimes act as brokers
by providing electronic order matching.
Alternative trading systems: serve the same trading function as exchanges but have
no regulatory function.
Investment banks: help corporations sell securities to investors.
★Information-motivated traders：
Those trade to profit from using the information from model
R7-6 ★Securitizers
Pool large amounts of securities or other assets and then sell interests in the pool to
other investors.
A firm may set up a special purpose vehicle (SPV) or special purpose entity (SPE) to
buy firm assets, which removes them from the firm's balance sheet and may
increase their value by removing the risk that financial trouble at the firm will give
other investors a claim to the assets' cash flows.
R8-6 ★Arbitrageurs
In its pure (riskless) form, arbitrage refers to buying an asset in one market and
reselling it in another at a higher price.
In markets with good information, pure arbitrage is rare because traders will favor
the markets with the best prices.
Creating similar positions using different assets is referred to as replication.
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Hedgers: use short position in one asset to hedge an existing risk from a long
position in another asset that has returns that are strongly correlated with the
returns of the asset shorted.
R9-6 ★Clearinghouses and Custodians
Clearinghouses act as intermediaries between buyers and sellers in financial
markets and provide:
Escrow services (transferring cash and assets to the respective parties).
Guarantees of contract completion.
Assurance that margin traders have adequate capital.
Limits on the aggregate net order quantity (buy orders minus sell orders) of
members.
P3-6 Classification of assets and market
Q3-6 A hedge fund holds its excess cash in 90-day commercial paper and negotiable
certificates of deposit. The cash management policy of the hedge fund is best described
as using:
A. capital market instruments.
B. money market instruments.
C. intermediate-term debt instruments.
Solution: B.
The 90-day commercial paper and negotiable certificates of deposit are money market
instruments.
Q4-6 ★An investor primarily invests in stocks of publicly traded companies. The investor
wants to increase the diversification of his portfolio. A friend has recommended
investing in real estate properties. The purchase of real estate would best be
characterized as a transaction in the: （原版书 R47-5）
A. derivative investment market.
B. traditional investment market.
C. alternative investment market.
Solution: C.
The purchase of real estate properties is a transaction in the alternative investment market.
Q5-6 ★The Standard & Poor's Depositary Receipts (SPDRs) is an investment that tracks the
S&P 500 stock market index. Purchases and sales of SPDRs during an average trading
day are best described as:（原版书 R47-14）
A. primary market transactions in a pooled investment.
B. secondary market transactions in a pooled investment.
C. secondary market transactions in an actively managed investment.
Solution: B.
SPDRs trade in the secondary market and are a pooled investment vehicle.
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R10-6 Classification of assets
Financial Assets ：
Security: Debt securities, equity securities , public securities, private securities
Derivative contracts：Finance derivative contracts, physical derivative contracts
Currency
Real Assets :
Commodity
Real Estate
Securities
Fixed income securities: typically refer to debt securities that are promises to
repay borrowed money in the future.
★Equity securities
Common stock：callable, putable
Preferred stock
Warrants
★Pooled investment vehicles
Mutual funds: can purchase shares, either from the fund or in the secondary
market.
Exchange-traded funds and exchange-traded notes:
Asset-backed securities
Hedge fund: organized as limited partnership, often use leverage
★Real assets
Are real estate, equipment, and machinery.
Often provides income, tax advantages, and diversification benefits. However,
they often entail substantial management costs, they usually require the
investor to do substantial due diligence before investing. They are illiquid
because their specialization may result in a limited pool of investors for a
particular real asset.
R11-6 Rather than buying real assets directly, an investor may choose to buy them indirectly
through an investment such as a real estate investment trust (REIT) or master limited
partnership (MLP).
R12-6 Classification of market
Money markets: markets for debt securities with maturities of one year or less.
Capital markets: markets for long-term debt securities and equity securities without
specific maturity date.
Primary market: for newly issued securities
Secondary market: subsequent sales of securities.
Traditional investment markets: for to those for debt and equity
Alternative markets: for hedge funds, commodities, real estate, collectibles,
gemstones, leases and equipment.
P4-6 Primary market
Q6-6 A British company listed on the Alternative Investment Market of the London Stock
Exchange, announced the sale of 6,686,665 shares to a small group of qualified
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investors at £ per share. Which of the following best describes this sale?
A. Shelf registration.
B. Private placement.
C. Initial public offering.
Solution: B.
This sale is a private placement. As the company is already publicly traded, the share sale is
clearly not an initial public offering. The sale also does not involve a shelf registration because
the company is not selling shares to the public on a piecemeal basis.
R13-6 Primary capital markets：Refer to the sale of newly issued of securities.
R14-6 Public offering
underwritten offering：the investment bank agrees to purchase the entire issue at
a price that is negotiated between the issuer and bank. 包销
best efforts：the bank is not obligated to buy the unsold portion. 承销
★conflict of interest for investment bank：they should set the price high to raise
the most funds for the issuer. But, as underwriters, they would prefer that the
price be set low enough that the whole issue sells.
R15-6 Primary Market
Price placement
Shelf registration
A dividend reinvestment
Rights offering
P5-6 Secondary market( call market . continuous market; order-driven market,
quote-drive market and brokered market)
Q7-6 A market participant buys all stocks of a company and then sells these stocks to
investors. The market is mostly like a(n):
A. quote-driven market
B. order-driven market
C. brokered market
Solution: A.
In quote-driven markets (sometimes called price-driven or dealer markets), customers trade
with dealers.
Order-driven markets arrange trades using rules to match buy orders to sell orders.
In brokered markets, brokers arrange trades between their customers. Brokered markets are
common for transactions of unique instruments, such as real estate properties, intellectual
properties, or large blocks of securities.
Q8-6 A security market in which all the bids and asks for a stock are gathered to arrive at a
single price that satisfies most of the orders is best described as a
A. Call market.
B. Dealer market.
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C. Primary market.
Solution: A.
In Call Markets, different from the continuous markets, the stock is only traded at specific
times, all trades bids ,and asks are declared and then one negotiated price is set that clears the
market for the stock.
Dealer market is often defined as Quote-Driven Markets or OTC markets, trader transact with
dealers who post bid and ask prices.
Primary markets refer to the sale of newly issued securities.
Q9-6 ★★A trader seeking to sell a very large block of stock, or a piece of urban real estate
property, for her client will most likely execute the trade in a(n): (Mock84-85)
A. brokered market.
B. order-driven market.
C. quote-driven market.
Solution: A.
Instruments that are infrequently traded and expensive to carry as inventory (., very large
blocks of stock, real estate properties, fine art masterpieces, and liquor licenses) are executed
in brokered markets. Organizing order-driven markets for such instruments is not sensible
because too few traders would submit orders to them.
Q10-6 If traders can hardly find the buyer and seller in a market, the market is mostly like
a(n)
A. Brokered market
B. Order-driven market
C. Quote-driven market.
Solution: A.
In a market which traders can hardly find the counterparty, they need brokers to provide
liquidity, and the other two market can functions well in such a situation.
R16-6 Function of the secondary market
They provide liquidity and price/value information.
Liquid markets are those in which a security can be sold quickly without incurring
a discount from the current price.
R17-6 Call markets & Continuous markets（重点）
In call markets, the stock is only traded at specific times. All trades, bids, and asks
are declared, and then one negotiated price is set that clears the market for the
stock. This method is used in smaller markets and to set opening prices and prices
after trading halts on major exchanges
In continuous markers, traders occur at any time the market is open. The price is
set by either the auction process or by dealer bid-ask quotes
R18-6 Call market & Continuous markets 的异同
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C
ll Markets Continuous Markets
At specific times At any time when mark
is o
pen
All bids and asks are gathered
an
th
n a negotiated price is
pro
uced
The price is determined either by an auction
p
rocess or through a dealer bid-ask process.
R19-6 Quote-Driven Markets：Traders transact with dealers (market makers) who post bid and
ask prices.
R20-6 Order-Driven Markets：In order-driven markets, orders are executed using trading rules
Order Matching Rules: Price priority—>non-hidden orders first—>first come, first serve
R21-6 Brokered Markets：Brokers find the counterparty in order to execute a trade.
P6-6 Long & short position in transaction
Q11-6 ★Which of the following is the least accurate statement about the short sale of stocks?
A. The short seller must pay all dividends or interest to the lender of shares.
B. Short sales involve time limits for returning the shares borrowed to the lender.
C. A short sale can be made only on an uptick or a zero uptick trade if the previous trade was
an uptick trade.
Solution: B.
Short sales have no time limits. However, if the lender of shares decides to sell them, the
broker must find another investor willing to lend the shares.
Q12-6 ★You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its
yearly high of 56. Your broker tells you that your margin requirement is 45% and that
the commission on the purchase is $155. While you are short the stock, Charlotte pays a
$ per share dividend. At the end of one year, you buy 100 shares of Charlotte at 45
to close out your position and are charged a commission of $145. What is your rate of
return on the investment?
A. %
B. %
C. %
Solution: A.
Profit on a short sale = Begin value — Ending value — Dividends( Interest)— Trans. costs
Beginning value of investment = $ x 100 =$5,600 (Sold under a short sale
arrangement)
Ending value of investment = $ x 100=$4,500
Transaction costs= $155 + $145 =$
Dividends = $ x 100 shares =$
Profit= $5,600 — $4,500 — $250 — $300= $
Initial investment = Margin requirement + Commission = ( x $5,600) + $155=
$2,520 + $155= $2,675
The rate of return on your investment is %=$ / $2,675
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Short Sale 掌握概念及过程：
R22-6 Short sale 的作用，掌握过程.
Simultaneously borrows and sells securities through a broker
Must return the securities at the request of the lender or when the short sale is
closed out
Must keep a portion of the proceeds of the short sale on deposit with the
broker
Must pay all dividends or interest to the lender
R23-6 计算 short sale 的收益率
P7-6 Leverage position in transaction
Q13-6 An investor opens a margin account with an initial deposit of $5,000. He then purchases
200 shares of PRK stock at $46 in his margin account, which has a margin maintenance
requirement of 25 percent, Ignoring commissions and interest, the minimum price that
PRK stock can fall to before the investor receives a margin call is closest to:
A. $.
B. $.
C. $.
Solution: B.
Determine the price (P) that is equal to 25%:
0
1-initial margin 1 %
Trigger price = P ( )=46 =
1-maintenance margin 1 25%
Q14-6 ★An investor purchased 5,000 stocks at 57 dollars on margin. The initial margin he
deposited to his broker is 40%. The broker will make a margin call when the margin
account is less than 25%. The price that will cause a margin call is closest to: (2012 年 12
月真题)
A.
B.
C.
Solution: B.
0
1-initial margin 1-40%
Trigger price = P ( )=57( )=
1-maintenance margin 1-25%
Q15-6 ★★An online brokerage firm has set the minimum margin requirement at 55 percent.
What is the maximum leverage ratio associated with a position financed by this
minimum margin requirement? （原版书 R47-19）
A. .
B. .
C. .
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Solution: B.
The maximum leverage ratio is =1 /55%. The maximum leverage ratio associated with a
position financed by the minimum margin requirement is one divided by the minimum margin
requirement.
Q16-6 ★★A trader has purchased 200 shares of a non-dividend-paying firm on margin at a
price of $50 per share. The leverage ratio is . Six months later, the trader sells these
shares at $60 per share. Ignoring the interest paid on the borrowed amount and the
transaction costs, what was the return to the trader during the six-month period?
A. 20 percent.
B. percent.
C. 50 percent.
Solution: C.
The return is 50 percent. If the position had been unleveraged, the return would be 20% = ($60
−$ 50)/ $50. Because of leverage, the return is 50% = X 20%.
From another way to think about it: The minimum margin requirement is 40%=1/, so he
contribute $4000=40% X (200shares X $50) to the margin. Six month later, the amount in the
margin is $6000= $4000+($60−$50)X200shares. Hence, the return is 50% =
($6000−$4000)/$4000
Q17-6 ★★A trader buys 500 shares of a stock on margin at $36 a share using an initial
leverage ratio of . The maintenance margin requirement the position is 30%. The
stock price at which the margin call occurs is closest to:
A. $.
B. $.
C. $.
Solution: A.
Initial equity (%) in the margin transaction = 1/ Leverage ratio = 1 / = ;
Initial equity per share at the time of purchase = $36× = $;
Price at which margin call occurs. Equity per share / Price per share = Maintenance margin %
= ($ + P - $36) / P = ; = $; P = $.
OR
0
1-initial margin
Trigger price = P ( )
1-maintenance margin
Q18-6 ★The following data pertains to a margin purchase of a stock by an investor.
Stock's purchase price $50/share
Sale price $55/share
Shares purchased 500
Margin 45%
Call money rate 6%
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Dividend $
Transaction commission on purchase $
Transaction commission on sale $
If the stock is sold exactly one year after the purchase, the total return on the investor's
investment is closest to:
A. 14%
B. 19%
C. 22%
Solution: C.
Proceeds on sale: $55x500 $27,500
Payoff loan: $ -$13,750
Margin interest paid: $13, -$825
Dividend received: $ +$900
commission paid on sale: $ -$25
Remaining equity $13,800
Initial investment (including commission):
($)+($)
$11,275
Return on the initial investment:
($13,800-$11,275)/$11,275
%
Q19-6 ★★★Jason Williams purchased 500 shares of a company at $32 per share. The stock
was bought on 75 percent margin. One month later, Williams had to pay interest on the
amount borrowed at a rate of 2 percent per month. At that time, Williams received a
dividend of $ per share. Immediately after that he sold the shares at $28 per share.
He paid commissions of $10 on the purchase and $10 on the sale of the stock. What was
the rate of return on this investment for the one-month period?
A. – percent.
B. – percent.
C. – percent.
Solution: B.
Total cost of the purchase = $16,000 = 500 X $32
Equity invested = $12,000 = X $16,000
Amount borrowed = $4,000 = $16,000 - $12,000
Interest paid at month end = $80 = X $4,000
Dividend received at month end = $250 = 500 X $
Proceeds on stock sale = $14,000 = 500 X 28
Total commissions paid = $20 = $10 + $10
Net gain/loss = -$1,850 = -16,000 - 80 + 250 + 14,000- 20
Initial investment including commission on purchase = $12,010
Return = - % =-$1,850 / $12,010
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R24-6 Margin Transaction 掌握概念及计算：
概念：margin transactions involve buying securities with borrowed money.
计算：Trigger price (margin of long position)
0
1-
( )
1-
IM
P
MM
=
IM=Initial Margin MM=Maintenance Margin
P8-6 Execution instructions
Q20-6 ★★Consider an order-driven system that allows hidden orders. The following four sell
orders on a particular stock are currently in the system's limit order book. Based on the
commonly used order precedence hierarchy, which of these orders will have precedence
over others?
Time of Arrival Special Instruction
Order (HH:MM:SS) Limit Price (€) (If Any)
I 9:52:01
II 9:52:08 Hidden order
III 9:53:04
IV 9:53:49
A. Order I (time of arrival of 9:52:01).
B. Order II (time of arrival of 9:52:08).
C. Order III (time of arrival of 9:53:04).
Solution: C.
Order III (time of arrival of 9:53:04) has precedence. In the order precedence hierarchy, the
first rule is price priority. Based on this rule, sell orders II, III, and IV get precedence over order
I. The next rule is display precedence at a given price. Because order II is a hidden order, orders
III and IV get precedence. Finally, order III gets precedence over order IV based on time priority
at same price and same display status.
Q21-6 ★A market has the following limit orders standing on its book for a particular stock. The
bid and ask sizes are number of shares in hundreds.
Bid Size Limit Price (€) Offer Size
5
12
4
6
5
12
8
What is the market?
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A. bid, offered at .
B. bid, offered at .
C. bid, offered at .
Solution: C.
Simply find the information in the panel, namely the highest bid price and the lowest offer
price
Q22-6 Consider the following limit order book for a stock. The bid and ask sizes are number of
shares in hundreds.
Bid Size Limit Price (¥) Offer Size
3
8
4
7
6
7
A new buy limit order is placed for 300 shares at ¥. This limit order is said to:
A. Take the market.
B. Make the market.
C. Make a new market.
Solution: C.
This order is said to make a new market. The new buy order is at ¥, which is better than
the current best bid of ¥. Therefore, the buy order is making a new market. Had the
new order been at ¥, it would be said to make the market. Because the new buy limit
order is at a price less than the best offer of ¥, it will not immediately execute and is not
taking the market.
Q23-6 ★★A market has the following limit orders standing on its book for a particular stock:
Buyer Bid Size Limit Price Offer Size
(Number of Shares) (f) (Number of Shares) Seller
Keith 1,000
Paul 200
Ann 400
Mary 300
800 Jack
1,100 Margaret
400 Jeff
Ian submits a day order to sell 1,000 shares, limit £. Assuming that no more buy
orders are submitted on that day after Ian submits his order, what would be Ian's
average trade price?
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A. £.
B. £.
C. £.
Solution: B.
Ian's average trade price is:
300 + 400 + 200
=
300 + 400 + 200
Ian's sell order first fills with the most aggressively priced buy order, which is Mary's order for
300 shares at £. Ian still has 700 shares for sale. The next most aggressively priced buy
order is Ann's order for 400 shares at £. This order is filled. Ian still has 300 shares for
sale. The next most aggressively priced buy order is Paul's order for 200 shares at £. A
third trade takes place. Ian still has 100 shares for sale.
The next buy order is Keith's order for 1,000 shares at £. However, this price is below
Ian's limit price of £. Therefore, no more trade is possible.
R25-6 Execution Instructions 的分类：
Market orders: are the orders to buy or sell a security at the best current price,
is the most frequent type of order.
Limit orders: specify the buy or sell order. Limit orders waiting to execute are
called standing limit orders.
Make the market: a limit buy order at best bid or a limit sell order at the
best.
Take the market: Those who trade with them at posted prices are said to.
Behind the market: a buy order with a limit price below the best bid, or a
sell order with a limit price above the best ask.
Far from the market: a limit buy order with a price considerably lower than
the best bid, or a limit sell order with a price significantly higher than the best
ask.
All-or-nothing orders execute only if the whole order can be filled.
Hidden orders are those for which only the broker or exchange knows the trade
size.
Iceberg orders are orders that traders can also specify certain aspects of the
trade so that only part of the trade is visible to the market.
P9-6 Validity instructions
Q24-6 ★ You have placed a sell market-on-open order—a market order that would
automatically be submitted at the market's open tomorrow and would fill at the market
price. Your instruction, to sell the shares at the market open, is a(n):
A. execution instruction
B. validity instruction
C. clearing instruction
Solution: B.
Execution instructions specify how to trade;
Validity instructions specify when the order can be filled;
Clearing instructions specify how to settle the trade.
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Q25-6 Which of the following orders are validity instructions? （2012 年 12 月真题)
A. Kill or fill orders
B. Iceberg orders
C. All or nothing orders
Solution: A.
Kill or fill orders also known as immediate or cancel orders are good only upon receipt by
the broker or exchange. If they cannot be filled in part or in whole, they cancel immediately.
They are one of the validity instructions.
Q26-6 ★A market has the following limit orders standing on its book for a particular stock:
Buyer
Bid Size
(# of shares)
Limit Price
($)
Seller
Offer Size
(# of shares)
Limit Price
($)
1 500 1 200
2 300 2 300
3 400 3 400
4 200 4 100
5 100 5 200
If a trader submits an immediate-or-cancel limit buy order for 700 shares at a price of
$, the most likely average price the trader would pay is:
A. $.
B. $.
C. $.
Solution: A.
The limit buy order will be filled first with the most aggressively priced limit sell order and
will be followed by filling with the higher priced limit sell orders that are needed up to and
including the limit buy price until the order is filled.
Average price = [(200 x $) + (300 x $) + (200 x $)] / 700 = $
Q27-6 ★★Jim White has sold short 100 shares of Super Stores at a price of $42 per share. He
has also simultaneously placed a "good-till-cancelled, stop 50, limit 55 buy" order.
Assume that if the stop condition specified by White is satisfied and the order becomes
valid, it will get executed. Excluding transaction costs, what is the maximum possible
loss that White can have? （原版书 R47-28）
A. $800.
B. $1,300.
C. Unlimited.
Solution: B.
If the stock price crosses $50, the stop buy order will be triggered and will get executed at a
maximum limit price of $55. The maximum loss per share is $13 = $55 -$42, or $1,300 for 100
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shares.
Q28-6 ★★You own shares of a company that are currently trading at $30 a share. Your
technical analysis of the shares indicates a support level of $. That is, if the price of
the shares is going down, it is more likely to stay above this level rather than fall below it.
If the price does fall below this level, however, you believe that the price may continue
to decline. You have no immediate intent to sell the shares but are concerned about the
possibility of a huge loss if the share price declines below the support level. Which of
the following types of orders could you place to most appropriately address your
concern? （原版书 R47-29）
A. Short sell order.
B. Good-till-cancelled stop sell order.
C. Good-till-cancelled stop buy order.
Solution: B.
The most appropriate order is a good-till-cancelled stop sell order. This order will be acted on if
the stock price declines below a specified price (in this case, $). This order is sometimes
referred to as a good-till-cancelled stop loss sell order. You are generally bullish about the stock,
as indicated by no immediate intent to sell, and would expect a loss on short selling the stock.
A stop buy order is placed to buy a stock when the stock is going up.
Q29-6 ★★Adams owns 100 shares of Brikley stock, which is trading at $86 per share, and
Brown is short 200 shares of Brikley. Adams wants to buy 100 more shares if the price
rises to $90, and Brown wants to cover his short position and take profits if it falls to $75.
The orders Adams and Brown should enter to accomplish their stated objectives are:
Adams Brown
A. Limit buy @ 90 Limit buy @ 75
B. Limit buy @ 90 Stop buy @75
C. Stop buy @90 Limit buy @ 75
Solution: C.
Adams should enter a stop buy at 90, which will be executed only if the stock price rises to 90.
Brown should enter a buy order with a limit at 75 because he wants to buy stock to close out
his short position if he can purchase it at 75 (or less).
Q30-6 A stock now available in the market is quoted $14, a trader place a stop-buy order at 15,
a limit order at $20. Which interval the stock price will be if the both two orders are not
get satisfied.
A. Below 15
B. Between 15 to 20
C. Above 20
Solution: A.
A stop-buy order becomes valid only after a price rises above the specified stop price, and
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both orders are not satisfied, thus, the price must be below 15.
Q31-6 ★★A stop-buy order is most likely placed when a trader: （Mock83-79）
A. thinks that the stock is overvalued.
B. wants to limit the loss on a long position.
C. wants to limit the loss on a short position.
Solution: C.
Investors who have entered into a short sale will incur losses if the stock begins to increase in
value. A stop-buy order helps limit the loss on a short position because it becomes valid when
the stock price rises above the specified stop price.
Q32-6 ★★A trader who has bought a stock at $30 is concerned about a downside movement
in the stock and would like to place an order that guarantees selling it at $25. Which of
the following will most likely help the trader achieve her objective? (GTC =
Good-till-cancelled) (Mock83-85)
A. “GTC, stop 25, market sell” order
B. “GTC, stop 25, limit 25 sell” order
C. “put option buy” market order with a strike price of 25
Solution: C.
Option contracts can be viewed as limit orders for which execution is guaranteed at the strike
price. Therefore, a “put buy” order at a strike price of 25 will guarantee selling the stock at 25.
Q33-6 ★★Zhenhu Li has submitted an immediate-or-cancel buy order for 500 shares of a
company at a limit price of CNY . There are two sell limit orders standing in that
stock's order book at that time. One is for 300 shares at a limit price of CNY and
the other is for 400 shares at a limit price of CNY . How many shares in Li's order
would get cancelled? （原版书 R47-34）
A. None (the order would remain open but unfilled).
B. 200 (300 shares would get filled).
C. 500 (there would be no fill).
Solution: C.
The order for 500 shares would get cancelled; there would be no fill. Li is willing to buy at CNY
or less but the minimum offer price in the book is CNY ; therefore, no part of the
order would be filled. Because Li's order is immediate-or-cancel, it would be cancelled.
R26-6 Validity Instructions 的分类：
Day orders: means the orders expire if unfilled by the end of the trading day.
Good-till-cancelled orders(GTC):In practice, most brokers limit how long they
will manage an order to ensure that they do not fill orders that their clients
have forgotten
Immediate or cancel orders: are cancelled unless they can be filled
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immediately. They are also known as fill or kill orders.
Good-on-close orders: are only filled at the end of the trading day. If they are
market orders, they are referred to as market-on-close orders.
Good-on-open orders: are only filled at the open of the trading day.
Stop orders: are those that are not executed unless the stop price has been
met. They are often referred to as stop loss orders because they can be used to
prevent losses or to protect profits.
Stop-sell order: If the investor wants to sell out of the position if the price
falls 10% to $45, he can enter a stop-sell order at $45. If the stock trades down
to $45 or lower, this triggers a market order to sell.
Stop-buy: is entered with at stop (trigger) above the current market price.
Two primary reasons are: (1) A trader with shot position; (2)an investor who
believes a stock is undervalued, but does not wish to own it until there are
signs.
P10-6 Security market index
Q34-6 ★Uses of market indices do not include serving as a:
A. measure of systematic risk.
B. basis for new investment products.
C. benchmark for evaluating portfolio performance.
Solution: A.
Security market indices are used as proxies for measuring market or systematic risk, not as
measures of systematic risk.
Q35-6 ★Which of the following statements is most accurate with respect to rebalancing and
reconstitution of security market indices?
A. Equal weighted indices require frequent rebalancing.
B. Turnover within an index results from a reconstitution but not from rebalancing.
C. A price-weighted index requires rebalancing more than a market-capitalization
weighted index.
Solution: A.
After an equal weighted index is constructed and the prices of constituent securities change,
the index is no longer equally weighted. Therefore, maintaining equal weights requires
frequent adjustments (rebalancing) to the index.
Q36-6 ★Which kind of stock index will be most likely affected by a large-cap stock?
A. Nikkei 225 Dow Jones index
B. CAC 40 index
C. Value Line Index
Solution: B.
Nikkei 225 Dow Jones index is price-weighted index.
Value Line Index is geometric-weighted index.
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CAC 40 index is market-value weighted index. Only market-value weighted index is affected by
large-cap stocks.
Q37-6 ★Security market indices are:
A. constructed and managed like a portfolio of securities.
B. simple interchangeable tools for measuring the returns of different asset classes.
C. valued on a regular basis using the actual market prices of the constituent securities.
Solution: A.
Security market indices are constructed and managed like a portfolio of securities.
Q38-6 When creating a security market index, the target market:
A. determines the investment universe.
B. is usually a broadly defined asset class.
C. determines the number of securities to be included in the index.
Solution: A.
The target market determines the investment universe and the securities available for
inclusion in the index.
Q39-6 ★★Reconstitution of a security market index reduces:（原版书 R48-21）
A. portfolio turnover.
B. the need for rebalancing.
C. the likelihood that the index includes securities that are not representative of the target
market.
Solution: C.
Reconstitution is the process by which index providers review the constituent securities,
re-apply the initial criteria for inclusion in the index, and select which securities to retain,
remove, or add. Constituent securities that no longer meet the criteria are replaced with
securities that do. Thus, reconstitution reduces the likelihood that the index includes securities
that are not representative of the target market.
Q40-6 ★Which of the following is an example of a style index? An index based on:
A. geography.
B. economic sector.
C. market capitalization.
Solution: C.
Style indices represent groups of securities classified according to market capitalization, value,
growth, or a combination of these characteristics.
R27-6 Security market indexes have several uses
Reflection of market sentiment
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Benchmark of manager performance
Measure of market return and risk
Measure of beta and risk-adjusted return
Model portfolio for index funds
R28-6 Characteristics of Equity Indexes 注意掌握不同组合的构成
Broad market index：涵盖市场总市值的 90%以上。
Multi-market index：由多个国家的指数构成。
Multi-market index with fundamental weighting：由多个国家的指数构成， 同
时考虑了基本面因素（比如 GDP）
Sector Index：用于衡量行业的回报
Style index：用于衡量市场资本成长型战略、价值型战略的回报
R29-6 Rebalancing and Reconstitution
★Rebalancing: Adjust the weights of securities in a portfolio to their target
weights after price changes have affected the weights. Equal-weighted requires
more frequency to adjust
Reconstitution: Periodically adding and deleting securities that make up an
index
P11-6 Different weighting method in securities’ index
Q41-6 If the following three stocks are held in a portfolio, the portfolio’s total return on an
equal-weighted basis (%) is closest to: (MOCK92-85)
Stock Number of
shares owned
Price ($) per share
as of 1/1/2011
Price per share ($)
as of 1/1/2012
Dividend per share
($)During 2011
A 500 40 37
B 320 50 52
C 800 30 34
A. .
B. .
C. .
Solution: B.
Equal weighting assigns an equal weight to each constituent security at inception. Therefore, it
is the sum of the total return from each security divided by the number of securities in the
portfolios (see Exhibit 3).
Stock
1 0 0( ) /P P D P Total Returns (%)
A (37-40+)/40=
B (52-50+)/50=
C (34-30+0)/30=
Portfolio return with equal weighting:
(— + + ) / 3 =
%
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Q42-6 ★★An analyst gathers the following information for a price-weighted index comprised
of securities ABC, DEF, and GHI:
Beginning of End of Period Total
Security Period Price (€) Price (€) Dividends (€)
ABC
DEF
GHI
The price return of the index is: （原版书 R48-8）
A. %.
B. %.
C. %.
Solution: B.
The price return of the price-weighted index is the percentage change in price of the index: (68
-75)/75 = %.
Beginning of End of Period
Security Period Price (f) Price (f)
ABC
DEF
GHI
TOTAL
Q43-6 ★★★An analyst gathers the following information for a market-capitalization¬
weighted index comprised of securities MNO, QRS, and XYZ:
Beginning of End of Period Dividends Shares
Security Period Price (￥) Price (￥) Per Share (￥) Outstanding
MNO 2,500 2,700 100 5,000
QRS 3,500 2,500 150 7,500
XYZ 1,500 1,600 100 10,000
The total return of the index is: （原版书 R48-10）
A. %.
B. %.
C. %.
Solution: B.
The total return of the market-capitalization-weighted index is calculated below:
Beginning of End of Dividend
Security Period Value (V) Period Value (V) Value (V)
MNO 12,500,000 13,500,000 500,000
QRS 26,250,000 18,750,000 1,125,000
XYZ 15,000,000 16,000,000 1,000,000
Total 53,750,000 48,250,000 2,625,000
So return= (End Value+ Dividend – Begin Value)/ Begin Value=%
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Q44-6 ★As of January 1, the index of three stocks:
January 1 December 31
Share price Outstanding number Share Price Outstanding number
Stock A $22 1500 $28 1,500
Stock B $40 10,000 $50 10,000
Stock C $34 3,000 $30 3,000
The 1-year return on an equal-weighted index of these three stocks is closest to: (Notes
P250-2)
A. 12%
B. %
C. %
Solution: C.
28 50 30 1
-1 + -1 + -1 ==%
22 40 34 3
（ ）（ ）（ ）（ ）
Q45-6 ★The values of a price return index and a total return index consisting of identical
equal-weighted dividend-paying equities will be equal:(原版书 R48-5)
A. only at inception.
B. at inception and on rebalancing dates.
C. at inception and on reconstitution dates.
Solution: A.
At inception, the values of the price return and total return versions of an index are equal.
Q46-6 ★★An analyst gathers the following information for an equal-weighted index
comprised of assets Able, Baker, and Charlie.
Beginning of End of Period Total
Security Period Price (€) Price (€) Dividends (€)
Able
Baker
Charlie
The total return of the index is:`
A. %.
B. %.
C. %.
Solution: C.
The total return of an index is calculated on the basis of the change in price of the underlying
securities plus the sum of income received or the sum of the weighted total returns of each
security. The total return of Able is percent; of Baker is 0 percent; and of Charlie is
percent:
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Able: (12 — 10 + )/10 = %
Baker: (19 — 20 + 1)/20 = 0%
Charlie: (30 — 30 + 2)/30 = %
An equal-weighted index applies the same weight (1/3) to each security's return; therefore, the
total return = 1/3 X (% + 0% + %) = %.
Q47-6 ★★★ If the price return of an equal-weighted index exceeds that of a
market¬capitalization- weighted index comprised of the same securities, the most likely
explanation is: （原版书 R48-16）
A. stock splits.
B. dividend distributions.
C. outperformance of small-market-capitalization stocks.
Solution: C.
The main source of return differences arises from outperformance of small-cap securities or
underperformance of large-cap securities. In an equal-weighted index, securities that
constitute the largest fraction of the market are underrepresented and securities that
constitute only a small fraction of the market are overrepresented. Thus, higher
equal-weighted index returns will occur if the smaller-cap equities outperform the larger-cap
equities.
Q48-6 ★★Which of the following index weighting methods requires an adjustment to the
divisor after a stock split?
A. Price weighting.
B. Fundamental weighting.
C. Market-capitalization weighting.
Solution: A.
In the price weighting method, the divisor must be adjusted so the index value immediately
after the split is the same as the index value immediately prior to the split.
Q49-6 ★A price-weighted index series is composed of the following three stocks:
Stock Price before Split End of Day 1 Price after Split End of Day 2
X $10 $12
Y $20 $19
Z $60 $22
If stock Z completes a three-for-one split at the end of Day 1, the value of the index
after the split (at the end of Day 2) is closest to(2014 Mock 98-91)
A. .
B. .
C. .
Solution: B.
The value of the price-weighted index is determined by dividing the sum of the security values
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by the divisor, which is typically set at inception to equal the initial number of securities in the
index. In the case of a stock split, the index provider must adjust the value of divisor by
dividing the sum of the constituent prices after the split by the value of the index before the
split. This adjustment results in a new divisor that keeps the index value at the same level as
before the split. The new divisor will then be used to calculate the index value after the split.
Index before the split=
10 20 60
30
3
New divisor, X: 30=
10 20 20
x
X =
Index after the split
12 19 22
Q50-6 ★The index weighting that results in portfolio weights shifting away from securities
that have increased in relative value toward securities that have fallen in relative
value whenever the portfolio is rebalanced is most accurately described as:
（MOCK79-85）
A. equal weighting
B. fundamental weighting
C. float-adjusted market-capitalization weighting.
Solution: B.
Fundamental weighting indices generally will have a contrarian "effect" in that the portfolio
weights will shift away from securities that have increased in relative value and toward
securities that have fallen in relative value whenever the portfolio is rebalanced.
Q51-6 ★★★Which of the following index weighting methods is most likely subject to a value
tilt? （原版书 R48-18）
A. Equal weighting.
B. Fundamental weighting.
C. Market-capitalization weighting.
Solution: B.
Fundamental weighting leads to indices that have a value tilt.
Q52-6 ★★One month after inception, the price return version and total return version of a
single index (consisting of identical securities and weights) will be equal if:（原版书 R48）
A. market prices have not changed.
B. capital gains are offset by capital losses.
C. the securities do not pay dividends or interest.
Solution: C.
The difference between a price return index and a total return index consisting of identical
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securities and weights is the income generated over time by the underlying securities. If the
securities in the index do not generate income, both indices will be identical in value.
Q53-6 ★Hari Raju, CEO of Securities Tracking Associates (STA), is thinking of devising a new
index for the Indian stock market. He does not, however, like an index that requires
adjustment for stock splits. Given this preference, Raju would be least likely to develop
which of the following types of Indexes?
A. Un-weighted Index
B. Price-weighted Index
C. Value-weighted Index
Solution: B.
A price-weighted index, such as the Dow Jones Industrial Average, is computed by summing up
the prices of individual stocks and dividing by a divisor that is adjusted for stock splits such that
the index value is the same before and after the split.
Q54-6 ★★★An analyst gathers the following data for an equally-weighted index:
Beginning of Period End of Period
Security Price (￥) Shares Price (￥) Shares
A 300 300
B 300 300
C 2,000 2,000
The return on the index over the period is: （原版书 R48-14）
A. %.
B. %.
C. %.
Solution: C.
22 48 30 1
-1 + -1 + -1 =%
20 50 26 3
（ ）（ ）（ ）（ ）
Q55-6 An ETF analyst collected data of an index comprising three stocks as follows:
December 31 2009 January 1 2009
Price Stocks Price Stocks
Hymalaya 65 600,000 30 1,000,000
Blanc 42 3,000,000 50 3,000,000
Kirimazaro 40 5,000,000 96 2,500,000
The base of the index on January 1 2009 is 137, the market value weighted index is
closest to:
A. 157.
B. 87.
C. 119.
Solution: C.
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The base market capitalization is
301,000,000+503,000,000+962,500,000=420,000,000
600,000 42 3,000,000 40 5,000,000
137 %*137 119
30 3,000,000 50 3,000,000 96 2,500,000
65
Index
Q56-6 ★An equity index consists of three securities with market information as follows:
Security
Shares
Outstanding
Price at
Beginning of
Period
Price at
End of Period
Dividend
per Share
A 5,000,000 $ $ $
B 2,000,000 $ $ $
C 1,500,000 $ $ $
The price-weighted total return index is closest to: (2014 Mock 98-97)
A. %.
B. %.
C. %.
Solution: A.
Calculation of Index and Return Based on Price-Weighted Method
Security
Shares
Outstanding
BOP Price EOP Price
Dividends per
Share
A 5,000,000 $ $ $
B 2,000,000 $ $ $
C 1,500,000 $ $ $
Total
$ $ $
Index value
Type of Index BOP Value EOP Value Return
Price return $ $ %
Total return $ $ %
BOP = Beginning of period
EOP = Ending of period
Price-weighted Index, Market-weighted Index, Unweighted Index Fundamental Weighting 掌
握概念及公式：
R30-6 概念：理解 the use of securities market indexes.
R31-6 计算：
Price-weighted index
sum of stock pricesprice - weighted index =
number of stocks in index adjusted for splits
Assumption: purchasing an equal number of shares of each stock in the
index.
Value-weighted index
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current total market value of the stocks value - weighted index = base year index value
base year total market value of the stocks
´
Assumption: making a proportionate market value investments in each
stock.
Equal-weighted index
Places an equal weight on the returns of all index stock, regardless of
their price or market value.
Assumption: Investing the same dollar in each stock in the index.
Arithmetic mean: HPRi is the return on each stock:
i
HPR
change in average index value=
n
Geometric mean: Xi=1+HPRi：
n
1 2 nchange in average index value= x x x -1
★Unweighted index assumes that the index portfolio makes and maintains an
equal dollar investment in each stock in the index.
★Fundamental Weighting indices generally will have a contrarian style and
value-tilt
R32-6 难点：股票分割时，价格权重指数不会变化，所以要调整因子
R33-6 Bias：各个 index 应用时的 bias
Price-weighted bias places a downward bias on the index because large
successful firms tend to split their stocks more often than low growth stocks
and will weight within the index simply by splitting their stock. （Dow Jones
Industrial Average)受高价格股票价格变动影响大。
Value-weighted bias is that firms with greater market capitalization have a
greater impact on the index than do firms with lower market capitalization.受
高市值股票价格变动影响大。
Unweighted bias places a downward bias in the index by the use of the
geometric mean rather than the arithmetic mean.
P12-6 Other market index
Q57-6 ★★Which of the following statements regarding fixed-income indices is most accurate?
A. Liquidity issues make it difficult for investors to easily replicate fixed-income indices.
B. Rebalancing and reconstitution are the only sources of turnover in fixed-income indices.
C. Fixed-income indices representing the same target market hold similar numbers of bonds.
Solution: A.
The large number of fixed-income securities—combined with the lack of liquidity of some
securities—makes it costly and difficult for investors to replicate fixed-income indices
Q58-6 ★★ Fixed-income indices are least likely constructed on the basis of:（原版书 R48-28）
A. maturity.
B. type of issuer.
C. coupon frequency.
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Solution: C.
Fixed income indexes can be classified by issuer, collateral, coupon, maturity, credit risk and
inflation protection. But coupon frequency is not a dimension on which fixed-income indices
are based.
Q59-6 ★★Which of the following is not a real estate index category?（原本书 R48-31）
A. Appraisal index.
B. Initial sales index.
C. Repeat sales index.
Solution: B.
Real estate indexes can be constructed using returns based on appraisals of properties, repeat
property sales, or the performance of Real Estate Investment Trusts(REITs). Initial sales index
is not a real estate index category.
Q60-6 ★★ A unique feature of hedge fund indices is that they: （原版书 R48-32）
A. are frequently equal weighted.
B. are determined by the constituents of the index.
C. reflect the value of private rather than public investments.
Solution: B.
Hedge funds are not required to report their performance to any party other than their
investors. Therefore, each hedge fund decides to which database(s) it will report its
performance. Thus, for a hedge fund index, constituents determine the index rather than index
providers determining the constituents.
Q61-6 Which of the following is least likely to be directly reflected in the returns on a
commodity index?
A. Roll yield
B. Changes in the spot prices of underlying commodities
C. Changes in the futures prices of commodities in the index
Solution: B.
Commodity indexes are based on the prices of commodity futures contracts, not the spot
prices of commodities. Commodity futures contracts reflect the risk-free rate of return,
changes in futures prices, and the roll yield.
Roll yield —— The yield due to a difference between the spot price and futures price, or a
difference between two futures prices with different expiration dates.
Q62-6 Which of the following most accurately describes the basis for construction of nearly all
bond market indices? (2014 Mock 99-93)
A. Dealer prices
B. Market prices
C. Model prices
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Solution: A.
Firms (dealers) are assigned to specific securities and are responsible for creating liquid
markets for those securities by purchasing and selling them from their inventory. In addition,
many securities do not trade frequently and, as a result, are relatively illiquid. As a result, index
providers must contact dealers to obtain current prices on constituent securities to update the
index, or they must estimate the prices of constituent securities using the prices of traded
fixed-income securities with similar characteristics.
Q63-6 ★An aggregate fixed-income index:
A. comprises corporate and asset-backed securities.
B. represents the market of government-issued securities.
C. can be subdivided by market or economic sector to create more narrowly defined indices.
Solution: C.
An aggregate fixed-income index can be subdivided by market sector (government,
government agency, collateralized, corporate), style (maturity, credit quality), economic sector,
or some other characteristic to create more narrowly defined indices.
R34-6 ★Several issues with the construction of fixed income indexes
Large universe of securities：
Dealer markets and infrequent trading
R35-6 ★Alternative Investment Indexes：
Commodity indexes：Represent futures contracts on commodities such as
grains, livestock, metals, and energy.
Weighting method：Some use equal weighting, others weight commodities
by their global production values, and others use fixed weights that the index
provider determines. As a result, different indexes have significantly different
commodity exposures and risk and return characteristics.
Real estate indexes: appraisal value, repeat property sales, performance of
REITs
Hedge Fund Indexes：Most hedge fund indexes equally weight the returns of
the hedge funds included in the index.
P13-6 Efficient market hypothesis
Q64-6 Which of the following inferences concerning market efficiency most accurate?
