CFP MOCK EXAM QUESTIONS AND ANSWERS
Which of the following is correct regarding certificates of deposit (CDs)?
A. CD's are short-term securities that may be bought or sold in the open market at a
market-determined price.
B. CD's typically invest in high-quality, short-term investments, such as commercial
paper, T-Bills, and money market funds.
C. CDs are known as "time deposits"
D. The financial institution pays a variable rate of interest for the term of the CD. -
Answers -C. CDs are known as "time deposits"
[Certificates of deposit (CDs) are known as "time deposits". They are deposits made
with a bank for a specified period of time.]
All but which of the following are correct regarding Treasury bills?
A. Have maturities of one year or less
B. Sold in minimum denominations of $500
C. Considered to be default risk free
D. Sold at a discount to par - Answers -B. Sold in minimum denominations of $500
[Treasury bills are sold in minimum denominations of $1,000.]
Which of the following describes the relationship between total risk, systematic risk, and
unsystematic risk?
A. Total risk= systematic risk - unsystematic risk
B. Total risk - systematic risk= unsystematic risk
C. Unsystematic risk - total risk= systematic risk
D. Total risk + unsystematic risk= systematic risk - Answers -B. Total risk - systematic
risk= unsystematic risk
[Total risk = systematic risk + unsystematic risk. This formula can be rewritten as: Total
risk - systematic risk = unsystematic risk.]
Common stock is referred to as __________ because the owner of the stock is also an
owner of the corporation and may participate in its capital and income growth.
A. debt
B. equity
C. cumulative stock
D. preferred stock - Answers -B. equity
[Common stock is referred to as equity because the owner of the stock is also an owner
of the corporation and may participate in its capital and income growth.]
,5. Which of the following are correct regarding a bond's yield to maturity (YTM)?
(1) The YTM assumes that coupon payments are reinvested at the YTM rate of return
for the life of the bond.
(2) When the market rate of interest for the same term and risk is higher than the
coupon rate, a discount will be priced into the bond.
(3) Bonds that are riskier will have lower yields to maturity.
(4) The YTM is the internal rate of return for cash flow associated with a bond, including
the purchase price, coupon payments, and maturity value.
A. (1) and (2) only
B. (3) and (4) only
C. (1), (2), and (4) only
D. (1), (3), and (4) only - Answers -C. (1), (2), and (4) only
[Bonds that are riskier will have higher yields to maturity.]
An investment grade bond is one that is rated __________ or higher by the Standard &
Poor's bond rating service. A high-yield bond is rated __________ or lower by Standard
& Poor's.
A. BBB, BB
B. BBB+, BB
C. BBB-, BB+
D. BB, BBB - Answers -C. BBB-, BB+
[An investment grade bond is one that is rated BBB- or higher by the Standard & Poor's
bond rating service. A high- yield bond is rated BB+ or lower by Standard & Poor's.]
Which of the following describes bonds that have a legal claim to specific assets in the
event of default, insolvency, or liquidation?
A. Debenture bonds
B. Secured bonds
C. Unsecured bonds
D. Indenture bonds - Answers -B. Secured bonds
[Secured bonds have a legal claim to specific assets in the event of default, insolvency,
or liquidation.]
Which of the following measures how far the actual outcomes of a probability
distribution deviate from the arithmetic mean?
A. Skewness
B. Correlation coefficient
C. Coefficient of determination
D. Poisson distribution - Answers -A. Skewness
, [Skewness measures how far the actual outcomes of a probability distribution deviate
from the arithmetic mean.]
The Alpha and Treynor ratios assume a __________ portfolio. The Sharpe ratio
assumes a __________portfolio.
A. non-diversified, diversified
B. non-diversified, riskless
C. diversified, non-diversified
D. riskless, diversified - Answers -C. diversified, non-diversified
[The Jensen and Treynor ratios assume a diversified portfolio. The Sharpe ratio
assumes a non-diversified portfolio.]
Which of the following is/are correct regarding beta?
(1) Beta is used to measure the amount of unsystematic risk in an investor's portfolio.
(2) A portfolio's beta can be positive or equal to zero, but cannot be negative.
A. (1) only
B. (2) only
C. None of the above
D. All of the above - Answers -C. None of the above
[Beta is used to measure the amount of systematic risk in an investor's portfolio. A
portfolio's beta can be positive, negative, or equal to zero.]
When a bond is selling at a premium to par, the YTM will always be __________ the
bond's coupon rate. If a bond is selling at a discount to par, the YTM will always be
__________ the bond's coupon rate.
A. greater than, less than
B. less than, greater than
C. greater than, equal to
D. less than, equal to - Answers -B. less than, greater than
[When a bond is selling at a premium to par, the YTM will always be less than the
bond's coupon rate. If a bond is selling at a discount to par, the YTM will always be
greater than the bond's coupon rate.]
Which of the following describes a strategy used to minimize the interest rate risk of
bond investments by adjusting the portfolio duration to match the investment time
horizon?
