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CFA Level 1 Exam Questions and Answers Graded A+
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Exam of 2 pages for the course CFA at CFA (CFA Level 1 Exam)
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CFA Level 1 ExamThe principle of time value of money - answer The notion that a given sum of money is
more valuable the sooner it is received, due to its capacity to earn interest.
The Five Components of Interest Rates - answer1. Real Risk-Free Rate 2. Expected
Inflation 3. Default-Risk Premium 4. Liquidity Premium 5. Maturity Premium
Real Risk-Free Rate - answer This assumes no risk or uncertainty, simply reflecting
differences in timing: the preference to spend now/pay back later versus lend
now/collect later.
Expected Inflation - answer The market expects aggregate prices to rise, and the
currency's purchasing power is reduced by a rate known as the inflation rate. Inflation
makes real dollars less valuable in the future and is factored into determining the
nominal interest rate (from the economics material: nominal rate = real rate + inflation
rate).
Default-Risk Premium - answerWhat is the chance that the borrower won't make
payments on time, or will be unable to pay what is owed? This component will be high
or low depending on the creditworthiness of the person or entity involved.
Liquidity Premium - answerSome investments are highly liquid, meaning they are easily
exchanged for cash (U.S. Treasury debt, for example). Other securities are less liquid,
and there may be a certain loss expected if it's an issue that trades infrequently. Holding
other factors equal, a less liquid security must compensate the holder by offering a
higher interest rate.
Maturity Premium - answerAll else being equal, a bond obligation will be more sensitive
to interest rate fluctuations the longer to maturity it is.
The stated annual rate - answer(or quoted rate) is the interest rate on an investment if
an institution were to pay interest only once a year.
In practice, institutions compound interest more frequently, either ... - answer...quarterly,
monthly, daily and even continuously.
The effective annual yield... - answer...represents the actual rate of return, reflecting all
of the compounding periods during the year.
Effective annual rate (EAR) - answer= (1 + Periodic interest rate)^m - 1
(Where: m = number of compounding periods in one year, and periodic interest rate =
(stated interest rate) / m)
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