A. Fully exploitable over and under-reactions often occur in efficient markets.
B. Market pricing anomalies and behavioral biases are contrary to the existence of market
efficiency.
C. If a market is semi-strong form efficient neither technicians nor fundamental analysts can
expect to consistently earn abnormal returns.
Solution: C.
If securities markets are semi-strong form efficient, active trading to exploit price patterns or
public information is not likely to generate abnormal returns. Thus, both technical and
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fundamental analyses become futile exercises.
Q65-6 ★★If the investor is a fundamental analyst, which of the following market is consistent
with the abnormal return investor can achieve?(真题)
A. Weak
B. Semi-strong
C. Strong
Solution: A.
The weak form of the efficient markets hypothesis states that current security prices fully
reflect all currently available security market data. Fundamental analysis is based on public
information such as earnings, dividends, and various accounting ratios and estimates, so an
investor cannot achieve abnormal return under semi-strong market efficiency.
Q66-6 ★Arbitrage activity will most likely be higher in securities markets: (Mock84-87)
A. that are efficient.
B. with no restrictions on short selling.
C. with high information-acquisition costs.
Solution: B.
Short selling helps in price discovery. Arbitrageurs benefit from pricing discrepancies
(inefficiencies); therefore, arbitrage activity will be higher in markets with no restrictions on
short selling.
Q67-6 ★Which of following below will a technical analysis most likely adhere to?
Weak EMH Strong EMH
A. No No
B. Yes No
C. No Yes
Solution: A.
Technical analysis doesn’t hold weak EMH and Strong EMH.
Q68-6 In which efficient market hypothesis, the technical analysis can have abnormal return?
(2012 年 12 月真题)
A. weak form inefficiency
B. weak form
C. semi-strong form
Solution: A.
In a weak form market, technical analysis cannot have an abnormal return, and if the technical
analysis do have an abnormal return , that is to say, the market is weak form inefficiency.
Q69-6 ★★If markets are semi-strong-form efficient, then passive portfolio management
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strategies are most likely to: （原版书 R49-13）
A. earn abnormal returns.
B. outperform active trading strategies.
C. underperform active trading strategies.
Solution: B.
Costs associated with active trading strategies would be difficult to recover; thus, such active
trading strategies would have difficulty outperforming passive strategies on a consistent
after-cost basis.
Q70-6 ★★If a market is semi-strong-form efficient, the risk-adjusted returns of a passively
managed portfolio relative to an actively managed portfolio are most likely: (原版书
R49-14)
A. lower.
B. higher.
C. the same.
Solution: B.
In a semi-strong-form efficient market, passive portfolio strategies should outperform active
ones.
Q71-6 ★With respect to efficient markets, a company whose share price reacts gradually to
the public release of its annual report most likely indicates that the market where the
company trades is:(原版书 R49-19)
A. semi-strong-form efficient.
B. subject to behavioral biases.
C. receiving additional information about the company.
Solution: C.
If markets are efficient, the information from the annual reports is reflected in the stock prices;
therefore, the gradual changes must be from the release of additional new information.
Q72-6 ★Researchers have found that value stocks have consistently outperformed growth
stocks. An investor wishing to exploit the value effect should purchase the stock of
companies with above-average:(原版书 R49-23)
A. dividend yields.
B. market-to-book ratios.
C. price-to-earnings ratios
Solution: A.
Higher than average dividend yield is a characteristic of a value stock, along with low
price-to-earnings and low market-to-book ratios. Growth stocks are characterized by low
dividend yields and high price-to-earnings and high market-to-book ratios.
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Q73-6 ★★The intrinsic value of an undervalued asset is:（原版书 R49-7）
A. less than the asset's market value.
B. greater than the asset's market value.
C. the value at which the asset can currently be bought or sold.
Solution: B.
The intrinsic value of an undervalued asset is greater than the market value of the asset, where
the market value is the transaction price at which an asset can be currently bought or sold.
Q74-6 ★★The market value of an undervalued asset is:(原版书 R49-8)
A. greater than the asset's intrinsic value.
B. the value at which the asset can currently he bought or sold.
C. equal to the present value of all the asset's expected cash flows.
Solution: B.
The market value is the transaction price at which an asset can be currently bought or sold.
Q75-6 ★Kaylee Sumners, Level 1 CFA candidate, has just finished reviewing flash cards for the
reading on the efficient market hypothesis (EMH). Confused by the different tests for
the different forms of the EMH, she outlines the information (of which four summary
points appear below) from memory. It appears that Sumners should review the
material because three of the points are incorrect. Which of her summary points is
CORRECT?
A. Statistical and trading rule tests support the weak-form of the EMH.
B. Early tests of the semi-strong form used the equation: Return Abnormal = ReturnActual -
(RMarket × BetaStock).
C. The superior historical performance of exchange specialists and corporate insiders rejects
the semi-strong form of the EMH.
Solution: A.
These two tests support the weak-form EMH contention that securities prices reflect all
historical market information and those mechanical trading rules do not result in superior
returns.
The other statements are false. Later tests of the semi-strong form EMH used the equation:
Return Abnormal = ReturnActual – (RMarket × BetaStock). Early tests omitted beta, using the formula:
Return Abnormal = ReturnActual – RMarket. The superior historical performance of exchange
specialists and corporate insiders rejects the strong form of the EMH. Cross-sectional tests
such as the price-earnings ratio, neglected firms tests, and book value to market value tests
reject the semi-strong form of the EMH. These tests show that certain stocks have high
realized returns (for example, low P/E stocks and high book value to market value stocks).
R36-6 EMH 掌握概念：
Efficient market: security price adjust rapidly to infusion of new information, and
therefore current security prices fully reflect all available information.
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R37-6 Factors affect the degree of market efficiency:
Number of market participants analyze and value securities, each is independent
of others
Availability of information: new information regarding securities comes to the
market in random fashion, and the timing of one announcement is generally of
others.
Impediments to trading.
Transaction and information costs. After deducting costs, there are no
risk-adjusted return
R38-6 区分 strong-form EMH & semi-strong form EMH & weak-form EMH 定义
Strong-form EMH states that stock prices fully reflect all information from public
and private sources.
Semi-strong form EMH states that stock prices fully reflect all publicly available
information.
If markets are semi-strong-form efficient, then passive portfolio management
strategies are most likely to outperform active trading strategies.
Weak-form EMH states that stock prices fully reflect all currently available security
market information.
R39-6 如果 EMH 成立哪种分析无效
Weak-form: 技术分析无效
Semi-strong form: 基本面分析无效
Strong form: 全部无效，不可能打败市场
R40-6 ★检验（包含 6 anomalies）
1) Tests for Weak-Form EMH (success)
Statistical Tests of Independence
Auto correlation tests
Runs tests
Tests of Trading Rules
2) Tests for semi-strong form EMH
Time-series tests (fail)
Cross-sectional tests (fail)
Event studies(success)
3) Tests for strong-form EMH
Corporate Insider Trading (1970s 以前 fail， 1980s 以后成功)
Stock Exchange Specialists(fail)
Security Analysts (success)
P14-6 Market anomalies
Q76-6 ★Which of the following market anomalies is inconsistent with weak-form market
efficiency?
A. Earnings surprise.
B. Momentum pattern.
C. Closed-end fund discount.
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Solution: B.
Trading based on historical momentum indicates that price patterns exist and can be exploited
by using historical price information. A momentum trading strategy that produces abnormal
returns contradicts the weak form of the efficient market hypothesis, which states that
investors cannot earn abnormal returns on the basis of past trends in prices.
Q77-6 ★The most accurate characterization of the nature of abnormal returns relating to an
anomaly and a source of unreliability of an anomaly, respectively, are:
Nature of Abnormal Returns Source of Unreliability of An Anomaly
A. Persistent Behavioral bias
B. Persistent Survivorship bias
C. Momentary Behavioral bias
Solution: B.
The persistent realization of abnormal returns is referred to as an anomaly and survivorship
bias is a source of unreliability of an anomaly.
Q78-6 ★★Compared to its market-value-weighted counterpart, a fundamentally weighted
index will least likely have a:
A. value tilt.
B. contrarian “effect.”
C. momentum “effect.”
Solution: C.
Momentum “effect” is a characteristic of a market-value-weighted index, not a fundamentally
weighted index.
Q79-6 ★★Which of the following is least likely to explain the January effect anomaly?
A. Tax-loss selling.
B. Release of new information in January.
C. Window dressing of portfolio holdings.
Solution: B.
The excess returns in January are not attributed to any new information or news;
Tax-loss selling——investors sell losing positions in December to realize losses for tax purposes
and then repurchase stocks in January, pushing their prices up
Window dressing—— portfolio managers sell risky stocks in December to remove them from
their year-end statements and repurchases them in January.
R41-6 ★Anomalies in Time-Series Data
Calendar anomalies: During the first five days of January, stock returns, especially
for small firms, are significantly higher than they are the rest of the
turn-of-the-month effect (stock returns are higher in the days surrounding month
end), the day-of-the-week effect (average Monday returns are negative), the
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weekend effect (positive Friday returns are followed by negative Monday
returns), and the holiday effect (pre-holiday returns are higher).
Overreaction and momentum anomalies: The overreaction effect refers to the
finding that firms with poor stock returns over the previous three or five years
(losers) and then have better subsequent returns. This pattern has been
attributed to investor overreaction to both unexpected good news and
unexpected bad news. This pattern is also present for bonds and in some
international markets. Momentum effects have also been found where high
short-term returns are followed by continued high returns. This pattern is present
in some international markets as well.
R42-6 ★Anomalies in Cross-Sectional Data
The size effect: Small-cap stocks outperform large-cap stocks. This effect could
not be confirmed in later studies, suggesting that either investors had traded on,
and thereby eliminated, this anomaly or that the initial finding was simply a
random result for the time period examined.
★The value effect: Value stocks [those with lower price-to-earnings (P/E), lower
market-to-book (M/B), and higher dividend yields] have outperformed growth
stocks (those with higher P/E, higher M/B, and lower dividend yields). This
violates the semi-strong form of market efficiency because the information
necessary to classify stocks as value or growth is publicly available. However,
some researchers attribute the value effect to greater risk of value stocks that is
not captured in the risk adjustment procedure used in the studies.
R43-6 ★Other Anomalies
Closed-end investment funds: The shares of closed-end investment funds trade at
prices that sometimes deviate from the net asset value (NAV) of the fund shares.
Various explanations have been put forth to explain this anomaly, including
management fees, taxes on future capital gains, and share illiquidity. However,
transactions costs would eliminate any profits from exploiting the unexplained
portion of closed-end fund discounts.
Earnings announcements: An earnings surprise is that portion of announced
earnings that was not expected by the market. Positive earnings surprises
(earnings higher than expected) precede periods of positive risk-adjusted
post-announcement stock returns. The anomaly is that the adjustment process
does not occur entirely on the announcement day. Investors could exploit this
anomaly by buying positive earnings surprise firms and selling negative earnings
surprise firms.
Initial public offerings: IPOs are typically underpriced, with the offer price below
the market price once trading begins.
Economic fundamentals: Research has found that stock returns are related to
known economic fundamentals such as dividend yields, stock volatility, and
interest rates.
R44-6 Implications for Investors
The majority of the evidence suggests that reported anomalies are not violations
of market efficiency but are due to the methodologies used in the tests of market
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efficiency. Furthermore, both underreaction and overreaction have been found in
the markets, meaning that prices are efficient on average. Other explanations for
the evidence of anomalies are that they are transient relations, too small to profit
from, or simply reflect returns to risk that the researchers have failed to account
for.
The bottom line for investors is that portfolio management based on previously
identified anomalies will likely be unprofitable. Investment management based
solely on anomalies has no sound economic basis.
P15-6 Behavior finance
Q80-6 ★★Which of the following is not included in behavior finance?(真题)
A. Risk aversion
B. Loss aversion
C. Overconfidence
Solution: A.
Risk aversion belongs to traditional finance. Behavioral finance examines investor behavior, its
effect on financial markets, how cognitive biases may result in anomalies, and whether
investors are rational.
Q81-6 ★Like traditional finance models, the behavioral theory of loss aversion assumes that
investors dislike risk; however, the dislike of risk in behavioral theory is assumed to
be:
A. leptokurtic.
B. symmetrical.
C. asymmetrical.
Solution: C.
Behavioral theories of loss aversion allow for the possibility that the dislike for risk is not
symmetrical, which allows for loss aversion to explain observed overreaction in markets such
that investors dislike losses more than they like comparable gains.
Q82-6 ★A financial analyst utilizing his analytical expertise and up-to-date information buys a
company’s stock. His close friends, who lack information or expertise, imitate the
financial analyst’s action and buy the stock. Which of the following statements
concerning this behavioral bias is most accurate?
A. It improves market efficiency.
B. It is identical to representativeness.
C. It is inconsistent with rational behavior.
Solution: A.
This behavioral bias is an example of an information cascade wherein the transmission of
information is from those participants who act first and whose decisions influence the
decisions of others.
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Representativeness——investors assume good companies or good markets are good
investments.
The behavior of informed traders acting first and uninformed traders imitating the informed
traders is consistent with rationality. The imitation trading by the uninformed traders helps the
market incorporate relevant information and improves market efficiency.
Q83-6 ★★Observed overreactions in markets can be explained by an investor's degree of:(原
版书 R49-25)
A. risk aversion.
B. loss aversion.
C. confidence in the market.
Solution: B.
Behavioral theories of loss aversion can explain observed overreaction in markets, such that
investors dislike losses more than comparable gains (., risk is not symmetrical)
R45-6 ★Behavioral finance:
Traditional finance models, including efficient markets, are based on an
assumption that the market as a whole acts rationally, although some individual
investors may not.
★Loss aversion: Investors dislike losses more than they like gains of an equal
amount. Dislike of losses may explain investor overreaction. However, investor
underreaction is just as common as overreaction, and loss aversion does not
explain underreaction.
Investors sometimes overestimate their ability to value securities. If there is a
prevalence of investor overconfidence, securities will be mispriced. However, it
appears that this mispricing may be hard to predict. Overconfidence in their
estimates also causes investors to hold portfolios that are not well diversified,
increasing their portfolio risk but not overall market risk.
Other behavioral biases that have been identified include:
Representativeness: Investors assume good companies or good markets are
good investments.
Gambler's fallacy: Recent results affect investor estimates of future
probabilities.
Mental accounting: Investors classify different investments into separate
mental accounts instead of viewing them as a total portfolio.
Conservatism: Investors react slowly to changes.
Disposition effect: Investors are willing to realize gains but unwilling to
realize losses.
Narrow framing：Investors view events in isolation.
Herding : trading that occurs in clusters and is not necessarily driven by
information. (NEW)
Information Cascades : is the transmission of information from those
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participants who act first and whose decisions influences the decisions of
others.(NEW)
One explanation for the evidence of the slow adjustment of security prices to
new information is the concept of information cascades. This refers to the idea
that uninformed traders, when faced with unclear information, watch the actions
of informed traders to make their decisions. Recall the earnings surprise anomaly,
in which prices were slow to adjust to earnings surprises. Information cascades
can explain this occurrence.
Behavioral finance can account for how securities prices can deviate from their
rational levels and be biased estimates of intrinsic value.
P16-6 Overview of equity investment
Q84-6 ★All of the following are characteristics of preference shares except:
A. They are either callable or putable.
B. They generally do not have voting rights.
C. They do not share in the operating performance of the company.
Solution: A.
Preference shares do not have to be either callable or putable.
Q85-6 ★Which of the following is incorrect about the risk of an equity security? The risk of an
equity security is:（原版书 R50-14）
A. based on the uncertainty of its cash flows.
B. based on the uncertainty of its future price.
C. measured using the standard deviation of its dividends。
Solution: C.
Some equity securities do not pay dividends, and therefore the standard deviation of dividends
cannot be used to measure the risk of all equity securities.
Q86-6 The type of equity voting right that grants one vote for each share of equity owned is
referred to as:
A. proxy voting.
B. statutory voting.
C. cumulative voting.
Solution: B.
Statutory voting: each share held is assigned one vote in the election of each member of the
board of directors.
Cumulative voting: shareholders can allocate their votes to one or more candidates as they
choose
Proxy voting: having someone else vote as they direct them, on their behalf
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Q87-6 ★When investing in unsponsored depository receipts, the voting rights to the shares in
the trust belong to:
A. the depository bank.
B. the investors in the depository receipts.
C. the issuer of the shares held in the trust
Solution: A.
In an unsponsored DR, the depository bank owns the voting rights to the shares. The bank
purchases the shares, places them into a trust, and then sells shares in the trust-not the
underlying shares-in other markets.
Q88-6 Which of the following investment assets has the least investment risk? (2012 年真题)
A. Putable common share
B. Putable preferred share
C. Convertible preferred share
Solution: B.
Dividends on preference share are known and fixed, and they account for a large portion of
the preference shares’ total return. Therefore, it is less risky than common share. And putable
common or preference shares are less risky than the callable or non-callable counterparts
because they give the investor the option to sell the shares to the issuer at a pre-determined
price.
Q89-6 ★★A company's cost of equity is often used as a proxy for investors':（原版书 R50-24）
A. average required rate of return.
B. minimum required rate of return.
C. maximum required rate of return.
Solution: B.
Companies try to raise funds at the lowest possible cost. Therefore, cost of equity is used as a
proxy for the minimum required rate of return.
R46-6 ★Characteristics of various types of equity securities
Common shares
Putable common shares：股东有权按照预定价格卖回给公司
Callable common shares: 公司有权按照预定价格回购股票
Preference shares：fixed periodic payments do not have voting rights
Cumulative preference：当期未获得的优先股股利可以累积到下期
Convertible preference shares：可以转为 Common shares
R47-6 ★characteristics of private equity
Less liquidity because no public market for the shares exists.
Share price is negotiated between the firm and its investors, not determined
in a market.
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More limited firm financial disclosure because there is no government or
exchange requirement to do so.
Lower reporting costs because of less onerous reporting requirements.
Potentially weaker corporate governance because of reduced reporting
requirements and less public scrutiny.
Greater ability to focus on long-term prospects because there is no public
pressure for short-term results.
Potentially greater return for investors, once the firm goes public.
R48-6 Three main types of private equity investments
Venture capital: The capital provided to firms early in their life cycles to fund
their development and growth. Venture capital financing at various stages of
a firm's development is referred to as seed or start-up, early stage, or
mezzanine financing.
In a leveraged buyout (LBO), investors buy all of a firm's equity using debt
financing (leverage). If the buyers are the firm's current management, the
LBO is referred to as a management buyout (MBO). Firms in LBOs usually
have cash flow that is adequate to service the issued debt, or have
undervalued assets that can be sold to pay down the debt over time.
In a private investment in public equity (PIPE), a public firm that needs
capital quickly sells private equity to investors. The firm may have growth
opportunities, be in distress, or have large amounts of debt. The investors
can often buy the stock at a sizeable discount to its market price.
P17-6 Non-domestic investment
Q90-6 ★With respect to Level III sponsored ADRs, which of the following is least likely to be
accurate? They:(原版书 R50-10)
A. have low listing fees.
B. are traded on the NYSE, NASDAQ, and AMEX.
C. are used to raise equity capital in . markets.
Solution: A.
The listing fees on Level III sponsored ADRs are high.
Q91-6 For a . investor, which of the following statements concerning investing in depository
receipts (DRs) is least accurate? (MOCK92-87)
A. Investing in DRs could provide arbitrage opportunities and entail currency risk.
B. Sponsored DRs are subject to greater reporting requirements than unsponsored DRs.
C. Investors in unsponsored DRs would have the same voting rights as the direct owners of
common shares.
Solution: C.
Investors of unsponsored DRs would not have the same voting rights as the direct owners of
common shares because the depository bank retains the voting rights.
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Q92-6 ★★A . institutional money manager prefers to invest in depository instruments of
non-domestic equity securities that are privately placed in the . and not subject to
the foreign ownership and capital flow restrictions. The type of security that is most
appropriate for this investor is: (Mock 83-88)
A. global registered shares.
B. global depository receipts.
C. American depository shares.
Solution: B.
Global depository receipts (GDRs) meet the investor preferences. They are not subject to the
foreign ownership and capital flow restrictions that may be imposed by the issuing company’s
home country because they are sold outside of that country. GDRs cannot be listed on .
exchanges, but they can be privately placed with the institutional investors based in the United
States.
Q93-6 ★An arbitrageur buys a security on a European exchange, where it is quoted in
euros, and simultaneously sells the same security on a . exchange, where it is
quoted in dollars. The security is most likely a:(Notes 11)
A. global registered shares.
B. global depository receipts.
C. sponsored depository receipt.
Solution: A.
Global registered shares (GRS) are identical shares of the same issuer that trade on multiple
global exchanges in the local currencies.
Global depository receipts (GDRs) are issued outside the United States and the issuer’s home
country.
Depository receipt (DR) represent ownership in a foreign firm and are traded in the markets of
other countries in local market currencies. If the firm is involved with the issue, the DR is a
sponsored DR.
R49-6 Methods for investing in non-domestic equity
Direct investing in the securities of foreign companies. Some obstacles to
direct foreign investment are that: currency illiquid, be less strict, must be
familiar with the regulations and procedures of each market in which they
invest.
★Depository receipts (DRs) represent ownership in a foreign firm and are
traded in the markets of other countries in local market currencies. A bank
deposits shares of the foreign firm and then issues receipts representing
ownership of a specific number of the foreign shares. The value of the DR is
affected by exchange rate changes, as well as firm fundamentals, economic
events.
Global depository receipts (GDRs) are issued outside the . and the
issuer's home country. Most GDRs are traded on the London and
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Luxembourg exchanges.
★American depository receipts (ADRs) are denominated in . dollars and
trade in the United States. The security on which the ADR is based is the
American depository share (ADS), Which trades in the firm's domestic
market. Some ADRs allow firms to raise capital in the . or use the shares
to acquire other firms. Most require . Securities and Exchange
Commission (SEC) registration, but some are privately placed (Rule 144A or
Regulation S receipts).
R50-6 The returns on equity investments: price changes, dividend payments, and, in the
case of equities denominated in a foreign currency, gains or losses from changes in
exchange rates.
P18-6 Industry analysis
Q94-6 ★With regard to forming a company's peer group, which of the following statements is
not correct?
A. Comments from the management of the company about competitors are generally not
used when selecting the peer group.
B. The higher the proportion of revenue and operating profit of the peer company derived
from business activities similar to the subject company, the more meaningful the
comparison.
C. Comparing the company's performance measures with those for a potential peer-group
company is of limited value when the companies are exposed to different stages of the
business cycle.
Solution: A.
Because it is a fake statement. Reviewing the annual report to find management's discussion
about the competitive environment and specific competitors is a suggested step in the process
of constructing a peer group.
Q95-6 ★★When graphically depicting the life-cycle model for an industry as a curve, the
variables on the axes are: （原版书 R51-21）
A. price and time.
B. demand and time.
C. demand and stage of the life cycle.
Solution: B.
The industry life-cycle model shows how demand evolves through time as an industry passes
from the embryonic stage through the stage of decline.
Q96-6 ★★If an industry tends to be characterized by falling price, relatively low barriers to
entry, and relatively low competition, which of the following cycle the industry
belongs to? (真题)
A. Shakeout
B. Mature
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C. Growth
Solution: C.
A growth industry tends to be characterized by rapidly increasing demand, improving
profitability, falling prices, and relatively low competition. The threat of new competitors
entering the industry is usually highest when barriers to entry are relatively low.
Q97-6 Chenchells India Trading Co. (CITC), an importer-exporter of specialty goods and
garments, has operations In Asia, Europe, and North America. Marc Twinsing, CFA, a
balanced fund manager, is considering adding CITC’s stock to his portfolio and he has
compiled the following Information:
CITC Industry Average
Weighted Average Cost of Capital
(WACC)
14% 12%
Return on Assets (ROA) 20% 15%
Dividend Yield 0% %
Consensus Estimate of Stock’s Value $53 N/A
Current Price of CITC’s Stock $50 N/A
Based on his analysis Twinsings would most likely make conclusions about the company
and its stock, respectively, would be:
That CITC company is a: That CITC’s stock is a:
A. growth company growth stock
B. growth company speculative stock
C. speculative company growth stock
Solution: A.
CITC is a growth company because its spread between ROA and WACC is larger than the
industry average and its dividend yield is 0% compared with the industry average of %.
CITC’s stock is a growth stock considering its under-valuation. A speculative stock, on the other
hand, would be overvalued.
Q98-6 ★In which of the following life-cycle phases are price wars most likely to be absent?
A. Mature.
B. Decline.
C. Growth.
Solution: C.
The growth phase is not likely to experience price wars because expanding industry demand
provides companies the opportunity to grow even without increasing market share. When
industry growth is stagnant, companies may only be able to grow by increasing market share,
., by engaging in price competition.
Q99-6 ★★In which sector would a manufacturer of personal care products be classified?
A. Health care.
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B. Consumer staples.
C. Consumer discretionary
Solution: B.
Personal care products are classified as consumer staples in the "Description of Representative
Sectors."
Q100-6 ★A company that is sensitive to the business cycle would most likely:
A. not have growth opportunities.
B. experience below-average fluctuation in demand
C. sell products that the customer can purchase at a later date if necessary.
Solution: C.
Customers' flexibility as to when they purchase the product makes the product more sensitive
to the business cycle.
Q101-6 ★★Which of the following statements about commercial and government- industry
classification systems is most accurate? （原版书 R51-6）
A. Many commercial classification systems include private for- profit companies.
B. Both commercial and government classification systems exclude not-for-profit companies.
C. Commercial classification systems are generally updated more frequently than
government classification systems.
Solution: C.
Commercial systems are generally updated more frequently than government systems, and
include only publicly traded for-profit companies.
Q102-6 ★Which of the following industry characteristics is generally least likely to produce
high returns on capital?
A. High barriers to entry.
B. High degree of concentration.
C. Short lead time to build new plants.
Solution: C.
With short lead times, industry capacity can be rapidly increased to satisfy demand, but it may
also lead to overcapacity, and lower profits.
Q103-6 ★★Which factor is most likely associated with stable market share?（原版书 R51-1）
A. Low switching costs.
B. Low barriers to entry.
C. Slow pace of product innovation
Solution: C.
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A slow pace of product innovation often means that customers prefer to stay with suppliers
they know, implying stable market shares.
Q104-6 ★★★An industry with high barriers to entry and weak pricing power most likely
has:
A. high barriers to exit.
B. stable market shares.
C. significant numbers of issued patents.
Solution: A.
An industry that has high barriers to entry generally requires substantial physical capital
and/or financial investment. With weak pricing power in the industry finding a buyer for
excess capacity (., to exit the industry) may be difficult.
Q105-6 ★★Which of the following industries is most likely to be considered to have the
lowest barriers to entry? （原版书 R51-28）
A. Oil services.
B. Confections and candy.
C. Branded pharmaceuticals.
Solution: A.
The oil services industry has medium barriers to entry because a company with a high level of
technological innovation could obtain a niche market in a specific area of expertise.
Q106-6 ★★An equity analyst follows two industries with the following characteristics:
Industry 1:
A few companies with proprietary technologies; products with unique features; high
switching costs; and minimal regulatory influences.
Industry 2:
A few companies producing relatively similar products; sales varying with disposable
income and employment levels; high capital costs and investment in physical plants;
rapid shifts in market shares of competing firms; and minimal regulatory influences.
Based on the above information, the analyst will most appropriately conclude that
compared to the firms in Industry 2, those in Industry 1 would potentially have:
A. larger economic profits.
B. over-capacity problems.
C. high bargaining power of customers.
Solution: A.
The economic profit (the spread between the return on invested capital and the cost of capital)
tends to be larger in industries with differentiated products, greater pricing power, and high
switching costs to customers. Industry 1 has these features. Firms in Industry 2, on the other
hand, have little pricing power (undifferentiated products and rapid shifts in market shares
indicating intense rivalry), which is indicative of potentially smaller economic profits.
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R51-6 ★The uses of industry analysis
It provides a framework for understanding the firm.
Understanding a firm's business environment can provide insight about the
firm's potential growth, competition, and risks.
In an active management strategy, industry analysis can identify industries
that are undervalued or overvalued in order to weight them appropriately.
Some investors engage in industry rotation, which is overweighting or
underweighting industries based on the current phase of the business cycle.
In performance attribution analysis, the sources of portfolio return are
determined relative to a benchmark. The industry representation within a
portfolio is often a significant component of attribution analysis.
R52-6 ★Methods of classification system
products and services：Systems that are grouped by products and services
usually use a firm's principal business activity (the largest source of sales or
earnings) to classify firms.
Firms can also be classified by their sensitivity to business cycles. This
system has two main classifications: cyclical and non-cyclical firms.
Statistical methods, such as cluster analysis, can also be used. This method
groups firms that historically have had highly correlated returns. The groups
(., industries) formed will then have lower returns correlations between
groups.
R53-6 Commercial classification:
Basic materials and processing firms(produce building materials, chemicals,
paper and forest products, container and packaging, and metals, mineral,
and mining)
Customer discretionary firm are cyclical and sell goods and services in
industries such as automotive, apparel, hotels and restaurants.
Consumer staples firms are less cyclical and sell goods and services in
industries such as food, beverage, tobacco, and personal care products.
Energy firms
Financial services firms
Health care
Industrial and producer durables firms produce capital goods for commercial
services industries. ( heavy machinery and equipment, aerospace, defense
transportation, commercial services and supplies).
Technological firms.
An analyst should not assume that two firms in the same narrowest industry
classification can be compared with each other for fundamental analysis and
valuation. Instead, the analyst should construct peer groups.
R54-6 Growth
Growth companies: earn higher returns than WACC; sales and earnings grow
faster than similar risk firm and the overall economy; have low
dividend-payout ratios
Growth stocks: with a higher rate of return than similar risk stocks; usually
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undervalued
注意：可能由于投资者过于乐观而使得增长型公司的股票价格已经被高估，及
时公司利润仍在增长，该股票就不是增长型股票；相反，一个普通公司的股票，
只要市场价格低于内在价值，就可以认为是增长型股票。
R55-6 ★Defensive
Defensive company: earnings are insensitive to downturns in the economy;
have low business risk and moderate financial risk.主要看公司的盈利增长
和整体经济增长的相关性，如果相关性不高，盈利增长很稳定，就是防
守型公司。
Defensive stock: the stock’s rate of return do not decline or decline less than
the market; have a small positive or negative beta.主要看股票的价格和市
场指数的相关性，如果相关性不高，股价增长很稳定，就是防守型股票。
R56-6 Cyclical
Cyclical company: sales and earnings are heavily influenced by the aggregate
business activity; have high business risk and financial risk 主要看公司的盈
利增长和整体经济增长的相关性，如果相关性很高，就是周期性公司。
Cyclical stock: have high betas; the company of the cyclical stock are more
volatile than the overall market 主要看股票的价格和市场指数的相关性，
如果相关性很高，就是周期性股票。
R57-6 Speculative
Speculative company: the company’s assets involve risk but that also has the
potential to generate very large earnings; 通常主营业务很不稳定。
Speculative stock: usually overpriced, leading to a high probability of low or
negative rate of return; 虽然股价已经被高估，但仍有可能进一步上涨。
R58-6 ★Growth vs. value stock
Growth stock: a stock of the company that is experiencing rapid growth and
sales and earnings; have high P/E and P/B ratios.
Value stock: undervalued for reasons other than earnings growth potential;
usually has low P/E and P/B ratios.
R59-6 ★Peer group 及相关概念：
A peer group is a set of similar companies an analyst will use for valuation
comparisons.
To form a peer group, an analyst will often start by identifying companies in
the same industry classification, using the commercial classification
providers previously described.
The following are steps an analyst would use to form a peer group:
Use commercial classification providers to determine which firms are in the
same industry.
Examine firms' annual reports to see if they identify key competitors.
Examine competitors' annual reports to see if other competitors are named.
Use industry trade publications to identify competitors.
Confirm that comparable firms have similar sources of sales and earnings,
have similar sources of demand, and are in similar geographic markets
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Adjust financial statements of non-financial companies for any financing
subsidiary data they include
R60-6 ★Industry Life Cycle
In the embryonic stage, the industry has just started：Slow growth, High
price, Large investment required, High risk of failure
In the growth stage, industry growth is rapid：Rapid growth, Limited
competitive pressures, Falling prices, Increasing profitability,
In the shakeout stage, industry growth and profitability are slowing due to
strong competition: Growth has slowed, Intense competition, Increasing
industry overcapacity, Declining profitability, Increased cost cutting,
Increased failures.
In the mature stage, there is little industry growth and firms begin to
consolidate：Slow growth, Consolidation, High barriers to entry, Stable
pricing, Superior firms gain market share.
In the decline stage, industry growth is negative: Negative growth, Declining
prices, Consolidation.
Growth firms should be reinvesting in operations in an attempt to increase
product offerings, increase economies of scale, and build brand loyalty.
Mature firms focus on cost efficiency because demand is largely from
replacement. They find few opportunities to introduce, new products. These
firms should typically pay out cash to investors as dividends.
R61-6 ★Industry Concentration
High industry concentration does not guarantee pricing power
Absolute market share may not matter as much as a firm's market share
relative to its competitors.
If industry products are undifferentiated and commodity-like, then
consumers will switch to the lowest-priced producer.
If the industry is capital intensive, and therefore costly to enter or exit,
overcapacity can result in intense price competition.
R62-6 ★Ease of Entry
In industries with low barriers to entry, firms have little pricing power.
Capital, intellectual property, and customer base should be considered to
assess the ease of entry.
Examine the composition of the industry over time. If the same firms
dominate the industry today as ten years ago, entry is probably difficult.
High barriers to entry do not necessarily mean firm pricing power is
high( overcapacity)
Low barriers to entry do not ensure success for new entrants.
R63-6 ★Capacity
Under capacity, a situation in which demand exceeds supply at current
prices, results in pricing power.
Capacity is fixed in the short run and variable in the long run.
However, producers may overshoot the optimal industry capacity, especially
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in cyclical markets.
Capacity is not necessarily physical. For example, an increase in demand for
insurance can be more easily and quickly met than an increase in demand for
a product requiring physical capacity, such as electricity or refined petroleum
products.
If capacity is physical and specialized, overcapacity can exist for an extended
period if producers expand too much over the course of a business cycle.
R64-6 Market Share Stability
Whether firms' market shares in an industry have been stable over time.
Market shares that are highly variable likely indicate a highly competitive
industry in which firms have little pricing power.
Switching costs, such as the time and expense of learning to use a
competitor's product, tend to be higher for specialized or differentiated
products.
R65-6 Principles of strategy analysis of an industry
Industries differ markedly in profitability because of differences in economic
fundamentals, industry structure, and degree of competition.
★The degree of economic profits depends in part on pricing power Rivalry
among existing competitors：Rivalry increases when many firms of relatively
equal size compete within an industry. Slow growth leads to competition as
firms fight for market share, and high fixed costs lead to price decreases as
firms try to operate at full capacity. Industries with products that are
undifferentiated or have barriers (are costly) to exit tend to have high levels
of competition.
Threat of new entrants：Industries that have significant barriers to entry
(., large capital outlays for facilities) will find it easier to maintain
premium pricing.
Threat of substitute products：Substitute products limit the profit potential
of an industry because they limit the prices firms can charge by increasing
the elasticity of demand.
Bargaining power of buyers：Buyers' ability to bargain for lower prices or
higher quality influences industry profitability. Bargaining by governments
and ever-larger health care providers have put downward pressure even on
patented drugs
Bargaining power of suppliers：Suppliers' ability to raise prices or limit supply
influences industry profitability. Suppliers are more powerful if there are just
a few of them and their products are scarce.
R66-6 Summary（重要，请仔细阅读）
Higher barriers to entry reduce competition.
Greater concentration (a small number of firms control a large part of the
market) reduces competition, whereas market fragmentation (a large
number of firms, each with a small market share) increases competition.
Unused capacity in an industry, especially if prolonged, results in intense
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price competition.
Stability in market share reduces competition. For example, loyalty of a firm's
customers tends to stabilize market share and profits.
More price sensitivity in customer buying decisions results in greater
competition.
Greater maturity of an industry results in slowing growth.
R67-6 A company analysis should include the following elements:
Firm overview, including information on operations, governance, and
strengths and weakness.
Industry characteristics.
Product demand.
Product costs.
Pricing environment.
Financial ratios, with comparisons to other firms and over time.
Projected financial statements and firm valuation.
P19-6 Discount cash flow model
Q107-6 An analyst collected the following data about a listed company:
Earnings per share 20
Dividend declared 3
Return on assets 6%
Debt/Equity ratio
Net profit margin 12%
The constant growth rate of dividends is closest to: （2012 年 12 月真题）
A. 2%
B. 12%
C. 20%
Solution: B.
From debt/equity ratio we can calculate the Asset/Equity ratio=.
ROE= ROA Financial Leverage = 6% = %
Constant growth rate of dividends g= ROE retention ratio = ROE (1- payout ratio) =
% (1-3/20) = %
Q108-6 ★★The best model to use when valuing a voting dividend-paying company that is
just entering the growth phase is most likely the: （原版书 R52-19）
A. Gordon growth model.
B. Two-stage dividend discount model.
C. Three-stage dividend discount model.
Solution: C.
The Gordon growth model is best suited to valuing mature companies. The two-stage model is
best for companies that are transitioning from a growth stage to a mature stage. The
three-stage model is appropriate for young companies just entering the growth phase.
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Q109-6 ★Geo Telecommunications Inc. is a fast growing company with a double-digit
growth rate that is expected to continue for three more years. In his pursuit of
valuing the company’s stock, Dimiter Nenkov, a free-lance equity analyst, has
compiled the following data about the company:
Current years free cash flow to
equity
€20 million
Growth rate in free cash flow
during the next three years
30% in years 1 and 2
20% in year 3
Growth rate in free cash flow for
year 4 and beyond
8%
Weighted average cost of capital 12%
Cost of equity capital 15%
Number of outstanding shares 50 million
Based on the above information, Nenkov’s best estimate of the value per share for
Geo Telecommunications would be closest to:
A. €.
B. €.
C. € .
Solution: A.
Time Period FCFE PVIF @15% Present Value
1 20=26 €
2 20= €
3 20= €
4&Beyond V3=（）/( – )= €
Value of Equity €
Value per share = Value of Equity / # of outstanding shares €
Q110-6 ★An investor uses the data below and the constant growth model to evaluate a
company's common stock. To estimate growth, she uses the average value of the:
1. dividend growth rate over the period 2004-2009 and
2. sustainable growth rate for the year 2009
Year EPS DPS ROE
2009 $ $ 12%
2008 $ $ 17%
2007 $ $ 13%
2006 $ $ 15%
2005 $ $ 11%
2004 $ $ 9%
If her requited return is 15 percent, the stock's estimated value is closest to:
A. $
B. $
C. $
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Solution: B.
Dividend growth rate over the period 2004-2009= (1+g)5=; g=%=9% Sustainable
growth rate for the year 2009;
retention rate= (1-Dividend payout ratio)=[1-(
g= bxROE; g=%=%
Average of the two approaches=(9+)/2=%
V0=D1/(r-g)=($)/()=
Q111-6 An investor evaluating a company's common stock for investment has gathered the
following data.
Current year's earnings per share $
Dividend payout ratio 60%
Dividend growth rate expected during Year 1 and 2 25%
Dividend growth rate expected after Year 2 5%
Investors' requited rate of return 12%
The value per share of this common stock is closest to:
A. $
B. $
C. $
Solution: B.
Current year's dividend per share =$=$
V=()/+()2/+()2()/()}/ = $+$+
=$
Q112-6 ★★An investor gathered the following data in order to estimate the value of the
company's preferred stock: (Mock 83-81)
Par value of preferred stock offered at a 6% dividend rate 100
Company's sustainable growth rate 5%
Yield on comparable preferred stock issues %
Investor's marginal tax rate 30%
The value of the company's preferred stock is closest to:
A. $.
B. $.
C. $.
Solution: A.
V0 = D0/r = ($100 ×)/ = $
R68-6 DDM 掌握计算：
The general DDM
31 2 ?
1 2 3 ?(1 ) (1 ) (1 ) (1 )e e e e
DD D D
value
k k k k
= + + + ?
+ + + +
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Multiple-year holding period DDM
1 2 2
1 2 2(1 ) (1 ) (1 )e e e
D D P
value
k k k
= + +
+ + +
Preferred stock valuation
p
p
D
value
k
The constant growth DDM
0 1
0
(1 )
- -
c
e c e c
D g D
PV
k g k g
(GGM)
Dividends grow at a constant rate g, 通过公式的变形，求 k 和 g 的关系。
1
0
e c
D
k g
PV
★Sustainable growth (g)=(1-dividend payout ratio)×ROE
Assumption:
The firm expects to pay a dividend, D, in one year.
Dividends will grow at a constant rate, g, forever.
The growth rate(g) is less than the required rate(r)
Limitations:
Very sensitive to estimates of r and g
Difficult with non-dividend stocks
Difficult with unpredictable growth patterns(use multi-stage model)
R69-6 Free cash flow to equity model:
FCFE=net income+depreciation-increase in working capital-fixed capital
investment (FCInv)-debt principle repayments+new borrowing.
FCFE= CFO-FCInv+net borrowing
The required return for equity is calculated using CAPM model.
P20-6 Price multiple model
Q113-6 ★An investor gathers the following data. To estimate the stock's justified forward
P/E, the investor prefers to use:
the earnings growth rate rather than the dividends growth rate and
the average of the payout ratios over the relevant period, in this case 2006-2009,
rather the most recent payout ratio.
Year EPS DPS ROE
2009 $ $ 12%
2008 $ $ 17%
2007 $ $ 13%
2006 $ $ 15%
The yield on 10-year T-notes is 3 percent and the current equity risk premium is
percent. If beta is , then the stock's justified forward P/E is closest to:
A. 12.
B. 16.
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C. 21.
Solution: C.
Earnings growth rate over the period 2006-2009=(1+g)3=; g=%
Average payout ratio=(+++)/4=
Required rate of return on share i= Current expected risk-free rate of return+ Beta x [Market
(equity) risk premium]=3%+(%)=%
1/P E =payout rate/(r-g) =
Q114-6 An investor evaluating a company's common stock now available on the market is
selling for $15, and he has gathered the following data.
Current year's earnings per share $
Dividend retention ratio 40%
Expected dividend growth rate 5%
Investors' requited rate of return 12%
The justified leading P/E ratio is: （2012 年 12 月真题）
A. 6
B.
C. 10
Solution: B.
The justified leading P/E ratio is
1
0 1
1
1-b 60%
= = =
r- 12%-5%
D
P E
E r g g
Q115-6 ★Strongsville Fabricators Inc. uses the FIFO method or inventory valuation.
Assuming a rising costs environment and other factors held constant, Strongsville’s
price-to-earning and price-to-book multiples relative to those for another company
that uses the LIFO method or inventory valuation would be:
Price-to-earnings Multiple Price-to-book Multiple
A. Overstated overstated
B. Overstated understated
C. Understated understated
Solution: C.
