CFA Level 1 - mock exams

How does a stronger domestic currency impact inflation?

Lowers cost of imported goods, contributing to reduced inflation

How can a higher policy rate affect real domestic demand?

It reduces borrowing and spending, leading to lower consumption and investment

What is the relationship between higher interest rates and asset prices?

Higher rates often lead to falling asset prices, which can reduce household wealth and consumption

What happens to consumption growth when interest rates rise?

Consumption growth decreases because borrowing becomes more expensive and financial wealth may decline due to falling asset prices.

Higher rates also weaken investor confidence due to expectations of slower economic growth and reduced corporate profit

What is net external demand and how is it influenced by interest rates?

Net external demand is exports minus imports.

Higher interest rates may reduce net demand by strengthening the currency and decreasing exports.

What is the impact of higher policy rates on aggregate demand?

They reduce both real domestic demand and net external demand, lowering inflationary pressures.

All else being equal, an increase in the central bank’s policy rate most likely puts downward pressure on domestic inflation by

Strengthening the country’s currency

Equity

Common stock + preferred stock

How does an inventory write-down affect the current ratio?

It decreases the current ratio because it decreases current assets while current liabilities remains unchanged.

How does an inventory write-down affect the total assets turnover?

It increases total asset turnover because the write down reduces average total assets

Total assets turnover = revenue - average total assets

Under IFRS, how is a reversal of an inventory write down recognized?

As a reduction in cost of sales, limited to the amount of the original write down

Is the reversal of an inventory write down included in other comprehensive income?

No. Inventory write-down reversals affect the income statement (cost of sales) not other comprehensive income

Is the reversal of an inventory write down permitted under both IFRS and US GAAP?

No. Reversals are permitted under IFRS but not allowed under US GAAP

When does A firm in an oligopoly market face a kinked demand curve?

Competitors match a price reduction and ignore a price increase.

What does Cournot model of oligopoly assume about competitor’s behaviour?

Each firm assumes competitors will keep output constant, and adjusts its own output to maximize profit.

Crowding out effect

Government borrowing diverts private sector investment from taking place.

If there is a limited amount of savings to be spent on investment, then larger government demands will lead to higher interest rates and lower private sector investing.

Three characteristics of Big Data

1. Volume

2. Velocity

3. Variety

What is the monetary transmission mechanism?

The process through which a central banks actions affect interest rates, asset prices, confidence, and output, employment, and inflation

Cash flow per share

Under US GAAP:

(CFO - preferred dividends)/common shares outstanding

Under IFRS:

• add back total dividends if included in CFO

(CFO + total dividends - preferred dividends)/common shares outstanding

What is Jensen’s free cash flow hypothesis

Managers may misuse excess free cash flow, and using debt can help reduce this risk by forcing more disciplined capital allocation

According to jenson’s free cash flow hypothesis, how does debt help limit management misuse of free cash flow?

By reducing available excess cash and creating fixed obligations (interest/principal), debt limits discretionary spending and forced efficient decision-making

What is pecking order theory

Firms prefer to finance projects using internal funds first, then debt, and issue equity only as a last resort, due to concerns about information asymmetry and costs.

Issuing equity may signal to investors that management believes the firms shares are overvalued, potentially lowering the stock price

What is debt signalling theory

Issuing debt can signal to the market that managers are confident in the firms future cash flows and ability to meet obligations.

By committing to fixed interest payments, managers show they believe the company will have strong enough performance to cover them - signalling strength to investors.

What does it mean when forward points are positive in a quote like USD/EUR?

The euro (base currency) is trading at a premium to the spot rate, and the USD (price currency) is at a discount.

Which party has lower interest rates when the base currency trades at a forward premium?

Interest rates in the base currency’s country are lower than those in the price currency’s country

What does the forward rate predict?

Forward rates reflect nominal interest rate differentials

(Not real interest rates)

What are characteristics of an oligopoly

High barriers to entry

High costs

Barriers to competition

the products offered are close substitutes and are highly differentiated through marketing, features, and other non-pricing strategies

Gain/loss of long-lived assets

Sales proceeds minus carrying amount at time of sale.

Carrying amount is net book value (historical cost - acc dep), unless carrying amount has been changed to reflect impairment or revaluation.