CFA Level 1 Practice Test Questions
with Correct Answers
The 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 - Answer-1. 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 - Answer-What 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 - Answer-Some 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 - Answer-All 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)
, FV - Answer-= PV * (1 + r)^N
PV of a perpetuity - Answer-= annuity payment A/interest rate r
PV - Answer-= FV * (1/(1 + r)^N)
Otto von Bismarck's phrase " blood and iron" What is related to the? - Answer-
Unification of Germany
all the following are consequences of the Franco-Prussian war EXCEPT? - Answer-A
wave of social reform in Germany
to what historical development is this cartoon from an 1898 French newspaper
referring? - Answer-efforts by imperialist powers to divide China into "spheres of
influence"
which of the following modern Asian countries had NOT been colonized by a European
country in 1914? - Answer-thailand
which European monarch ruled an area in Africa as a private preserve and ruthlessly
exploited its natural resources? - Answer-leopold II in the congo
which of the following statements accurately describes the economic changes in Africa
which resulted from European colonization in the late 19th century? - Answer-The
introduction of European run plantations and mines in Africa
which system of thought did imperialists used to sanction the conquest of territories in
Asia, Africa, the Americas, the Pacific in the late 19th century? - Answer-Social
Darwinism
which of the following was a factor resulting in the "scramble for Africa" By European
powers in the late 19th century? - Answer-Rivalry Between France, Germany, and great
Britain due to surging nationalism
Which of the following lead and native rebellion in the Philistines against Spain and later
the United States? - Answer-Emilio Aguinaldo
which of the following statements concerning the boer war is true? - Answer-after this
war of the British granted self government to the former Africaner republics, the
transvaal In the orange free state
China and Japan were similar Before the 19th century in that both were - Answer-
generally "closed" countries
The paramount power in the new Meiji Government was the - Answer-Emperor
with Correct Answers
The 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 - Answer-1. 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 - Answer-What 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 - Answer-Some 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 - Answer-All 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)
, FV - Answer-= PV * (1 + r)^N
PV of a perpetuity - Answer-= annuity payment A/interest rate r
PV - Answer-= FV * (1/(1 + r)^N)
Otto von Bismarck's phrase " blood and iron" What is related to the? - Answer-
Unification of Germany
all the following are consequences of the Franco-Prussian war EXCEPT? - Answer-A
wave of social reform in Germany
to what historical development is this cartoon from an 1898 French newspaper
referring? - Answer-efforts by imperialist powers to divide China into "spheres of
influence"
which of the following modern Asian countries had NOT been colonized by a European
country in 1914? - Answer-thailand
which European monarch ruled an area in Africa as a private preserve and ruthlessly
exploited its natural resources? - Answer-leopold II in the congo
which of the following statements accurately describes the economic changes in Africa
which resulted from European colonization in the late 19th century? - Answer-The
introduction of European run plantations and mines in Africa
which system of thought did imperialists used to sanction the conquest of territories in
Asia, Africa, the Americas, the Pacific in the late 19th century? - Answer-Social
Darwinism
which of the following was a factor resulting in the "scramble for Africa" By European
powers in the late 19th century? - Answer-Rivalry Between France, Germany, and great
Britain due to surging nationalism
Which of the following lead and native rebellion in the Philistines against Spain and later
the United States? - Answer-Emilio Aguinaldo
which of the following statements concerning the boer war is true? - Answer-after this
war of the British granted self government to the former Africaner republics, the
transvaal In the orange free state
China and Japan were similar Before the 19th century in that both were - Answer-
generally "closed" countries
The paramount power in the new Meiji Government was the - Answer-Emperor