In a rising costs environment, FIFO would result in higher earnings, higher ending inventory, as
well as higher book value of equity. Thus, both P/E and P/BV tend to be understated relative to
a comparable firm that uses LIFO method.
Q116-6 ★★An analyst makes the following statement: "Use of P/E and other multiples for
analysis is not effective because the multiples are based on historical data and
because not all companies have positive accounting earnings." The analyst's
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statement is most likely:（原本书 R52-23）
A. inaccurate with respect to both historical data and earnings.
B. accurate with respect to historical data and inaccurate with respect to earnings.
C. inaccurate with respect to historical data and accurate with respect to earnings.
Solution: A.
The statement is inaccurate in both respects. Although multiples can be calculated from
historical data, forecasted values can be used as well. For companies without accounting
earnings, several other multiples can be used. These multiples are often specific to a
company's industry or sector and include price to-sales and price to cash flow.
Q117-6 An investor who wants to estimate the enterprise value multiple (EV/EBITDA) of a
company has gathered the following data:
Market value of debt $10million
Market capitalization $45million
Cash and short-term investments $
EBITDA $15million
Firm’s marginal tax rate 40%
The company’s EV/EBITDA multiple is closest to:
A. .
B. .
C. .
Solution: B.
Enterprise value measures total company value.
EV = Market value of common and preferred stock + MV of debt - cash & short-term
investments
EV = 45 + 10 = ; EV/EBITDA = / 15 =
Q118-6 ★★An analyst has determined that the appropriate EV/EBITDA for Rainbow
Company is . The analyst has also collected the following forecasted information
for Rainbow Company:（原版书 R52-30）
EBITDA = $22,000,000
Market value of debt = $56,000,000
Cash = $1,500,000
The value of equity for Rainbow Company is closest to:
A. $169 million.
B. $224 million.
C. $281 million
Solution: A.
EV = x 22,000,000 = $224,400,000
Equity value = EV — Debt + Cash = 224,400,000 — 56,000,000+ 1,500,000 = $169,900,000
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P/E Ratio 计算：
R70-6 区分 Trailing P/E (P0 / E0)，Leading P/E (P0 / E1)。
Justified P/E (使用 DDM 模型演算而来的 P/E):
Leading P/E g-r
E/D
/EP 1110
; g-r
b-1
/EP 10
Trailing P/E gr
gb
)1)(1(
g-k
E/D
/EP 1110
0 1 1
1
( / )
-
P PR D E
E k g
,以及不同的 k 和 g 的组合对其大小影响
R71-6 required rate of return 所包含的三个因素：RFRreal，IP，RP。
k=required rate of return=(1+RFRreal)(1+IP)(1+RP)-1
k= required rate of return(approximate)≈RFRreal+IP+RP
g=(RR)(ROE)
P21-6 Asset-based model
Q119-6 ★Which of the following firms would most appropriately be valued using an
asset-based model? (Notes P325-13)
A. An energy exploration firm in financial distress that owns drilling right for offshore areas.
B. A paper firm located in country that is experiencing high inflation.
C. A software firm that invests heavily in research and development and frequently
introduces new products.
Solution: A.
The energy exploration firm would be most appropriately valued using an asset-based model.
Its near-term cash flows are likely negative, so a forward-looking model is of limited use.
Furthermore, it has valuable assets in the form of drilling rights that likely have a readily
determined market value. The paper firm would likely not be appropriately valued using an
asset-based model because high inflation makes the values of a firm’s assets more difficult to
estimate. An asset-based model would not be appropriate to value the software firm because
the firm’s value largely consists of internally developed intangible assets.
R72-6 ★Asset-based valuation
Equity value is the market or fair value of assets minus the market or fair
value of liabilities.
Applying asset-based models is especially problematic for a firm that has a
large amount of intangible assets, on or off the balance sheet.
Asset-based model valuations are most reliable when the firm has: primarily
tangible short-term assets, assets with ready market values, The firm will
cease to operate and is being liquidated.
Asset-based models are often used to value private companies
R73-6 Compare the advantages and disadvantages of each category of valuation model.
Cash flow models:
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Advantages of discounted cash flow models:
They are based on the fundamental concept of discounted present
value and are well grounded in finance theory.
They are wide accepted in the analyst community.
Disadvantages of discounted cash flow models:
Their input must be estimated.
Value estimates are very sensitive to input values.
Comparable valuation using price multiples:
★Advantages of comparable valuation using price multiples:
Evidence that some price multiples are useful for predicting stock
returns.
Price multiples are widely used by analysts.
Price multiples are readily available.
They can be used in time series and cross-sectional comparisons.
EV/EBITDA multiples are useful when comparing firm values
independent of capital structure or when earning are negative and
the P/E ratio cannot be used.
★Disadvantages of comparable valuation using price multiples:
Lagging price multiples reflect the past.
Price multiples for cyclic firms may be greatly affected by economic
conditions at a given point in time.
A stock may appear overvalued by the comparable method but
undervalued by a fundamental method, or vice versa.
Different accounting methods can result in price multiples that are
not comparable across firms, especially internationally.
A negative denominator in a price multiple results in a meaningless
ratio. The P/E ratio is especially susceptible to this problem.
Price multiple valuations on fundamentals
★ Advantages of price multiple valuations on fundamentals:
They are based on theoretically sound valuation models.
They correspond to widely accepted value metrics.
★Disadvantages price multiple valuations based on fundamentals:
Price multiples based on fundamentals will be very sensitive to the
inputs(especially the k-g denominator)
Asset-based models:
★Advantages of asset-based models:
They can provide floor value.
They are most reliable when the firm has primarily tangible
short-term assets, assets with ready market values, or when the
firm is being liquidated.
They are increasing useful for valuing public firms that report fair
values
★Disadvantages of asset-based models:
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Market values are often difficult to obtain.
Market values are usually different than book values.
They are inaccurate when a firm has a high proportion of intangible
assets or future cash flows not reflected in asset values.
Assets can be difficult to value during periods of hyperinflation.
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7-Fixed Income
P1-7 Basic features of a fixed-income security
Q1-7 A sovereign bond which has a maturity of 15 years can be described as a: (2014 原版
书 R52-2)
A. perpetual bond.
B. pure discount bond.
C. capital market security.
Solution: C.
A capital market security has an original maturity longer than one year. A is incorrect because a
perpetual bond does not have a stated maturity date. Thus, the sovereign bond, which has a
maturity of 15 years, cannot be a perpetual bond. B is incorrect because a pure discount bond
is a bond issued at a discount to par value and redeemed at par. Some sovereign bonds (.,
Treasury bills) are pure discount bonds, but others are not.
Q2-7 The type of bond that allows bondholders to choose the currency in which they
receive each interest payment and principal repayment is a:
A. pure discount bond.
B. dual-currency bond.
C. currency option bond.
Solution: C.
Currency option bond gives bondholders a choice of which of two currencies they would like to
receive their payments in.
R1-7 描述 basic features of a fixed-income security
Issuer
Supranational organizations
Sovereign (national) governments
Non-sovereign (local) governments
Quasi-government entities
Companies (., corporate issuers)
Maturity: the date on which the principal is to be repaid
Term to maturity
Money market securities: securities with maturities at issuance (original
maturity) of one year or less.
Capital market securities: securities with original maturities that are longer
than one year.
Perpetual bonds: have no stated maturity date, make periodic int. payment
but no promise to repay the principal, such as consols issued by the
sovereign government in the United Kingdom, which have no stated maturity
date.
Par value
Coupon rate and frequency
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Currency
Dual-currency bond: makes coupon interest payments in one currency and
principal repayment maturity in another currency.
Currency option bond: gives bondholders a choice of which of two currencies
they would like to receive their payments in.
P2-7 Bond indenture, affirmative and negative covenants
Q3-7 ★The purpose of an affirmative covenant is most likely about: (2014 原版书 R52-6)
A. limits on the issuer's leverage ratio.
B. how the proceeds of the bond issue will be used.
C. the maximum percentage of the issuer's gross assets that can be sold.
Solution: B.
Affirmative (or positive) covenants enumerate what issuers are required to do and are typically
administrative in nature. A common affirmative covenant describes what the issuer intends to
do with the proceeds from the bond issue.
A and C are incorrect because imposing a limit on the issuer's leverage ratio or on the
percentage of the issuer's gross assets that can be sold are negative covenants. Negative
covenants prevent the issuer from taking actions that could reduce its ability to make interest
payments and repay the principal.
Q4-7 ★★Which of the following content is included in negative bond covenants. The issuer
is: (2014 原版书 R52-7)
A. required to pay taxes as they come due.
B. prohibited from investing in risky projects.
C. required to maintain its current lines of business.
Solution: B.
Prohibiting the issuer from investing in risky projects restricts the issuer's potential business
decisions. This restriction is referred to as negative bond covenants.
A and C are incorrect because paying taxes as they come due and maintaining the current lines
of business are positive covenants
Q5-7 ★★Which of the following content is in affirmative covenants? (2014 原版书 R52-8)
A. The company can’t sell assets that have been pledged as collaterals;
B. To insure and perform periodic maintenance on financed assets.
C. The company can’t borrow additional money unless certain financial conditions are met.
Solution: B.
Affirmative covenants indicate what the issuer "must do" and are administrative in nature. A
covenant requiring the issuer to insure and perform periodic maintenance on financed assets
is an example of affirmative covenant. A and C are incorrect because they are negative
covenants; they indicate what the issuer cannot do.
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R2-7 描述 functions of a bond indenture
Defines the obligations and restrictions on the borrower
Forms the basis for all future transactions between the bondholder and the issuer
R3-7 区分 Negative Covenants & Affirmative Covenants
Negative covenants: restrictions on a bond issuer’s operating decisions.
Restrictions on asset sales
Negative pledge of collateral
Restrictions on additional borrowing
Affirmative covenants: administrative actions the issuer must perform
Make timely interest and principal payments to bondholders
Insure and maintain assets
Comply with applicable laws and regulations
P3-7 Legal, regulatory and tax consideration
Q6-7 Which of the following is the benefit of issuing bonds through a special purpose
vehicle?
A. Bankruptcy remoteness
B. Beneficial tax treatments
C. Greater liquidity and lower issuing costs
Solution: A.
A SPV is a bankruptcy-remote vehicle. Bankruptcy remoteness is achieved by transferring the
assets from the sponsor to the SPV. Once this transfer is completed, the sponsor no longer has
ownership rights. If the sponsor defaults, no claims can be made to recover the assets that are
transferred or the proceeds from the transfer to the SPV.
Q7-7 ★Which of the following is not an example of external credit enhancement? (2014
原版书 R52-5)
A. A Letter of credit
B. A surety bond
C. Overcollaterization
Solution: C.
Overcollaterization is a type of internal credit enhancement.
Q8-7 ★★Which of the following external credit enhancement has the least amount of
third-party risk?(2014 原版书 P313-7)
A. Surety bond
B. Letter of credit
C. Cash collateral account
Solution: C.
The third-party (or counterparty) risk for a surety bond and a letter of credit arises from both
future promises to pay. In contrast, a cash collateral account allows the issuer to immediately
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borrow the credit-enhancement amount and then invest it.
Q9-7 ★A South African company issues bonds denominated in dollars that are sold to
investors in the . These bonds can be best described as: (2014 原版书 R52-8)
A. Eurobonds.
B. Global bonds.
C. Foreign bonds.
Solution: C.
Bonds sold in a country and denominated in that country’s currency by an entity from another
country are referred as foreign bonds.
A is incorrect because Eurobonds are bonds issued outside the jurisdiction of any single
country. B is incorrect because global bonds are bonds issued in the Eurobond market and at
least one domestic country simultaneously.
Q10-7 ★Which of the following is an example of a domestic bond? (2014 原版书 P316-1)
A. A bond is issued by LG Group from South Korea, denominated in British pounds, and sold
in the United Kingdom.
B. A bond is issued by the . Debt Management Office, denominated in British pounds,
and sold in the United Kingdom.
C. A bond is issued by Wal-Mart from the United States, denominated in . dollars, and
sold in various countries in North America, Europe, the Middle East, and Asia Pacific.
Solution: B.
A domestic bond is issued by a local issuer, denominated in local currency, and sold in the
domestic market. Gilts are British pound—denominated bonds issued by the . Debt
Management Office in the United Kingdom. Thus, they are . domestic bonds. A is incorrect
because a bond issued by LG Group from South Korea, denominated in British pounds, and
sold in the United Kingdom, is an example of a foreign bond (bulldog bond). C is incorrect
because a bond issued by Wal-Mart from the United States, denominated in . dollars, and
sold in various countries in North America, Europe, the Middle East, and Asia Pacific is most
likely an example of a global bond, particularly if it is also sold in the Eurobond market.
Q11-7 ★★An investor in a country with an original issue discount tax provision purchases a
20-year pure discount bond. If the investor plans to hold the bond until maturity. The
investor will most likely report: (2014 原版书 R52-11)
A. a capital gain at maturity.
B. a tax deduction in the year the bond is purchased.
C. taxable income from the bond every year until maturity.
Solution: C.
The original issue discount tax provision requires the investor to include a prorated portion of
the original issue discount in his taxable income every tax year until maturity. The original issue
discount is equal to the difference between the bond's par value and its original issue price.
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A is incorrect because the original issue discount tax provision allows the investor to increase
his cost basis in the bond so that when the bond matures, he faces no capital gain or loss. B is
incorrect because the original issue discount tax provision does not require any tax deduction
in the year the bond is purchased or afterwards.
Q12-7 ★Interest portion of a bond investment is taxed as: (2014 原版书 P318-1)
A. ordinary income.
B. short-term capital gain.
C. long-term capital gain.
Solution: A.
Interest income is typically taxed at the ordinary income tax rate, which may be the same tax
rate that individuals pay on wage and salary income.
Q13-7 Collateral trust bonds is most likely backed by: (2014 原版书 P313-6)
A. Securities.
B. Mortgages.
C. Physical assets.
Solution: A.
Collateral trust bonds are secured by securities, such as common shares, other bonds, or other
financial assets. B is incorrect because mortgage¬backed securities are secured by mortgages.
C is incorrect because equipment trust certificates are backed by physical assets such as
aircrafts, railroad cars, shipping containers or oil rigs.
Q14-7 Most of Eurobonds are : (2014 原版书 R52-9)
A. bearer bonds.
B. registered bonds.
C. subject to greater regulation.
Solution: A.
Eurobonds are typically issued as bearer bonds, ., bonds for which the trustee does not keep
records of ownership. In contrast, domestic and foreign bonds are typically registered bonds
for which ownership is recorded by either name or serial number, so B is is
incorrect because Eurobonds are typically subject to lower, not greater, regulation than
domestic and foreign bonds.
R4-7 legal, regulatory 和 tax consideration 对 fixed-income securities 发行及交易的影响
The places where fixed-income securities are issued and traded
National bond market
Domestic bond: bond issued by a firm domiciled in a country and also
traded in that country’s currency
Foreign bond: bond issued by a firm incorporated in a foreign country that
trade on the national bond market of another country in that country’s
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currency
Eurobond market
Eurobond: bond issued outside the jurisdiction of any one country and
denominated in a currency different from the currency of the countries in
which they are sold.
Global bonds: Eurobonds that trade in the national bond market of a country
other than the country that issues the currency the bond is denominated in ,
and in the Eurobond market.
Issuing entities: may be a government or agency; a corporation, holding company, or
subsidiary; or a special purpose entity
Sources of repayment:
For sovereign bonds: country’s taxing authority
For non-sovereign government bonds: taxing authority or revenues from a
project
For corporate bonds: funds from the firm’s operations
For securitized bonds: cash flows from a pool of financial assets
★Collateral and credit enhancements
Secured: backed by specific collateral.
Internal credit enhancement-overcollateralization: collateral pledged has a value
greater than the par value of the debt issued.
Internal credit enhancement-excess spread: yield on the financial assets
supporting the debt is greater than the yield promised on the bonds issued.
Internal credit enhancement-tranches with different seniority of claims: any
losses of assets supporting a securitized bond are firs absorbed by the bonds
with the lowest seniority, then the bonds with the next-lowest priority of claims
(waterfall structure).
External credit enhancements-surety bonds: issued by insurance companies and
are a promise to make up any shortfall in the cash available to service the debt.
External credit enhancement-letter of credit: a promise to lend money to the
issuing entity if it does not have enough cash to make the promised payments
on the covered debts.
A cash collateral account: the issuer immediately borrows the credit
enhancement amount and then invest that amount usually in highly rated
short-term commercial paper. A cash collateral account mitigates investors’
exposure to the third-party risk, which is the possibility that a guarantor cannot
meet its obligation.
Unsecured: represent an overall claim against the issuer’s cash flow and assets.
Taxation of bond income
Interest income: taxed as ordinary income at the same rate as wage and salary
income.
Interest income from bonds issued by municipal government: tax-exempt
Capital gain: gain or loss between purchase price and selling price.
税率高低比较：利息税税率高于资本利得税税率
OID bond(original issue discount bond): pure-discount bonds and other bonds
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sold at significant discounts to par
会产生 tax liability 的原因：Because the gains over an OID bond’s tenor as
the price moves towards par value are really interest income, these bonds
can generate a tax liability even when no cash interest payment has been
made.
A portion of the discount from par at issuance is treated as taxable interest
income each year. This tax treatment also allows that the tax basis of the
OID bond is increased each year by the amount of interest income
recognized, so there is no additional capital gains tax liability at maturity.
P4-7 Cash flow structure
Q15-7 ★Which kind of bond has a fixed periodic payment schedule that reduces the bond's
outstanding principal amount to zero by the maturity date? (2014 原版书 R52-11)
A. Bullet bond.
B. Plain vanilla bond.
C. Fully amortized bond.
Solution: C.
A fully amortized bond calls for equal cash payments by the bond's issuer prior to maturity.
Each fixed payment includes both an interest payment component and a principal repayment
component so that the bond's outstanding principal amount is reduced to zero by the maturity
date.
A and B are incorrect because a bullet bond or plain vanilla bond only make interest payments
prior to maturity. The entire principal repayment occurs at maturity.
Q16-7 ★Which of the following structure requires the largest repayment of principal at
maturity? (2014 原版书 P322-1)
A. Bullet bond.
B. Fully amortized bond.
C. Partially amortized bond.
Solution: A.
The entire repayment of principal occurs at maturity for a bullet (or plain vanilla) bond,
whereas it occurs over time for fully and partially amortized bonds. Thus, the largest
repayment of principal at maturity is that of a bullet bond
Q17-7 ★★Relative to a fully amortized bond, the coupon payments of an otherwise similar
partially amortized bond are: (2014 Mock 102-101)
A. lower or equal.
B. equal.
C. higher or equal.
Solution: C.
Except at maturity, the principal repayments are lower for a partially amortized bond than for
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an otherwise similar fully amortized bond. Consequently, the principal amounts outstanding
and, therefore, the amounts of interest payments are higher for a partially amortized bond
than for a fully amortized bond, all else equal. The only exception is the first interest payment,
which is the same for both repayment structures. This is because no principal repayment has
been made by the time the first coupon is paid.
Q18-7 ★Sinking funds are most likely to: 2014 Mock102 第 95 题
A. Reduce credit risk (default risk).
B. Never allow issuers to retire more than the sinking fund requirement.
C. Always reduce the outstanding balance of the bond issue to zero prior to maturity.
Solution: A.
Sinking funds are designed to reduce default risk (the crisis-at-maturity). If present in the
indenture, sinking funds must be met. They are not optional. Some sinking funds allow for
accelerated sinking funds provisions. Some sinking funds pay only part of the outstanding
balance, leaving a balloon payment at maturity.
Q19-7 ★If interest rates are expected to decline, an investor can earn a higher coupon
interest rate by purchasing a (n): 2013 百题 Q9-7
A. callable bond
B. inverse floater
C. floater with a cap
Solution: B.
Inverse floaters have a coupon formula such that the coupon rate increases when the
reference rate decreases and decreases when the reference rate increases. The coupon rate
moves in the opposite direction from the change in the reference rate.
Q20-7 ★★A 5-year floating rate security was issued on January 1, 2006. The coupon rate
formula was 1-year LIBOR + 300 bps with a cap of 10% and a floor of 5% and annual
reset. The 1-year LIBOR rate on January 1st of each year of the security’s life is provided
in the following table: 2013 百题 Q11-7
Year 1-Year LIBOR
2006 %
2007 %
2008 %
2009 %
2010 %
During 2010, the payments owed by the issuer were based on a coupon rate closest to:
A. %.
B. %.
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C. %.
Solution: B.
LIBOR + 300 bps at the reset date is % + % = %, which is below the floor of % ,
so the coupon rate will be equal to the floor.
Q21-7 ★★A 10-year, capital-indexed bond linked to the Consumer Price Index (CPI) is issued
with a coupon rate of 8% and a par value of 1,000. The bond pays interest
semi-annually. During the first six months after the bond's issuance, the annualized CPI
increases by 6%. On the first coupon payment date, the bond's: 2014 原版书 R52-14
A. coupon rate increases to 11%.
B. coupon payment is equal to .
C. principal amount increases to 1,100.
Solution: B.
Capital-indexed bonds pay a fixed coupon rate that is applied to a principal amount that
increases in line with increases in the index during the bond's life. If the consumer price index
increases by 6%, the coupon rate remains unchanged at 8%, but the principal amount
increases by 6%/2=3% and the coupon payment is based on the inflation-adjusted principal
amount. On the first coupon payment date, the inflation-adjusted principal amount is 1,000 x
(1 + ) = 1,030 and the semi-annual coupon payment is equal to ( x 1,030) / 2 = .
Q22-7 The table below provides a history of a fixed-income security's coupon rate and the
risk-free rate over a five-year period.
Year Risk-Free Rate Coupon Rate
1 % %
2 % %
3 % %
4 % %
5 % %
The security is most likely a (n): (2014 Mock 102-99)
A. step-up note.
B. inverse floater.
C. deferred coupon bond.
Solution: B.
The security's coupon rate moves in the opposite direction (inversely) with the risk-free rate.
(Specifically, the coupon rate = %-2x risk-free rate)
R5-7 Fixed-income securities 现金流的构成
根据本金偿还方式分类
Bullet structure
periodic interest payment(coupon payments) over the life of the bond
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entire principal value at maturity
Amortizing structure: repay part of principal at each payment date
fully amortizing structure: equally periodic payment
(interest+principal)
partially amortizing structure: a balloon payment at maturity, which
repays the remaining principal as a lump sum
Sinking fund provision
requires the issuer to retire a portion of a bond issue at specified
times during the bonds’ life
The issuer can usually repurchase the bonds at the market price, at
par, or at a specified sinking fund price, whichever is the lowest.
根据利息偿还方式分类
Floating-rate notes: coupon rates that are adjusted based on a reference
rate such as LIBOR.
Step-up coupon bonds: have a coupon rate that increases over time.
Credit-linked coupon bond: coupon rate will go up (down) by a certain
amount if the credit rating of the issuer falls (improves).
Pay-in-kind (PIK) bond: allows the issuer to make the coupon payment by
increasing the principal amount of the outstanding bonds, essentially paying
bond interest with more bonds.
Deferred coupon bonds (split coupon bond): interest payments are
deferred for a specified number of years.
Index-linked bond: coupon payments and/or the principal value are based on a
commodity index.
Inflation linked bonds/ linkers: payments are based on the change in an
inflation index, . CPI
Index-annuity bonds: fully amortizing with the periodic payments
directly adjusted for inflation or deflation.
Indexed zero-coupon bonds: the payment at maturity is adjusted for
inflation.
Interest-indexed bonds: coupon rate is adjusted for inflation while the
principal value remains unchanged.
Capital-indexed bonds: coupon rate remains constant, and principal
value is increased by the rate of inflation. . Treasury inflation
Protected Securities (TIPS).
Principal protected bonds: will not pay less than their original par value at
maturity, even when the index decreases.
Equity-linked notes (ETN): no periodic interest payments, and the payment at
maturity is based on an equity index.
P5-7 Contingency provisions
Q23-7 ★★Which of the following bond has a lower price than an otherwise similar bond
without the embedded option? 2014 原版书 P336-2
A. Putable bond.
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B. Callable bond.
C. Convertible bond.
Solution: B.
The call provision is an option that benefits the issuer. Because of this, callable bonds sell at
lower prices and higher yields relative to otherwise similar non-callable bonds. A and C are
incorrect because the put provision and the conversion provision are options that benefit the
investor. Thus, putable bonds and convertible bonds sell at higher prices and lower yields
relative to otherwise similar bonds that lack those provisions.
Q24-7 ★★Compared with a similar option-free bond, which of the following is most
accurate? 2014 原版书 R52-17
A. Putable bond will trade at a higher price.
B. Callable bond will trade at a higher price.
C. Convertible bond will trade at a lower price.
Solution: A.
A put feature is beneficial to the bondholders. Thus, the price of a putable bond will typically
be higher than the price of an otherwise similar non-putable bond.
Q25-7 ★Assume that a convertible bond has a par value of $1,000,000 and is currently
priced at $1,100,000. The underlying share price is $40,000 and the conversion ratio is
25:1. The conversion condition for this bond is: 2014 原版书 P336-5
A. Parity.
B. Above parity.
C. Below parity.
Solution: C.
The conversion value of the bond is 40,000 x 25 = $1,000,000. The price of the convertible
bond is $1,100,000. Thus, the conversion value of the bond is less than the bond's price, and
this condition is referred to as below parity.
Q26-7 ★The provision that gives the bondholders the right to sell the bond back to the
issuer at an agreed price prior to the bond's maturity date is referred to as: 2014 原版
书 R52-15
A. A put provision.
B. A make-whole call provision.
C. An original issue discount provision.
Solution: A.
A put provision provides bondholders the right to sell the bond back to the issuer at a
predetermined price prior to the bond's maturity date.
B is incorrect because a make-whole call provision is a form of call provision; ., a provision
that provides the issuer the right to redeem all or part of the bond before its maturity date. A
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make-whole call provision requires the issuer to make a lump sum payment to the
bondholders based on the present value of the future coupon payments and principal
repayments not paid because of the bond being redeemed early by the issuer. C is incorrect
because an original issue discount provision is a tax provision related to bonds issued at a
discount to par value. The original issue discount tax provision typically requires the
bondholders to include a prorated portion of the original issue discount (., the difference
between the par value and the original issue price) in their taxable income every tax year until
the bond's maturity date.
Q27-7 ★★Compared with an otherwise identical option-free bond, when interest rates fall,
the price of a callable bond will: (2014 Mock 101-99)
A. rise more.
B. rise less.
C. fall less.
Solution: B.
When interest rates fall, the price of the embedded call option increases. The price of a
callable bond equals the price of an option-free bond minus the price of the embedded call
option. So, the price of the callable bond will not increase as much as an option-free bond
because the price of the call option increases. As interest rates fall, the bond is more likely to
be called, limiting the upside potential of price.
Q28-7 An analyst stated that a callable bond has less reinvestment risk and more price
appreciation potential than an otherwise identical option-free bond. The analyst's
statement most likely is:(2014 Mock 102-96)
A. incorrect with respect to both reinvestment risk and price appreciation potential.
B. incorrect with respect to reinvestment risk, but correct with respect to price appreciation
potential.
C. correct with respect to reinvestment risk, but incorrect with respect to price appreciation
potential.
Solution: A.
Both statements are incorrect. An issuer is more likely to call a bond when rates have declined,
thereby the reinvestment risk increases relative to an option-free bond. Because of the call
provision, the callable bond has less potential price appreciation than an identical option-free
bond (termed price compression).
Q29-7 ★★Which kind of following risk is most likely inherent to a callable bond ? 2014 原
版书 P336-3
A. Credit risk.
B. Interest rate risk.
C. Reinvestment risk.
Solution: C.
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Reinvestment risk refers to the effect that lower interest rates have on available rates of return
when reinvesting the cash flows received from an earlier investment. Because bonds are
typically called following a decline in market interest rates, reinvestment risk is particularly
relevant for the holder of a callable bond.
R6-7 Contingency provisions 有哪些及分别给 borrower 还是 lender 带来好处
contingency provisions: an action that may be taken if an event actually occurs.
★Call option: allow the issuer to redeem bonds at a specified call price
Vcallable bond = Vpure bond- Vcall option
If interest rates fall
Issuer can retire the bond paying high coupon rate, and replace it with
lower coupon bonds.
When the bond is called, the proceeds can only be reinvested at a lower
interest rate.
Three styles of exercise for callable bonds
American style: can be called anytime after the first call date.
European style: can only be called on the call date specified.
Bermuda style: can be called on specified dates after the first call date,
often on coupon payment dates.
★Put option: allow the bondholder to sell bonds back to the issuer at a specified
put price
Vputable bonds= Vpure bonds+ Vput option.
If interest rates rise
The bondholders can sell the bond back to the issuer and get cash.
When the bond is put, the proceeds can be reinvested at a higher interest
rate.
Conversion option: (benefit bondholders) allow the bondholder to exchange bonds
for a specified number of shares of the issuer’s common stock.
Conversion price: the price per share at which the convertible bond can be
converted into shares.
Conversion ratio: the number of common shares that each bond can be converted
into.
Conversion value: parity value, the current share price multiplied by the conversion
ratio. (加上 at/above/below parity 的概念)
Conversion parity:
At parity: conversion value = convertible bond’s price
Above parity: conversion value > convertible bond’s price
Below parity: conversion value < convertible bond’s price
★Make-whole call provision: the call price is not fixed but includes a lump-sum
payment based on the present value of the future coupons the bondholder will not
receive if the bond is called early, which is unlikely to be lower than the market value
of the bond .
Warrants: (benefit bondholders) entitles the bondholder to buy the underlying stock
of the issuing company at a fixed exercise price until the expiration date.
★Contingent convertible bonds (“CoCos”): bonds that convert from debt to
common equity automatically if a specific event occurs.
Banks must maintain specific levels of equity financing. If a bank’s equity falls
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below the required level, CoCos are automatically converted to common stocks.
P6-7 Classification of global fixed-income markets
Q30-7 The classification of a bond issued by a city would most likely be a: 2014 原版书
P355-2
A. Supranational bond.
B. Quasi-government bond.
C. Non-sovereign government bond.
Solution: C.
Non-sovereign (local) government bond issuers include provinces, regions, states, and cities. A
is incorrect because supranational bonds are issued by international organizations. B is
incorrect because quasi-government bonds are issued by agencies that are either owned or
sponsored by governments
Q31-7 Which of the following can be regarded as an issuer of bonds? 2014 原版书 P355-1
A. Hedge fund
B. Pension fund
C. Local government
Solution: C.
Major issuers of bonds include sovereign (national) governments, non-sovereign (local)
governments, quasi-government agencies, supranational organizations, and financial and
non-financial companies. A and B are incorrect because hedge funds and pension funds are
typically investors in, not issuers of, bonds.
Q32-7 Which of the following statement best describe the investment of retail investors?
They: 2014 原版书 P358-1
A. do not invest in fixed income.
B. invest in fixed income directly by buying and selling securities.
C. invest in fixed income indirectly through mutual funds or exchange-traded funds.
Solution: C.
Retail investors typically invest heavily in fixed-income securities because of the attractiveness
of relatively stable prices and steady income production. However, because most retail
investors lack the expertise to value fixed-income securities and are not large enough investors
to buy and sell them directly, they usually invest in fixed income indirectly through mutual
funds and exchange-traded funds.
R7-7 全球 fixed-income markets 分类
by type of issuer
by credit quality
by original maturities
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by coupon structure
by currency denomination
by geography
by indexing
by tax status
R8-7 Fixed-income indices
a multi-purpose tool used by investors and managers to describe a given bond
market or sector, as well as to evaluate the performance of investments and
investment managers.
Index construction: security selection and index weighting
★Major types of fixed-income indices
Barclays Capital Global Aggregate Bond Index: represents a broad-based
measure of the global investment-grade fixed-rate bond market.
Morgan Emerging Market Bond Index: used to describe the emerging
market
FTSE Bond Index Series: set up to provide coverage of different classes of
securities related to the government and corporate bond markets.
Investors in fixed-income securities
Major categories of bond investors
Central banks: use open market operations(purchase or sale of bonds)to
implement monetary policy.
Institutional investors: represent the largest groups of investors in fixed
income securities
Retail investors: invest heavily due to the attractiveness of relatively stable
prices and steady income production
Central banks and institutional investors typically invest directly, while retail
investors invest often indirectly through fixed-income mutual funds or
exchange-traded funds
Fixed-income securities are more diverse and more difficult to understand and
access than equity securities
P7-7 LIBOR 和 floating-rate bond 的 reference rate
Q33-7 ★A company issues floating rate bonds. The coupon rate is expressed as the
three-month Libor plus a spread. The coupon payment are most likely to increase as:
2014 原版书 P356-6
A. libor increases.
B. the spread increases.
C. the company’s credit quality decreases.
Solution: A.
The coupon payments of a floating-rate bond that is tied to the three-month Libor will reset
every three months, based on changes in Libor. Thus, as Libor increases, so will the coupon
payments. B is incorrect because the spread on a floating-rate bond is typically constant; it is
set when the bond is issued and does not change afterward. C is incorrect because the issuer’s
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credit quality affects the spread and thus the coupon rate that server as the basis for the
calculation of the coupon payments, but only when the spread is set-that is , at issuance.
R9-7 Interbank offered rates 作为 reference rates 的作用
A reference rate is one that matches a floating-rate note’s currency and frequency of
rate resets.
最常用的 reference rate:LIBOR
The rates are based on the expected rates for unsecured loans from one bank to
another in the interbank money market.
P8-7 Primary market and secondary market
Q34-7 ★The primary market for bonds is a market: 2014 原版书 P366-1
A. in which bonds are issued for the first time to raise capital.
B. that has a specific location where the trading of bonds takes place.
C. in which existing bonds are traded among individuals and institutions.
Solution: A.
Primary bond markets are markets in which bonds are issued for the first time to raise capital.
B is incorrect because having a specific location where the trading of bonds takes place is not a
requirement for a primary bond market. C is incorrect because a market in which existing
bonds are traded among individuals and institutions is the definition of a secondary, not
primary, market.
Q35-7 ★A mechanism by which an issuer may be able to offer additional bonds to the
general public without preparing a new and separate offering circular best describes:
A. The grey market
B. A shelf registration
C. A private placement
Solution: B.
A shelf registration allows certain authorized issuers to offer additional bonds to the general
public without having to prepare a new and separate offering circular. The issuer can offer
multiple bond issuances under the same master prospectus, and only has to prepare a short
document when additional bonds are issued. A is incorrect because the grey market is a
forward market for bonds about to be issued. C is incorrect because a private placement is a
non-underwritten, unregistered offering of bonds that are not sold to the general public but
directly to an investor or a small group of investors.
R10-7 Primary Markets 债券发行机制
A public offering: bonds can be registered with securities regulators for sale to the
public and is typically done with the help of an investment bank.
Underwritten offering: the investment bank or syndicate purchasing the entire
issue and selling the bonds to dealers.
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★Best efforts offering: investment bank sells the bonds on a commission
basis and do not commit to purchase the whole issue.
Shelf registration: a bond issue is registered with securities regulators in its
aggregate value with a master prospectus and can be issued over time when
issuer needs to raise funds.
A private placement: sale of an entire issue to a qualified investor or a group of
investors, which are typically large institutions.
R11-7 Secondary market
Secondary markets: trading of previously issued bonds.
Exchange market
OTC dealer Market
P9-7 Bonds issued by government, nonsovereign governments, government agencies, and
supranational entities
Q36-7 ★Compared with sovereign bonds, the yield of non-sovereign bonds with similar
characteristics most likely is: 2014 原版书 P372-1
A. Lower.
B. The same.
C. Higher.
Solution: C.
Non-sovereign bonds usually trade at a higher yield and lower price than sovereign bonds with
similar characteristics. The higher yield is because of the higher credit risk associated with
non-sovereign issuers relative to sovereign issuers, although default rates of local governments
are historically low and their credit quality is usually high. The higher yield may also be a
consequence of non-sovereign bonds being less liquid than sovereign bonds with similar
characteristics.
Q37-7 ★The bond issued by a multilateral agency such as the International Monetary Fund
(IMF) can be regarded as a: 2014 原版书 R53-15
A. Sovereign bond.
B. Supranational bond.
C. Quasi-government bond.
Solution: B.
The IMF is a multilateral agency that issues supranational bonds. A and C are incorrect because
sovereign bonds and quasi-government bonds are issued by national governments and by
entities that perform various functions for national governments, respectively.
Q38-7 ★A governmental agency bonds are most likely: 2014 原版书 P372-2
A. Repaid from the cash flows generated by the agency.
B. Guaranteed by the national government that sponsored the agency.
C. Backed by the taxing power of the national government that sponsored the agency.
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Solution: A.
Most bonds issued by a governmental agency are repaid from the cash flows generated by the
agency or from the project the bond issue is financing. B and C are incorrect because although
some bonds issued by governmental agencies are guaranteed by the national government or
are backed by the taxing power of the national government that sponsored the agency, bonds
are most likely repaid first from the cash flows generated by the agency.
R12-7 sovereign government bond, non-sovereign government bond, government agency
bonds 和 supranational bonds
Sovereign bonds: issued by national governments and backed by their tax
power.
Nonsovereign government bonds: issued by governments below the national
level.
Agency bonds (quasi-government bonds): issued by entities created by
national government and may be explicitly or implicitly backed by government.
Supranational bonds: issued by supranational agencies (multilateral
agencies,. the IMF,the World Bank) that operate across national.
P10-7 Bonds issued by corporation
Q39-7 ★The characteristic of Eurocommerical paper is most likely that: 2014 原版书 R53-17
A. It is negotiable.
B. It is denominated in euro.
C. It is issued on a discount basis
Solution: A.
Commercial paper, whether . commercial paper or Eurocommercial paper, is
negotiable—that is, investors can buy and sell commercial paper on secondary markets. B is
incorrect because Eurocommercial paper can be denominated in any currency. C is incorrect
because Eurocommercial paper is more frequently issued on an interest-bearing (or yield)
basis than on a discount basis.
Q40-7 ★The characteristic of Eurocommerical paper is least likely that:
A. It is negotiable.
B. Euro commercial paper ranges in maturity from overnight to 364 days.
C. It is issued on a discount basis
Solution: C.
Commercial paper, whether . commercial paper or Eurocommercial paper, is
negotiable—that is, investors can buy and sell commercial paper on secondary markets. C is
incorrect because Eurocommercial paper is more frequently issued on an interest-bearing (or
yield) basis than on a discount basis.
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Q41-7 ★A loan made by a group of banks to a private company is most likely: 2014 原版书
P380-1
A. a bilateral loan
B. a syndicated loan
C. a private placement
Solution: B.
A loan from a group of lenders to a single borrower is a syndicated loan. A is incorrect because
a bilateral loan is a loan from a single lender to a single borrower. C is incorrect because a
private placement involves placing the debt issued by a borrower directly with a lender or a
group of lenders. The fact that the borrower is a private company is irrelevant.
Q42-7 Which of the following statements relating to commercial paper is most accurate?
Companies issue commercial paper: （2015 年原版书 p300-T2）
A. only for funding working capital.
B. only as an interim source of financing.
C. both for funding working capital and as an interim source of funding.
Solution: C.
Companies use commercial paper as a source of funding working capital and seasonal demand
for cash, as well as an interim source of financing until permanent financing can be arranged.
Q43-7 Maturities of Eurocommercial paper range from: （2015 年原版书 p300-T3）
A. overnight to three months.
B. overnight to one year.
C. three months to one year.
Solution: B.
Eurocommercial paper ranges in maturity from overnight to 364 days.
Q44-7 A bond issue that has a stated number of bonds that mature and are paid off each
year before final maturity most likely has a: （2015 年原版书 p300-T4）
A. term maturity.
B. serial maturity.
C. sinking fund arrangement.
Solution: B.
With a serial maturity structure, a stated number of bonds mature and are paid off each year
before final maturity. A is incorrect because a bond issue with a term maturity structure is paid
off in one lump sum at maturity. C is incorrect because a sinking fund arrangement, like a serial
maturity structure, results in a portion of the bond issue being paid off every year. However,
with a serial maturity structure, the bonds are paid off because the maturity dates are spread
out during the life of the bond and the bonds that are retired are maturing; the bondholders
know in advance which bonds will be retired. In contrast, the bonds retired annually with a
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sinking fund arrangement are designated by a random drawing.
R13-7 由公司发行的债务类别
Bank debt
Bilateral loan: involves only one bank
Syndicated loan: funded by several banks
Commercial paper: short term, unsecured, low rate ( issued by corporations of high
credit quality) debt.
commercial paper Vs. Eurocommercial paper
Feature commercial paper Eurocommercial paper
Currency dollar Any currency
Maturity Overnight to 270 days Overnight to 364 days
Interest
Discount basis (pure discount
security)
Interest-bearing basis (add-on
yield)
Settlement T+0 T+2
Negotiable Can be sold to another Can be sold to another
Corporate bonds: may have a term maturity structure or a serial maturity structure
and may have a sinking fund provision.
Medium-term notes: corporate issues that can be structured to meet the
requirements of investors.
P11-7 Short-term funding available to banks
Q45-7 ★Which of the following are not refer to wholesale funds? 2014 原版书 P386-1
A. Interbank funds
B. Central bank funds
C. Repurchase agreements
Solution: C.
Wholesale funds refer to the funds that financial institutions lend to and borrow from each
other. They include central bank funds, interbank funds, and certificates of deposit. Although
repurchase agreements are an important source of funding for banks, they are not considered
wholesale funds.
Q46-7 ★Most negotiable certificate of deposit: 2014 原版书 P386-3
A. is traded in the open market.
B. is purchased by retail investors.
C. has a penalty for early withdrawal of funds.
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Solution: A.
Large-denomination negotiable certificates of deposit (CDs) can be traded in the open market.
B is incorrect because it is small-denomination, not large-denomination, negotiable CDs that
are primarily purchased by retail investors. C is incorrect because it is non-negotiable, not
negotiable, CDs that have a penalty for early withdrawal of funds.
R14-7 银行的短期融资工具
Customers deposits: including checking accounts, savings accounts, and money
market mutual funds
Certificates of deposit(CDs): interest-bearing CDs that mature on specific dates and
are offered in a range of short-term maturities.
Negotiable certificates of deposit: CDs which may be sold in the wholesale
market
Central bank funds market: banks may buy or sell excess reserves deposited with
their central bank.
Interbank funds: banks make unsecured loans to one another for periods up to a
year.
P12-7 Repurchase agreements
Q47-7 ★The higher the level of repo margin: 2014 原版书 P386-6
A. the higher the quality of the collateral.
B. the higher the credit quality of the counterparty.
C. the longer the length of the repurchase agreement.
Solution: C.