A. Bond laddering
B. Bond immunization
Which of the following is correct regarding certificates of deposit (CDs)?
A. CD's are short-term securities that may be bought or sold in the open market at a
market-determined price.
B. CD's typically invest in high-quality, short-term investments, such as commercial
paper, T-Bills, and money market funds.
C. CDs are known as "time deposits"
D. The financial institution pays a variable rate of interest for the term of the CD. -
Answers -C. CDs are known as "time deposits"
[Certificates of deposit (CDs) are known as "time deposits". They are deposits made
with a bank for a specified period of time.]
All but which of the following are correct regarding Treasury bills?
A. Have maturities of one year or less
B. Sold in minimum denominations of $500
C. Considered to be default risk free
D. Sold at a discount to par - Answers -B. Sold in minimum denominations of $500
[Treasury bills are sold in minimum denominations of $1,000.]
Which of the following describes the relationship between total risk, systematic risk, and
unsystematic risk?
A. Total risk= systematic risk - unsystematic risk
B. Total risk - systematic risk= unsystematic risk
C. Unsystematic risk - total risk= systematic risk
D. Total risk + unsystematic risk= systematic risk - Answers -B. Total risk - systematic
risk= unsystematic risk
[Total risk = systematic risk + unsystematic risk. This formula can be rewritten as: Total
risk - systematic risk = unsystematic risk.]
Common stock is referred to as __________ because the owner of the stock is also an
owner of the corporation and may participate in its capital and income growth.
A. debt
B. equity
C. cumulative stock
D. preferred stock - Answers -B. equity
[Common stock is referred to as equity because the owner of the stock is also an owner
of the corporation and may participate in its capital and income growth.]
,5. Which of the following are correct regarding a bond's yield to maturity (YTM)?
(1) The YTM assumes that coupon payments are reinvested at the YTM rate of return
for the life of the bond.
(2) When the market rate of interest for the same term and risk is higher than the
coupon rate, a discount will be priced into the bond.
(3) Bonds that are riskier will have lower yields to maturity.
(4) The YTM is the internal rate of return for cash flow associated with a bond, including
the purchase price, coupon payments, and maturity value.
A. (1) and (2) only
B. (3) and (4) only
C. (1), (2), and (4) only
D. (1), (3), and (4) only - Answers -C. (1), (2), and (4) only
[Bonds that are riskier will have higher yields to maturity.]
An investment grade bond is one that is rated __________ or higher by the Standard &
Poor's bond rating service. A high-yield bond is rated __________ or lower by Standard
& Poor's.
A. BBB, BB
B. BBB+, BB
C. BBB-, BB+
D. BB, BBB - Answers -C. BBB-, BB+
[An investment grade bond is one that is rated BBB- or higher by the Standard & Poor's
bond rating service. A high- yield bond is rated BB+ or lower by Standard & Poor's.]
Which of the following describes bonds that have a legal claim to specific assets in the
event of default, insolvency, or liquidation?
A. Debenture bonds
B. Secured bonds
C. Unsecured bonds
D. Indenture bonds - Answers -B. Secured bonds
[Secured bonds have a legal claim to specific assets in the event of default, insolvency,
or liquidation.]
Which of the following measures how far the actual outcomes of a probability
distribution deviate from the arithmetic mean?
A. Skewness
B. Correlation coefficient
C. Coefficient of determination
D. Poisson distribution - Answers -A. Skewness
, [Skewness measures how far the actual outcomes of a probability distribution deviate
from the arithmetic mean.]
The Alpha and Treynor ratios assume a __________ portfolio. The Sharpe ratio
assumes a __________portfolio.
A. non-diversified, diversified
B. non-diversified, riskless
C. diversified, non-diversified
D. riskless, diversified - Answers -C. diversified, non-diversified
[The Jensen and Treynor ratios assume a diversified portfolio. The Sharpe ratio
assumes a non-diversified portfolio.]
Which of the following is/are correct regarding beta?
(1) Beta is used to measure the amount of unsystematic risk in an investor's portfolio.
(2) A portfolio's beta can be positive or equal to zero, but cannot be negative.
A. (1) only
B. (2) only
C. None of the above
D. All of the above - Answers -C. None of the above
[Beta is used to measure the amount of systematic risk in an investor's portfolio. A
portfolio's beta can be positive, negative, or equal to zero.]
When a bond is selling at a premium to par, the YTM will always be __________ the
bond's coupon rate. If a bond is selling at a discount to par, the YTM will always be
__________ the bond's coupon rate.
A. greater than, less than
B. less than, greater than
C. greater than, equal to
D. less than, equal to - Answers -B. less than, greater than
[When a bond is selling at a premium to par, the YTM will always be less than the
bond's coupon rate. If a bond is selling at a discount to par, the YTM will always be
greater than the bond's coupon rate.]
Which of the following describes a strategy used to minimize the interest rate risk of
bond investments by adjusting the portfolio duration to match the investment time
horizon?
A. Bond laddering
B. Bond immunization