The longer the length of the repurchase agreement, the higher the repo margin (haircut). A is
incorrect because the higher the quality of the collateral, the lower the repo margin. B is
incorrect because the higher the credit quality of the counterparty, the lower the repo margin.
Q48-7 ★The interest on a repurchase agreement is known as the: 2014 原版书 P386-5
A. Repo rate
B. Repo yield
C. Repo margin
Solution: A.
The repo rate is the interest rate on a repurchase agreement. B is incorrect because the
interest on a repurchase agreement is known as the repo rate, not repo yield. C is incorrect
because the repo margin refers to the difference between the market value of the security
used as collateral and the value of the loan.
Q49-7 ★A repurchase agreement is most comparable to a(n): 2014 原版书 P392-21
A. Interbank deposit
B. Collateralized loan
C. Negotiable certificate of deposit
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Solution: B.
A repurchase agreement(repo) can be viewed as a collateralized loan where the security sold
and subsequently repurchased represents the collateral posted. A and C are incorrect because
interbank deposits and negotiable certificates of deposit are unsecured deposits-that is, there
is no collateral backing the deposit.
Q50-7 ★★Which of the following factors will most likely drive the repo margin lower? (2014
Mock 99-97)
A. Lower quality of the collateral
B. Lower credit quality of the counterparty
C. Shorter supply of the collateral
Solution: C.
If the collateral is in short supply or if there is a high demand for it, repo margins are lower.
Repo margin is the difference between the market value of the security used as collateral and
the value of the loan.
R15-7 repurchase agreement(repos) 及其对于短期资金投资者的重要性
Repurchase agreement(repos): a form of short-term collateralized borrowing in
which one party sells a security to another party and agree to buy it back at a
predetermined future date and price.
Repurchase agreements are an important source of short-term financing for bond
dealers.
Credit risk associated with repos:
For the lender(investor), the credit risk associated with repos lies on the risk
that collateral has fallen following the inception of the repurchase agreement,
causing the market value of collateral to be lower than the unpaid repurchase
price.
For the borrower, the credit risk associated with that the investor(lender)
defaults and that the price of the collateral has risen since the inception of the
repurchase agreement, resulting in the dealer now holding an amount of cash
lower than the market value of the collateral.
The investor is liable for any excess of the price paid by the dealer for
replacement of the securities over the repurchase price
★Repo rate: the interest rate on a repurchase agreement.
The repo rate is lower when
Repo term is shorter
Credit quality of the collateral security is higher
Collateral security is delivered to the lender
Interest rate for alternative sources of funds are lower
Repo margin (haircut): the difference between the market value of the security
used as collateral and the value of the loan.
The repo margin is lower when
Repo term is shorter
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Credit quality of the collateral security is higher
Credit quality of the borrower is higher
Collateral security is in high demand or low supply
P13-7 Valuation of bond based on spot rate
Q51-7 ★The present value of a $1,000 par value, zero-coupon bond with a three-year
maturity assuming an annual discount rate of 6 percent compounded semiannually is
closest to: 2013 百题 Q67-7
A. $.
B. $.
C. $.
Solution: A.
The present value of the bond = Maturity value / (1 + i) Year to maturity X 2 Where: i =
semiannual discount rate = 6% / 2 = 3%
PV = $1,000 / ()6 = $
Q52-7 ★A bond offers an annual coupon rate of 5%, with interest paid semiannually. The
bond matures in seven years. At a market discount rate of 3%, the price of this bond
per 100 par value is closest to: 2014 原版书 P444-5
A.
B.
C.
Solution: B.
1 2 3 13 14
...
(1 ) (1 ) (1 ) (1 ) (1 )
PV
Q53-7 Consider a $100 par value bond with a 7 percent coupon paid annually and 5 years to
maturity. At a discount rate of percent, the value of the bond is $. One year
later, the appropriate discount rate has risen to percent and the bond's value is
$. What part of this change in value is most likely attributable to the passage of
time?
A. $
B. $
C. $
Solution: B.
With 4 years remaining to maturity and a discount rate that is unchanged at percent, the
value of the bond would be $ or N=4, I/Y=6, PMT=7, FV=100, CPT(PV)=
Q54-7 ★Assume a $1,000,000 par value, semiannual coupon . Treasury note with two
years to maturity and a coupon rate of 10 percent. Using the following Treasury spot
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rates and ignoring accrued interest and transactions costs, the arbitrage-free value of
the Treasury note is closest to: 20
A. $846,210.
B. $1,000,000.
C. $1,002,647.
Solution: C.
Note that the four cash flows are, in percent of par terms, 5, 5, 5, and 105. Adjust the
spot rates for semiannual compounding. Solve (5 / ) + (5 / ()2) + (5 /
()3) + (105 / ()4) = percent of par. As par is $1,000,000, the correct
answer is $1,002,647. 百题 Q88-7
R16-7 给定 Market discount rate, 计算 Bond’s price
对于年付息 1 次、剩余期限为 N 年的债券，
2
...
(1 ) (1 ) (1 )N
coupon coupon coupon pricipal
price
YTM YTM YTM
对于年付息 2 次、剩余期限为 N 年的债券，
2
...
(1 ) (1 ) (1 )
2 2 2
N
coupon coupon coupon pricipal
price
YTM YTM YTM
R17-7 Spot rate:market discount rates for single payment to be made in the future
2
1 2
...
(1 ) (1 ) (1 )NN
coupon coupon coupon pricipal
price
S S S
, where S is the spot rate.
P14-7 Relationship among a bond’s price, coupon rate, maturity, and market discount rate
Q55-7 A bond with 14 years to maturity and a coupon rate of percent has a
yield-to-maturity (YTM) of percent. Assuming the bond's YTM remains constant,
the bond's value as it approaches maturity will most likely: 2013 百题 Q69-7
A. increase.
B. decrease.
C. remain constant.
Solution: B.
The bond is selling at a premium (coupon rate >YTM). As it approaches maturity, the bond's
value will decrease towards par value.
Maturity Spot Rate (%)
Six months
Twelve months
Eighteen months
Twenty-four months
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Q56-7 Each of the option-free bonds listed below has a par value of $1,000: 2013 百题
Bond 1 Bond 2
Time to maturity 10 years 10 years
Annual coupon rate % %
Discount rate today % %
Which of the following statements about the two bonds is most accurate? If the
discount rate for each of the bonds remains at percent for ten years, the passage
of time will result in a decrease in value for:
A. bond 1 only.
B. bond 2 only.
C. both of the bonds.
Solution: B.
Bond 1 is currently selling at a discount to par and Bond 2 is selling at a premium to par. If the
discount rate does not change for either bond, Bond 1 will increase in price and Bond 2 will
decrease in price because all bonds are expected to mature at par value.
Q57-7 ★★Consider a $100 par value bond with a 7% coupon paid annually and 5 years to
maturity. At a discount rate of %, the value of the bond today is $. One day
later, the discount rate increases to %. Assuming the discount rate remains at %
over the remaining life of the bond, what is most likely to occur to the price of the
bond between today and maturity? (2014 Mock 100-109)
A. Decreases then increases
B. Decreases then remains unchanged
C. Increases then decreases
Solution: A.
If the discount rate increases to % from %, the price of a bond decreases. At a discount
rate of %, the bond sells at a discount to face value. As a discount bond approaches
maturity, it will increase in price over time until it reaches par at maturity.
R18-7 Relationship among a bond’s price, coupon rate, maturity, and market discount rate
At a point in time, a decrease (increase) in a bond’s YTM will increase (decrease) its
price.
If a bond’s coupon rate is greater than its YTM, its price will be at a premium to par
value. If a bond’s coupon rate is less than its YTM, its price will be at a discount to
par value.
The percentage decrease in value when the YTM increase by a given amount is
smaller than the increase in value when the YTM decreases by the same
amount(the price-yield relationship in convex).
Other things equal, the price of a bond with a lower coupon rate is more sensitive
to a change in yield than is the price of a bond with a higher coupon rate.
Other things equal, the price of a bond with a longer maturity is more sensitive to
a change in yield than is the price of a bond with a short maturity.
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A bond’s price moves toward par value as time passes and maturity approaches.
P15-7 Flat price, accrued interest and full price & Maxtrix pricing
Q58-7 The price often quoted by the bond dealers is most likely: 2014 原版书 R54-18
A. flat price.
B. full price.
C. full price plus accrued interest.
Solution: A.
Bond dealers usually quote the flat price. When a trade takes place, the accrued interest is
added to the flat price to obtain the full price paid by the buyer and received by the seller on
the settlement date. The reason for using the flat price for quotation is to avoid misleading
investors about the market price trend for the bond. If the full price were to be quoted by
dealers, investors would see the price rise day after day even if the yield-to-maturity did not
change. That is because the amount of accrued interest increases each day. Then after the
coupon payment is made the quoted price would drop dramatically. Using the flat price for
quotation avoids that misrepresentation. The full price, flat price plus accrued interest, is not
usually quoted by bond dealers. Accrued interest is included in not added to the full price and
bond dealers do not generally quote the full price.
Q59-7 ★Bond G, described in the exhibit below, is sold for settlement on 16 June 2014. The
full price that bond G will settle at on 16 June 2014 is closest to: 2014 原版书 P448-19
Annual coupon:5%
Coupon payment frequency:semiannual
Interest payment date:10 April and 10 October
Maturity date: 10 October 2016
Day count convention:30/360
Annual yield-to-maturity:4%
A.
B.
C.
Solution: B.
1 2 3 4 5
66/180
(1 ) (1 ) (1 ) (1 ) (1 )
*()
PV
PV
Q60-7 ★The bonds of Whakatane and Co. are priced for settlement on 15 July 2014 and
have the following features.
Par value $
Annual coupon rate 8%
Coupon payment frequency Semiannual
Coupon payment dates 15 May and 15 November
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Maturity date 15 November 2017
Day count convention Actual/Actual
Annual yield to maturity %
On the basis of this information, the difference between the full and flat prices is
closest to
A. .
B. .
C. .
Solution: C.
The difference between the full and flat prices is the accrued interest, which is computed as
follows. Based on the Actual/Actual day convention, the number of days between the coupon
periods is 183 days. Also, using the Actual/Actual day count convention, the number of days
between 15 May 2014 and 15 July 2014 is 16 days remaining in May + 30 days in June + 15
days in July = 61 days. Accrued interest (per $100 par value) = (61/183)( = .
Q61-7 ★By using matrix pricing, investors can estimate market discount rates and prices for
bonds: 2014 原版书 R54-22
A. With different coupon rates.
B. That are not actively traded.
C. With different credit quality.
Solution: B.
For bonds not actively traded or not yet issued, matrix pricing is a price estimation process that
uses market discount rates based on the quoted prices of similar bonds (similar
times-to-maturity, coupon rates, and credit quality).
Q62-7 ★An analyst needs to assign a value to an illiquid four-year, % annual coupon
payment corporate bond. The analyst identifies two corporate bonds that have similar
credit quality: One is a three-year, % annual coupon payment bond priced at
per 100 of par value, and the other is a five-year, % annual coupon
payment bond priced at per 100 of par value. Using matrix pricing, the
estimated price of the illiquid bond per 100 of par value is closest to:
A. .
B. .
C. .
Solution: B.
The first step is to determine the yields-to-maturity on the observed bonds. The required yield
on the three-year, % bond priced at is %.
Some fixed-rate bonds are not actively traded. Therefore, there is no market price available to
calculate the rate of return required by investors. The same problem occurs for bonds that are
not yet issued. In these situations, it is common to estimate the market discount rate and price
based on the quoted or flat prices of more frequently traded comparable bonds. These
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comparable bonds have similar times-to-maturity, coupon rates, and credit quality. This
estimation process is called matrix pricing.
R19-7 计算 flat price, accrued interest 和 full price, matrix pricing
Accrued Interest: the interest received by the seller when a bond trades between
coupon dates.
1
1 2
int *
T
accrued erest coupon
T T
Clean Price(or flat price): the agreed upon price of the bond.
Full Price (or dirty price, or invoice price): the amount that the buyer pays to the
seller, which equals the clean price plus any accrued interest.
Full Price = Clean Price +Accrued Interest
Full price=
/*(1 )t TPV YTM ,
where it is the number of days from the last coupon payment date until the date
the bond trade will settle, and T is the number of days between the last coupon
payment and the next.
Matrix pricing is a method used to estimate the yield-to-maturity for bonds that
are not traded or infrequently traded.
P16-7 Yield measure
Q63-7 ★Which of the following yield is only related with the coupon rate and bond price?
A. Current yield
B. Effective annual yield
C. Holding period yield
Solution: A.
Current yield = annual cash coupon payment / bond price
Q64-7 ★★A 5-year, 5% semiannual coupon payment corporate bond is priced at
per 100 of par value. The bond's yield-to-maturity, quoted on a semiannual bond basis,
is %. An analyst has been asked to convert to a monthly periodicity. Under this
conversion, the yield-to-maturity is closest to: 2014 原版书 P448-26
A. %.
B. %.
C. %.
Solution: A.
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2 1212
12
(1 ) (1 )
2 12
*12
YTM
YTM
YTM
Q65-7 ★★A 365-day year bank certificate of deposit has an initial principal amount of USD
million and a redemption amount due at maturity of USD 100million. The
number of days between settlement and maturity is 350. The bond equivalent yield is
closest to : 2014 原版书 P450-33
A. %
B. %
C. %
Solution: C.
365 100
* %
350
BEY
Q66-7 ★★The bond equivalent yield of a 180-day banker’s acceptance quoted at a discount
rate of % for a 360-day year is closest to: 2014 原版书 P450-34
A. %
B. %
C. %
Solution: C.
180
100*(1 *)
360
365 100
*
180
PV
BEY
Q67-7 ★A 10% coupon bond with annual payments, maturing in 3 years, is priced at 105.
The bond is callable in one year at a call price of 104 or two years at a call price of 102.
The bonds yield to worst most likely occurs when the bond is: 2013 百题 Q76-7
A. Called in year 1.
B. Called in year2.
C. Held until maturity.
Solution: C.
The yield to worst for a callable bond is the lowest of the yields to call for each possible call
date and the yield to maturity. The yield to call or yield to maturity solves the following
equation:
1
/ (1 )
T
t
t
t
P CF i
, where i is the yield to call, or yield to maturity CF is the cash flow at
date t, and T is the maturity or call date. The yield to call if the bond is called in one year is
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%, because 105=
1
10 104
The yield to call if the bond is called in two years is %, because 105=
1 2
10 10 102
.
The yield to maturity of the bond is %, because
1 2 3
10 10 10 100
105
.
The yield to worst is the lowest of these and occurs when the bond is held until maturity (.,
it is the yield to maturity).
Q68-7 ★An analyst evaluates the following information relating to floating rate notes (FRNs)
issued at par value that have 3-month Libor as a reference rate:
Floating Rate Note Quoted Margin Discount Margin
X % %
Y % %
Z % %
Based only on the information provided, the FRN that will be priced at a premium on
the next reset date is:
A. FRN X.
B. FRN Y.
C. FRN Z.
Solution: A.
FRN X will be priced at a premium on the next reset date because the quoted margin of %
is greater than the discount or required margin of %. The premium amount is the present
value of the extra or "excess" interest payments of % each quarter (% - %). FRN Y
will be priced at par value on the next reset date since there is no difference between the
quoted and discount margins. FRN Z will be priced at a discount since the quoted margin is less
than the required margin.
Q69-7 ★★DMT Corp. issued a five-year floating-rate note (FRN) that pays a quarterly
coupon of three-month LIBOR plus 125 bps. The FRN is priced at 96 per 100 of par
value. Assuming a 30/360 day-count convention, evenly spaced periods, and constant
three-month LIBOR of 5%, the discount margin for the FRN is closest to: (2014 Mock
99-105)
A. 221 bps.
B. 400 bps.
C. 180 bps.
Solution: A.
The interest payment each period per 100 of par value is:
( ) ( ) 100
4
Index QM FV
m
The discount margin can be estimated by solving for DM in the equation:
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1 2 20
96
(1 ) (1 ) (1 )
4 4 4
DM DM DM
…
The solution for the discount rate, r = (+DM)/4 is %. Therefore DM = %, or 221
bps.
R20-7 Yield measures
Yield measures for fixed-rate bonds
The effective yield of a bond depends on its periodicity, or annual frequency of
coupon payments.
Effective yield= (1 ) 1m
YTM
m
For annual-pay bond: effective yield = YTM
For bonds with greater periodicity, the effective yields is greater than YTM
Bond Equivalent Yield (BEY): A Semiannual YTM or Semiannual-Pay YTM
BEY=2*semiannual discount rate
BEY of an annual-pay bond: 2( 1) (1 )
2
BEY
annual YTM
EAY 与 BEY 的转化关系式： 2( 1) (1 )
2
BEY
EAY
Bond yield that follow street convention use the stated coupon payment dates.
A true yield accounts for coupon payments that are delayed by weekends or
holidays.
Current yield is the ratio of a bond’s annual coupon payment to its price.
Simple yield adjusts current yield by using straight-line amortization of any
discount or premium.
For a callable bond, a yield-to-call may be calculated using each of tis call dates and
prices. The lowest of these yields and YTM is a callable bond’s yield-to-worst.
Floating-rate note yields
The margin used to calculate the bond coupon payments is called the quoted
margin.
The margin used to calculate the return of the FRN to its par value is called the
required margin(discount margin).
Selling at par(credit unchanged): required margin = quoted margin
Selling at discount(downgrade of credit): quoted margin < required margin
Selling at premium(upgrade of credit): quoted margin > required margin
Yield for money market instruments
Yield quoted on a discount basis: quote on . Treasury bills
( * )
year FV PV
DR
days FV
where DR is the yield quoted on a discount basis
Yield quoted on an add-on basis: LIBOR, bank CD rates
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*( )
year FV PV
AOR
days PV
where AOR is the yield quoted on an add-on basis. Both discount basis and
add-on yields in the money market are quoted as simple annual interest and
can be based on a 360-day or 365-day basis
Bond equivalent yield for money market security is an add-on yield based on a
365-day year.
365
*BEY AOR
days
where AOR is the yield quoted on an add-on basis
P17-7 Spot curve, yield curve on coupon bonds, par curve and forward curve
Q70-7 ★Which of the following statements describing a par curve is incorrect? 2014 原版书
P450-35
A. A par curve is obtained from a spot curve.
B. All bonds on a par curve are assumed to have different credit risk.
C. A par curve is a sequence of yields-to-maturity such that each bond is priced at par value.
Solution: B.
All bonds on a par curve are assumed to have similar, not different, credit risk. Par curves are
obtained from spot curves and all bonds used to derive the par curve are assumed to have the
same credit risk, as well as the same periodicity, currency, liquidity, tax status, and annual
yields. A par curve is a sequence of yields-to-maturity such that each bond is priced at par
value.
Q71-7 ★A yield curve constructed from a sequence of yields-to-maturity on zero-coupon
bonds is the: 2014 原版书 P450-36
A. Par curve
B. Spot curve
C. Forward curve
Solution: B.
The spot curve, also known as the strip or zero curve, is the yield curve constructed from a
sequence of yields-to-maturities on zero-coupon bonds. The par curve is a sequence of
yields-to-maturity such that each bond is priced at par value. The forward curve is constructed
using a series of forward rates, each having the same time frame.
Q72-7 ★★All rates are annual rates stated for a periodicity of one(effective annual rates).
Time period Forward rate
0y1y %
1y1y %
2y1y %
3y1y %
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4y1y %
The 3-year implied spot rate is closest to: 2014 原版书 P451-38
A. %
B. %
C. %
Solution: B.
3
3
3
(**) (1 )
%
Z
Z
Q73-7 ★★Using the following US Treasury forward rates, the value of a 2½ -year $100 par
value Treasury bond with a 5% coupon rate is closest to: (2014 Mock 100-106)
Period Years Forward Rate
1 %
2 1 %
3 %
4 2 %
5 %
A. $.
B. $.
C. $.
Solution: A.
The value of the bond is
(1 / 2) (1 / 2)(1 / 2) (1 / 2)(1 / 2)(1 2)
(1 / 2)(1 / 2)(1 2)(1 / 2)
$
(1 / 2)(1 / 2)(1 2)(1 / 2)(1 / 2)
R21-7 Spot curve, yield curve on coupon bonds, par curve and forward curve
Yield curve: yield 与 maturity 之间的关系
Spot curve(spot rate yield curve): a yield curve for single payments in the future
Yield for coupon bonds: coupon bond 的 YTM 与 maturity 之间的关系
Par curve(=par bond yield curve):shows the coupon rates for bonds of various
maturities that would result in bond prices equal to their par values.
Forward curve:shows the future rates for bonds or money market securities for
the same maturities for annual periods in the future
R22-7 Spot Rate 与 Forward Rate 之间的转化
Forward rate:current lending/borrowing rates for short-term loans to be made in
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future periods.
Forward rate 与 spot rate 之间的转换公式
R23-7 使用 forward rate 计算 bond price
1 2
1 1 1
...
(1 ) (1 )(1 1 1 ) (1 )(1 1 1 )...(1 ( 1) 1 )
nCFCF CFbond value
S S y y S y y T y y
P18-7 G-spread, I-spread, Zero-volatility and option-adjusted spreads
Q74-7 ★The yield spread of a specific bond relative to the standard swap rate in that
currency of the same tenor is most likely: 2014 原版书 P451-41
A. I-spread.
B. Z-spread.
C. G-spread.
Solution: A.
The I-spread, or interpolated spread, is the yield spread of a specific bond over the standard
swap rate in that currency of the same tenor. The yield spread in basis points over an actual or
interpolated government bond is known as the G-spread. The Z-spread (zero-volatility spread)
is the constant spread that is added to each spot rate so that the present value of the cash
flows matches the price of the bond.
Q75-7 ★★The G-spread in basis points(bps) on the bond is closest to:
bond Coupon Time-to-maturity price
Benchmark Bond
2% 3 year
Bond 5% 3 year
Both bonds pay interest annually. The current three-year EUR interest rate swap
benchmark is %.(2014 原版书 P452-42 )
A. 264 bps
B. 285 bps
C. 300 bps
Solution: B.
Yield-to-maturity on the . corporate bond:
1 2 3
5 5 105
, 476
(1 ) (1 ) (1 )
r or bps
r r r
Yield-to-maturity on the benchmark:
1 2 3
2 2 102
, 191
(1 ) (1 ) (1 )
r or bps
r r r
The G-spread is 476-191=285 bps
1(1 ) (1 )(1 1 1 ) (1 ( 1) 1 )
T
TS S y y T y yK+ = + + + -
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Q76-7 ★A corporate bond offers a 5% coupon rate and has exactly 3 years remaining to
maturity. The following rates are from the benchmark spot curve:
Time-to-maturity Spot rate
1 year %
2 year %
3 year %
The bond is currently traded at a Z-spread of 234 basis points. The value of the bond is
closest to: 2014 原版书 P452-43
A.
B.
C.
Solution: A.
1 2 3
5 5 105
(1 ) (1 ) (1 )
PV
Q77-7 ★★An option-adjusted-spread(OAS) on a callable bond is the Z-spread:
A. Over the benchmark spot curve.
B. Minus the standard swap rate in that currency of the same tenor.
C. Minus the value of the embedded call option expressed in basis points per year.
Solution: C.
The option value in basis points per year is subtracted from the Z-spread to calculate the
option-adjusted spread(OAS). The Z-spread is the constant yield spread over the benchmark
spot curve. The I-spread is the yield spread of a specific bond over the standard swap rate in
that currency of the same tenor.
R24-7 各种 Yield Spread
Yield spread: the difference between the yields of two different bonds.
Benchmark spread: a yield spread relative to a benchmark bond.
G-spread: the benchmark is government bond yield
bond treasuryG spread YTM YTM
Interpolated spread/I-spread: the benchmark is swap rate
Z-spread: the spread that must be added to each rate on the benchmark yield
curve to make the present value of a bond equal to its price.
1 2
1 2
2 2
...
(1 ) (1 )
market
CF CF
P
R Z R Z
The difference between the GS and the ZS
The steeper the benchmark spot rate curve, the greater the difference
between the two spread measures.
There is no difference between the GS and ZS when the spot yield curve
is flat.
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The earlier bond principal is paid, the greater the difference between the two
spread measures
Option-adjusted spread(OAS): used for bonds with embedded options.
Callable bond: ZS>OAS
Putable bond: ZS<OAS
OAS=Z-spread-option cost
1 2
1 2
1 2
...
(1 ) (1 )
market
CF CF
P
R OAS R OAS
P19-7 Sources of return from investing in a fixed-rate bond
Q78-7 ★A "buy-and-hold" investor purchases a fixed-rate bond at a discount and holds the
security until it matures. Which of the following sources of return is least likely to
contribute to the investor's total return over the investment horizon, assuming all
payments are made as scheduled? 2014 原版书 P518-1
A. Capital gain
B. Principal payments
C. Reinvestment of coupon payments
Solution: A.
A capital gain is least likely to contribute to the investor's total return. There is no capital gain
(or loss) because the bond is held to maturity. The carrying value of the bond at maturity is par
value, the same as the redemption amount. When a fixed-rate bond is held to its maturity, the
investor receives the principal payment at maturity. This principal payment is a source of
return for the investor. A fixed-rate bond pays periodic coupon payments, and the
reinvestment of these coupon payments is a source of return for the investor. The investor's
total return is the redemption of principal at maturity and the sum of the reinvested coupons.
Q79-7 ★★Which of the following sources of return is most likely exposed to interest rate
risk for an investor of a fixed-rate bond who holds the bond until maturity? 2014 原版
书 P518-2
A. Capital gain or loss
B. Redemption of principal
C. Reinvestment of coupon payments
Solution: C.
Because the fixed-rate bond is held to maturity (a "buy-and-hold" investor), interest rate risk
arises entirely from changes in coupon reinvestment rates. Higher interest rates increase
income from reinvestment of coupon payments, and lower rates decrease income from
coupon reinvestment. There will not be a capital gain or loss because the bond is held to
maturity. The carrying value at the maturity date is par value, the same as the redemption
amount. The redemption of principal does not expose the investor to interest rate risk. The risk
to a bond's principal is credit risk.
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Q80-7 ★★An investor purchases a bond at premium value and two years later, the investor
sells the bond. The resulting capital gain or loss can be calculated by comparing the
price at which the bond is sold to the: 2014 原版书 P518-3
A. Carrying value.
B. Original purchase price.
C. Original purchase price value plus the amortized amount of the premium.
Solution: A.
Capital gains (losses) arise if a bond is sold at a price above (below) its constant-yield price
trajectory. A point on the trajectory represents the carrying value of the bond at that time.
That is, the capital gain/loss is measured from the bond's carrying value, the point on the
constant-yield price trajectory, and not from the original purchase price. The carrying value is
the original purchase price plus the amortized amount of the discount if the bond is purchased
at a price below par value. If the bond is purchased at a price above par value, the carrying
value is the original purchase price minus (not plus) the amortized amount of the premium.
The amortized amount for each year is the change in the price between two points on the
trajectory.
Q81-7 ★An investor purchases a nine-year, 7% annual coupon payment bond at a price
equal to par value. After the bond is purchased and before the first coupon is received,
interest rates increase to 8%. The investor sells the bond after five years. Assume that
interest rates remain unchanged at 8% over the five-year holding period. Per 100 of
par value, the future value of the reinvested coupon payments at the end of the
holding period is closest to: 2014 原版书 P518-4
A. .
B. .
C. .
Solution: C.
4 3 27* 7* 7* 7* 7
Q82-7 ★An investor purchases a nine-year, 7% annual coupon payment bond at a price
equal to par value. After the bond is purchased and before the first coupon is received,
interest rates increase to 8%. The investor sells the bond after five years. Assume that
interest rates remain unchanged at 8% over the five-year holding period. The capital
gain/loss per 100 of par value resulting from the sale of the bond at the end of the
five-year holding period is closest to a: 2014 原版书 P518-5
A. loss of .
B. loss of .
C. gain of .
Solution: B.
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1 2 3 4
7 7 7 107
() () ()
PV
Capital gain/loss=-100=
Q83-7 ★★An investor purchases a nine-year, 7% annual coupon payment bond at a price
equal to par value. After the bond is purchased and before the first coupon is received,
interest rates increase to 8%. The investor sells the bond after five years. Assume that
interest rates remain unchanged at 8% over the five-year holding period. Assuming
that all coupons are reinvested over the holding period, the investor's five-year
horizon yield is closest to: 2014 原版书 P518-6
A. %.
B. %
C. %
Solution: B.
1 2 3 4
7 7 7 107
() () ()
PV
4 3 27* 7* 7* 7* 7
5
100 ,
(1 )
r
r
R25-7 Three sources of return:
Coupon and principal payments
Reinvestment of coupon payments
Capital gain or loss if bond is sold before maturity
Total return: future value of reinvested coupon interest payments and the sale
price (par value if the bond is held to maturity)
A point on the trajectory represents the carrying value of the bond at that time.
The carrying value is the purchase price plus the amortized amount of the
discount if the bond is purchased at a price below par value, while it is the
purchase price minus the amortized amount of the premium if the bond is
purchased at a price above par value.
R26-7 投资时间与 YTM 的关系
An investor who holds a fixed-rate bond to maturity will earn an annualized rate
of return equal to the YTM of the bond when purchased.
An investor who sells a bond prior to maturity will earn a rate of return equal to
the YTM at purchase if the YTM at sale has not changed since purchase.
If the market YTM for the bond, our assumed reinvestment rate, increases
(decreases) after the bond is purchased but before the first coupon date, a
buy-and-hold investor's realized return will be higher (lower) than the YTM of the
bond when purchased.
If the market YTM for the bond, our assumed reinvestment rate, increases after
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the bond is purchased but before the first coupon date, a bond investor will earn
a rate of return that is lower (higher) than the YTM at bond purchase if the bond
is held for a short period.
If the market YTM for the bond, our assumed reinvestment rate, decreases after
the bond is purchased but before the first coupon date, a bond investor will earn
a rate of return that is lower (higher) than the YTM at bond purchase if the bond
is held for a long period.
R27-7 Investment horizon 与 price risk、reinvestment risk 的关系
Short investment horizon:
market price risk > reinvestment risk
annualized holding period return is negatively related with YTM
Long investment horizon:
market price risk < reinvestment risk
annualized holding period return is positively related with YTM
R28-7 Annualized holding period return: calculated as the compound annual return earned
from the holding period
1
( ) 1n
total return
auunalized holding period return
bond price
P20-7 Macaulay, modified and effective durations, Money duration and PVBP
Q84-7 ★★An investor buys a three-year bond with a 5% coupon rate paid annually. The
bond, with a yield-to-maturity of 3%, is purchased at a price of per 100 of
par value. Assuming a 5-basis point change in yield-to-maturity, the bond's
approximate modified duration is closest to: 2014 原版书 P519-7
A. .
B. .
C. .
Solution: A.
1 2 3
1 2 3
5 %
5 5 105
(1 ) (1 ) (1 )
5 %
5 5 105
(1 ) (1 ) (1 )
lower yield to maturity by bps to
PV
higher yield to maturity by bps to
PV
a
mod
2**
pproximate ified duration
Q85-7 ★★An investor buys a 6% annual payment bond with three years to maturity. The
bond has a yield-to-maturity of 8% and is currently priced at per 100 of par.
The bond's Macaulay duration is closest to: 2014 原版书 P519-9
A. .
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B. .
C. .
Solution: C.
period Cash flow Present value weight Period*weight
1 6
2 6
3 106
Q86-7 ★★The interest rate risk of a fixed-rate bond with an embedded call option is best
measured by: 2014 原版书 P519-10
A. effective duration.
B. modified duration.
C. Macaulay duration.
Solution: A.
The interest rate risk of a fixed-rate bond with an embedded call option is best measured by
effective duration. A callable bond's future cash flows are uncertain because they are
contingent on future interest rates. The issuer's decision to call the bond depends on future
interest rates. Therefore, the yield-to-maturity on a callable bond is not well defined. Only
effective duration, which takes into consideration the value of the call option, is the
appropriate interest rate risk measure. Yield durations like Macaulay and modified durations
are not relevant for a callable bond because they assume no changes in cash flows when
interest rates change.
Q87-7 ★A Canadian pension fund manager seeks to measure the sensitivity of her pension
liabilities to market interest rate changes. The manager determines the present value
of the liabilities under three interest rate scenarios: a base rate of 7%, a 100 basis
point increase in rates up to 8%, and a 100 basis point drop in rates down to 6%. The
results of the manager's analysis are presented below:
Interest rate assumption Present value of liabilities
6% CAD million
7% CAD million
8% CAD million
The effective duration of the pension fund's liabilities is closest to: 2014 原版书 P519-11
A. .
B. .
C. .
Solution: B.
2**
effective duration
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Q88-7 ★Which of the following statements about Macaulay duration is correct? 2014 原版
书 P519-12
A. A bond's coupon rate and Macaulay duration are positively related.
B. A bond's Macaulay duration is inversely related to its yield-to-maturity.
C. The Macaulay duration of a zero-coupon bond is less than its time-to-maturity.
Solution: B.
A bond's yield-to-maturity is inversely related to its Macaulay duration: The higher the
yield-to-maturity, the lower its Macaulay duration and the lower the interest rate risk. A higher
yield-to-maturity decreases the weighted average of the times to the receipt of cash flow, and
thus decreases the Macaulay duration.
A bond's coupon rate is inversely related to its Macaulay duration: The lower the coupon, the
greater the weight of the payment of principal at maturity. This results in a higher Macaulay
duration. Zero-coupon bonds do not pay periodic coupon payments; therefore, the Macaulay
duration of a zero-coupon bond is its time-to-maturity.
Q89-7 Assuming no change in the credit risk of a bond, the presence of an embedded put
option: 2014 原版书 P520-13
A. reduces the effective duration of the bond.
B. increases the effective duration of the bond.
C. does not change the effective duration of the bond.
Solution: A.
The presence of an embedded put option reduces the effective duration of the bond,
especially when rates are rising. If interest rates are low compared with the coupon rate, the
value of the put option is low and the impact of the change in the benchmark yield on the
bond's price is very similar to the impact on the price of a non-putable bond. But when
benchmark interest rates rise, the put option becomes more valuable to the investor. The
ability to sell the bond at par value limits the price depreciation as rates rise. The presence of
an embedded put option reduces the sensitivity of the bond price to changes in the
benchmark yield, assuming no change in credit risk.
Q90-7 ★★A bond portfolio consists of the following three fixed-rate bonds. Assume annual
coupon payments and no accrued interest on the bonds. Prices are per 100 of par
value.
The bond portfolio's modified duration is closest to: 2014 原版书 P520-14
bond maturity
Market
value
price Coupon
Yield-to-mat
urity
Modified
duration
A 6 years 170,000 % %
B 10 years 120,000 % %
C 15 years 100,000 % %
A. .
B. .
C. .
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Solution: A.
170,000 120,000 100,000 390,000
*(170,000 / 390,000) *(120,000 / 390,000)
*(100,000 / 390,000)
market value of the portfolio
portfolio duration
Q91-7 ★★A limitation of calculating a bond portfolio's duration as the weighted average of
the yield durations of the individual bonds that compose the portfolio is that it:
A. assumes a parallel shift to the yield curve.
B. is less accurate when the yield curve is less steeply sloped.
C. is not applicable to portfolios that have bonds with embedded options.
Solution: A.
A limitation of calculating a bond portfolio's duration as the weighted average of the yield
durations of the individual bonds is that this measure implicitly assumes a parallel shift to the
yield curve (all rates change by the same amount in the same direction). In reality, interest rate
changes so frequently that results in a steeper or flatter yield curve. This approximation of the
"theoretically correct" portfolio duration is more accurate when the yield curve is flatter (less
steeply sloped). An advantage of this approach is that it can be used with portfolios that
include bonds with embedded options. Bonds with embedded options can be included in the
weighted average using the effective durations for these securities.
Q92-7 ★★Consider two bonds that are identical except for their coupon rates. The bond
that will have the highest interest rate risk most likely has the: (2014 Mock 101-110)
A. lowest coupon rate.
B. coupon rate closest to its market yield.
C. highest coupon rate.
Solution: A.
A lower coupon rate means that more of the bond's value comes from repayment of face value,
which occurs at the end of the bond's life.
Q93-7 ★★★Which of the following is correct regarding to the change of Macaulay duration
as time passes and immediately after coupon payment? (自编题)
Time passage Coupon payment
A. Decrease increase
B. Increase Decrease
C. Decrease Decrease
Solution: A.
As time passes during the coupon period, the Macaulay duration declines smoothly and then
jumps upward after the coupon is paid.
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Q94-7 ★Using the information below, which bond has the greatest money duration per 100
of par value assuming annual coupon payments and no accrued interest? 2014 原版
书 P520-16
bond
Time-to-
maturity
Price per 100
of par value
Coupon rate
Yield-to-
maturity
Modified
duration
A 6 years % %
B 10 years % %
C 9 years % %
A. Bond A
B. Bond B
C. Bonc C
Solution: B.
MoneyDur of Bond A = x =
MoneyDur of Bond B = x =
MoneyDur of Bond C = x =
Q95-7 ★★A bond with exactly nine years remaining until maturity offers a 3% coupon rate
with annual coupons. The bond, with a yield-to-maturity of 5%, is priced at
per 100 of par value. The estimated price value of a basis point for the bond is closest
to:
A.
B.
C.
Solution: B.
Lowering the yield-to-maturity by one basis point to % results in a bond price of
:
1 9
3 103
...
(1 ) (1 )
PV
Increasing the yield-to-maturity by one basis point to % results in a bond price of
:
1 9
3 103
...
(1 ) (1 )
PV
2
PVBP
R29-7 定义、计算及解释 Macaulay duration, modified duration 和 effective duration
Interest rate risk: 债券价格对利率变化的敏感程度，价格对利率变化越敏感，
价格波动的可能性就越高
Duration: a measure of a bond’s interest rate risk or sensitivity of a bond’s full
price to a change in its yield.
Macaulay duration: the weighted average number of coupon periods until a
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bond’s scheduled cash flows.
As time passes during the coupon period, the Macaulay duration declines
smoothly and then jumps upward after the coupon is paid because when the
coupon is paid, both numerator and denominator decline by a same amount
and the total impact is an increase for the number greater than one.
1
0
10
[ ( / )]
( )
n
t n
t
t
tt
t PVCF
Macaulay duration t PVCF P
PVCF P
Modified duration: a linear estimate of the percentage change in a bond’s price
that would result from a 1% change in its YTM.
Effective duration: a linear estimate of the percentage change in a bond’s price
that would result from a 1% change in the benchmark yield curve.
For a traditional option-free bond:
The modified duration and effective duration on a traditional option-free
bond are not identical.
The difference narrows when the yield curve is flatter, the time-to-maturity is
shorter, and the bond is priced closer to par value (so that the difference
between the coupon rate and the yield-to-maturity is smaller).
The modified duration and effective duration on an option-free bond are
identical only in the rare circumstance of an absolutely flat yield curve.
R30-7 为什么 effective duration 是衡量 bonds with embedded options 最有效的方法
Interest rates may change the future cash flows of bonds with embedded options
R31-7 债券的 maturity, coupon, embedded option 和 yield level 对 interest rate risk 的影
向
Lower coupon means higher duration.
Longer maturity means higher duration.
Lower market yield means higher duration
A put or call provision means lower duration
Zero-coupon bond 的久期等于债券的剩余期限
perpetuity 的久期=
1 YTM
YTM
Fixed-rate coupon 的久期
bond trading at par of at premium: the longer time to maturity, the higher
Macaulay duration
1
Macaulay duration
Modified duration
periodic market yield
=
+
0
mod
2
V V
Approximate ified duration
V YTM
- +-=
创 D
0
2
V V
Effective duration
V curve
- +-=
创 D
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bond trading at discount:
usual: the longer to maturity, the higher Macaulay duration
exception: for long-term, low-coupon bonds, the duration may be lower
for a longer maturity bond. This situation only occurs if the coupon rate
is low (but not zero) relative to the yield and the time-to-maturity is long.
R32-7 计算 portfolio 的 duration 并解释 portfolio duration 的局限性
Calculate the weighted average number of periods until cash flows will be
received using the portfolio’s IRR.
Limitation: better theoretically but cannot be used for bonds with options.
Calculate the weighted average of durations of bonds in the portfolio.
Portfolio duration = w1D1+ w2D2 + ……+wnDn
Limitations: the yields may not change equally on all the bond in the
portfolio.
R33-7 Money duration and PVBP
Money duration: stated in currency units and is sometimes expressed per 100 of
bond value
Money duration=annual modified duration * full price of bond
Money duration per 100 units of par value=annual modified duration * full price
of bond per 100 of par value
PVBP(=price value of a basis point): the money change in full price of a bond
when its YTM changes by one basis point(%)
( ) ( )
2
PV PV
PVBP
PVBP=money duration*
R34-7 Macaulay Duration between Coupon Payments with a Constant Yield to Maturity
The Macaulay duration decreases smoothly as t goes from t=0 to t=T, which
creates a “saw-tooth” pattern. This pattern for a typical fixed-rate bond is
illustrated in the following exhibit.
P21-7 Convexity
Q96-7 ★Which of the following is the "second-order" effect on a bond's percentage price
change given a change in yield-to-maturity? 2014 原版书 P521-18
A. Duration.
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B. Convexity.
C. Yield volatility.
Solution: B.
Convexity measures the "second order" effect on a bond's percentage price change given a
change in yield-to-maturity. Convexity adjusts the percentage price change estimate provided
by modified duration to better approximate the true relationship between a bond's price and
its yield-to-maturity which is a curved line (convex).
Duration estimates the change in the bond's price along the straight line that is tangent to this
curved line ("first order" effect). Yield volatility measures the magnitude of changes in the
yields along the yield curve.
Q97-7 ★★Consider the following statements about non-callable bonds.
Statement 1: "For non-callable bonds, duration provides only a linear approximation of
a bond's price changes as interest rates change."
Statement 2: "Incorporating convexity into the analysis of a non-callable bond's price
changes as interest rates change always results in higher bond price estimates than
derived by using only - the bond's duration. This is true whether interest rates increase
or decrease."
Are the statements most likely correct or incorrect? 2013 百题 Q108-7
A. Both statements are correct.
B. Statement 1 is incorrect, but Statement 2 is correct.
C. Statement 1 is correct, but Statement 2 is incorrect.
Solution: A.
Duration is a linear approximation. It is the tangent line to the actual bond pricing curve for a
given starting point (interest rate). The actual pricing curve for an option-free bond is convex.
Because of convexity, as you move away from the tangency (the starting point), actual prices
(., those on the actual pricing curve) will always be above the tangent line.
Q98-7 ★★If three bonds are otherwise identical, the one exhibiting the highest level of
positive convexity is most likely the one that is: 2013 百题 Q112-7
A. Putable.
B. Callable.
C. Option-free.
Solution: A.
A is correct because when interest rates rise, a putable bond is more likely to be put back to
the issuer by the investor, limiting the loss of value and giving the bond more positive
convexity than an option-free bond. In contrast, a callable bond is likely to be called from the
investor when interest rates fall, limiting the gain in value and giving the bond negative
convexity.
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Q99-7 ★★A bond is currently trading for per 100 of par value. If the bond’s
yield-to-maturity(YTM) rises by 10 basis points, the bond’s full price is expected to fall
to . if the bond’s YTM decreases by 10 basis points, the bond’s full price is
expected to increase to . The bond’ s approximate convexity is closest to: 2014
A.
B.
C.
Solution: B.
2approximate convexity [ (2*)] / ( *)
Q100-7 ★★A bond has an annual modified duration of and annual convexity of .
If the bond's yield-to-maturity decreases by 25 basis points, the expected percentage
price change is closest to: 2014 原版书 P521-20
A. %
B. %
C. %
Solution: C.
2% [*( )] [**( ) ] , %fullPV or
Q101-7 ★An analyst accurately calculates that the price of an option-free bond with percent
coupon would change 15% if market yields increase 100 basis points. If market yields
decrease 100basis points, the bond’s price would likely: 2013 百题 Q107-7
A. Increase by less than 15%
B. Decrease by less than 15%
C. Increase by more than 15%
Solution: C.
Percentage change in price ={ [- duration×(△y)]+[×convexity×(△y)^2]}100
When the bond yield increase, △y >0, the price decreases 12%, now the bond yield decreases,
△y<0, percentage change in price will be greater than the one when yield increases.
Q102-7 ★The duration of an option-free bond priced at $900 is . If yields decrease by 150
basis points, the most accurate statement about the actual price of the bond after the
decrease in yields is that the actual price will be: 2013 百题 Q109-7
A. Equal to $1,.
B. Greater than 1,.
C. Less than 1, because the lower level of yields increases the bond's interest rate
risk.
Solution: B.
The price adjustment for duration can be calculated as follows:
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X () X 100 = %.
$900() = $1,
This adjusts the price for duration only. Because the bond is option-free and the change in
yield is large, using duration alone underestimates the actual price of the bond because of the
effect of convexity. Once an adjustment is made for convexity, the price would be greater than
$1,.
R35-7 计算及解释 approximate convexity，并区分 approximate convexity 和 effective
convexity
Convexity: a measure of the curvature of the price-yield curve.
0
2
0
2
( YTM)
V V V
approximate convexity
V
Effective convexity: appropriate for bonds with embedded options.
0
2
0
2
( )
V V V
Effective convexity
curve V
R36-7 给定债券 duration 和 convexity，计算债券价格变动的百分比
21
% mod ( ) ( )
2
full price annual ified duration YTM annual convexity YTM
P22-7 Yield volatility, Relationship among a bond’s holding period return, duration, and
the investment horizon
Q103-7 The coupon reinvestment risk just offsets the market price risk when The holding
period for a bond equals to:2014 原版书 P521-23
A. Duration gap.
B. Modified duration.
C. Macaulay duration.
Solution: C.
When the holder of a bond experiences a one-time parallel shift in the yield curve, the
Macaulay duration statistic identifies the number of years necessary to hold the bond so that
the losses (or gains) from coupon reinvestment offset the gains (or losses) from market price
changes. The duration gap is the difference between the Macaulay duration and the
investment horizon. Modified duration approximates the percentage price change of a bond
given a change in its yield-to-maturity.
Q104-7 ★When the investor's investment horizon is larger than the Macaulay duration of the
bond she owns: 2014 原版书 P521-24
A. The investor is hedged against interest rate risk.
B. Reinvestment risk dominates, and the investor is at risk of lower rates.
C. Market price risk dominates, and the investor is at risk of higher rates.
Solution: B.
The investor is hedged against interest rate risk if the duration gap is zero; that is, the investor's
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investment horizon is equal to the bond's Macaulay duration. The investor is at risk of lower
rates only if the duration gap is negative; that is, the investor's investment horizon is greater
than the bond's Macaulay duration. In this case, coupon reinvestment risk dominates market
price risk.
Q105-7 ★An investor purchases an annual coupon bond with a 8% coupon rate and exactly 20
years remaining until maturity at a price equal to par value. The investor's investment
horizon is eight years. The approximate modified duration of the bond is years.
The duration gap at the time of purchase is closest to: 2014 原版书 P521--25
A. .
B. .
C. .
Solution: C.
The duration gap is closest to . The duration gap is a bond's Macaulay duration minus the
investment horizon. The approximate Macaulay duration is the approximate modified duration
times one plus the yield-to-maturity. It is (= x ).
Given an investment horizon of eight years, the duration gap for this bond at purchase is
positive: - 8 = . When the investment horizon is less than the Macaulay duration
of the bond, the duration gap is positive, and price risk dominates coupon reinvestment risk.
Q106-7 ★An investor purchases an annual coupon bond with a 6% coupon rate and exactly 20
years remaining until maturity at a price equal to par value. The investor’s investment
horizon is eight years. The approximate modified duration of the bond is years.
The duration gap at the time of purchase is closest to:
A. .
B. .
C. .
Solution: C.
The duration gap is closest to . The duration gap is a bond's Macaulay duration minus the
investment horizon. The approximate Macaulay duration is the approximate modified duration
times one plus the yield-to-maturity. It is (= x ).
Given an investment horizon of eight years, the duration gap for this bond at purchase is
positive: - 8 = . When the investment horizon is less than the Macaulay duration
of the bond, the duration gap is positive, and price risk dominates coupon reinvestment risk.
R37-7 yield volatility 的 term structure 是如何影响债券的 interest rate risk 的
Term structure of yield volatility: the relationship between maturity and yield
volatility.
Shorter-term bond may be have more price volatility than a longer bond with a
greater duration because of the greater yield volatility of the shorter-term yield.
R38-7 描述债券 holding period return, duration 和 investment horizon 之间的关系
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If investment horizon > Macaulay duration, then reinvestment risk dominates
price risk, investor’s risk is to lower interest rates.
If investment horizon = Macaulay duration, then reinvestment risk offsets price
risk
If investment horizon < Macaulay duration, then price risk dominates
reinvestment risk, investor’s risk is to higher interest rates.
Duration gap = Macaulay duration – investment horizon
P23-7 Credit and liquidity risk
Q107-7 ★A company receives a ratings upgrade and the price increases on its fixed-rate bond.
The reason of the price increase was most likely a(n): 2014 原版书 P522-26
A. Decrease in the bond's credit spread.
B. Increase in the bond's liquidity spread.
C. Increase of the bond's underlying benchmark rate.
Solution: A.
The price increase was most likely caused by a decrease in the bond's credit spread. The ratings
upgrade most likely reflects a lower expected probability of default and/or a greater level of
recovery of assets if default occurs. The decrease in credit risk results in a smaller credit spread.
The increase in the bond price reflects a decrease in the yield-to-maturity due to a smaller
credit spread. The change in the bond price was not due to a change in liquidity risk or an
increase in the benchmark rate.
R39-7 Credit risk premium and liquidity risk premium
A bond’s yield spread to the benchmark curve includes a premium for credit risk
and a premium for illiquidity.
An increase or decrease in any of these components of yield will increase or
decrease the bond’s YTM by the same amount
21
% ( ) ( )
2
bond value duration spread convexity spread
P24-7 Credit risk and credit-related risk
Q108-7 ★The risk that a bond’s creditworthiness declines is best described by:
A. Credit migration risk
B. Market liquidity risk
C. Spread widening risk
Solution: A.
Credit migration risk or downgrade risk refers to the risk that a bond issuer's creditworthiness
may deteriorate or migrate lower. The result is that investors view the risk of default to be
higher, causing the spread on the issuer's bonds to widen.
R40-7 Credit risk and credit-related risk
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Credit risk: the risk associated with losses stemming from the failure of a
borrower to make timely and full payments of interest or principal. Credit has two
components:
Default risk: the probability that a borrower fails to pay interest or repay
principal when due.
Loss severity, or loss given fault: the value a bond investor will lose if the
issuer defaults. Loss severity can be stated as a monetary amount or as a
percentage of a bond’s value(principal and unpaid interest)
Spread risk:
Credit migration (or downgrade risk):the possibility that spreads will increase
because the issuer has become less creditworthy.
Market liquidity risk: the risk of receiving less than market value when selling
a bond and is reflected in the size of the bid-ask spreads.
Expected loss = Default probability * Loss severity given default
Loss severity given default = 1 – Recovery rate
P25-7 Seniority rankings of corporate debt
Q109-7 In the event of default, debentures' claims will most likely rank: 2014 原版书 P594-3
A. above that of secured debt holders.
B. below that of secured debt holders.
C. the same as that of secured debt holders.
Solution: B.
Secured debt holders have a direct claim on certain assets and their associated cash flows
whereas unsecured debt holders only have a general claim on the issuer's assets and cash flow.
Q110-7 ★In the event of default, the recovery rate of which of the following bonds would
most likely be the highest? 2014 原版书 P594-4
A. First mortgage debt
B. Senior unsecured debt
C. Junior subordinate debt
Solution: A.
First mortgage debt is the highest ranked debt in terms of priority of claims and is considered
secured debt. First mortgage debt will also have the expected highest recovery rate. First
mortgage debt refers to the pledge of specific property. Neither senior unsecured nor junior
subordinate debt has any claims on specific assets.
R41-7 Seniority rankings of corporate debt
Priority of claims: in the event of default, unsecured debt holders claim rank
below (., get paid after) those of secured creditors.
Secured debt is backed by collateral
Unsecured debt (debentures) represent a general claim to the issuer’s assets
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and cash flows.
General seniority ranking for debt repayment priority
First lien or first mortgage
Senior secured debt
Junior secured debt
Senior unsecured debt
Senior subordinated debt
Subordinated debt
Junior subordinated debt
All debt within the same category is said to rank pari passu, or have same
priority of claims
P26-7 Issuer credit rating, issue credit rating, and “notching”
Q111-7 ★Although rating agencies assess the creditworthiness of debt issuers and issues, the
least likely reason that a fixed income analyst should conduct an independent analysis
of credit risk is because rating agencies: 2014 原版书 P594-6
A. may at times mis-rate issues.
B. often lag the market in pricing credit risk.
C. cannot foresee future debt-financed acquisitions.
Solution: C.
Neither an analyst nor ratings agencies can anticipate unexpected events.
Q112-7 ★Based on the practice of notching by the rating agencies, a subordinated bond from
a company with an issuer rating of BB would likely carry what rating? 2014 原版书
P546-4
A. B+
B. BB
C. BBB
Solution: A.
The subordinated bond would have its rating notched lower than the company's BB rating,
probably by two notches, reflecting the higher weight given to loss severity for
below-investment-grade credits.
R42-7 Issuer credit rating, issue credit rating, and “notching”
Three major credit ratings agencies: Moody’s, S&P, Fitch
Different credit ratings: Triple A, investment grade(BBB 及以上), non-investment
grade(BB+及以下)
Issuer credit rating(corporate family ratings): a debt issuer’s overall
creditworthiness and typically apply to a firm’s senior unsecured debt.
Issue ratings(corporate credit rating): credit risk of a specific debt issue
Notching: assign different ratings to bonds of the same issuer by rating agencies
Notching is less common for highly rated issuers than for lower-rated issuers.
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For lower-rated issuers, higher default risk leads to significant differences
between recovery rates of debt with different seniority rankings, leading to
more notching.
★Structural subordination: Subsidiary’s debt covenant may restrict the transfer
of cash or assets upstream to the parent company before the subsidiary’s debt is
serviced. Thus the parent company’s bonds are effectively subordinated to the
subsidiary’s bonds.
★ Cross default provision: Provisions whereby events of default such as
non-payment of interest on one bond trigger default on all outstanding debt;
implies the same default probability for all issues.
Risks in relying on agency ratings
Credit ratings are dynamic
Rating agencies are not perfect.
Event risk is difficult to assess.
Credit ratings lag market pricing.
P27-7 Four Cs of credit analysis
Q113-7 ★Which of the following should be assessed when a credit analyst analyzes the
collateral of a company? 2014 原版书 P595-9
A. Cash flows of the company.
B. Soundness of management's strategy.
C. Value of the company's assets in relation to the level of debt.
Solution: C.
The value of assets in relation to the level of debt is important to assess the collateral of the
company; that is, the quality and value of the assets that support the debt levels of the
company.
Q114-7 ★If goodwill makes up a large percentage of a company’s total assets, this most
likely indicates that: 2014 原版书P594-8
A. the company has low free cash flow before dividends.
B. there is a low likelihood that the market price of the company’s common stock is below
book value.
C. a large percentage of the company’s assets are of low quality.
Solution: C.
Goodwill is viewed as a lower quality asset compared with tangible assets that can be sold and
more easily converted into cash.
Q115-7 Using the "Four Cs of Credit Analysis" framework, which of the following is the least
likely factor to be considered under the category of "capacity"? (2014 Mock 101-107)
A. Industry fundamentals
B. History of fraud or malfeasance
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C. Level of competition
Solution: B.
Any history of fraud or malfeasance is a major warning flag to credit analysis under the
category of "character."
R43-7 Four Cs of credit analysis
Capacity
Industry structure
Industry fundamentals
Industry cyclicality
Industry growth prospects
Industry published statistics
Company fundamentals
Competitive position
Operating history
Management’s strategy and execution
Ratios and ratio analysis
Collateral
Intangible assets
Depreciation
Equity market capitalization
Human and intellectual capital
Covenants
Affirmative covenant
Negative covenants
Character
Soundness of strategy
Track record
Accounting policies and tax strategies
Fraud and malfeasance record
Prior treatment of bondholders
P28-7 Financial ratios used in credit analysis
Q116-7 The following information is from the annual report of Adidas AG for December
2010:
Depreciation and amortization: €249 million
Total assets: €10,618 million
Total debt: €1,613 million
Shareholders' equity: €4,616 million
The debt/capital ratio of Adidas AG is closest to: 2014 原版书 P596-13
A. %.
B. %.
C. %.
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Solution: B.
Total debt is €1,613 million with Total capital = Total debt + Shareholders' equity = €1,613 +
4,616 = €6,229 million. The Debt/Capital ratio = 1,613/6,229 = %.
Q117-7 Based on the information provided in Exhibit 1, the EBITDA interest coverage ratio of
Adidas AG is closest to : 2014 原版书P596-12
Exhibit 1: Adidas AG Excerpt from Consolidated Income
Statement Year Ending 31 December 2010(€ in millions)
Gross profit 5,730
Royalty and commission income 100
Other operating income 110
Other operating expenses 5,046
Operating profit 894
Interest income 25
Interest expense 113
Income before taxes 806
Income taxes 238
Net income 568
Additional information:
Depreciation and amortization: €249 million
Source: Adidas AG Annual Financial Statements, December
2010
A.
B.
C.
Solution: B.
The interest expense is €113 million and EBITDA = Operating profit + Depreciation and
amortization = €894 + 249 million = €1,143 million. EBITDA interest coverage = EBITDA/Interest
expense = 1,143/113 = times.
Q118-7 ★Funds from operations (FFO) of Pay Handle Ltd increased in 2011. In 2011 the total
debt of the company remained unchanged, while additional common shares were
issued. Pay Handle Ltd's ability to service its debt in 2011, as compared to 2010,
most likely: 2014 原版书P596-14
A. improved.
B. worsened.
C. remained the same.
Solution: A.
If the debt of the company remained unchanged but FFO increased, more cash is available to
service debt compared to the previous year. Additionally, the debt/capital ratio has improved.
It would imply that the ability of Pay Handle Ltd to service their debt has improved.
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R44-7 Financial ratios used in credit analysis
Profitability and cash flow measures
EBITDA = operating income + dep. & amor.
FFO = NI from continuing operations + dep. & amor. + deferred income taxes +
other non-cash items
FCF before div. = NI + dep. & amor. – capital expenditure – increase (+ decrease)
in non-cash working capital – non-recurring items
FCF after div. = FCF before div. – div.
Leveraged ratios
Debt/capital, Capital = total debt + shareholders equity
Debt/EBITDA
FFO/debt
Coverage ratios
EBITDA/interest expense
EBIT/interest expense
P29-7 Factors influence yield spreads
Q119-7 ★Holding all other factors constant, the most likely effect of low demand and heavy
new issue supply on bond yield spreads is that yield spreads will: 2014 原版书
P597-17
A. widen.
B. tighten.
C. not be affected.
Solution: A.
Low demand implies wider yield spreads, while heavy supply will widen spreads even further.
R45-7 yield spread
Yield spread = liquidity premium + credit spread
Factors affect the spreads on corporate bonds
Credit cycle: credit spreads narrows as the credit cycle improves
Economic conditions: credit spread narrows as the economy strengthens
and investors expect firms’ credit metrics to improve
Financial market performance: credit spread narrow in strong-performing
markets overall
Broker-dealer capital: yield spreads are narrower when broker-dealers
provide sufficient capital
General market demand and supply: credit spreads narrow in times of high
demand for bonds
R46-7 Return impact of spread changes
For small spread changes: Return impact ≈ - modified duration × Δ spread
For larger spread changes: Return impact ≈ - modified duration × Δ spread +
×convexity ×(Δ spread)2
Credit curves(spread curves): the relationship between spread and maturity.
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Because longer maturity bonds tend to have wider spreads, credit curve are
typically upward sloping.
P30-7 High yield, sovereign, and municipal debt
Q120-7 ★An investor owns a high yield bond issued by a subsidiary of a parent company.
Which of the following provisions is least likely to benefit to the investor?
A. Restricted payments.
B. Change of control put.
C. Restricted subsidiary.
Solution: C.
Restricted subsidiaries favor the parent holding company by making its debt pari passu with a
subsidiary’s debt, rather than being structurally subordinated to the subsidiary’s debt. A
change of control put specifies a form of protection for the bondholder if the subsidiary is sold.
A restricted payments covenant provides some protection to the bondholder by limiting the
amount of cash paid to equity holders.
R47-7 High yield debt
High yield debt=non-investment grade bond=junk bonds(rated below
Baa3/BBB-)
Special considerations of high-yield credit analysis:
Greater focus on issuer liquidity and cash flow
Detailed financial projections
Detailed understanding and analysis of the debt structure
Understanding of an issuer’s corporate structure
Covenant analysis
R48-7 Sovereign debt
Framework for evaluating sovereign credit and assigning sovereign debt ratings:
Institutional effectiveness
Economic prospects
International investment
Fiscal flexibility
Monetary flexibility
R49-7 Municipal debt
GO bonds
backed by the taxing authority of the issuing municipality
The credit analysis has some similarities to sovereign analysis
Revenue bonds
Support specific projects, such as toll roads, bridges, airports, and other
infrastructure.
The creditworthiness comes from the revenues generated by usage fees
and tolls levied.
Often have higher credit risk than GO bonds.
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Analysis of revenue bonds is similar to those for analyzing corporate
bonds.
Debt service coverage ratio (DSCR): the ratio of the project’s net revenue
to the required interest and principal payments on the bonds.
Many revenue bonds include a covenant requiring a minimum DSCR
to protect the lenders’ interests.
P31-7 Securitization process and advantages
Q121-7 Which of the following is the benefit of issuing bonds through a special purpose
vehicle? (原版书课后题目改编)
A. Bankruptcy remoteness.
B. Beneficial tax treatments.
C. Greater liquidity and lower issuing costs.
Solution: A.
A SPV is a bankruptcy-remote vehicle. Bankruptcy remoteness is achieved by transferring the
assets from the sponsor to the SPV. Once this transfer is completed, the sponsor no longer has
ownership rights. If the sponsor defaults, no claims can be made to recover the assets that
were transferred or the proceeds from the transfer to the SPV.
R50-7 Securitization process
R51-7 Parties in a securitization transaction
Main counterparties
The seller of the collateral(originator or depositor, . Bank)
The SPV(issuer or trust):Protect investors from the issuer’s bankruptcy
Third parties:
Servicer(if different from the seller)
Other parties:independent accountants, lawyers/attorneys; Trustee or
trustee agent; underwriters, rating agencies; Guarantors
R52-7 Benefits of securitization
Lowers or removes the wall between ultimate investors and originating
borrowers.
Securitization reduces liquidity risk in the financial system
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Securitization allows for the creation of tradable securities with better
liquidity than the original loans on the bank’s balance sheet.
Makes financial markets more efficient and improves liquidity for the
underlying financial claims.
Securitization enables innovations in investment products
Allow investors to access asset classes matching their risk, return, and
maturity profiles that are otherwise not directly available. . Pension
fund with a long-term horizon can gain direct access to long-term housing
loans by investing in RMBS.
Benefits of SPV in securitization: sell the loan to SPV instead of using it as
collateral
Protect investors from the issuer’s bankruptcy
Securitization can have lower credit cost than a corporate bond secured by
the same collateral.
Funding cost of issuing an asset-backed bond is less than that of issuing a
corporate bond
P32-7 Characteristics of mortgage loan
Q122-7 Assume that an investor has invested in a mortgage pool with a $100,000 principal
balance outstanding. The scheduled monthly principal payment is $.
The mortgage pool has a conditional prepayment rate (CPR) of 6% and pool is
seasoned. The single monthly mortality rate is closest to:
A.
B.
C.
Solution: C.
Seasoned means that the pool is older than 30 months.
SMM=1-()1/12=
Q123-7 William Marolf obtains a 5 million EUR mortgage loan from Bank Nederlandse. A
year later the principal on the loan is 4 million EUR and Marolf defaults on the loan.
Bank Nederlandse forecloses, sells the property for million EUR, and is entitled to
collect the shortfall, million EUR, from Marolf. Marolf most likely had a: (原版书)
A. bullet loan.
B. recourse loan.
C. non-recourse loan.
Solution: B.
Bank Nederlandse has a claim against Marolf for million EUR, the shortfall between the
amount of the mortgage balance outstanding and the proceeds received from the sale of the
property. This indicates that the mortgage loan is a recourse loan. The recourse/non-recourse
feature indicates the rights of a lender in foreclosure. If Marolf had a non-recourse loan, the
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bank would have only been entitled to the proceeds from the sale of the underlying property,
or million EUR.
Q124-7 The fund manager is concern about the fact that market interest rates will go up
unexpectedly and lead to prepayment rates that are much lower than previous
expectation. He also expresses his expectation for a relatively long-term investment
(average life of greater than five years) and does not want to receive any cash flow
from coming years. The endowment fund manager's concern about the impact of
movements in market interest rates is best described as a concern about:(原版书后)
A. Extension risk.
B. Prepayment risk.
C. Contraction risk.
Solution: A.
If the prepayment rate falls, it usually result in a lengthening of the security's life which is
called extension risk and is also fund manager’s concern
R53-7 Mortgage loan
Loan-to-value ratio(LTV): the ratio of the property’s purchase price to the
amount of the mortgage
The higher the LTV, the lower the borrower’s equity, vice versa
Lower LTV, more equity the borrower has
Foreclosure: allows the lender to take possession of the mortgaged property
and then sell it in order to recover funds toward satisfying the debt obligation
Recourse loan: the lender has a claim against the borrower for the shortfall
between the amount of the mortgage balance outstanding and the
proceeds received from the sale of the property.
Nonrecourse loan: the lender does not have such a claim, so the lender
can look only to the property to recover the outstanding mortgage balance.
★Strategic default: A strategic default is less likely in a recourse provision
because the lender can seek restitution from the borrower’s other assets
and/or income in an attempt to recover the shortfall.
Term of a mortgage: the number of years to maturity
R54-7 Interest rate of mortgage loan
Interest rate determination: mortgage rate or contract rate
Fixed rate: the mortgage rate remains the same during the life of the
mortgages.
Adjustable or variable rate: The mortgage rate is reset periodically (daily,
weekly, monthly, or annually).
Indexed-referenced ARM
reviewable ARM
Initial period fixed rate
Rollover or renegotiable mortgage:he adjustment calls for a fixed rate.
Hybrid mortgage: the mortgage starts out with a fixed rate and then
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becomes an adjustable rate after a specified initial term
Convertible: the mortgage rate is initially either a fixed rate or
adjustable rate. At some point, the borrower has the option to
convert the mortgage into a fixed rate or an adjustable rate for the
remainder of the mortgage’s life.
R55-7 Amortization schedule of mortgage loan
Periodic mortgage payments assuming no prepayments are made: interest
payments and scheduled principal repayments
The amortization of a loan: gradual reduction of the amount borrowed over
time.
Fully amortizing loan: the sum of all the scheduled principal repayments
during the mortgage’s life is such that when the last mortgage payment is
made, the loan is fully repaid.
Partially amortizing loan: the sum of all the scheduled principal
repayments is less than the amount borrowed.(balloon payment)
Interest-only mortgage(IO): if no scheduled principal repayment is
specified for a certain number of years
P33-7 Types and cash flow of Mortgage pass-through securities
Q125-7 Which of the following describes a typical feature of a non-agency residential
mortgage-backed security (RMBS)?
A. Senior-subordinate structure in bond classes
B. pool of conforming mortgages as collateral
C. A guarantee by the appropriate government sponsored enterprise (GSE)
Solution: A.
Non-agency RMBS are credit enhanced, either internally or externally. The most common
forms of internal credit enhancements are senior/sub¬ordinate structures, reserve funds, and
overcollateralization. Conforming mortgages are used as collateral for agency (not non-agency)
mortgage pass-through securities. An agency RMBS, rather than a non-agency RMBS, issued by
a GSE (government sponsored enterprise), is guaranteed by the respective GSE.
B is incorrect because non-conforming (not conforming) mortgages are used as collateral for
non-agency mortgage pass-through securities. To be included in a pool of loans backing an
agency RMBS, it must meet specified under¬writing standards. If a loan satisfies the
underwriting standards for inclusion as collateral for an agency mortgage-backed security, it is
called a conforming mortgage. If a loan fails to satisfy the underwriting standards, it is called a
non¬conforming loan.
C is incorrect because an agency RMBS, rather than a non-agency RMBS, issued by a GSE
(government sponsored enterprise), is guaranteed by the respective GSE. The RMBS issued by
GSEs are those issued by Fannie Mae (previously referred to as the Federal National Mortgage
Association) and Freddie Mac (previously referred to as the Federal Home Loan Mortgage
Corporation).
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R56-7 Types of mortgage pass-through securities
Mortgage pass-through security: a security created when one or more holders
of mortgages form a pool of mortgages and sell shares or participation
certificates in the pool.
Types of Mortgage Pass-through securities
Government National Mortgage Association (Ginnie Mae)
Federal Home Loan Mortgage Corporation (Freddie Mac)
Federal National Mortgage Association (Fannie Mae)
Conforming and non-conforming
If a loan satisfies the underwriting standards for inclusions as collateral for
an agency MBS, it is called a conforming mortgage.
Nonconforming mortgage pass-through securities are issued by thrifts,
commercial banks, and private conduits
R57-7 Cash flow of a mortgage pass-through security:
Monthly cash flow for a mortgage pass-through = Monthly cash flow of the
underlying pool of mortgages - servicing and other fees
Monthly cash flow: Interest, Scheduled repayment of principal, Prepayments,
Servicing fee
Pass-through rate: mortgage pass-through security’s coupon rate
Pass-through rate(net interest or net coupon)=mortgage rate on the
underlying pool of mortgages -Servicing and other fees
Not all of the mortgages included in the pool of mortgages have the same
mortgage rate and the same maturity.
Weighted average coupon (WAC)
Weighted average maturity(WAM)
P34-7 Risk of Mortgage Pass-through securities
Q126-7 For a mortgage pass-through security, which of the following risks most likely
increases as interest rates decline? (原版书后题目)
A. Balloon
B. Extension
C. Contraction
Solution: C.
When interest rates decline, a pass-through security is subject to contraction risk. Contraction
risk is the risk that the security will be shorter in maturity than was anticipated when the
security was purchased due to higher than expected prepayments (which typically occurs
when interest rates decline). Extension risk is the risk that when interest rates rise, there are
fewer prepayments and, as a result, the security becomes longer in maturity than anticipated
at the time of purchase. Balloon risk (common with commercial mortgage-backed securities), a
type of extension risk, is the risk that a borrower will not be able to make the balloon payment
when due.
A is incorrect because balloon risk is a type of extension risk. A pass-through security is subject
to extension risk when interest rates rise (not decline).
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B is incorrect because extension risk is the risk that when interest rates rise (not decline), there
are fewer prepayments and, as a result, the security becomes longer in maturity than
anticipated at the time of purchase.
Q127-7 An excess spread account incorporated into a securitized structure is designed to
limit: (原版书后题目)
A. credit risk.
B. extension risk.
C. contraction risk.
Solution: A.
Because of the credit risk, all structures have some form of credit enhancement. An excess
spread account is a form of internal credit enhancement which involves the allocation of any
amounts into an account resulting from monthly funds remaining after paying out the interest
to the bond classes, servicing fees, and administrative fees. The excess spread is a design
feature of the structure.
R58-7 Risk of Mortgage Pass-through securities
Prepayment risk
Contraction risk
The proceeds received must now be invested at lower interest rates
Price appreciation is not as great as that of an otherwise identical bond
that does not have a prepayment or call option
Extension risk
The value of the security has fallen because interest rates are higher
Income they receive can potentially reinvest is typically limited to the
interest payment and scheduled principal repayments
Weighted average life
duration can be calculated to assess the sensitivity of the bonds to interest
rate movement.
Weighted average life(or simply the average life) is a widely used measure for
MBS
R59-7 Risk enhancement
External
enhancement
Weak link
Philosophy
Corporate guarantees
Letter of credit
Bond insurance
Internal
enhancement
Reserve
funds
Cash reserve funds (from
issuance proceeds)
Excess servicing spread
funds
Over collateralization
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A senior/ subordinated structure
R60-7 Prepayment Risk Measurement
Two industry conventions : CPR and PSA
Single monthly mortality(SMM): monthly measure
Prepayment for month
SMM
(Beginning mortgage balance for month scheduled principal repayment for month)
Public Securities Association (PSA)
Monthly series of CPRs
The PSA prepayment benchmark assumption: prepayment rates are low
for newly originated mortgages and then speed up as the mortgages
become seasoned
Benchmark: 100PSA
PSA assumption>100PSA: prepayment faster than the benchmark
PSA assumption<100PSA: prepayment slower than the benchmark
P35-7 Collateralized mortgage obligations(CMO)
Q128-7 ★Which of the following statements concerning the role of a support tranche in a
planned amortization class collateralized mortgage obligation (PAC CMO) is least
accurate?
A. The purpose of a support tranche is to provide prepayment protection for one or more
PAC tranches.
B. The support tranches are exposed to extremely high levels of credit risk.
C. If prepayments are too low to maintain the PAC schedule, the shortfall is provided by the
support tranche.
Solution: B.
The support tranches are exposed to extremely high levels of prepayment risk, not credit risk.
Q129-7 ★Consider a collateralized mortgage obligation (CMO) structure with one planned
amortization class (PAC) and one support tranche outstanding. Also, assume that the
prepayment speed is higher than the upper collar on the PAC. Which of the following
statements is most accurate? The:
A. PAC tranche has no risk of prepayments.
B. Average life of the support tranche will contract.
C. Average life of the PAC tranche will extend.
Solution: B.
If the prepayment speed is faster than the PAC collar, the support tranche receives a higher
level of prepayments (so that the PAC tranche remains at the upper collar of the PAC). The
average life of the support tranche will contract (shorten). The PAC tranche could receive
higher prepayments if eventually the support tranche is fully repaid its principal (., a busted
PAC). However, the question says that the support tranche is still outstanding, which means
that hasn’t happened yet.
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Q130-7 The fund manager is concern about the fact that market interest rates will go up
unexpectedly and lead to prepayment rates that are much lower than previous
expectation. He also expresses his expectation for a relatively long-term investment
(average life of greater than five years) and does not want to receive any cash flow
from coming years. Which type of collateralized mortgage obligation (CMO) tranche
would most likely meet the endowment fund manager's investment requirement for
maturity and cash flow? (2014年二级考题回顾改编)
A. A planned amortization class tranche.
B. An support tranche.
C. A sequential-pay tranche.
Solution: B.
The accrual tranche typically receives principal only after all sequential-pay and/or planned
amortization class tranches have been paid off, meeting the investor's requirement for a
long-term security. In addition, before its principal repayment begins, the support tranche
does not pay interest but accrues the interest to the principal, which meets the investor's need
to not receive any cash flow for the coming years
Q131-7 ★Client of Kingston, Donald Washington, he expects mortgage interest rates to
rise by about 1% in the near future and remain at that higher level for some time.
And he is looking for the types of collateralized mortgage obligation (CMO)
tranches and stripped MBS that would perform best if his expectation happens.
What is Victor’s recommendation to Washington? (2014年二级题目改编)
A. A principal-only strip
B. A planned amortization class (PAC) tranche
C. A support tranche
Solution: B.
If interest rates rise moderately, prepayment rates will decline moderately. The PAC tranche
will still be within its effective prepayment collar, so its cash flows will remain as promised or
planned. The tranche's value will be reduced only by the increase in the discount rate.
Q132-7 ★Two different structures of collateralized mortgage obligations (CMO) are being
considered for issuance:
Structure 1: $400 million of pass-through will be used as collateral for two
sequential pay tranches: $325 million worth of bonds of Tranche X and $75
million of bonds of Tranche Y. The principal for Tranche X must be completely
paid off before any payments are made to Tranche Y.
Structure 2: $400 million of pass-through will be used as collateral for $325
million of E bonds in a planned amortization class (PAC) tranche and $75 million
of F bonds in a support tranche.
Which of the following statements is least accurate? The:
A. X bonds have less contraction risk than the Y bonds.
B. X bonds have less extension risk than the Y bonds.
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C. E bonds have less contraction risk than the F bonds.
Solution: A.
In structure 1, we have two sequential pay tranches. If prepayments slow, it will take longer for
cash flows to get the Y bonds, so the X bonds have less extension risk. The X bonds have more
contraction risk than the Y bonds because they will get cash flows more quickly if prepayments
accelerate. The X bonds protect the Y bonds against contraction risk. In the case of Structure 2
where there are two PAC tranches, the F support tranche will absorb the impact of both
accelerated and slower than expected prepayments, resulting in the E bonds having both less
contraction risk and less extension risk than the F bonds.
R61-7 CMO definition
The motivation for the creation of different structure is the redistribution of
prepayment risk.
Collateralized Mortgage Obligations(CMO)
The collateral is not a pool of mortgage loans but a mortgage pass-through
security
Cannot eliminate prepayment risk; it can only distribute the various forms
of this risk among various classes of bondholders.
Major financial innovation
R62-7 Different types of CMOs
1. Sequential Pay tranches
Each class of bonds is retired sequentially in sequential pay CMO.
The short tranche, which matures first, offers relatively more protection
against extension risk. The other tranche provides more protection against
contraction risk.
2. Planned amortization class (PAC) CMO
initial PAC collar.
PAC bondholders have priority over all other classes in the CMO
The greater certainty of the cash flow for the PAC bonds comes at the
expense of the non-PAC tranches (support tranches).
Protection against both extension risk and contraction risk, providing
two-sided prepayment protection.
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P36-7 CMBS
Q133-7 Credit risk is a factor for commercial mortgage-backed securities because they are
backed by mortgage loans that:
A. are non-recourse.
B. have limited call protection.
C. have no prepayment penalty points.
Solution: A.
Because commercial mortgage loans are non-recourse loans, the lender can only look to the
income-producing property backing the loan for interest and principal repayment. If there is a
default, the lender looks to the income-producing property backing the loan for interest and
principal repayment. If there is a default, the lender looks to the proceeds from the sale of the
property for repayment and has no recourse against the borrower for any unpaid mortgage
loan balance.
Q134-7 ★Which commercial mortgage-backed security (CMBS) characteristic causes CMBS
to trade more like a corporate bond than an agency residential mortgage-backed
security (RMBS)?
A. Call protection
B. Internal credit enhancement
C. Debt-to-service coverage ratio level
Solution: A.
With CMBS, investors have considerable call protection. An investor in a RMBS is exposed to
considerable prepayment risk, but with CMBS, call protection is available to the investor at
both the structure and the loan level. The call protection results in CMBS trading in the market
more like a corporate bond than a RMBS.
R63-7 CMBS characteristics and structure
CMBS are no recourse loans;
Therefore, analysis of CMBS securities focuses on the property and not the
borrower
Debt-to-service coverage ratio=
net operating income
debt service
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486
Loan-to-value ratio =
current mortgage amount
current appraised value
Loan level call protection
Prepayment lockout.
Defeasance.
Prepayment penalty points.
Yield maintenance charges( make-whole charge).
CMBS-level call protection
Basic CMBS structure
Balloon maturity provisions
Balloon loans require substantial principal payment at the end of the
term of the loan
If the borrower fails to make the balloon payment, the borrower is in
default(extension risk)
“workout period”
P37-7 Non-mortgage asset-backed securities
Q135-7 Which of the following best describes the cash flow that owners of credit card
receivable-backed securities receive during the lockout period?
A. Only principal payments collected
B. Only finance charges and fees collected
C. No cash flow is received as all cash flow collected is reinvested.
Solution: B.
During the lockout period, the cash flow that is paid out to security holders is based only on
finance charges collected and fees. After the lockout period, the principal is no longer
reinvested but paid to investors.
Q136-7 Escobar, a junior bond manager, is curious about the CDO recently and asks his
colleague John to tell him anything unique about the CDO. John says:” In a CDO,
there is a need for a CDO manager, to buy and sell debt obligations. In an arbitrage
CDO, a CDO manager buys and sells debt obligations with the sole purpose of paying
off the holders of the bond classes. Each investor shares the same risk of a CDO.”
John’ statement is right about:
A. a need for a CDO manager
B. an arbitrage CDO
C. each investor
Solution: A.
In an ABS, the funds necessary to pay the bond classes come from a pool of loans that must be
serviced. In a CDO, however, there is a need for a CDO manager, also called "collateral
manager," to buy and sell debt obligations for and from the CDO's portfolio of assets (., the
collateral) to generate sufficient cash flows to meet the obligations to the CDO bondholders.
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487
R64-7 non-mortgage asset-backed securities 的现金流结构和风险特征
Auto Loan Receivable-backed securities: include deals backed by auto loans,
lease receivables
Cash flows
Regularly scheduled monthly loan payments(interest payments and
scheduled principal repayments)
Any prepayments
Credit enhancement
Senior/subordinated
Reserve account, overcollateralization, excess interest on the
receivables
Credit Card Receivable-backed securities: credit card receivables are used as
collateral for the issuance, non-amortizing loans
Cash flow:
Finance charges collected, Fees, Principal repayments
Payment: interest paid periodically(monthly, quarterly, semiannually)
Fixed, Floating(roughly half of the securities are floaters, usury rate
laws)
lockout periods: cash flow paid out based on finance charges collected and
fee
After lockout periods: principal no longer reinvested but paid to investors
R65-7 CDO 产品的风险和现金流结构
Collateralized debt obligation (CDO)
Corporate bonds
Collateralized bond obligation (CBO)
Emerging market bonds
Leveraged Bank loans Collateralized loan obligation (
LO)
ABS, RMBS, CMBS and other CDOs Structured finance CDOs
A portfolio o
credit default swaps Synthetic CDOs
★Structure of CDO transaction
CDO is not an asset-backed security
Funds to purchase the collateral assets obtained from the issuance of debt
obligation(bond classes or tranches).
The motivation for investors to invest in senior or mezzanine bond
classes is to earn a potentially higher yield than on a comparably
rated corporate bond by gaining exposure to debt products that they
may not otherwise be able to purchase
Senior tranche Highest credit ratings
Mezzanine tranche
Credit ratings between senior and
subordinated bond classes
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Subordinate/residual or equity tranche Receive the residual cash flow
Structure of CDO transaction
The basic economics of the CDO is that the funds are raised by the sale of
the bond classes and CDO manager invests those funds in assets
Each class of CDO bonds structured to provide a specific level of risk for
investors.
The ability of the CDO manager to make payment depend on the
performance of the collateral
Interest payments from the collateral assets
Maturing of collateral assets
Sale of collateral assets
P38-7 Pari Passu
Q137-7 In the event of bankruptcy, claims at the same level of the capital structure are:
A. on an equal footing, regardless of size, maturity, or time outstanding.
B. paid in the order of maturity from shortest to longest, regardless of size or time
outstanding.
C. paid on a first-in, first-out (FIFO) basis so that the longest-standing claims are satisfied first,
regardless of size or maturity.
Solution：A.
All claims at the same level of the capital structure are pari passu (on an equal footing).
R66-7 Pari Passu
All creditors at the same level of the capital structure are treated as one class; thus, a senior
unsecured bondholder whose debt is due in 30 years has the same pro rata claim in
bankruptcy as one whose debt matures in six months. This provision is referred to as bonds
ranking pari passu (“on an equal footing”) in right of payment.
P39-7 Structured financial instruments（NEW）
Q138-7 If an investor holds a credit-linked note and the credit event does not occur, the
investor receives: (2016年CFA原版书例题)
A. all promised cash flows as scheduled.
B. all coupon payments as scheduled but not the par value at maturity.
C. all coupon payments as scheduled and the par value minus the nominal value of the
reference asset to which the credit-linked note is linked at maturity.
Solution: A.
If the credit event does not occur, the issuer must make all promised cash flows as
scheduled—that is, the regular coupon payments and the par value at maturity.
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489
Q139-7 A structured financial instrument whose coupon rate is determined by the formula
5% – ( × Libor) is most likely: 2016年CFA原版书例题)
A. a leveraged inverse floater.
B. a participation instrument.
C. a deleveraged inverse floater.
Solution: C.
A structured financial instrument whose coupon rate moves in the opposite direction of the
reference rate is called an inverse floater. Because the coupon leverage () is greater than
zero but lower than one, the structured financial instrument is a deleveraged inverse floater. In
this example, if the reference rate increases by 100 bps, the coupon rate decreases by 50 bps.
A is incorrect because the coupon leverage would have to be higher than one for the
structured financial instrument to be a leveraged inverse floater. B is incorrect because a
participation instrument is designed to give investors indirect exposure to a particular
underlying asset.
R67-7 Structured financial instruments
Structured financial instruments represent a broad sector of financial
instruments. This sector includes asset backed securities (ABS)，collateralized
debt obligations (CDOs) and other structured financial instruments such as
Capital protected instruments
Yield enhancement instruments
Participation instruments
Leveraged instruments
R68-7 Capital Protected Instruments
The combination of the zero coupon bond and the call option can be
prepackaged as a structured financial instrument called a guarantee certificate.
The zero-coupon bond provides the investor capital protection; at maturity,
the investor will receive 100% of the capital invested even if the call option
expires worthless. The call option provides upside potential if the price of
the underlying asset rises and a limited downside if the price of the
underlying asset falls.
Capital protected instruments offer different levels of capital protection. A
guarantee certificate offers full capital protection. Other structured financial
instruments may offer only partial capital protection.
R69-7 Yield Enhancement Instruments
Yield enhancement refers to increasing risk exposure in the hope of realizing a
higher expected return. A credit linked note (CLN) is an example of a yield
enhancement instrument.
Specifically, it is a type of bond that pays regular coupons but whose redemption
value depends on the occurrence of a well-defined credit event, such as a rating
downgrade or the default of an underlying asset.
A CLN allows the issuer to transfer the effect of a particular credit event to
investors. Thus, the issuer is the protection buyer and the investor is the
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490
protection seller.
R70-7 Participation Instruments
As the name suggests, a participation instrument is one that allows investors to
participate in the return of an underlying asset. Floating-rate bonds can be
viewed as a type of participation instrument.
Most participation instruments are designed to give investors indirect exposure
to a particular index or asset price.
Many structured products sold to individuals are participation instruments linked
to an equity index. In contrast to capital protected instruments that offer equity
exposure, these participation instruments usually do not offer capital protection.
R71-7 Leveraged Instruments
Leveraged instruments are structured financial instruments created to magnify
returns and offer the possibility of high payoffs from small investments. An
inverse floater is an example of a leveraged instrument.
Inverse floater coupon rate = C – (L × R)
where C is the maximum coupon rate reached if the reference rate is equal
to zero, L is the coupon leverage, and R is the reference rate on the reset
date.
Inverse floaters with a coupon leverage greater than zero but lower than one are
called deleveraged inverse floaters. Inverse floaters with a coupon leverage
greater than one are called leveraged inverse floaters.
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491
8-Derivatives
P1-8 Forward Contracts
Q1-8 A derivative is best described as a financial instrument that derives its performance by:
A. passing through the returns of the underlying.
B. replicating the performance of the underlying.
C. transforming the performance of the underlying.
Solution: C.
A derivative is a financial instrument that transforms the performance of the underlying. The
transformation of performance function of derivatives is what distinguishes it from mutual
funds and exchange traded funds that pass through the returns of the underlying.
A is incorrect because derivatives, in contrast to mutual funds and exchange traded funds, do
not simply pass through the returns of the underlying at payout. B is incorrect because a
derivative transforms rather than replicates the performance of the underlying.
Q2-8 ★The usefulness of a forward contract is limited by some problems. Which of the
following is most likely one of those problems?（原版书 -10）
A. Once you have entered into a forward contract, it is difficult to exit from the contract.
B. Entering into a forward contract requires the long party to deposit an initial amount with
the short party.
C. If the price of the underlying asset moves adversely from the perspective of the long party,
periodic payments must be made to the short party.
Solution: A.
As opposed to a futures contract, trading out of a forward contract is quite difficult. There is no
exchange of cash at the origination of a forward contract. There is no exchange on a forward
contract until the maturity of the contract.
Q3-8 Which of the following is most representative of forward contracts and contingent
claims?
Forward Contracts Contingent Claims
A. Premium paid at inception Premium paid at inception
B. Premium paid at inception No premium paid at inception
C. No premium paid at inception Premium paid at inception
Solution: C.
Unlike a contingent claim, a forward commitment typically requires no premium to be paid up
front. An intuitive way to look at this is to realize that a forward commitment is binding on
both parties, so any up-front fees would cancel, while a contingent claim is binding only on the
party in the short position. For this, the party in the short position demands (and receives)
compensation.
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492
Q4-8 Forward rate agreements are most likely used to hedge an exposure in the:
A. money market.
B. foreign exchange market.
C. equity market.
Solution: A.
Forward rate agreements are used to hedge interest rate exposure present in the money
market.
Q5-8 A contract has no contingent claim and is also over the counter traded. Which of the
following contract satisfies the characteristics? (2012 年 12 月真题)
A. Forward
B. Option
C. Futures
Solution: A.
Only forward contract has no contingent claim and over the counter traded.
Q6-8 A buyer would face the greatest risk of default with: (Mock 84-92)
A. A farmer making physical delivery on a short soybean futures position.
B. An investment bank making cash settlement on a short euro futures position.
C. Multinational firm making cash settlement on a short . dollar forward contract.
Solution: C.
In a forward contract, each party assumes the risk that the other party will default.
Q7-8 ★★Which of the following have the largest counterparty risk? (真题)
A. Option
B. Forward
C. Futures
Solution: B.
Forward contracts are traded on over-the-counter markets. They are largely unregulated
markets and each contact is with a counterparty, which may expose the owner of a derivative
to default risk.
Q8-8 ★★Euribor would most likely be the interest rate quoted on a large: (Mock84)
A. euro time deposit in Toronto.
B. dollar time deposit in Frankfurt.
C. euro dollar time deposit in the United States
Solution: A.
Euribor is the interest rate on large euro currency time deposits traded in most major world
cities (except European Continent)
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493
Q9-8 Kaven, a hedge fund manager, observes that the spot gold price is negatively
correlated with interest rate. He intends to get profit from the short-term price
movement. Which instrument is most suitable to him to long?
A. forward
B. future
C. swap
Solution: A.
If futures prices are positively correlated with interest rates, futures contracts are more
desirable to holders of long positions than are forwards. A negative correlation between
futures prices and interest rates leads to the opposite interpretation, with forwards being more
desirable than futures to the long position.
If futures prices and interest rates are uncorrelated, forwards and futures prices will be the
same.
If futures prices are positively correlated with interest rates, futures contracts are more
desirable to holders of long positions than are forwards.
A negative correlation between futures prices and interest rates leads to the opposite
interpretation, with forwards being more desirable than futures to the long position.
The more desirable contract will tend to have the higher price.
Q10-8 The main risk faced by an individual who enters into a forward contract to buy the
S&P 500 Index is that:
A. the market may rise.
B. the market may fall.
C. market volatility may rise.
Solution: B.
If the market falls, the buyer of a forward contract could pay more for the index, as
determined by the price that was contracted for at the inception of the contract, than the
index is worth when the contract matures. If the market volatility rise, the value of the
contract gets greater.
Q11-8 Derivative markets serve a number of purposes in global economic systems. Which of
the following is least likely one of these purposes?
A. Reveal prices and volatility of the underlying assets
B. Improve market efficiency by lowering transaction costs
C. Enable companies to more easily practice risk management
Solution: B.
Derivative markets improve market efficiency for the underlying assets by increasing market
fairness and competitiveness, not by lowering transaction costs. Lower transaction cost is a
characteristic of derivative markets that is required for them to exist, not a purpose for
derivative markets.
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494
Q12-8 Two counterparties sign a forward contract on a stock, the underlying stock price goes
up afterward, which counterparty/counterparty suffer from credit default risk? （2012
A. The long position only
B. The short position only
C. Both long and short position
Solution: A.
Since long position gains positive profit when underlying price goes up, then long position may
suffer from the credit default of the short position. So the long position only suffers from credit
default risk when the underlying stock price goes up.
R1-8 衍生品就是现在约定将来的交易。
Futures and forward:
Future is standardized and more actively traded in the secondary markets.
Future contracts are backed and regulated by the clearinghouse. Forwards is
more customized.
R2-8 FRA 掌握概念，公式改版后一级要求计算，但需要掌握原理
概念：Viewed as a forward contract for the long to get a loan from the short at a
specific future date at a rate fixed in the contract
A 60-day FRA on 90-day LIBOR（2×5 FRA）means：Settlement or expiration is 60 days
from now and the payment at settlement is based on 90-day LIBOR 60 days from
now.
The general formula for the payment to the long at settlement is:
Payoff of long=
( - )
360
1 ( )
360
t
L FRA
NP
t
L
Synthetic FRA：
衍生品的定义: A derivative is a financial instrument (contract) that derives its
performance from the performance of an underlying asset.
衍生品分类方法
根据合约特点分类：Forward commitment & Contingent claim
Forward commitment: is an agreement between two parties in
which one party, the buyer, agrees to buy from the other party, the
seller, an underlying asset at a future date at a price established at
the start forward, futures and swap contracts
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495
Contingent claim: is derivative in which the payoffs occur if a specific
event happens option contracts
Euribor is a similar rate for borrowing and lending in Euros
Prices of Futures vs. Forward Contracts
If the correlation between the
underlying asset value and interest
rate is:
Investors will:
Positive Prefer to go long in a futures contract, and
the futures price will be greater than the
price of an otherwise comparable forward
contract.
Zero Have no preference
Negative Prefer to go long in a forward contract, and
the forward price will be greater than the
price of an otherwise comparable futures
contract.
P2-8 Forward commitment & Contingent Claim
Q13-8 Which of the following statements is true about contingent claims?
A. Either party can default to the other.
B. The payoffs are linearly related to the performance of the underlying.
C. The most the long can lose is the amount paid for the contingent claim.
Solution: C.
The maximum loss to the long is the premium. The payoffs of contingent claims are not linearly
related to the underlying, and only one party, the short, can default.
Q14-8 Which of the following derivatives is classified as a contingent claim?
A. Futures contracts
B. Interest rate swaps
C. Credit default swaps
Solution: C.
A credit default swap (CDS) is a derivative in which the credit protection seller provides
protection to the credit protection buyer against the credit risk of a separate party. CDS are
classified as a contingent claim.
A is incorrect because futures contracts are classified as forward commitments. B is incorrect
because interest rate swaps are classified as forward commitments.
Q15-8 ★A credit derivative is a derivative contract in which the:
A. clearinghouse provides a credit guarantee to both the buyer and the seller.
B. seller provides protection to the buyer against the credit risk of a third party.
C. the buyer and seller provide a performance bond at initiation of the contract.
Solution: B.
A credit derivative is a derivative contract in which the credit protection seller provides
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496
protection to the credit protection buyer against the credit risk of a third party.
A is incorrect because the clearinghouse provides a credit guarantee to both the buyer and the
seller of a futures contract, whereas a credit derivative is between two parties, in which the
credit protection seller provides a credit guarantee to the credit protection buyer. C is incorrect
because futures contracts require that both the buyer and the seller of the futures contract
provide a cash deposit for a portion of the futures transaction into a margin account, often
referred to as a performance bond or good faith deposit.
Q16-8 Which of these is best classified as a forward commitment derivative?
A. A swap agreement.
B. A convertible bond.
C. An asset-backed security.
Solution: A.
A swap agreement is equivalent to a series or forward agreements that are described as
forward commitment derivatives.
Q17-8 Which of the following characteristics is associated with over-the-counter derivatives?
A. Trading occurs in a central location.
B. They are more regulated than exchange-listed derivatives.
C. They are less transparent than exchange-listed derivatives.
Solution: C.
OTC derivatives have a lower degree of transparency than exchange-listed derivatives. Trading
does not occur in a central location but, rather, is quite dispersed. Although new national
securities laws are tightening the regulation of OTC derivatives, the degree of regulation is less
than that of exchange-listed derivatives.
Q18-8 Market makers earn a profit in both exchange and over-the-counter derivatives
markets by:
A. charging a commission on each trade.
B. a combination of commissions and markups.
C. buying at one price, selling at a higher price, and hedging any risk.
Solution: C.
Market makers buy at one price (the bid), sell at a higher price (the ask), and hedge whatever
risk they otherwise assume. Market makers do not charge a commission. Hence, A and B are
both incorrect.
Q19-8 Which of the following statements most accurately describes exchange-traded
derivatives relative to over-the-counter derivatives? Exchange-traded derivatives are
more likely to have:
A. greater credit risk.
B. standardized contract terms.
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497
C. greater risk management uses.
Solution: B.
Standardization of contract terms is a characteristic of exchange-traded derivatives. A is
incorrect because credit risk is well-controlled in exchange markets. C is incorrect because the
risk management uses are not limited by being traded over the counter.
R3-8 Forward commitment & Contingent claim
Forward commitment: is an agreement between two parties in which one party, the
buyer, agrees to buy from the other party, the seller, an underlying asset at a future
Contingent claim: is derivative in which the payoffs occur if a specific event happens
s.
Credit default swaps (CDS) is essentially an insurance contract for the reference,
the reference obligation is the fixed income security on which the swap is
written-usually a bond but potentially also a loan.
Protection buyer receives a payment from the protection seller if default occurs on
the reference entity.
The protection buyer pays the seller a premium. The default swap premium is also
referred to as the CDS spread.
P3-8 Exchange-traded & Over-the-counter traded
Q20-8 Which of the following characteristics is not associated with exchange-traded
derivatives?
A. Margin or performance bonds are required.
B. The exchange guarantees all payments in the event of default.
C. All terms except the price are customized to the parties' individual needs.
Solution: C.
Exchange-traded contracts are standardized, meaning that the exchange determines the
terms of the contract except the price. The exchange guarantees against default and requires
margins or performance bonds.
Q21-8 Market makers earn a profit in both exchange and over-the-counter derivatives
markets by:
A. charging a commission on each trade.
B. a combination of commissions and markups.
C. buying at one price, selling at a higher price, and hedging any risk.
Solution: C.
Market makers buy at one price (the bid), sell at a higher price (the ask), and hedge whatever
risk they otherwise assume. Market makers do not charge a commission. Hence, A and B are
both incorrect.
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498
R4-8 根据交易场所分类：Exchange-traded & Over-the-counter traded
Exchange-traded：在一个固定的交易所交易。多空双方不直接见面，与清算所交
易（A—>Clearinghouse —>B）
OTC traded：没有固定交易场所，多空双方直接交易（A—>B）
Exchange-traded Over-the-counter
Standardized Liquid Customized/Specific needs
Backed by a clearinghouse Trade with counterparty
(default risk)
Trade in the a physical exchange Not trade in organized markets
Regulated Unregulated
Market makers ：buy at one price (the bid), sell at a higher price (the ask), and
hedge whatever risk they otherwise assume.
P4-8 Advantages & Disadvantages of Derivatives
Q22-8 Compared with the underlying spot market, derivative markets are more likely to
have:
A. greater liquidity.
B. higher transaction costs.
C. higher capital requirements.
Solution: A.
Derivative markets typically have greater liquidity than the underlying spot market as a result
of the lower capital required to trade derivatives compared with the underlying. Derivatives
also have lower transaction costs and lower capital requirements than the underlying.
B is incorrect because transaction costs for derivatives are lower than the underlying spot
market. C is incorrect because derivatives markets have lower capital requirements than the
underlying spot market.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
499
Q23-8 Which of the following characteristics is least likely to be a benefit associated with
using derivatives?
A. More effective management of risk
B. Payoffs similar to those associated with the underlying
C. Greater opportunities to go short compared with the spot market
Solution: B.
One of the benefits of derivative markets is that derivatives create trading strategies not
otherwise possible in the underlying spot market, thus providing opportunities for more
effective risk management than simply replicating the payoff of the underlying.
A is incorrect because effective risk management is one of the primary purposes associated
with derivative markets. C is incorrect because one of the operational advantages associated
with derivatives is that it is easier to go short compared to the underlying spot market.
Q24-8 Which of the following is not an advantage of derivative markets?
A. They are less volatile than spot markets.
B. They facilitate the allocation of risk in the market.
C. They incur lower transaction costs than spot markets.
Solution: A.
Derivative markets are not by nature more or less volatile than
spot markets. They facilitate risk allocation by making it easier and less costly
to transfer risk, and their transaction costs are lower than those of spot markets.
Q25-8 The most likely reason derivative markets have flourished is that:
A. derivatives are easy to understand and use.
B. derivatives have relatively low transaction costs.
C. the pricing of derivatives is relatively straightforward.
Solution: B.
Derivatives have lower transaction costs relative to traditional investment. But derivatives are
relatively more complex and difficult to pricing.
Q26-8 Which of the following responds to the criticism that derivatives can be destabilizing
to the underlying market?
A. Market crashes and panics have occurred since long before derivatives existed.
B. Derivatives are sufficiently regulated that they cannot destabilize the spot market.
C. The transaction costs of derivatives are high enough to keep their use at a minimum
level.
Solution: A.
Derivatives regulation is not more and is arguably less than spot market regulation, and the
transaction costs of derivatives are not a deterrent to their use; in fact, derivatives are widely
used. Market crashes and panics have a very long history, much longer than that of derivatives.
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R5-8 Advantages & Disadvantages of Derivatives
Advantage:
Price discovery
Risk management: hedge and speculation
Lowering transaction costs
Low capital requirement
Greater liquidity
Ease of going short
Enhance market efficiency
Disadvantage:
Too risky and High leverage
Complex instruments
Sometimes likened to gambling
Risk neutrality
Risk-neutral investors are willing to buy risky investments for which they expect
to earn only the risk-free rate. They do not expect to earn a premium for bearing risk.
The expected payoff of the derivative can be discounted at the risk-free rate.
And should yield the risk-free rate of return, if it generates certain payoffs.
P5-8 Arbitrage and No-arbitrage principle
Q27-8 The law of one price is best described as:
A. the true fundamental value of an asset.
B. earning a risk-free profit without committing any capital.
C. two assets that will produce the same cash flows in the future must sell for equivalent
prices.
Solution: C.
The law of one price occurs when market participants engage in arbitrage activities so that
identical assets sell for the same price in different markets.
A is incorrect because the law of one price refers to identical assets. B is incorrect because it
refer to arbitrage not the law of one price.
Q28-8 An investor who requires no premium to compensate for the assumption of risk is
said to be which of the following?
A. Risk seeking
B. Risk averse
C. Risk neutral
Solution: C.
Risk-seeking investors give away a risk premium because they enjoy taking risk. Risk-averse
investors expect a risk premium to compensate for the risk. Risk-neutral investors neither give
nor receive a risk premium because they have no feelings about risk.
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Q29-8 Which of the following best describes an arbitrage opportunity? It is an opportunity
to:
A. Earn a risk premium in the short run.
B. Buy an asset at less than its fundamental value.
C. Make a profit at no risk with no capital invested.
Solution: C.
C is correct because it is the only answer that is based on the notion of when an arbitrage
opportunity exists: when two identical assets or portfolios sell for different prices. A risk
premium earned in the short run can easily have occurred through luck. Buying an asset at less
than fair value might not even produce a profit.
Q30-8 Arbitrage opportunities exist when:
A. two identical assets or derivatives sell for different prices.
B. combinations of the underlying asset and a derivative earn the risk-free rate.
C. arbitrageurs simultaneously buy takeover targets and sell takeover acquirers.
Solution: A.
Arbitrage opportunities exist when the same asset or two equivalent combinations of assets
that produce the same results sell for different prices. When this situation occurs, market
participants would buy the asset in the cheaper market and simultaneously sell it in the more
expensive market, thus earning a riskless arbitrage profit without committing any capital.
B is incorrect because it is not the definition of an arbitrage opportunity. C is incorrect because
it is not the definition of an arbitrage opportunity.
R6-8 Risk-free arbitrage and no-arbitrage rule
Arbitrage involves earning over the risk-free rate with no risk or earning an
immediate gain with no future liabilities
Arbitrage opportunities: arbitrage occurs when equivalent assets or combinations
of assets sell for two different prices
Law of one price: two securities or portfolios that have identical cash flows in the
future, regardless of future events, should have the same price
The role of arbitrage is to eliminate mispricing and lead to the market efficiency.
That is why arbitrage also plays a role in pricing.
P6-8 Future margin vs equity margin
Q31-8 When receive a margin call, an investor must deposit more money to meet the
___________in the future market, whereas to meet the __________ in the stock
market:
A. Initial margin Initial margin
B. Maintenance margin Maintenance margin
C. Initial margin Maintenance margin
Solution: C.
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In stock market, additional margin must be deposited to bring the ending balance up to the
Maintenance margin requirement, however, in futures market; additional margin must be
deposited to bring the ending balance up to the initial margin requirement.
Q32-8 By nature, margin in futures contracts can be most likely regarded as a:
A. Loan granted by brokers
B. Advance payment to carry out the ultimate settlement
C. Deposit of commission for brokers
Solution: B.
A margin deposit in futures contract is in fact a guarantee of delivery of the underlying assets.
The change in the amount of margin is a current gain or loss of counterparties of futures
contracts. If a participant has a margin greater than his maintenance margin, he/she can
withdraw the part above the maintenance level to realize the gain.
The loan granted by brokers is used in a purchase in margin of stocks. Commissions are a fee
charged by brokers. It is a transaction cost and has no direct relation with margin.
Q33-8 Which of the' following occurs in the daily settlement of futures contracts?
A. Initial margin deposits are refunded to the two parties.
B. Gains and losses are reported to other market participants.
C. Losses are charged to one party and gains credited to the other.
Solution: C.
Losses and gains are collected and distributed to the respective parties. There is no specific
reporting of these gains and losses to anyone else. Initial margin deposits are not refunded and,
in fact, additional deposits may be required.
R7-8 掌握股票与期货保证金的区别：
Clearinghouse
Each exchange has a clearing house that guarantees that traders in the
futures market will honor their obligations.
A clearinghouse acts as the counterparty to each participant. The
clearinghouse is the buyer to every seller and the seller to every buyer.
There is no need to worry about the counterparty default risk.
Clearinghouse allows either side of the trade to reverse positions at a future
date.
Margin in securities markets Margin in futures markets
A percentage of the market value of the
asset
Performance guarantee
Paid to the seller of the security Deposited by both the long and the
short and paid to clearinghouse
There is interest charged on the
borrowed amount, the margin loan.
There is no loan involved and,
consequently, no interest charges.
If falls below maintenance margin,
Need back up to maintenance margin.
If falls below maintenance margin,
Need back up to initial margin.
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P7-8 Futures Contract
Q34-8 ★Tony Harris is planning to start trading in commodities. He has heard about the use
of futures contracts on commodities and is learning more about them. Which of the
following is Harris least likely to find associated with a futures contract? （原版书
R47-11）
A. Existence of counterparty risk.
B. Standardized contractual terms.
C. Payment of an initial margin to enter into a contract.
Solution: A.
Harris is least likely to find counterparty risk associated with a futures contract. There is
limited counterparty risk in a futures contract because the clearinghouse is on the other side
of every contract.
Q35-8 Which of the following statements most accurately describes exchange-traded
derivatives relative to over-the-counter derivatives? Exchange-traded derivatives are
more likely to have:
A. greater credit risk.
B. standardized contract terms.
C. greater risk management uses.
Solution: B.
Standardization of contract terms is a characteristic of exchange-traded derivatives. A is
incorrect because credit risk is well-controlled in exchange markets. C is incorrect because the
risk management uses are limited by being traded over the counter.
Q36-8 Market makers earn a profit in both exchange and over-the-counter derivatives
markets by:
A. charging a commission on each trade.
B. a combination of commissions and markups.
C. buying at one price, selling at a higher price, and hedging any risk.
Solution: C.
Market makers buy at one price (the bid), sell at a higher price (the ask), and hedge whatever
risk they otherwise assume. Market makers do not charge a commission. Hence, A and B are
both incorrect.
R8-8 Futures contract 风险控制方法
Margin;
Daily Price Limit: Price limits are exchanged-imposed limits on how much the
contract price can change from the previous day’s settlement price
Marking to market: The margin requirement of a futures contract is low because at
the end of every day there is a daily settlement process called marking to market
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Forwards Futures
Private contracts Exchange-traded
Unique customized contracts Standardized contracts
Little or no regulation Regulated
Default risk is present Guaranteed by clearinghouse
Settlement at maturity Daily settlement(mark to market)
No margin deposit required Margin required and ajusted
P8-8 Moneyness, Intrinsic Value, Time Value
Q37-8 ★Which of the following statements about put and call options is least accurate?
A. The price of the option is less volatile than the price of the underlying stock.
B. Option prices are generally higher the longer the time until the option expires.
C. For put options, the higher the strike price relative to the stock’s underlying price, the
more the put is worth
Solution: A.
Option prices are more volatile than the price of the underlying stock. The other statements
are true. Options have time value, which means prices are higher the longer the time until the
option expires, and a higher strike price increase the value of a put option.
Q38-8 ★★Which of the following statements most closely relates to the concept of
moneyness? (Mock 84-93)
A. The sum of money the option buyer pays the seller is called the premium.
B. Both call and put option prices decline as the time to expiration becomes shorter.
C. One would never exercise a call option if the price of the underlying is below the strike
price.
Solution: C.
Only an in-the-money option would be exercised. Moneyness describes the relationship
between the price of the underlying and an option’s exercise price.
Q39-8 ★★★An investor with $5000 to invest believes that the price of ABC Corp. stock will
appreciate by $7 to $95 in two months. Two-month at-the- money puts on one share
of ABC stock are trading at $, while two-month at-the-money calls are trading at
$. What action will he most likely take to profit from his view on ABC stock?(Mock
85-114)
A. Sell 100 ABC puts.
B. Buy 100 ABC calls.
C. Buy 100 ABC shares.
Solution: B.
Buying a call gives the owner the right to buy the stock at the exercise price. The investor
predicts that the stock will increase to $95 at the end of two months. He will be able to
exercise the call, buy the stock at $88, and sell it at $95, thereby making a profit.
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Q40-8 Which of the following is most similar to a short position in the underlying asset?
A. Buying a put.
B. Writing a put.
C. Buying a call.
Solution: A.
Buying a put is most similar to a short position in the underlying asset because the put
increase the value if the underlying asset value decreases. The writer of a put and the holder
of call have a long exposure to the underlying asset because their positions increase in value if
the underlying asset value increase.
Q41-8 ★★Pierre-Louis Robert just purchased a call option on shares of the Michelin Group.
A few days ago he wrote a put option on Michelin shares. The call and put options
have the same exercise price, expiration date, and number of shares underlying.
Considering both positions, Robert's exposure to the risk of the stock of the Michelin
Group is:
A. long.
B. short.
C. neutral.
Solution: A.
Robert's exposure to the risk of the stock of the Michelin Group is long. The exposure as a
result of the long call position is long. The exposure as a result of the short put position is also
long. Therefore, the combined exposure is long.
Q42-8 Consider a put option on Deter, Inc., with an exercise price of $45. The current stock
price of Deter is $52. What is the intrinsic value of the put option, and is the put
option at-the-money or out-of-the-money?
Intrinsic Value Moneyness
A. $7 At-the-money
B. $0 Out-of-the-money
C. $0 At-the-money
Solution: B.
The option has an intrinsic value of $0, because the stock price is above the exercise price. Put
value is MAX (0, X-S). Equivalently, the option is out-of-the-money.
Q43-8 Unless far out-of-the-money or far in-the-money, for otherwise identical call options,
the longer the term to expiration, the lower the price for: (原版书 R63-10)
A. American call options, but not European call options.
B. both European call options and American call options.
C. neither European call options nor American call options.
Solution: C.
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Although there are exceptions, in general the longer the time to expiration the more valuable
is the option, ceteris paribus. With the exception of the rare case in which [options] are so far
out-of-the-money or in-the-money that the additional time is of no value, the longer term
[options] will be worth more. In addition, it is not always true that a longer-term is beneficial
to the holder of a European put.
Q44-8 Compare an American call with a strike of 50 which expires in 90 days to an American
call on the same underlying asset which has a strike of 60 and expires in 120 days. The
underlying asset is selling at 55. Consider the following statements:
Statement 1: "The 50 strike call is in-the-money and the 60 strike call is
out-of-the-money."
Statement 2: "The time value of the 60 strike call, as a proportion of the 60 strike
call's premium, exceeds the time value of the 50 strike call as a proportion of the 50
strike call's premium."
Are the statements most likely correct or incorrect? (2012 年 12 月真题)
A. Both statements are correct.
B. Statement 1 is incorrect, but Statement 2 is correct.
C. Statement 1 is correct, but Statement 2 is incorrect.
Solution: A.
A call is in-the-money when the underlying asset price exceeds the strike price. The entire
premium of the 60 strike call reflects time value; only a part of the 50 strike call's premium is
time value, the rest will be intrinsic value.
R9-8 Option 的主要种类： financial option (equity options, interest options, foreign
currency options, bond options, index options), option on futures, commodity option).
R10-8 Moneyness:
R11-8 Intrinsic value and time value
The intrinsic value of an option is the amount that it is in the money, and zero
otherwise.
The difference between the value of an option (option premium) and its intrinsic
value is termed its time value. If the option is deeply out of money or deeply in the
money, time value is negligible. Time value is maximized when option is at the
money.
option value=intrinsic value + time value
R12-8 For European put option, time value can be larger than, smaller than or equal to zero;
for others, time value is not less than zero.
R13-8 The Effect of Difference in Time to Expiration
Moneyness Call option Put option
In-the-money S＞X S＜X
At-the-money S = X S = X
Out-of-the-money S＜X S＞X
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0 2 0 1C (T ) C (T )
0 2 0 1P (T ) P (T )
American
options
0 T1 T2
0 2 0 1c (T ) c (T )
0 2
0 1Greater or
p (T ) can be either
than pess (TL )
European
options
2 1
0 2 0 1( ) max[ ,0] ( ) max[ ,0]
(1 ) (1 )
t tT T
f f
X X
C T S C T S
r r
0 2 0 1C (T ) C (T )
0 2 0 1P (T ) P (T )
0 2 0 1C (T ) C (T )
0 2 0 1P (T ) P (T )
American
options
0 T1 T20 T1 T2T1 T2
0 2 0 1c (T ) c (T )
0 2
0 1Greater or
p (T ) can be either
than pess (TL )
European
options
0 2 0 1c (T ) c (T )
0 2
0 1Greater or
p (T ) can be either
than pess (TL )
0 2 0 1c (T ) c (T )
0 2
0 1Greater or
p (T ) can be either
than pess (TL )
European
options
2 1
0 2 0 1( ) max[ ,0] ( ) max[ ,0]
(1 ) (1 )
t tT T
f f
X X
C T S C T S
r r
Long call+short put=long forward
P9-8 Option Payoff
Q45-8 A market participant has a view regarding the potential movement of a stock. He sells
a customized over-the-counter put option on the stock when the stock is trading at
$38. The put has an exercise price of $36 and the put seller receives $ in premium.
The price of the stock is $35 at expiration. The profit or loss for the put seller at
expiration is:
A. .
B. $.
C. $.
Solution: C.
Profit = max (0, -payoff of put at expiration + premium) = max (0, - (X - S) + premium) = -1 +
=$
Q46-8 An investor paid $10 for an option that is currently in-the-money $5. If the underlying
is priced at $90, which of the following best describes that option?(原版书 R63-18)
A. Call option with an exercise price of $80.
B. Put option with an exercise price of $95.
C. Call option with an exercise price of $95.
Solution: B.
A put option is in-the-money if the stock price is less than the exercise price. The put option
with an exercise price of $95 is in-the-money $5. The call option with an exercise price of $80
is in-the-money $10, and the call option with an exercise price of $95 is out-of-the-money $5.
Q47-8 An investor held 100 stocks, which he purchased for 26 dollars. Estimating that the
price of the stocks would not rise significantly in the near future, he wrote call options
for 100 stocks. The information of the call options is listed as follows:
Strike price 30
Call option price per stock 3
The current price of the stocks is 24 dollars. The maximum profit the investor can
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expect is closest to
A. 100 dollar.
B. 700 dollars.
C. 7 dollars.
Solution: B.
A covered call is position consisting of a short stock and a long call. The investor holding such a
position believes that the stock is likely to rise but cannot rise above a certain level. So he
longs a stock to get the rise potential and shorts a put to get a premium. The profit of the
position consists of two parts: one part is the gain on stocks held and the other is the call
premium. The gain on the stocks is limited to the strike price because buyer of the call will
exercise the stock once the price rise above. As a result, the maximum profit=Strike
Profit-Purchase Price+ Call Premium. Here the maximum profit = (30 – 26 + 3) 100 = 700
dollars.
P10-8 Option sensitivity
Q48-8 ★A decrease in the risk-free rate of interest will:
A. increase put and call prices.
B. decrease put prices and increase call prices.
C. increase put prices and decrease call prices.
Solution: C.
Interest rates are inversely related to put prices and directly related to call prices.
Q49-8 If the risk-free rate increases, the value of an in-the-money European put option will
most likely:
A. decrease.
B. remain the same.
C. increase.
Solution: A.
An in-the-money European put option decreases in value with an increase in the risk-free rate.
A higher risk-free rate reduces the present value of any proceeds received on exercise.
Q50-8 The table below shows three European call options on the same underlying, which
one of them has the highest value:
Time to Expiration Exercise Price
A. Option 1 3 months $100
B. Option 2 6 months $100
C. Option 3 6 months $105
Solution: B.
The value of a European call option is inversely related to the exercise price and directly
related to the time to expiration. Option 1 and Option 2 have the same exercise price; however,
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Option 2 has a longer time to expiration. Consequently, Option 2 would likely have a higher
value than Option 1. Option 2 and Option 3 have the same time to expiration; however, Option
2 has a lower exercise price. Thus, Option 2 would likely have a higher value than Option 3.
Q51-8 If the implied volatility for options on a broad-based equity market index goes up,
then it is most likely that:
A. the broad-based equity market index has gone up in value.
B. the general level of market uncertainty has gone up.
C. market interest rates have gone up.
Solution: B.
One benefit of derivatives markets is information discovery. Implied volatility reveals
information about the risk of the underlying. Increases in implied volatility are an implication
of increased market uncertainty.
Q52-8 The recent price per share of Win Big, Inc. is €50 per share. Verna Hillsborough buys
100 shares at €50. To protect against a falling price, Hillsborough buys one put,
covering 100 shares of Win Big, with a strike price of €40. The put premium is €1 per
share. If Win Big closes at €45 per share at the expiration of the put and Hillsborough
sells her shares at €45, Hillsborough's profit from the stay/put is closest to: (原版书
R65-8)
A. -€1,100.
B. -€600.
C. €900.
Solution: B.
The loss on her stock is (€45-€50) X 100 = -€500. She also paid €100 for the put. The put
expires worthless, making her total loss €600.
Q53-8 The effects on the price of a call option from an Increase in volatility and an Increase
in interest rates are:
Increase in Volatility Increase in Interest Rates
A. Decrease Increase
B. Increase Increase
C. Increase Decrease
Solution: B.
When volatility increases, the price of options increases. When interest rates increase, call
option prices increase.
Q54-8 Which of the following pieces of information is not conveyed by at least one type of
derivative?
A. The volatility of the underlying
B. The most widely used strategy of the underlying
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C. The price at which uncertainty in the underlying can be eliminated
Solution: B. Options do convey the volatility of the underlying, and futures, forwards, and
swaps convey the price at which uncertainty in the underlying can be eliminated. Derivatives
do not convey any information about the use of the underlying in strategies
R14-8 影响 call option 价格的因素：
Factor European call European put American call American put
Underly
ng asset price + - + -
Strike price - + - +
Time + ? + +
Risk-less rat
e + - + -
Volatility + + + +
Payments on the
underlying
- + - +
Carrying cost + - + -
There is an exception to the general rule that European put option thetas are
negative. The put value may increases as the option approaches maturity if the
option is deep in-the-money and close to maturity. The higher the risk-free rate, the
stronger the negative relationship.
Moneyness（价值状态）:定性看 long 是否赚钱
In the money: Immediate exercise would generate a positive payoff
At the money : Immediate exercise would generate no payoff
Out of the money : Immediate exercise would generate no payoff
Covered call
Consists of: short call and long stock
Equivalent to: short put and long bond
Similar to: Short put
Net Cost：S0-c
Breakeven point: S0-c
Maximum Gain: X-(S0-c)
P11-8 Option Value
Q1-8 ★A call with a strike price of $40 is available on a stock currently trading for $35. The
call expires in one year and the risk-free rate of return is 10%. The lower bound on this
call's value:(2012 年 12 月真题)
A. is zero.
B. is $5 if the call is American-style.
C. is $ if the call is European-style.
Solution: A.
For an American- or European-style call, the lower bound is the greater of zero or the
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difference between the stock price and the present value of the strike price.
Max[0,St-X/(1+RFR)
T-t]=Max[0, $35 - ($40 / )] =$0
Q2-8 ★★The greater of either zero or the present value of the exercise price minus the
underlying price is most likely the lower bound on the price of a(n): (2012 年 12 月真
题)
A. European put option.
B. American put option.
C. American call option
Solution: A.
For a European put, the exercise price must be adjusted to the present value because the
option can only be exercised on expiration.
Option Min Value Max Value
European call Max[0 , St－X/(1+RFR)
T－t] St
American call Max[0 , St－X/(1+RFR)
T－t] St
European put Max[0 , X/(1+RFR)T
－t－St] X/(1+RFR)
T－t
American put Pt. ≥ Max[0 , X－St] X
Q3-8 A call option with an exercise price of 65 will expire in 73 days. No cash payments will
be made by the underlying asset over the life of the option. If the underlying asset
price is at 70 and the risk-free rate of return is percent, the lower bounds for an
American call option and a European call option, respectively, are closest to:(原版书
R63-11)
Lower bound for American Lower bound for European
call option call option
A.
B.
C.
Solution: C.
Because time remains until expiration and the problem deals with calls, the lower bound of
the European call will exceed the intrinsic value. In concept, one can invest the strike price
amount until it is needed at expiration and earn the risk-free rate on this amount for that
period of time. The intrinsic value is $; given the available answers, the lower bound for
the European call must be $. This is confirmed by applying the formula Co≥ Max[0, So —
X/(1 + r)T]. In this problem, the lower bound is Max[0, 70 — 65/ () ]= . Note that the
value of the American call cannot be less than the value of the European call.
Q4-8 ★A put option with an exercise price of 75 will expire in 73 days. No cash. payments
will be made by the underlying asset over the life of the option. If the underlying asset
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is at 70 and the risk-free rate of return is percent, the lower bounds for an
American put option and a European put option, respectively, are closest to: (原版书
R63-12)
Lower bound for American Lower bound for European
put option put option
A.
B.
C.
Solution: C.
When valuing European puts that have time left until expiration, the lower bound must reflect
the fact that exercise is delayed until the expiration date. That is, with a European put one
can't recognize the current intrinsic value, but must wait until expiration. This delay in
receiving payment for selling (putting) the stock to the writer has a cost. The lower bound will
therefore be below the intrinsic value (but never negative). This can be confirmed by applying
the formula Po Max[0, X/(1 + r)
T -So] . In this problem, the lower bound is the greater of 0 or
75/() -70 = . Regarding the American put, as one can recognize the intrinsic value of
an American put immediately if one chooses to, the lower bound of an American put, in the
absence of intervening cash payments on the underlying asset, will simply be equal to the
intrinsic value.
Q5-8 A European stock index call option has a strike price of $1160 and a time to expiration
of 3 months. Given a risk-free rate of 4%, if the underlying index is trading at $1200
and has a multiplier of 1, then the lower bound for the option price is closest to:
A. $.
B. $.
C. $.
Solution: C.
The lower bound on a European call is either zero or the underlying asset’s price minus the
present value of the exercise price, whichever is greater
Max[0,St-X/(1+RFR)
T-t]=Max[0, $1200 - ($1160 / )] = $.
Q55-8 With respect to American calls, which of the following statements is most accurate?
A. American calls should be exercised early if the underlying has reached its expected
maximum price.
B. American calls should be exercised early if the underlying has a lower expected return
than the risk-free rate.
C. American calls should be exercised early only if there is a dividend or other cash payment
on the underlying.
Solution: C.
Cash payments on the underlying are the only reason to exercise American calls early. Interest
rates, the expected return on the underlying, and any notion of a maximum price is irrelevant.
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But note that a dividend does not mean that early exercise should automatically be conducted.
A dividend is only a necessary condition to justify early exercise for calls
Q56-8 The effect of dividends on a stock on early exercise of a put is to:
A. make early exercise less likely.
B. have no effect on early exercise.
C. make early exercise more likely.
Solution: A.
Dividends drive down the stock price when the dividend is paid. Thus, all else being equal, a
stock paying dividends has a built-in force that drives down the stock price. This characteristic
discourages early exercise, because stock price declines are beneficial to holders of puts.
Q57-8 Which of the following shows correctly the differences between American option and
European option?（2012 年 12 月真题）
A. American option is always more expensive than European option
B. The exercise style is different
C. European options allow for exercise on or before the option expiration date.
Solution: B.
American option gives the holder the right to exercise before or at the expiration date, while
European option can only be exercised at the expiration date, so the main difference is
exercise style. Also since no one would exercise a American call option if the underlying stock
pays no dividend, then the American call option may be equal to European call option.
Q58-8 An investor purchased an European put option. The current price of the underlying
stock is 30 dollars. The exercise price is 40 dollars and the put will expire in 270 days.
If the put was not purchased, the investor could invest the premium in T-bills with a
discount rate of 3%. The lower bound of put value is closest to:
A. 10 dollars
B. 9 dollars
C. 11 dollars
Solution: B.
The lower bound of an European put option is Max[0 , X/(1+RFR)T
－t－St]=$9
P12-8 Put-call Parity
Q6-8 A description that will least likely be used to explain put-call parity is:
A. The prices of calls and puts on an underlying asset must be consistent with each other to
remove arbitrage opportunities.
B. A fiduciary call option strategy and a protective put option strategy for an underlying
asset are equal in value.
C. A put is equivalent to long a call, a long position in the underlying asset, and a long
position in the risk-free asset.
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Solution: C.
For P=C+Xe-rt-S
A put is equivalent to long a call, a short position in the underlying asset, and a long position in
the risk free asset.
Q7-8 A stock is selling at $40, a 3-month put at $50 is selling for $11, a 3-month call at $50
is selling for $1, and the risk-free rate is 6%. How much, if anything, can be made on
an arbitrage?
A. $0 (no arbitrage).
B. $
C. $
Solution: C.
A synthetic stock is S=C-P+X/[(1+RFR)T]=$1-$11+50/[()]=. Since the stock is selling
for $40, you can short a share of stock for $40 and buy the synthetic for an immediate
arbitrage profit of $.
Q8-8 ★To account for positive cash flows from the underlying asset, we need to adjust the
put-call parity formula by:(Notes R63-11)
A. adding the future value of the cash flows to S.
B. adding the future value of the cash flows to X.
C. subtracting the present value of the cash flows from S.
Solution: C.
If the underlying asset used to establish the put-call parity relationship generates a cash flow
prior to expiration, the asset’s value must be reduced by the present value of the cash flow
discounted at the risk-free rate.
Q9-8 According to put-call-forward parity, the difference between the price of a put and
the price of a call is most likely equal to the difference between:
A. spot price and exercise price discounted at the risk-free rate.
B. exercise price and forward price discounted at the risk-free rate.
C. forward price and spot price discounted at the risk-free rate.
Solution: B.
Put-call-forward parity can be written as:
p-c=[X-F (T)]/(1+r)^T
This means that the difference between the price of a put and the price of a call is equal to the
difference between exercise price and forward price discounted at the risk-free rate. .
Q59-8 Assume the probability of bankruptcy for the underlying asset is high. Compared to
the price of an American put option on the same underlying asset, the price of an
equivalent European put option will most likely be:
A. lower.
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B. higher.
C. the same because the probability of bankruptcy does not affect pricing.
Solution: A.
In bankruptcy, the price of the bankrupt company's stock falls. In the limit it falls to zero. At a
price of zero, the price cannot go any lower, and it would be advantageous to exercise the
American put at that point in time rather than be forced to wait until the expiration date.
Therefore, the American-style put is likely to have a higher price than an equivalent
European-style put.
Q60-8 Using put-call parity, you can create a long position in a synthetic underlying asset by
A. combining long positions in a call option, a risk-free bond, and a short put option
B. combining short positions in a call option, a long position in risk-free bond, and a put
option
C. combining long positions in a call option, a short position in risk-free bond, and a put
option
Solution: A.
Put-call parity is P0+S0 =C0+X/(1+r)
T
Solving for the underlying asset, S0 =C0+X/(1+r)
T- P0
Therefore, the synthetic long assets are a combination of long the call, long the risk-free bond,
and short the put option.
R15-8 Put-Call parity
熟练掌握 put-call parity 公式的各种变形：
- / (1 )
TS C P X RFR
- / (1 )
TP C S X RFR
- / (1 )
TC S P X RFR
/ (1 ) -
TX RFR S P C
Note that the options much be European-style and the puts and calls mush
have the same exercise price for these relations to hold.
Fiduciary call: buy riskless bond that pays X at maturity and a call with exercise
price X.
Protective put: buy security and long put.
Put-call parity 的作用：
1) 为 option 定价
2) 合成 option。
3) 无风险套利。在无风险套利中，遵循 long 小边，short 大边原则
如：
PS
RFR
X
C
T
)1( ，套利方法是:long security, long put, short call, short
bonds.
Put-call-forward parity can be written as:
p-c=[X-F (T)]/(1+r)^T
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This means that the difference between the price of a put and the price of a call is equal
to the difference between exercise price and forward price discounted at the risk-free
rate.
P13-8 Covered Call & protective put
Q10-8 An Investor purchases a stock at $60 and at the same time, sells a 3-month call on the
stock. The short call has a strike price of $65 and a premium of $. The risk-free
rate is 4%. The breakeven underlying stock price at expiration is closest to:
A. $
B. $
C. $
Solution: B.
A covered call breakeven price equals the price paid for the stock less the premium received
for the call. Breakeven = (S - c) = (60 - ) = $.
Q11-8 ★★Which of the following has the most potential profit? (真题)
A. Protective put
B. Covered call
C. Long position with put option
Solution: A.
A protective put has the same shape profit diagram as a long call. A covered call has the same
shape profit diagram as a short put. Only long call position has the most potential profit.
Q12-8 An investor writes a covered call on a $40 stock with an exercise price of $50 for a
premium of $2. The investor’s maximum
A. gain will be $12
B. loss will be $40
C. loss will be unlimited.
Solution: A.
As soon as the stock rises to the exercises price, the covered call writer will cease to realize a
profit because the short call moves into-the-money. Each dollar gain on the stock is the offset
with a dollar loss on the short call. Since the option is $10 out-of-the-money, the covered call
writer can gain this amount plus the $2 call premium. Thus, the maximum gain is $2+$10=$12.
However, because the investor owns the stock, he or she could lose $40 if the stock goes to
zero, but gain $2 from the call premium. Maximum loss is $38.
Q13-8 ★★An investor purchases ABC stock at $71 per share and executes a protective put
strategy. The put option used in the strategy has a strike price of $66, expires in two
months, and is purchased for $. At expiration, the protective put strategy breaks
even when the price of ABC and the maximum loss of the protective put strategy is
closest to: (Mock 83-96)
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A. $; $
B. $; $
C. $; $
Solution: C.
To breakeven, the underlying stock must be at least as high as the amount expended up front
to establish the position. To establish the protective put, the investor would have spent $71 +
$ = $. The maximum loss of a protective put equals to S0-X+p0, so the maximum loss
equals to 71-66+=$
Q61-8 What is the maximum profit of a covered call position?（2012 年 12 月真题）
A. Initial stock price minus initial call option premium
B. Strike price of call option minus initial stock price plus initial call option premium
C. It doesn’t have a maximum profit
Solution: B.
The maximum profit of a covered call option is X-S0+c0
Q62-8 The recent price per share of Dragon Vacations, Inc. is $50 per share. Calls with exactly
six months left to expiration are available on Dragon with strikes of $45, $50, and $55.
The prices of the calls are $, $, and $, respectively. Assume that each call
contract is for 100 shares of stock and that at initiation of the strategy the investor
purchases 100 shares of Dragon at the current market price. Further assume that the
investor will close out the strategy in six months when the options expire, including
the sale of any stock not delivered against exercise of a call, whether the stock price
goes up or goes down. If the closing price of Dragon stock in six months is exactly $60,
the profit to a covered call using the $50 strike call is closest to:(原版书 R65-7)
A. $400.
B. $600.
C. $1,600.
Solution: B.
Buying the stock at $50 and delivering it against the $50 strike call generates a payoff of zero.
The premium is retained by the writer. The net profit is $ per share X 100 shares or $600.
Q63-8 An investor writes a covered call on a $40 stock with an exercise price of $50 for a
premium of $2. The investor’s maximum
A. gain will be $12
B. loss will be $40
C. loss will be unlimited.
Solution: A.
As soon as the stock rises to the exercises price, the covered call writer will cease to realize a
profit because the short call moves into-the-money. Each dollar gain on the stock is the offset
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with a dollar loss on the short call. Since the option is $10 out-of-the-money, the covered call
writer can gain this amount plus the $2 call premium. Thus, the maximum gain is $2+$10=$12.
However, because the investor owns the stock, he or she could lose $40 if the stock goes to
zero, but gain $2 from the call premium. Maximum loss is $38.
R16-8 盈亏平衡点：covered call 和 protective put 的盈亏平衡点实际上是买卖成本的问
题。
R17-8 Covered call strategy = -C+S=-P+X（short call, long stock)
Value at expiration: VT =ST- max (0, ST-X)
Profit=Profit1+Profit2 = -Max [-c0, ST-X-c0] + (ST-S0) = Min[X-S0+c0, ST- S0+c0]=
VT-S0+ c0
Maximum profit: X-S0+c0
Maximum loss: S0-c0
Breakeven underlying price at expiration: S0-c0
R18-8 Protective put strategy=P+S=C+X (long put, long stock)
Value at expiration: VT =ST- max (0, X -ST)
Profit=Profit1+Profit2= Max [-p0, X-ST-p0] + (ST-S0) =Max [-(S0-X+p0), ST-S0-p0]= ST
-S0-p0
Maximum profit: ∞
Maximum loss: S0-X+p0
Breakeven underlying price at expiration: S0+p0
Notes：
payoff 不考虑 premium, G/L 要考虑 premium
此类题应分别考虑 underwriting 的盈亏和 option 的盈亏，然后综合考虑总体
的盈亏。排除法是不错的选择。
P14-8 Forward Pricing and Valuation
Q14-8 Which of the following best describes the difference between the price of a forward
contract and its value?
A. The forward price is fixed at the start, and the value starts at zero and then changes.
B. The price determines the profit to the buyer, and the value determines the profit to the
seller.
C. The forward contract value is a benchmark against which the price is compared for the
purposes of determining whether a trade is advisable.
Solution: A.
The forward price is fixed at the start, whereas the value starts at zero and then changes. Both
price and value are relevant in determining the profit for both parties. The forward contract
value is not a benchmark for comparison with the price.
Q15-8 Which of the following factors does not affect the forward price?
A. The costs of holding the underlying
B. Dividends or interest paid by the underlying
C. Whether the investor is risk averse, risk seeking, or risk neutral
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Solution: C.
The costs of holding the underlying, known as carrying costs, and the dividends and interest
paid by the underlying are extremely relevant to the forward price. How the investor feels
about risk is irrelevant, because the forward price is determined by arbitrage.
Q64-8 Which of the following factors does not affect the spot price of an asset that has no
interim costs or benefits?
A. The time value of money
B. The risk aversion of investors
C. The price recently paid by other investors
Solution: C.
The price recently paid by other investors is past information and does not affect the spot price.
The time value of money and the risk aversion of investors determine the discount rate. Only
current information is relevant as investors look ahead, not back.
Q16-8 The price of a forward contract:
A. is the amount paid at initiation.
B. is the amount paid at expiration.
C. fluctuates over the term of the contract.
Solution: B.
The forward price is agreed upon at the start of the contract and is the fixed price at which the
underlying will be purchased (or sold) at expiration. Payment is made at expiration. The value
of the forward contract may change over time, but the forward price does not change.
Q17-8 Assume an asset pays no dividends or interest, and also assume that the asset does
not yield any non-financial benefits or incur any carrying cost. At initiation, the price of
a forward contract on that asset is:
A. lower than the value of the contract.
B. equal to the value of the contract.
C. greater than the value of the contract.
Solution: C.
The price of a forward contract is a contractually fixed price, established at initiation, at which
the underlying will be purchased (or sold) at expiration. The value of a forward contract at
initiation is zero; therefore, the forward price is greater than the value of the forward contract
at initiation.
Q18-8 Stocks BWQ and ZER are each currently priced at $100 per share. Over the next year,
stock BWQ is expected to generate significant benefits whereas stock ZER is not
expected to generate any benefits. There are no carrying costs associated with holding
either stock over the next year. Compared with ZER, the one-year forward price of
BWQ is most likely:
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A. lower.
B. the same.
C. higher.
Solution: A.
The forward price of each stock is found by compounding the spot price by the risk-free rate
for the period and then subtracting the future value of any benefits and adding the future
value of any costs. In the absence of any benefits or costs, the one-year forward prices of BWQ
and ZER should be equal.
After subtracting the benefits related to BWQ, the one-year forward price of BWQ is lower
than the one-year forward price of ZER.
Q19-8 Which of the following factors most likely explains why the spot price of a commodity
in short supply can be greater than its forward price?
A. Opportunity cost
B. Lack of dividends
C. Convenience yield
Solution: C.
The convenience yield is a benefit of holding the asset and generally exists when a commodity
is in short supply. The future value of the convenience yield is subtracted from the
compounded spot price and reduces the commodity's forward price relative to it spot price.
The opportunity cost is the risk-free rate. In the absence of carry costs, the forward price is the
spot price compounded at the risk-free rate and will exceed the spot price. Dividends are
benefits that reduce the forward price but the lack of dividends has no effect on the spot price
relative to the forward price of a commodity in short supply.
Q20-8 Which of the following does not represent a benefit of holding an asset?
A. The convenience yield
B. An optimistic expected outlook for the asset
C. Dividends if the asset is a stock or interest if the asset is a bond
Solution: B.
An optimistic forecast for the asset is not a benefit of holding the asset, but it does appear in
the valuation of the asset as a high expected price at the horizon date. Convenience yields and
dividends and interest are benefits of holding the asset.
Q65-8 Which of the following best describes the value of the forward contract at expiration?
The value is the price of the underlying:
A. minus the forward price.
B. divided by the forward price.
C. minus the compounded forward price.
Solution: A.
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A is correct because the holder of the contract gains the difference between the price of the
underlying and the forward price. That value can, of course, be negative, which will occur if the
holder is forced to buy the underlying at a price higher than the market price.
R19-8 Forward Pricing and Valuation：
Pricing a forward contract is the process of determining the no-arbitrage price
that will make the value of the contract be zero to both sides at the initiation of
the contract
FP=S0＋Carrying Costs－Carrying Benefits
Valuation of a forward contract means determining the value of the contract to
the long (or the short) at some time during the life of the contract.
Time Forward Contract Valuation
t=0 Zero, because the contract is priced to prevent arbitrage
t=t
( )1
long t T t
f
FP
V S
R
-
= -
+
( )1
short long tT t
f
FP
V V S
R
-
= - = -
+
t=T
TS FP-
T-bill (zero-coupon bond) forwards
T
fRSFP )1(0
Forward contracts on a dividend-paying stock
T
fRPVDSFP )1()( 00
tT
f
ttlong
R
FP
PVDSV
)1(
General Equation
P15-8 Futures pricing and Valuation
Q21-8 To the holder of a long position, it is more desirable to own a forward contract than a
futures contract when interest rates and futures prices are:
A. negatively correlated.
B. uncorrelated.
C. positively correlated.
Solution: A.
If futures prices and interest rates are negatively correlated, forwards are more desirable to
holders of long positions than are futures. This is because rising prices lead to futures profits
that are reinvested in periods of falling interest rates. It is better to receive all of the cash at
expiration under such conditions. If futures prices and interest rates are uncorrelated, forward
and futures prices will be the same. If futures prices are positively correlated with interest
rates, futures contracts are more desirable to holders of long positions than are forwards.
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Q22-8 Which of the following conditions will not make futures and forward prices
equivalent?
A. Interest rates are known.
B. Futures prices are uncorrelated with interest rates.
C. The volatility of the forward price is different from the volatility of the futures price.
Solution: C.
Known interest rates and the condition that futures prices are uncorrelated with forward prices
will make forward and futures prices equivalent. The volatility of forward and futures prices
has no relationship to any difference.
Q66-8 Which of the following best describes how futures contract payoffs differ from forward
contract payoffs?
A. Forward contract payoffs are larger.
B. They are equal, ignoring the time value of money.
C. Futures contract payoffs are larger if the underlying is a commodity.
Solution: B.
Forward payoffs occur all at expiration, whereas futures payoffs occur on a day-to-day basis
but would equal forward payoffs ignoring interest. Payoffs could differ, so forward payoffs are
not always larger. The type of underlying is not relevant to the point of which payoff is larger.
Q67-8 With respect to the value of a futures contract, which of the following statements is
most accurate? The value is the:
A. futures price minus the spot price.
B. present value of the expected payoff at expiration.
C. accumulated gain since the previous settlement, which resets to zero upon settlement.
Solution: C.
Value accumulates from the previous settlement and goes to zero when distributed.
R20-8 Futures Pricing and Valuation：futures price and forward price
If the correlation between the
underlying asset value and interest
rate is…
Investors will…
Positive
Prefer to go long in a futures contract, and
the futures price will be greater than the
price of an otherwise comparable forward
contract.
Zero Have no preference
Negative
Prefer to go long in a forward contract, and
the forward price will be greater than the
price of an otherwise comparable futures
contract.
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P16-8 Swap and option pricing and valuation
Q23-8 The price of a swap typically:
A. is zero at initiation.
B. fluctuates over the life of the contract.
C. is obtained through a process of replication.
Solution: C.
Replication is the key to pricing a swap. The swap price is determined at initiation by
replication. The value (not the price) of the swap is typically zero at initiation and the fixed
swap price is typically determined such that the value of the swap will be zero at initiation.
Q24-8 The value of a swap is equal to the present value of the:
A. fixed payments from the swap.
B. net cash flow payments from the swap.
C. underlying at the end of the contract.
Solution: B.
The principal of replication articulates that the valuation of a swap is the present value of all
the net cash flow payments from the swap, not simply the present value of the fixed payments
of the swap or the present value of the underlying at the end of the contract.
Q25-8 If the present value of the payments in a forward contract or swap is not zero, which
of the following is most likely to be true?
A. The contract cannot legally be created.
B. The contract must be replicated by another contract with zero value.
C. The party whose stream of payments to be received is greater has to pay the other party
the present value difference.
Solution: C.
The party whose stream of payments to be received is greater has to pay the other party the
present value difference. Such a contract can legally be created, but the party receiving the
greater present value must compensate the other party with a cash payment at the start.
Replication is never required.
Q26-8 Which of the following best describes the binomial option pricing formula?
A. The expected payoff is discounted at the risk-free rate plus a risk premium.
B. The spot price is compounded at the risk-free rate minus the volatility premium.
C. The expected payoff based on risk-neutral probabilities is discounted at the risk-free rate.
Solution: C.
Risk-neutral probabilities are used, and discounting is at the risk-free rate. There is no risk
premium incorporated into option pricing because of the use of arbitrage.
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Q27-8 Which of the following terms directly represents the volatility of the underlying in the
binomial model?
A. The standard deviation of the underlying
B. The difference between the up and down factors
C. The ratio of the underlying value to the exercise price.
Solution: B.
The up and down factors express how high and how low the underlying can go. Standard
deviation does not appear directly in the binomial model, although it is implicit. The ratio of
the underlying value to the exercise price expresses the moneyness of the option.
Q68-8 A swap is equivalent to a series of:
A. forward contracts, each created at the swap price.
B. long forward contracts, matched with short futures contracts.
C. forward contracts ,each created at their appropriate forward prices.
Solution: A.
Each implicit forward contract is said to be off-market, because it is created at the swap price,
not the appropriate forward price, which would be the price created in the forward market.
Q69-8 A swap in which the investor receives a variable payment in line with market
conditions and makes a fixed payment can best be replicated by purchasing a:
A. set of long futures contracts which are matched with short forward contracts.
B. series of forward contracts, each with an initial value of zero.
C. floating rate bond which is financed using a fixed rate bond.
Solution: C.
The payment structure is replicated by being long the floating rate bond, while being short the
fixed rate bond.
R21-8 Swap and Option Pricing and Valuation
Equivalence of swaps to bonds:
An interest rate swap is identical to issuing a fixed-rate bond and using the
proceeds to buy a floating-rate bond.
Equivalence of swaps to forward contracts (FRA):
A forward contract is an agreement to exchange future cash flows once, so a
swap can be viewed as a series of forward contracts.
R22-8 Binomial Model
A binomial model is based on the idea that, over the next period, some value will
change to one of two possible values (binomial). To construct a binomial model,
we need to know the beginning asset value, the size of the two possible changes,
and the probabilities of each of these changes occurring.
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Risk-neutral probability of an up move is πu ; Risk-neutral probability of an down
move is πd=1- πu
u
1 fR d
u d
We should notice that:
On the first point, if volatility increases, the difference between S1
+ and S1
-
increases, which widens the range between c1
+ and c1
-, leading to a higher
option value. The upper payoff, c1
+, will be larger and the lower payoff, c1
- ,
will be lower .
On the second point, the actual probabilities of the up and down moves do
not matter. This result is because of our ability to construct a hedge and the
rule of arbitrage.
On the third point, the irrelevance of the actual probabilities is replaced by
the relevance of a set of synthetic or pseudo probabilities, π and 1-π, which
are called risk-neutral probabilities.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
526
9-Alternative Investments
P1-9 Traditional investment VS alternative investment
Q1-9 Compared to managers of traditional investments, managers of alternative investments
are likely to have fewer restrictions on: (notesb5-252-1)
A. Holding cash.
B. Buying stocks.
C. Using derivatives.
Solution: C.
Traditional managers can hold cash and buy stocks but may be restricted from using derivatives.
Q2-9 ★Adding alternative investments to a portfolio of traditional investments will most
likely result in a new combined portfolio with returns and standard deviation that are,
respectively: （2013 下午 mock—111）
Returns Standard Deviation
A. Lower lower
B. Higher lower
C. Higher higher
Solution: B.
Because the risk/return profile of the overall portfolio will potentially improve. The overall risk
will most likely drop, and the overall return will most likely rise.
Q3-9 ★An investor is seeking an investment that can take long and short positions, may use
Multi-strategies, and historically exhibits low correlation with a traditional investment
Portfolio. ‘The investor’s goals will be best satisfied with an investment in:
A. Real estate.
B. A hedge fund.
C. A private equity fund.
Solution: B.
Hedge funds may use a variety of strategies (event-driven, relative value, macro and equity
hedge), generally have a low correlation with traditional investments, and may take long and
short positions.
Q4-9 ★Relative to traditional investments, alternative investments are least likely to be
Characterized by: （2014 原版书 P268-3）
A. High levels of transparency.
B. Limited historical return data.
C. Significant restrictions on redemptions.
Solution: A.
Alternative investments are characterized as typically having low levels of transparency.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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527
Q5-9 Alternative investment funds are typically managed: （2014 原版书 P268-4）
A. Actively.
B. To generate positive beta return.
C. Assuming that markets are efficient.
Solution: A.
There are many approaches to managing alternative investment funds but typically these
funds are actively managed and aim to generate positive alpha return.
R1-9 理解其他类投资与传统投资的不同之处，并掌握其他类投资的特性
Less liquidity of assets held
More specialization by investment managers
Less regulation and transparency
More problematic and less available historical return and volatility data
Different legal issues and tax treatments
R2-9 理解其他类投资的分类，尤其重视 hedge funds 与 private equity funds
Hedge funds
Private equity funds
Real estate
Commodities
Other
R3-9 掌握其他类投资在整个投资组合中的优点
The primary motivation for adding alternative investments to a portfolio is to reduce
portfolio risk based on the less-than-perfect correlation between alternative asset
returns and traditional asset returns.
P2-9 Hedge fund
Q6-9 ★An investor who chooses a fund of funds as an alternative to a single hedge fund is
most likely to benefit from: (notesb5-252-4)
A. Lower fees.
B. Higher returns.
C. More due diligence.
Solution: C.
A fund of funds manager is expected to provide more due diligence and better redemption
terms. Funds of funds charge an additional layer of fees. Investing in fund of funds may provide
more diversification but may not necessarily provide higher returns.
Q7-9 ★An investor may prefer a single hedge fund to a fund of funds if he seeks: （P268-6）
A. Due diligence expertise.
B. Better redemption terms.
C. A less complex fee structure.
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Solution: C.
Hedge funds of funds have multi-layered fee structures, while the fee structure for a single
hedge fund is less complex. Funds of funds presumably have some expertise in conducting due
diligence on hedge funds and may be able to negotiate more favorable redemption terms than
could an individual investor in a single hedge fund.
Q8-9 ★Diversification benefits from adding hedge funds to an equity portfolio may be
limited because: (notesb5-252-7)
A. Correlations tend to increase during periods of financial crisis.
B. Hedge fund returns are less than perfectly correlated with global equities.
C. Hedge funds tend to perform better when global equity prices are declining.
Solution: A.
Adding hedge funds to traditional portfolios may not provide the expected diversification to an
equity portfolio because return correlations tend to increase during periods of financial crisis.
Q9-9 It is most likely easiest for a research analyst to value the holdings of a: (MOCK92-101)
A. Hedge fund that follows a short bias strategy.
B. REIT invested only in high-rise office buildings.
C. Private equity firm concentrating in management buy-in lbos.
Solution: A.
A is correct because a short bias strategy involves positions in traded equities and, moreover,
many equities that are liquid enough to be shorted. Valuation can be accomplished using
market prices and bid-ask quotes. Valuation of the REIT requires subjective appraisal using a
variety of techniques, none of which reflect a market price for the property being appraised.
Valuation of firms acquired in lbos (leveraged buyouts) requires appraisals or estimates
because market pricing is no longer available after the firm is taken private.
Q10-9 For a hedge fund investor, a benefit of investing in a fund of funds is least likely the:
（2013 上午 mock—112）
A. Multilayered fee structure.
B. Higher level of due diligence expertise.
C. Ability to negotiate better redemption terms.
Solution: A.
Because funds of funds typically have a multilayered fee structure that may dilute the returns
to the investor.
Q11-9 Hedge funds are similar to private equity funds in that both:（2014 原版书 P268-7）
A. Are typically structured as partnerships.
B. Assess management fees based on assets under management.
C. Do not earn an incentive fee until the initial investment is repaid.
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Solution: A.
Private equity funds and hedge funds are typically structured as partnerships where investors
are limited partners (LP) and the fund is the general partner (GP). The management fee for
private equity funds is based on committed capital whereas for hedge funds the management
fees are based on assets under management. For most private equity funds, the general
partner does not earn an incentive fee until the limited partners have received their initial
investment back.
Q12-9 ★A hedge fund invests primarily in distressed debt. Quoted market prices are
available for the underlying holdings but they trade infrequently. Which of the
following will the hedge fund most likely use in calculating net asset value for trading
purposes? （2014 原版书 P269-9）
A. Average quotes
B. Average quotes adjusted for liquidity
C. Bid prices for short positions and ask prices for long positions
Solution: B.
Many practitioners believe that liquidity discounts are necessary to reflect fair value. This has
resulted in some funds having two navs—for trading and reporting. The fund may use average
quotes for reporting purposes but apply liquidity discounts for trading purposes.
Q13-9 ★A hedge fund uses derivative positions to take a long position in the Japanese yen
and a short position in the euro. The classification of this hedge fund is most likely
a(n):
A. Event-driven fund
B. Macro strategy fund
C. Quantitative directional fund.
Solution: B.
Macro strategy funds invest based on expected shifts of global economies, primarily in
currency and interest rate derivatives. Quantitative directional funds take long and short
positions in equities based on technical analysis. Event-driven funds seek to profit from
investment strategies based on specific corporate events and one-time transactions.
R4-9 了解对冲基金的收益目标（绝对和相对），投资策略，并能理解四种策略中的子策
略，潜在收益与风险、估值方式、尽职调查的要点
Return objective:
Absolute basis: eg,10%
Relative basis: ., return 5% above a specific benchmark return
Locked up period: a time after initial investment during which withdrawals are
not allowed
Notice period: the amount of time a fund has after receiving a redemption
request to fulfill the request
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530
Fund of fund: an investment company that invests in hedge funds
An additional layer of fees beyond the fees charged by the individual hedge
funds in the portfolio
Strategies
Event-driven strategies
Merger arbitrage: long the stock of the company being acquired, and
short the stock of the acquiring company.
Distressed/restructuring: focus on the securities of companies either in
bankruptcy or perceived to be near to bankruptcy.
Activist shareholder: purchase sufficient equity to influence a company's
policies or direction.
Special situations: focus on companies that are currently engaged in
restructuring activities other than merger/acquisitions and bankruptcy.
Relative value strategies
Fixed income convertible arbitrage: market neutral (zero beta) strategies
that seek to exploit a perceived mispricing between a convertible bond
and its component parts.
Fixed Income Asset Backed: take advantage of mispricing across different
asset backed securities.
Fixed Income General: focus on the relative value within the fixed
income markets.
Volatility: use options to go long or short market volatility
Multi-Strategy: looks for investment opportunities wherever they might
exist.
Macro strategies
Equity hedge strategies
Market Neutral: Maintain a net position that is neutral with respect to
market risk. The intent is to profit from individual securities movements
while hedging against market risk.
Fundamental Growth: fundamental analysis to identify companies
expected to exhibit high growth and capital appreciation.
Fundamental value: buy equity securities believed to be undervalued
based on fundamental analysis
Quantitative Directional: technical analysis to identify companies that are
under- and overvalued.
Short Bias: varies its net short exposure based upon market expectations,
going fully short in declining markets.
Potential benefits and risks
Different hedge fund strategies have the best returns during different time
periods.
In periods of financial crisis, the correlation of returns between global equities
and hedge funds tends to increase, which limits hedge funds’ effectiveness as
a diversifying asset class.
Valuation
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
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531
Based on market values for traded securities in portfolios, but must use model
values for non-traded securities.
Due diligence
Investment strategy
Investment process
Source of competitive advantage
Historical returns
Valuation and returns calculation methods
Longevity
Amount of assets under management
Management style
Key person risk
Reputation
Growth plans
Systems risk management
Appropriateness of benchmarks
P3-9 Private equity
Q14-9 ★Angel investing capital is typically provided in which stage of financing? 2014 原版书
P269-10
A. Later-stage.
B. Formative-stage.
C. Mezzanine-stage.
Solution: B.
Formative-stage financing occurs when the company is still in the process of being formed and
encompasses several financing steps. Angel investing capital is typically raised in this early
stage of financing.
Q15-9 ★A private equity valuation approach that uses estimated multiples of cash flows to
value a portfolio company is the: (notesb5-252-8)
A. Asset-based approach.
B. Discount cash flow approach.
C. Market/comparable approach.
Solution: C.
The market/comparable approach uses market or private transaction values of similar
companies to estimate multiples of EBITDA, net income, or revenue to use in estimating the
portfolio company’s value.
Q16-9 ★Which attributes would a private equity firm most likely consider when deciding if a
company is particularly attractive as a leveraged buyout target? （2013 下午 mock-113）
A. Sustainable cash flow
B. Efficiently managed companies
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532
C. Market value exceeds intrinsic value
Solution: A.
Because private equity firms look for companies with strong cash flow and that have a
significant amount of physical assets. These physical assets can be used as security and
borrowed against.
Q17-9 ★With respect to venture capital, the term “mezzanine-stage financing” is used to
Describe the financing: (2014 Mock 102-94)
A. To prepare for an initial public offering
B. To initiate commercial manufacturing
C. That supports product development and market research.
Solution: A.
Mezzanine-stage venture capital financing provides capital during the period prior to an initial
public offering.
R5-9 了解 PE 的投资策略，了解 PE 的费用结构、退出策略、潜在收益与风险、估值方
式、尽职调查的要点
Strategies
Leveraged buyouts (lbos): acquire companies with a significant percentage of
the purchase price financed through debt. LBO 的两种形式：MBO 和 MBI
Management buyout(MBO): the existing management team is involved
in the purchase
Management buy-ins(MBI): an external management team will replace
the existing management team
Venture capital(VC): invest in private companies with high growth potential.
Formative stage: 包含 angel investing, seed stage 和 early stage 三个阶
段
Later stage
Mezzanine-stage financing
Development capital (=minority equity investment): provision of capital for
business growth of restructuring.
Distressed investing: buying the debt of mature companies in financial
difficulties.
Structure and fees
Committed capital: the amount of capital provided to the fund by investors
Management fee: typically 1%~3% of committed capital
Incentive fee: 20% of profits, but are not earned until after the fund has
returned investors’ initial capital
Exit strategies
Trade Sale: sell a portfolio company to a competitor or another strategic buyer
IPO: sell all or some shares of a portfolio company to the public
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此预测为考点预测，考题仅为复习参考
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533
Recapitalization: the company issued debt to fund a dividend distribution to
equity holders
Secondary Sale: sell a portfolio company to another private equity firm or a
group of investors
Write-off/Liquidation: reassess and adjust to take losses from an unsuccessful
outcome
Potential benefits and risks
Diversification Benefits
Greater risk
Survivorship bias
Backfill bias
Valuation
Market / comparable approach: value a company or its equity using multiples
Discounted cash flow approach
FCFF and WACC company value
FCFE and Ke company's equity value
Simple approach: income or cash flow divided by a capitalization rate
Asset-based approach
Arrives at the value of the company to the equity holders
Assumes that the company value = Asset – liabilities
Can be valued by using fair values or liquidation values
Due diligence
Manager’s experience
Valuation methods used
Fee structure
P4-9 Real estate
Q18-9 A real estate property valuation would least likely use a(n): (notesb5-253-9)
A. Income approach.
B. Asset-based approach.
C. Comparable sales approach.
Solution: B.
The three approaches to valuing a property are income, comparable sales, and cost. An
asset-based approach can be used for real estate investment trusts, but not for valuing
individual real estate properties.
Q19-9 ★Which of the following investments most likely provides an investor with indirect,
equity exposure to real estate? （2013 上午 mock-113）
A. Real estate investment trusts.
B. Real estate limited partnerships.
C. Commercial mortgage backed securities.
Solution: A.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
534
Real estate investment trusts (REITS) provide investors with indirect, equity real estate
exposure. Real estate investment partnerships are a form of direct real estate equity
investment. Commercial mortgage backed securities (CMBS) provides investors with indirect,
debt investment opportunities in real estate.
Q20-9 ★Investors in alternative assets who seek liquidity are most likely to invest in: (2014
Mock 101-120)
A. Hedge funds.
B. Real estate investment trusts.
C. Private equity.
Solution: B.
Real estate investment trusts are publicly traded and thus provide liquidity.
R6-9 掌握房地产投资的形式、潜在收益与风险、估值方法与尽职调查的要点
Forms
Residential property
Commercial real estate
REIT Investing
MBS
Timberland and Farmland
Potential benefits and risks
Performance measure
Appraisal index
Use estimates of value (appraisals) as inputs to the indices
Rely on comparable sales and cash flow analysis techniques
Understate volatility
Repeat sales index
Use changes in prices of properties to construct the indices
Sample selection bias
REIT indices
Use the prices of publicly traded shares of reits to construct the
indices
More frequently traded, more reliable is the index
Real estate returns are highly correlated with global equity returns but less
correlated with global bond returns.
Real estate valuation
Comparable sales approach
Income approach
Property value=NOI/cap rate
NOI=net operating income
Cap rate=capitalization rate=discount rate-growth rate
Cost approach
REITS valuation
Income based approach
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
535
REIT Value=FFO/cap rate
FFO=net income + deprecation charges on sales real state
property - gains from sales of real state + losses on sales of real
state property
REIT Value=AFFO/cap rate
AFFO=FFO – recurring capital expenditures
Asset based approach
REIT NAV=market value of a REIT’s total assets - market value of a
REIT’s total liabilities.
Due diligence
Global and national economic factors
Local market conditions
Interest rate level
Variation in the abilities of managers to select and manage properties
Changes in regulation
P5-9 Commodities
Q21-9 ★If a commodity’s forward curve is in contango, the component of a commodities
Futures return most likely to reflect this is:（2014 原版书 P269-11）
A. Spot prices.
B. The roll yield.
C. The collateral yield.
Solution: B.
Roll yield refers to the difference between the spot price of a commodity and the price
specified by its futures contract (or the difference between two futures contracts with
different expiration dates). When futures prices are higher than the spot price, the commodity
forward curve is upward sloping, and the prices are referred to as being in contango. Contango
occurs when there is little or no convenience yield.
Q22-9 ★If an investor uses derivatives to make a long investment in commodities, the return
earned on margin is best described as:（2013 上午 mock-110）
A. Price return.
B. Collateral yield.
C. Convenience yield.
Solution: B.
Collateral yield is the return on cash used as margin on derivatives used to gain commodity
exposure.
Q23-9 ★★The most likely impact of adding commodities to a portfolio of equities and bonds
is to: （2013 上午 mock-111）
A. Increase risk
B. Enhance return.
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C. Reduce exposure to inflation.
Solution: C.
Over the long term, commodity prices are closely related to inflation and, therefore, including
commodities in a portfolio of equities and bonds will reduce its exposure to inflation.
Q24-9 ★. farmers have become concerned that the future supply of wheat production will
exceed demand. Any hedging activity to sell forward would most likely protect against
which market condition? （2013 下午 mock—109）
A. Contango
B. Full carry
C. Backwardation
Solution: C.
Because when a commodity market is in backwardation, the futures price is below the spot
price because market participants believe the spot price will be lower in the future. When
futures prices are above spot prices, the market is said to be in contango.
Q25-9 ★If the price of a commodity futures contract is below the spot price, it is most likely
that the: (2014 Mock 100-118)
A. Convenience yield exceeds storage costs.
B. Cost of carry exceeds the convenience yield.
C. Roll yield is negative.
Solution: A.
The convenience yield must exceed the cost of carry to arrive at a futures price below the spot
price because the futures price is approximately equal to the spot price [(1 + r) + Storage cost –
Convenience yield] and the cost of carry is defined as interest cost plus storage cost. Given that
interest cost is always positive, the convenience yield must also exceed storage costs to arrive
at a futures price below the spot price.
R7-9 掌握大宗商品的投资形式、潜在收益与风险及与定价相关的概念
Forms
Futures, forwards, options and swaps
Commodity ETF
Equities that are directly linked to a commodity
Managed futures funds
Individual managed accounts
Specialized funds in specific commodity sectors
Potential benefits and risks
Potential for returns
Portfolio diversification
Inflation protection
Pricing
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futures price spot price(1+r) + storage costs - convenience yield»
Convenience yield: the value of having the physical commodity for use over the
period of the futures contract.
Contango: futures price>spot price
Backwardation: futures price<spot price
Sources of commodities futures returns
Roll yield: the yield due to a difference between the spot price and futures
price
Positive for a market in backwardation
Negative for a market in contango
Collateral yield: the interest earned on collateral required to enter into a
futures contract
Change in spot prices: the total price return is a combination of the change in
spot prices and the convergence of futures prices to spot prices over the term
of the futures contract.
P6-9 Infrastructure（NEW）
Q26-9 Infrastructure investments may also be categorized by stage of development of the
underlying assets. Investing in existing investable infrastructure assets may be referred
to as： (根据 2016 年 CFA 原版书内容改编)
A. Brownfield investments.
B. Greenfield investments.
C. Redfield investment
Solution: A.
Investing in existing investable infrastructure assets may be referred to as brownfield
investments.
Investing in infrastructure assets that are to be constructed may be referred to as greenfield
investments.
R8-9 Infrastructure
Definition: real, capital intensive, long-lived assets, which are intended for public use
and provide essential services.
Characteristics of infrastructure:
High barriers to entry
Stable cash flows
Protection against inflation
Better match the longer-term liability structure of some investors
Categories of Infrastructure Investments:
Economic vs. Social infrastructure assets
Brownfield vs. Greenfield infrastructure investments
Investing in existing investable infrastructure assets may be referred to as
brownfield investments
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
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Investing in infrastructure assets that are to be constructed may be referred to
as greenfield investments.
Forms of Infrastructure Investments
Invest directly in the underlying assets: large sum of money
Indirect investment vehicles: no control
Publicly traded: (Master limited partnership, MLP)
Non-publicly traded: private equity fund
Risk and Returns Overview
Risk depends on underlying asset
An inherent risk to many infrastructure investments is regulatory risk.
P7-9 Fee structure of hedge funds
Q27-9 ★United Capital is a hedge fund with $250 million of initial capital. United charges a
2%management fee based on assets under management at year end, and a 20%
incentivefee based on returns in excess of an 8% hurdle rate. In its first year, United
appreciates 16%. Assume management fees are calculated using end-of-period
valuation. The investor’s net return assuming the performance fee is calculated net of
the management fee is closest to: （2014 原版书 P269-12）
A. %.
B. %.
C. %.
Solution: B.
The net investor return is %, ca1culated as: -
End of year capital = $250 million x = $290 million
Management fee = $290 million x 2% = $ million
Hurdle amount 8% of $250 million = $20 million;
Incentive fee = ($290 — $250 — $20 — $) million x 20% = $ million
Total fees to United Capital = ($ + $) million = $ million
Investor net return: ($290 — $250 — $) / $250 = %
Q28-9 ★A high water mark of£150 million was established two years ago for a British hedge
fund. The end-of-year value before fees for last year was £140 million. This year’s
end-of-year value before fees is £155 million. The fund charges “2 and 20.”
Management fees are paid independently of incentive fees and are calculated on
end-of-year values. What is the total fee paid this year? (notesb5-253-10)
A. £ million.
B. £ million.
C. £ million.
Solution: B.
Management fee is £155 million × = £ million.
Incentive fee is (£155 million — £150 million) × = £ million.
Total fee is £ million + £ million = £ million.
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
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Q29-9 ★High-water marks are typically used when calculating the incentive fee on hedge
funds. They are most likely used by clients to: （2013 下午 mock—114）
A. Avoid prime brokerage fees.
B. Claw back the management fees.
C. Prevent paying twice for the same performance.
Solution: C.
Because high-water marks prevent clients from paying twice for the same performance. When
a hedge fund’s value drops, the manager will not receive an incentive fee until the value of the
fund returns back to its previous level.
Q30-9 ★High Plains Capital is a hedge fund with a portfolio valued at $475,000,000 at the
beginning of the year. One year later, the value of assets under management is
$541,500,000. The hedge fund charges a % management fee based on the
end-of-year portfolio value, and a 10% incentive fee. If the incentive fee and
management fee are calculated independently, the effective return for a hedge fund
investor is closest to: （2013 上午 mock—114）
A. %.
B. %.
C. %.
Solution: A.
The management fee = $541,500,000 × = $8,122,500
The incentive fee = ($541,500,000 - $475,000,000) × = $6,650,000
Total fees = $14,772,500
The effective return=(541,500,000—14,772,500-475,000,000)/475,000,000=%
Q31-9 ★A hedge fund begins the year with $120 million and earns a 25% return for the year.
The fund charges a % management fee on end-of-year fund value and a 15%
incentive fee on the return, net of the management fees, that is in excess of a 6% fixed
hurdle rate. A fund investor’s return for the year, net of fees, is closest to: (MOCK92-99)
A. %.
B. %.
C. %.
Solution: B.
B is correct because the $120 million grows by 25% to $150 million = $120 million × (1 + ).
The management fee is $ million = $150 million × , leaving $ million, net of
the management fee, or an increase of $ million over the beginning value of $120 million.
The 6% hurdle rate requires an increase of $ million = $120 million × , so the fund has
earned $ million = $ million - $ million over the hurdle rate, net of the
management fee. The incentive fee is 15% of this, or $ million = $ million × ,
leaving an increase in fund assets, net of management and incentive fees, of $ million
= $ million- $ million. The investor’s return, net of fees, is $ / $120 million
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= %.
Q32-9 ★★The following information is available about a hedge fund:
Initial fund assets $100 million
Fund assets at the end of the period (before fees) $110 million
Management fee based on assets under management 2%
Incentive fee based on the return 20%
Soft hurdle rate 8%
No deposits to the fund or withdrawals from the fund occurred during the year.
Management fees are calculated using end-of-period valuation. Management fees and
incentive fees are calculated independently. The net-of-fees return of the investor is
closest to: (2014 Mock 99-120)
A. %.
B. %.
C. %.
Solution: C.
The soft hurdle rate is surpassed, because the return of the fund is 10%. For that reason, the
full fee, based on the full performance, is due.
Management fee: 2% of $110 million = $ million.
Incentive fee: 20% of $10 million = $2 million.
Total fees: $ million.
Therefore, the fund assets at the end of the period after fees are $ million. The return for
the investor is %.
R9-9 掌握 hedge funds 的管理费用结构
Management fee
Based on capital under management.
Attractive to portfolio managers because the management fee alone will
generate significant revenue if assets under management are large.
Earned irrespective of returns.
Incentive fee
Based on profits net of (or before) management fee
Only earned if the return exceeds a hurdle rate
High water mark highest value reported
The hedge fund must recover past losses and return to previous high water
mark before any additional incentive fee is earned.
Protect clients from paying twice for the same performance.
“2 and 20” means 2% management fee and 20% incentive fee for hedge funds.
Fofs may charge extra 1% management fee and 10% incentive fee.
Negotiable terms
Fees, notice and lockup periods are negotiable with potential investors.
Longer investment periods, lower fees.
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FOF benefits and drawbacks
Due diligence
Diversification
Lower minimum investment
Better liquidity
Lower mortality
Drawbacks
Fee
Difficult to generate positive alpha after fees
P8-9 Risk management of alternative investments
Q33-9 ★An analyst wanting to assess the downside risk of an alternative investment is least
likely to use the investment’s:（2014 原版书 P26--14）
A. Sortino ratio.
B. Value at risk (var).
C. Standard deviation of returns.
Solution: C.
Downside risk measures focus on the left side of the return distribution curve where losses
occur. The standard deviation of returns assumes that returns are normally distributed. Many
alternative investments do not exhibit close-to-normal distribution of returns, which is a
crucial assumption for the validity of a standard deviation as a comprehensive risk measure.
Assuming normal probability distributions when calculating these measures will lead to an
underestimation of downside risk for a negatively skewed distribution. Both the Sortino ratio
and the value-at-risk measure are both measures of downside risk.
R10-9 掌握其他类投资的风险管理与尽职调查
Risks management
Standard deviation of returns may be a misleading measure of risk.
Use of derivatives introduces operational, financial, counterparty, and liquidity
risk.
Performance for some alternatives investment categories is primarily determined
by management expertise and execution.
Hedge fund and private equity funds are much less transparent than traditional
investments.
Many alternative investments are illiquid.
When calculating optimal allocations, indices of historical returns and standard
deviations may not be good indicators of future returns and volatility.
Correlations vary across periods and are affected by events.
Due diligence
Organization
Portfolio management
Operations and controls
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Risk management
Legal review
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10-Portfolio
P1-10 Different Types of investors & Investment Products
Q1-10 In general, which of the following institutions will most likely have a high need for
liquidity and a short investment time horizon?
A. Banks
B. Endowments
C. Defined benefit pension plans
Solution: A.
Banks have a short term horizon and high liquidity needs. Endowments and defined benefit
pension plans have a long term horizon and low liquidity needs.
Q2-10 ★Which of the following types of institutions is most likely to have a long investment
time horizon and a high level of risk tolerance? （Mock83-15）
A. Banks
B. Endowments
C. Insurance companies
Solution: B.
Endowments have a long investment time horizon and a high level of risk have
a short investment time horizon and a low level of risk tolerance. Insurance companies have a
low level of risk tolerence and their investment time horizon depends on the the types of
insurance.
Q3-10 ★★Which of the following institutional investors will most likely have the longest
time horizon?(原版书 R43-5)
A. Defined benefit pension plans
B. University endowments
C. Life insurance companies
Solution: B.
Most foundations and endowments are established with the intent of having perpetual lives.
Although defined benefit pension plans and life insurance companies have portfolios with a
long time horizon, they are not perpetual.
Q4-10 ★★Which of the following investment products are most likely to trade at their net
asset value per share?(原版书 R43-12)
A. Exchange traded funds
B. Open–end mutual funds
C. Closed–end mutual funds
Solution: B.
Open–end funds are traded at their net asset value per share, whereas closed–end funds and
exchange traded funds can be traded at a premium or a discount.
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Q5-10 ★The timing of payouts for property and casualty insurers is unpredictable ("lumpy")
in comparison with the timing of payouts for life insurance companies. Therefore, in
general, property and casualty insurers have: （原版书 R46-14）
A. lower liquidity needs than life insurance companies.
B. greater liquidity needs than life insurance companies.
C. a higher return objective than life insurance companies.
Solution: B.
The unpredictable nature of property and casualty (P&C) claims forces P&C insurers to allocate
a substantial proportion of their investments into liquid, short maturity assets. This need for
liquidity also forces P&C companies to accept investments with relatively low expected returns.
Liquidity is of less concern to life insurance companies given the greater predictability of life
insurance payouts.
Q6-10 ★★Which of the following financial products are least likely to have a capital gain
distribution? (原版书 R43-13)
A. Exchange traded funds
B. Open–end mutual funds
C. Closed–end mutual funds
Solution: A.
Exchange traded funds do not have capital gain distributions. If an investor sells shares of an
ETF (or open–end mutual fund or closed–end mutual fund), the investor may have a capital
gain or loss on the shares sold; however, the gain (or loss) from the sale is not a distribution.
R1-10 Mutual funds and other forms of pooled investments
Mutual funds: open-end funds and closed-end funds, money market funds, bond
funds, stock funds.
Exchange-traded funds (ETFs)
Separately managed account 专款理财账户
Hedge funds：long/short funds, equity market-neutral funds, event-driven funds,
fixed-income arbitrage, convertible bond arbitrage funds, global macro funds
(speculate on interest rate and currency）
Buyout funds (private equity funds)与管理技能有关
Venture capital funds 与管理技能有关
The key to a DC plan is that the employee accepts the investment risk and is
responsible for ensuring that there are enough funds in the plan to meet his or
her needs upon retirement.
R2-10 Comparison among pooled investments
An investor investing in an index mutual fund buys the fund shares directly from
the fund and all investments are settled at the net asset value. In the case of an
ETF, however, investors buy the shares from other investors just as if they were
buying or selling shares of stock.
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Expenses are lower for ETFs but, unlike mutual funds, investors do incur
brokerage costs.
All purchases and redemptions in a mutual fund take place at the same price at
the close of business. ETFs are constantly traded throughout the business day,
and as such each purchase or sale takes place at the prevailing market price at
that time.
For ETFs, dividends are paid out to the shareholders, whereas index mutual funds
usually reinvest the dividends. Hence, there is a direct cash flow from the ETF
that is not there with the index mutual fund. Depending on the investor, this cash
flow may or may not be desirable.
The minimum required investment in an ETF is usually smaller. Investors can
purchase as little as one share in an ETF, which is usually not the case with an
index mutual fund.
ETFs are often cited as having tax advantages over index mutual funds.
The main disadvantage of an SMA is that the required minimum investment is
usually much higher than is the case with a mutual fund.
Hedge fund strategies generally involve a significant amount of risk, driven in
large measure by the liberal use of leverage and complexity. More recently, it has
also involved the extensive use of derivatives.
A key difference between hedge funds and mutual funds is that the vast majority
of hedge funds are exempt from many of the reporting requirements for the
typical public investment company.
R3-10 Characteristics of Different Types of investors：
Investor Risk Tolerance
Investment
Horizon
Liquidity
Needs
Income Needs
Individuals
Depends on
individual
Depends on
individual
Depends on
individual
Depends on
individual
Defined
Benefit
Pensions
High Long Low
Depends on
age
Banks Low Short High Pay interest
Endowments High Long Low Spending level
Insurance Low
Long-life
Short-P&C
High Low
Mutual
Funds
Denpends on
fund
Denpends on
fund
High
Denpends on
fund
P2-10 Investment Objectivity
Q7-10 Regarding an individual’s investment policy statement, which of the following is least
appropriate as the investment objective? The portfolio seeks:
A. current income in the form of dividends and interest.
B. 12% annual returns with above-average market risk.
C. to match the performance and risk characteristics of the S&P 500 Index.
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Solution: A.
The investment objective must be expressed in terms of both risk and return. And current
income from dividends and interest represents only the investor’s return objective. It does not
include any reference to risk tolerance or risk limits as provided in the other alternatives.
Q8-10 ★★With respect to the formation of portfolios, which of the following statements is
most accurate?（原版书 R43-3）
A. Portfolios affect risk less than returns.
B. Portfolios affect risk more than returns.
C. Portfolios affect risk and returns equally.
Solution: B.
As illustrated in the reading, portfolios reduce risk more than they increase returns.
R4-10 Investment objectives：
Risk objective: 1) measures of absolute risk include the variance or standard
deviation of returns and value at risk. 2) relative risk objectives, which relate risk to
one or more benchmarks perceived to represent appropriate risk standards.
However, for banks, the return of asset must be higher than that of liability.
Return objectives may be stated on an absolute or a relative basis: 1) the client
may want to achieve a particular percentage rate of return, for example, X percent,
a nominal rate of return or be expressed in real (inflation-adjusted) terms. 2) the
return objective can be stated on a relative basis, for example, relative to a
benchmark return; 3) some institutions also set their return objective relative to a
peer group or universe of managers. This objective can be problematic:
when limited information is known about the investment strategies
or the returns calculation methodology being used by peers,
the impossibility of all institutions being "above average."
Furthermore, a good benchmark should be investable.
P3-10 Portfolio Management Process
Q9-10 The final step in the portfolio management process is most likely to include:
A. investment research
B. portfolio construction
C. evaluation of portfolio performance
Solution: C.
The final step in the portfolio management process includes evaluating portfolio performance.
Evaluation of investor’s investment knowledge, investment research, and portfolio
construction are parts of the first three steps in the process.
Q10-10 An important reason for constructing an investment policy statement is that it:
A. minimizes the costs of portfolio construction.
B. ensures that managers outperform the performance benchmark.
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C. includes a performance benchmark to judge manager performance.
Solution: C.
An investment policy statement identifies a benchmark portfolio that will be used to judge the
performance of the portfolio manager.
Q11-10 ★With respect to the portfolio management process, the asset allocation is
determined in the：(原版书 R43-8)
A. planning step.
B. feedback step.
C. execution step.
Solution: C.
The client's objectives and constraints are established in the investment policy statement and
are used to determine the client's target asset allocation, which occurs in the execution step of
the portfolio management process.
Q12-10 ★Which of the following best describes the underlying rationale for a written
investment policy statement (IPS)?(原版书 R46-2)
A. A written IPS communicates a plan for trying to achieve investment success.
B. A written IPS provides investment managers with a ready defense against client lawsuits.
C. A written IPS allows investment managers to instruct clients about the proper use and
purpose of investments.
Solution: A.
A written IPS is best seen as a communication instrument allowing clients and portfolio
managers to mutually establish investment objectives and constraints.
Q13-10 ★The section of the investment policy statement (IPS) that provides information
about how policy may be executed, including investment constraints, is best described
as the: (原版书 R46-4)
A. Investment Objectives.
B. Investment Guidelines.
C. Statement of Duties and Responsibilities.
Solution: B.
The major components of an IPS are listed in Section of the reading. Investment Guidelines
are described as the section that provides information about how policy may be executed,
including investment constraints. Statement of Duties and Responsibilities details "the duties
and responsibilities of the client, the custodian of the client's assets, the investment managers,
and so forth." Investment Objectives is "a section explaining the client's objectives in
investing."
Q14-10 ★Which of the following is least likely to be placed in the appendices to an
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investment policy statement (IPS)? (原版书 R46-5)
A. Rebalancing Policy.
B. Strategic Asset Allocation.
C. Statement of Duties and Responsibilities.
Solution: C.
The major components of an IPS are listed in Section of the reading. Strategic Asset
Allocation (also known as the policy portfolio) and Rebalancing Policy are often included as
appendices to the IPS. The Statement of Duties and Responsibilities, however, is an integral
part of the IPS and is unlikely to be placed in an appendix.
Q15-10 ★Tactical asset allocation is best described as: (原版书 R46-19)
A. attempts to exploit arbitrage possibilities among asset classes.
B. the decision to deliberately deviate from the policy portfolio.
C. selecting asset classes with the desired exposures to sources of systematic risk in an
investment portfolio.
Solution: B.
Tactical asset allocation allows actual asset allocation to deviate from that of the strategic
asset allocation (policy portfolio) of the IPS. Tactical asset allocation attempts to take
advantage of temporary dislocations from the market conditions and assumptions that drove
the policy portfolio decision.
Q16-10 ★★Which of the following is not the major component of an investment policy
statement (IPS)? (2012 年 6 月考题回顾)
A. Investment Constraints
B. Client’s risk tolerance
C. Strategic asset allocation
Solution: C.
Many IPS include the following sections:
Introduction – Describes the client
Statement of purpose – The intentions of the IPS
Statement of duties and responsibilities – of the client, the asset custodian, and the
investment managers
Procedures – Related to keeping the IPS updated and responding to unforeseen events
Investment objectives – The client’s investment needs, specified in terms of required
return and risk tolerance
Investment constraints – Factors that may hinder the ability to meet investment
objectives; typically categorized as time horizon, taxes, liquidity, legal and regulatory, and
unique needs
Investment guidelines – For example, whether leverage, derivatives, or specific kinds of
asset are allowed
Evaluation and review – Related to feedback on investment results
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Appendices
Q17-10 ★★In defining asset classes as part of the strategic asset allocation decision, pairwise
correlations within asset classes should generally be: (原版书 R46-18)
A. equal to correlations among asset classes.
B. lower than correlations among asset classes.
C. higher than correlations among asset classes.
Solution: C.
As the reading states, "an asset class should contain homogeneous assets . . . paired
correlations of securities would be high within an asset class, but should be lower versus
securities in other asset classes."
Q18-10 ★In a strategic asset allocation, assets within a specific asset class are least likely to
have: (Mock84-120)
A. low paired correlations.
B. high paired correlations.
C. low correlations with other asset classes.
Solution: A.
In a strategic asset allocation, assets within a specific asset class will have high paired
correlations and low correlations with assets in other asset classes.
Q19-10 Which of the following constraints would most likely appear in the unique needs and
preferences section of a trusts Investment policy statement? The portfolio is:
A. subject to the prudent-man standard.
B. subject to income taxes of 40%.
C. prohibited from investing in tobacco companies.
Solution: C.
Unique needs and preferences include the prohibition of certain investments. The investment
constraints of liquidity, tax concerns, and legal and regulatory factors adequately address the
portfolio’s other constraints.
R5-10 Component of IPS
Introduction. This section describes the client.
Statement of Purpose. This section states the purpose of the IPS.
Statement of Duties and Responsibilities. This section details the duties and
responsibilities of the client, the custodian of the client's assets, and the
investment managers.
Procedures. This section explains the steps to take to keep the IPS current and the
proceduresfollowed able to respond to various contingencies.
Investment Objectives. This section explains the client's objectives in investing.
Investment Constraints. This section presents the factors that constrain the client
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in seeking to achieve the investment objectives.(内容需完善)
Investment Guidelines. This section provides information about how policy should
be executed (., on the permissible use of leverage and derivatives) and specific
types of assets excluded from investment, if any.
Evaluation and Review. This section provides guidance on obtaining feedback on
investment results.
Appendices: (A) Strategic Asset Allocation (B) Rebalancing Policy. Many investors
specify a strategic asset allocation (SAA), also known as the policy portfolio, which
is the baseline allocation of portfolio assets to asset classes in view of the investor's
investment objectives and the investor's policy with respect to rebalancing asset
class weights.
Portfolio management process: Planning（理解顾客的需求和 IPS）很重要
R6-10 Strategic Asset Allocation
R7-10 Active portfolio management
P4-10 Expected Return and Expected Standard Deviation
Q20-10 ★★An analyst gathered the following information about a portfolio comprised of two
assets: （Mock83-116）
Asset Weight % Expected Return E(R) Expected Standard Deviation E(σ)
X 60 11% 5%
Y 40 7% 4%
If the correlation of returns for the two assets equals , then the expected return and
expected standard deviation of the portfolio are closest to:
Expected Return Expected Standard Deviation
A. % %
B. % %
C. % %
Solution: C.
The expected return of the portfolio is the weighted average return of the two assets = x
11% + x 7% = %.
The expected standard deviation of the portfolio is calculated as:
= 212,121
2
2
2
2
2
1
2
1 2 sswwswsw
= [( x ) + ( x ) + (2 x x x x x )]
= [ + + ]
= [] = ≈ %
Q21-10 ★★The correlation between assets in a two–asset portfolio increases during a
market decline. If there is no change in the proportion of each asset held in the
portfolio or the expected standard deviation of the individual assets, the volatility of
the portfolio is most likely to: (原版书 R44-31)
A. increase.
B. decrease.
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C. remain the same.
Solution: A.
Higher correlations will produce less diversification benefits provided that the other
components of the portfolio standard deviation do not change (., the weights and standard
deviations of the individual assets).
Q22-10 ★★The portfolio of a risk–free asset and a risky asset has a better risk–return
trade–off than investing in only one asset type because the correlation between the
risk–free asset and the risky asset is equal to：(原版书 R45-2)
A. – .
B. .
C. .
Solution: B.
Portfolio of the risk–free asset and a risky asset or a portfolio of risky assets can result in a
better risk–return trade–off than an investment in only one type of an asset, because the
risk–free asset has no correlation with the risky asset.
Q23-10 A portfolio includes two assets. The portfolio’s standard deviation equals to the
weighted average mean of the two assets’ standard deviation. The correlation of these
two assets is closest to: （2012 年 12 月考题回顾）
A. -1
B. 0
C. 1
Solution: C.
2 2 2 2
1 1 2 2 1 2 1 2 1,22p w w w w
When the correlation = 1,
2 2 2 2 2
1 1 2 2 1 2 1 2 1 1 2 2 1 1 2 22 ( )p w w w w w w w w
Q24-10 A correlation matrix of the returns for securities A, B, and C is reported below:
Security A B C
A 1
B 1
C 0 – 1
Assuming that the expected return and the standard deviation of each security are the
same, a portfolio consisting of an equal allocation of which two securities will be most
effective for portfolio diversification?
A. Securities B and C
B. Securities A and B
C. Securities A and C
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Solution: A.
The negative correlation of – between investment securities B and C is the lowest and thus
is the most effective for portfolio diversification.
常考计算：
R8-10 An individual investment:
Expected Return
1 1 2 2
1
( )
n
i i n n
i
E R PR PR P R L P R
Variance of Return
2 2
1
[ - ( )]
n
i i
i
Var s R E R P
Standard Deviation of Return
2
1
[ - ( )]
n
i i
i
SD s R E R P
R9-10 A Portfolio:
Expected Return
n
i i
i=1
E(R)= W R
Standard deviation
2 2 2
,
1 1 1
n n n
P P i i i j i j
i i j
s s w s w w Cov
Covariance：Using expectation data
1,2 ,1 1 ,2 2
1
[ - ( )][ - ( )]
n
i i i
i
Cov P R E R R E R
Using historical data：
1,2 ,1 1 ,2 2
1
1
[ - ][ - ]
-1
n
t t
t
Cov R R R R
n
2
2 -1
P
s N
s Cov
N N
Variance of returns for a portfolio of two risky assets:
2,12121
2
2
2
2
2
1
2
1
2 2 wwwwp
P5-10 Markowitz Assumptions
Q25-10 ★★Evidence of risk aversion is best illustrated by a risk–return relationship that is:
A. negative.
B. neutral.
C. positive.
Solution: C.
Historical data over long periods of time indicates that there exists a positive risk–return
relationship, which is a reflection of an investor's risk aversion.
Q26-10 ★★With respect to the utility theory, the most risk–averse investor will have an
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indifference curve with the: （原版书 R44-18）
A. most convexity.
B. smallest intercept value.
C. greatest slope coefficient.
Solution: C.
The most risk–averse investor has the indifference curve with the greatest slope.
R10-10 The Markowitz assumptions are:
Returns distribution: Each investment can be measured by a probability distribution
of expected returns over a given horizon.
Utility maximization: Investor intends to maximize their expected utility over time
horizon.
Risk is variability: Risk is measured in terms of variance (standard deviation) of
expected returns.
Risk/return: Investors make their decision based on expected returns and risk.
Risk aversion: Investors prefer the portfolio with less risk given the same returns.
P6-10 Efficient Frontier & CAL
Q27-10 ★Compared to the efficient frontier of risky assets, the dominant capital allocation
line has higher rates of return for levels of risk greater than the optimal risky portfolio
because of the investor's ability to(原版书 R44-39)
A. lend at the risk–free rate.
B. borrow at the risk–free rate.
C. purchase the risk–free asset.
Solution: B.
The CAL dominates the efficient frontier at all points except for the optimal risky portfolio. The
ability of the investor to purchase additional amounts of the optimal risky portfolio by
borrowing (., buying on margin) at the risk–free rate makes higher rates of return for levels
of risk greater than the optimal risky asset possible.
Q28-10 ★With respect to the mean–variance theory, the optimal portfolio is determined by
each individual investor's: (原版书 R44-40)
A. risk–free rate.
B. borrowing rate.
C. risk preference.
Solution: C.
Each individual investor's optimal mix of the risk–free asset and the optimal risky asset is
determined by the investor's risk preference.
Q29-10 ★★Two individual investors with different levels of risk aversion will have optimal
portfolios that are:（原版书 R44-25）
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A. below the capital allocation line.
B. on the capital allocation line.
C. above the capital allocation line.
Solution: B.
The CAL represents the set of all feasible investments. Each investor's indifference curve
determines the optimal combination of the risk–free asset and the portfolio of all risky assets,
which must lie on the CAL.
Q30-10 ★★With respect to capital market theory, an investor's optimal portfolio is the
combination of a risk–free asset and a risky asset with the highest: (原版书 R45-3)
A. expected return.
B. indifference curve.
C. capital allocation line slope.
Solution: B.
Investors will have different optimal portfolios depending on their indifference curves. The
optimal portfolio for each investor is the one with the highest utility; that is where the CAL is
tangent to the individual investor's highest possible indifference curve.
R11-10 Portfolio and efficient frontier
Minimum-variance portfolio: the portfolio that have the lowest standard
deviation of all portfolios with a given expected return are known as
minimum-variance portfolios. Together they make up the minimum-variance
frontier.
Those portfolios that have the greatest expected return for each level of risk
make up the efficient frontier. The portfolio on the efficient frontier that has the
least risk is the global minimum-variance portfolio.
An investor's utility function represents the investor's preferences in terms of
risk and return.
Indifference curve: plots combinations of risk(standard deviation) and expected
return among which an investor is indifferent.
CAL: Given the risk-free rate and the risk and return of a portfolio of risky assets,
the line of possible portfolio risk and return combinations is referred as capital
allocation line.
CML: under the assumption of homogeneous expectations, given the risk-free
rate and the risk and return of market portfolio of all risky assets, the risk and
return combination is referred as capital market line.
P7-10 CML
Q31-10 An investor whose portfolio is located on the capital market line to the left of the
market portfolio most likely has:
A. Lower unsystematic risk than the market portfolio.
B. Higher unsystematic risk than the market portfolio.
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C. Less than 100 percent of his wealth invested in the market portfolio.
Solution: C.
A portfolio that is on the CML to the left of the market portfolio is a lending portfolio with part
of the investor’s wealth invested in the risk-free asset (loaned at the risk-free rate).
Q32-10 ★A portfolio on the capital market line with the returns greater than the returns on
the market portfolio represents a(n)(原版书 R45-9)
A. lending portfolio.
B. borrowing portfolio.
C. unachievable portfolio.
Solution: B.
As one moves further to the right of point M on the capital market line, an increasing amount
of borrowed money is being invested in the market portfolio. This means that there is negative
investment in the risk–free asset, which is referred to as a leveraged position in the risky
portfolio.
R12-10 CML
CML 好于马可维茨有效前沿；
CML 斜率越大，单位风险回报越高。
R13-10 在 CML 线上，如果投资组合要获得比市场组合更高的收益，必须怎么样？应该是
使用杠杆作用，采用无风险借款。
R14-10 Market portfolio 的含义：
Is the tangent point where the CML touches the Markowitz efficient frontier
Consists of every risky assets
The weights on each asset are equal to the percentage of the market value of the
asset to the market value of the entire market portfolio.
The greater the slope, the higher is the risk aversion of the investor as a greater
increment in return is required to accept a given increase in risk.
P8-10 SML
Q33-10 The following table shows date for the stock of JKU end a market-index.
Expected return of JKU E(Rjku) 15%
Expected return of market index RM 12%
Risk free rate RFR 5%
Standard deviation of market index returns 0 15%
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Covariance coefficient between JKU and
market index
CovJKUM
How is the price of the stock?
A. Overvalued
B. Undervalued
C. Properly valued
Solution: B.
βJKU= CovJKU,M / σ2M = / (^2) =
E(RJKU) = RFR + βJKU × (RM – RFR) = + 1 × ( – ) = required rate of return of
JKU is 12% and the expected return of JKU is 15%; therefore, JKU is undervalued relative to the
Security Market Line (SML). The risk-return relationship lies above the SML.
Q34-10 The risk-free rate is 6% and the expected market return is 15%. An investor sees a
stock with a beta of selling for $25 that will pay a $1 dividend next year. If he
thinks the stock will be selling for $30 at year end, he thinks it is:
A. Overpriced, so buy it.
B. Overpriced, so short it.
C. Underpriced, so buy it.
Solution: C.
Required rate=6+(15-6) =%
Return on stock= (30-25+1)/25=24%
Based on risk, the stock plots above the SML and is under-priced, so buy it.
Q35-10 An analyst gathers the following information:
Security
Expected
Annual Return
(%)
Expected
Standard Deviation
(%)
Correlation
between Security
and the Market
Security 1 11 25
Security 2 11 20
Security 3 14 20
Market 10 15
Which security has the least amount of market risk?
A. Security 1.
B. Security 2.
C. Security 3.
Solution: B.
Security 2 has the lowest beta value;
2, 2 20%
15%
m
m
compared to Security 1 and 3 with beta values of and
, respectively.
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Q36-10 In the context of capital market theory and the capital asset pricing model (CAPM),
the average investor is least likely to be compensated for assuming risk that can be:
A. Reduced by diversification.
B. Related to interest rate volatility.
C. Related to changes in macroeconomic variables.
Solution: A.
Unsystematic risk (risk that can be diversified away) is not rewarded. Systematic risk is the risk
for which investors are compensated. Systematic risk is that part of total risk that is correlated
with the market and related to changes in macroeconomic variables (such as changes in
interest rate volatility). Standard deviation of returns of the market portfolio is a measurement
of systematic risk
Q37-10 ★★Interest rate risk is belong to: (2012 年 6 月考题回顾)
A. Systematic risk
B. Unsystematic risk
C. Total risk
Solution: A.
Systematic risk is correlated with the market and related to changes in macroeconomic
variables such as changes in interest rate volatility.
Q38-10 Which one is not the systematic risk? (2012 年 12 月考题回顾)
A. New drug development test
B. The change of inflation rate
C. The change of bank reserve rate
Solution: A.
New drug development test is the unsystematic risk. Unsystematic risk is also called unique or
firm-specific risk that could be eliminated by diversification.
Q39-10 With respect to the security market line, if two risky assets have the same
covariance with the market portfolio but have different estimated rates of return,
the most accurate conclusion is that the two risky assets have:
A. The same amount of systematic risk, and both assets are properly valued.
B. Different amounts of systematic risk, and both assets are properly valued.
C. The same amount of systematic risk, and at least one of the assets is either overvalued or
undervalued.
Solution: C.
Beta is the covariance of an asset with the market portfolio divided by the variance of the
market portfolio. The variance of the market portfolio is the same for all assets. So if the
covariance with the market portfolio is the same, the assets must have the same beta (amount
of systematic risk), should plot at the same place on the SML, and have the same required rate
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of return. If the estimated rates of return for the two assets are different, at least one of them
is not properly valued and will not plot on the SML.
Q40-10 ★With respect to capital market theory, correctly priced individual assets can be
plotted on the: （原版书 R45-24）
A. capital market line.
B. security market line.
C. capital allocation line.
Solution: B.
The security market line applies to any security, efficient or not. The CAL and the CML use the
total risk of the asset (or portfolio of assets) rather than its systematic risk, which is the only
risk that is priced.
Q41-10 ★Analysts who have estimated returns of an asset to be greater than the expected
returns generated by the capital asset pricing model should consider the asset to be:
（原版书 R45-35）
A. overvalued.
B. undervalued.
C. properly valued.
Solution: B.
If the estimated return of an asset is above the SML (the expected return), the asset has a
lower level of risk relative to the amount of expected return and would be a good choice for
investment (., undervalued).
Q42-10 ★With respect to capital market theory, which of the following statements best
describes the effect of the homogeneity assumption? Because all investors have the
same economic expectations of future cash flows for all assets, investors will invest
in: （原版书 R45-36）
A. the same optimal risky portfolio.
B. the Standard & Poor's 500 Index.
C. assets with the same amount of risk.
Solution: A.
The homogeneity assumption refers to all investors having the same economic expectation of
future cash flows. If all investors have the same expectations, then all investors should invest in
the same optimal risky portfolio, therefore implying the existence of only one optimal portfolio
(., the market portfolio)
Q43-10 The slope of the security characteristic line is an asset's:
A. beta.
B. excess return.
C. risk premium.
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Solution: A.
The security characteristic line is a plot of the excess return of the security on the return of the
market. In such a graph, Jensen's alpha is the intercept and the beta is the slope.
Q44-10 With respect to capital market theory, the average beta of all assets in the market is:
A. less than .
B. equal to .
C. greater than .
Solution: B.
The average beta of all assets in the market, by definition, is equal to .
Q45-10 Which one is not the assumption of CAPM? （2012 年 12 月考题回顾）
A. Investors are risk averse
B. All investors plan using the same time period
C. Investors have different expectations of security returns
Solution: C.
The capital asset pricing model (CAPM) requires several assumptions:
Investors are risk averse, utility maximizing, and rational.
Markets are free of frictions like costs and taxes.
All investors plan to use the same time period.
All investors have the same expectations of security returns.
Investments are infinitely divisible.
Prices are unaffected by an investor’s trades.
SML 曲线需掌握的公式和概念：
R15-10 Systematic risk and Unsystematic risk
Systematic risk: the risk that cannot be eliminated by diversification, which is
measured by beta.
Unsystematic risk: the risk that is eliminated by diversification.
Since unsystematic risk can be eliminated through diversification, only systematic
risk is compensated.
R16-10 CML&SML
Sharp ratio: p
fp RR
the excess returns per unit of total portfolio risk.
CML SML
[ ( ) ]
( ) mktPP
mkt
E R RFR
E R RFR
( ) [ ( ) ]i i mktE R RFR E R RFR
Unsystematic risk has been diversified Apply for all investments
包含无风险资产的有效前沿 所有的证券均在证券市场线上
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Sharp ratio is the slope of the CML, while the slope of the SML is [E(Rmkt- RFR)].
R17-10 Return generate model:
E(Ri)-Rf=βi1×E(factor1)+βi2×E(factor2)+βi3×E(factor3)+...+βi3×E(factor3)
R18-10 Expected security returns depend only on systematic risk as measured by beta:
( ) [ ( ) ]i i mktE R RFR E R RFR
R19-10 SML 曲线应用：
Undervalued
Estimated return > Required return from the SML
Investors should buy.
Overestimated
Estimated return < Required return from the SML
Investors should sell.
Properly valued
Estimated return = Required return from the SML
Investors are indifferent between buying or selling
风险容忍度升高时，风险溢价降低，SML：clockwise rotation。
P9-10 Performance measures
Q46-10 ★Which of the following performance measures is consistent with the CAPM?(原版
书 R45-32)
A. M–squared.
B. Sharpe ratio.
C. Jensen's alpha.
Solution: C.
Jensen’s alpha adjusts for systematic risk, and M-squared and the Sharpe Ratio adjust for total
risk.
Q47-10 ★★Which of the following performance measures does not require the measure to
be compared to another value? (原版书 R45-33)
A. Sharpe ratio.
B. Treynor ratio.
C. Jensen's alpha.
Solution: C.
The sign of Jensen’s alpha indicates whether or not the portfolio has outperformed the market.
If alpha is positive, the portfolio has outperformed the market; if alpha is negative, the
portfolio has underperformed the market.
Q48-10 ★★Which of the following performance measures is most appropriate for an
investor who is not fully diversified? (原版书 R45-34)
A. M–squared.
B. Treynor ratio.
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C. Jensen's alpha.
Solution: A.
M-squared adjusts for risk using standard deviation (., total risk).
Q49-10 ★★Portfolio managers who are maximizing risk–adjusted returns will seek to
invest less in securities with: (原版书 R45-40)
A. lower values for nonsystematic variance.
B. values of nonsystematic variance equal to 0.
C. higher values for nonsystematic variance.
Solution: C.
Since managers are concerned with maximizing risk–adjusted returns, securities with greater
nonsystematic risk should be given less weight in the portfolio.
Q50-10 A portfolio manager earned a rate of return of %. The beta of the portfolio is .
If the risk-free rate of return is % and the market return is %, Jensen’s alpha
for the portfolio is closest to: (Mock 85-120)
A. %.
B. %.
C. %.
Solution: A.
Jensen’s alpha= P f P m fR -[R + (R -R )] = — [ + ×( — )] =
R20-10 Evaluate relative portfolio performance (risk-adjusted returns)
P f
P
R R
Sharpe ratio=
The Sharpe ratio for any portfolio along the CML is the same.
The M-squared (M2) measure produces the same portfolio rankings as the
Sharpe ratio but is stated in percentage terms.
M
1P
1P 2P
2P
M
fR
1PR
MR
2PR
( )E R
CAL 2
2
P f
P
R R
slope
CML 1
1
M f P f
M P
R R R R
slope
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可以用斜率及截距算出两条直线的方程，将 σM 带入，两式相减得出
2 ( - ) - ( - )Mp f M f
p
s
M R R R R
s
Treynor measure & Jensen’s alpha (systematic risk)
P f
P
R R
Treynor measure=
( ) ( )P P f P M fR R R R
M2与 Sharpe Ratio 一起，仅适用于非完全分散化的组合；两者的结论是一致
的。不能直接做判断，仅用于排序。但是，Jensen’s Alpha 和 Treynor ratio 仅
用于完全分散化的组合，Jensen’s Alpha 可以直接做判断。
P10-10 Investment objectives: risk and return
Q51-10 An individual investor’s ability to take risk is higher than average level. His
willingness to take risk is lower than average level. How about his risk tolerance,
comparing with the average level? （2012 年 12 月考题回顾）
A. Higher than average level
B. Lower than average level
C. Same with the average level
( )M
P p f
R R
E(R)
P M
fR
PR
MR
P
M
2M
P
( )E R
SML
Slope= treynor measure for Portfolio P
PR
P 1
MR
fR
P
M
Jensen’s
alpha
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Solution: B.
When assigning an overall risk tolerance, the prudent approach is to use the lower of ability to
take risk and willingness to take risk.
Q52-10 A financial adviser gathers the following information about a new client:
• The client is a successful economics professor at a major university.
• The client plans to work full time for seven years and then will work part time for
three years before retiring.
• The client owns two houses and does not have any outstanding debt.
• The client has accumulated retirement savings of approximately $2 million for his
employer's retirement plan and will have anticipated retirement spending needs
of $60,000 per year.
• The client reads numerous financial publications and follows markets closely.
• Although concerned about the current health of the global economy, the client
maintains that he is a long-term investor.
Based on the above information, which of the following best describes this client?
A. Low ability to take risk, but a high willingness to take risk
B. High ability to take risk and a high willingness to take risk
C. High ability to take risk, but a low willingness to take risk
Solution: B.
The client is in a strong financial situation (stable job, no debt), has a reasonably long time
horizon before needing any liquidity (10 years), and reasonable retirement spending needs
relative to total assets. These factors indicate a high ability to take risk. In addition, the client's
knowledge of financial markets, experience, and focus on the long term also indicates a high
willingness to take risk.
P11-10 Risk management
Q53-10 Risk management in the case of individuals is best described as concerned with:
(2016 年 CFA 原版书课后题)
A. hedging risk exposures.
B. maximizing utility while bearing a tolerable level of risk.
C. maximizing utility while avoiding exposure to undesirable risks.
Solution: B.
For individuals, risk management concerns maximizing utility while taking risk consistent with
individual’s level of risk tolerance.
Q54-10 The process of risk management includes: (2016 年 CFA 原版书课后题)
A. minimizing risk.
B. maximizing returns.
C. defining and measuring risks being taken.
Solution: C.
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Risks need to be defined and measured so as to be consistent with the entity’s chosen level of
risk tolerance and target for returns or other outcomes.
Q55-10 Which of the following is the correct sequence of events for risk governance and
management that focuses on the entire enterprise? Establishing: (2016 年 CFA 原版
书课后题)
A. risk tolerance, then risk budgeting, and then risk exposures.
B. risk exposures, then risk tolerance, and then risk budgeting.
C. risk budgeting, then risk exposures, and then risk tolerance.
Solution: A.
In establishing a risk management system, determining risk tolerance must happen before
specific risks can be accepted or reduced. Risk tolerance defines the appetite for risk. Risk
budgeting determines how or where the risk is taken and quantifies the tolerable risk by
specific metrics. Risk exposures can then be measured and compared against the acceptable
risk.
Q56-10 Effective risk governance in an enterprise provides guidance on all of the following
except: (2016 年 CFA 原版书课后题)
A. unacceptable risks.
B. worst losses that may be tolerated.
C. specific methods to mitigate risk for each subsidiary in the enterprise.
Solution: C.
Risk governance is not about specifying methods to mitigate risk at the business line level.
Rather, it is about establishing an appropriate level of risk for the entire enterprise. Specifics of
dealing with risk fall under risk management and the risk infrastructure framework.
Q57-10 Once an enterprise’s risk tolerance is determined, the role of risk management is
to: (2016 年 CFA 原版书课后题)
A. analyze risk drivers.
B. align risk exposures with risk appetite.
C. identify the extent to which the enterprise is willing to fail in meeting its objectives.
Solution: B.
When risk tolerance has been determined, the risk framework should be geared toward
measuring, managing, and complying with the risk tolerance, or aligning risk exposure with risk
tolerance. The risk tolerance decision begins by looking at what shortfalls within an
organization would cause it fail to achieve some critical goals and what the organization’s risk
drivers are.
Q58-10 Which factor would mostly affect a company’s ability to tolerate risk? (2016 年 CFA
原版书课后题)
A. A stable market environment
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B. The beliefs of the individual board members
C. The ability to dynamically respond to adverse events
Solution: C.
If a company has the ability to adapt quickly to adverse events, it may allow for a higher risk
tolerance. There are other factors, such as beliefs of board members and a stable market
environment, which may but not necessarily affect risk tolerance.
Q59-10 Risk budgeting includes all of the following except: (2016 年 CFA 原版书课后题)
A. determining the target return.
B. quantifying tolerable risk by specific metrics.
C. allocating a portfolio by some risk characteristics of the investments.
Solution: A.
Risk budgeting does not include determining the target return. Risk budgeting quantifies and
allocates the tolerable risk by specific metrics.
Q60-10 A benefit of risk budgeting is that it: (2016 年 CFA 原版书课后题)
A. considers risk tradeoffs.
B. establishes a firm’s risk tolerance.
C. reduces uncertainty facing the firm.
Solution: A.
The process of risk budgeting forces the firm to consider risk tradeoffs. As a result, the firm
should choose to invest where the return per unit of risk is the highest.
Q61-10 Liquidity risk is most associated with: (2016 年 CFA 原版书课后题)
A. the probability of default.
B. a widening bid–ask spread.
C. a poorly functioning market.
Solution: B.
Liquidity risk is also called transaction cost risk. When the bid–ask spread widens, purchase
and sale transactions become increasingly costly. The risk arises from the uncertainty of the
spread.
Q62-10 An example of a non-financial risk is: (2016 年 CFA 原版书课后题)
A. market risk.
B. liquidity risk.
C. settlement risk.
Solution: C.
Settlement risk is related to default risk, but deals with the timing of payments rather than the
risk of default.
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Q63-10 If a company has a one-day 5% Value at Risk of $1 million, this means:(2016 年 CFA
原版书课后题)
A. 5% of the time the firm is expected to lose at least $1 million in one day.
B. 95% of the time the firm is expected to lose at least $1 million in one day.
C. 5% of the time the firm is expected to lose no more than $1 million in one day.
Solution: A.
The VaR measure indicates the probability of a loss of at least a certain level in a time period.
R21-10 Risk terminologies
Risk
Exposure to uncertainty
Risk exposure
The extent to which an entity’s value may be affected through sensitivity to
underlying risks.
Risk management
Risk management is the process by which an organization or individual
defines the level of risk to be taken, measures the level of risk being taken,
and adjusts the latter toward the former; with the goal of maximizing the
company’s or portfolio’s value or the individual’s overall satisfaction, or
utility.
It comprises all the decisions and actions needed to best achieve
organizational or personal objectives while bearing a tolerable level of risk.
Not about minimizing risk.
R22-10 Risk management framework
It is the infrastructure, process, and analytics needed to support effective risk
management in an organization.
Integrate the risk and return aspects of the enterprise into decisions.
Not a “one size fits all” solution; it is best achieved through a custom solution.
Key factors:
Risk governance
Risk identification and measurement
Risk infrastructure
Defined policies and processes
Risk monitoring, mitigation, and management
Communications
Strategic analysis or integration
R23-10 Key factors of risk management framework
Risk governance
The top-down process foundation for risk management activities, including
risk oversight and setting risk tolerance for the organization.
Risk identification and measurement
The quantitative and qualitative assessment of all potential sources of risk
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and the organization’s risk exposures.
Risk infrastructure
Comprises the resources and systems required to track and assess the
organization’s risk profile.
Defined policies and processes
Management’s complement to risk governance at the operating level
Risk monitoring, mitigation, and management
Communications
Includes risk reporting and active feedback loops so that the process
improves decision making.
Strategic analysis or integration
Using these risk tools to rigorously sort out the factors that are and are not
adding value as well as incorporating this analysis into the management
decision process with the intent of improving outcomes.
R24-10 Risk governance
The top-down process and guidance that direct risk management activities to
align with and support the overall enterprise.
Including risk oversight and setting risk tolerance for the organization
Elements of effective risk governance
It determines the organization’s goals, direction and priorities
Spells out risk appetite or tolerance
Provide a sense of the worst losses that could be tolerated in various
scenarios
Decisions about risk budgeting
R25-10 Enterprise risk management
Focuses risk activities on the objectives, health and value of the whole
organization.
Requires the entire economic balance sheet of the business be considered, not
just the assets or one part of the business in isolation.
R26-10 Risk tolerance
A key element of good risk governance, delineates which risks are acceptable,
which are unacceptable, and how much risk the overall organization can be
exposed to.
Identifies the extent to which the entity is willing to experience losses or
opportunity costs and to fail in meeting its objectives.
Should be chosen and communicated before a crisis.
The ability of a company to respond dynamically to adverse events may allow
for a higher risk tolerance
R27-10 Risk budgeting
Risk budgeting is any means of allocating investments or assets by their risk
characteristics.
R28-10 Financial risks and non-financial risks
Financial risks refer to the risks that arise from events occurring in the financial
markets. 3 main types:
金程教育 专业·领先·增值
此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
568
Market risk
Arises from movements in stock prices, interest rates, exchange rates
and commodity prices
Credit risk
The risk that a counterparty will not pay any amount owed
Liquidity risk
The risk that, as a result of degradation in market conditions or the lack
of market participants, one will be unable to sell an asset without
lowering the price less than the fundamental value
Liquidity risk could also be called transaction cost risk and is most
associated with a widening bid-ask spread.
Non-financial risks consist of a variety of risks, including settlement risk,
operational risk, legal risk, regulatory risk, accounting risk, tax risk, model risk,
tail risk, and sovereign or political risk.
Operational risk is the risk that arises from the operations of an organization
and includes both human and system or process errors.
Solvency risk is that an entity does not survive or succeed because it runs
out of cash to meet its financial obligations.
R29-10 Other risk issues
Interaction between risks:
Risks are not necessarily independent because many risks arise as a result of
other risks; risk interactions can be extremely non-linear and harmful.
Risk drivers are the fundamental global and domestic, macroeconomic and
industry factors that create risk.
Common measures of risk include:
standard deviation or volatility;
asset-specific measures, such as beta or duration;
derivative measures, such as delta, gamma, vega, and rho;
and tail measures such as value at risk, CVaR and expected loss given
default.
Methods of risk modification:
Risk prevention and avoidance
Risk acceptance: self-insurance and diversification
Risk transfer (insurance)
Risk shifting (derivatives)
The determinants of which method is best for modifying risk are the benefits
weighed against the costs, with consideration for his overall final risk profile and
adherence to risk governance objectives.
