CFA LEVEL 1 MOCK EXAMS PRACTICE EXAM
QUESTIONS AND 100% VERIFIED ANSWERS 2026.
1. An analyst states that an increase in interest rates will most likely decrease the present
value of future cash flows. This relationship is best described as:
A. Direct
B. Inverse
C. Non-linear
D. Insignificant
Correct Answer: B
Rationale: Present value is inversely related to interest rates; as rates increase, the
discount factor increases, reducing present value. The other options do not correctly
describe this relationship.
2. Which of the following best describes the primary function of financial markets?
A. Minimize taxes
B. Allocate capital efficiently
C. Eliminate risk
D. Guarantee returns
Correct Answer: B
Rationale: Financial markets facilitate efficient capital allocation by connecting
savers and borrowers. They do not eliminate risk or guarantee returns.
3. A bond with a coupon rate lower than the market interest rate will most likely trade at:
A. Par
B. Premium
C. Discount
D. Book value
Correct Answer: C
Rationale: When the coupon rate is below the market rate, the bond is less attractive
and trades at a discount to compensate investors.
4. Which financial statement reports a company’s financial position at a specific point in
time?
A. Income statement
B. Cash flow statement
C. Balance sheet
D. Statement of retained earnings
Correct Answer: C
Rationale: The balance sheet shows assets, liabilities, and equity at a specific date,
unlike the others which cover a period of time.
,5. The time value of money concept is based on the assumption that:
A. Money loses value over time
B. Money has equal value at all times
C. Money today is worth more than in the future
D. Inflation is always constant
Correct Answer: C
Rationale: Money today can be invested to earn returns, making it more valuable than
the same amount in the future.
6. Which of the following is classified as systematic risk?
A. Business risk
B. Financial risk
C. Market risk
D. Operational risk
Correct Answer: C
Rationale: Market risk affects the entire market and cannot be diversified away,
unlike firm-specific risks.
7. A company reports revenue of $500,000 and expenses of $350,000. Its net income is:
A. $150,000
B. $200,000
C. $850,000
D. $350,000
Correct Answer: A
Rationale: Net income = revenue minus expenses = 500,000 − 350,000 = 150,000.
8. Which ratio measures a company’s ability to meet short-term obligations?
A. Debt-to-equity ratio
B. Current ratio
C. Return on equity
D. Price-to-earnings ratio
Correct Answer: B
Rationale: The current ratio assesses liquidity by comparing current assets to current
liabilities.
9. An increase in depreciation expense will most likely:
A. Increase net income
B. Decrease net income
C. Have no effect
D. Increase revenue
, Correct Answer: B
Rationale: Depreciation is an expense, so increasing it reduces net income.
10. Which of the following best describes a normal distribution?
A. Skewed distribution
B. Uniform distribution
C. Symmetrical bell-shaped curve
D. Random distribution
Correct Answer: C
Rationale: A normal distribution is symmetric and bell-shaped with mean = median =
mode.
11. The standard deviation of returns is a measure of:
A. Central tendency
B. Risk
C. Return
D. Liquidity
Correct Answer: B
Rationale: Standard deviation measures dispersion of returns, indicating risk.
12. Which ethical principle requires CFA candidates to place client interests above their
own?
A. Integrity of capital markets
B. Professionalism
C. Duties to clients
D. Independence
Correct Answer: C
Rationale: Duties to clients explicitly require prioritizing client interests.
13. If a company issues new shares, which account increases?
A. Retained earnings
B. Share capital
C. Liabilities
D. Expenses
Correct Answer: B
Rationale: Issuing shares increases equity through share capital.
14. Which monetary policy tool involves buying and selling government securities?
A. Reserve requirements
B. Discount rate
, C. Open market operations
D. Fiscal stimulus
Correct Answer: C
Rationale: Open market operations directly affect money supply through securities
transactions.
15. A higher beta indicates:
A. Lower risk than the market
B. Equal risk to the market
C. Greater volatility than the market
D. No risk
Correct Answer: C
Rationale: Beta > 1 means the asset is more volatile than the market.
16. Which of the following best defines GDP?
A. Total exports
B. Total imports
C. Total value of goods and services produced
D. Total government spending
Correct Answer: C
Rationale: GDP measures total economic output within a country.
17. The efficient market hypothesis states that:
A. Markets are always inefficient
B. Prices reflect all available information
C. Investors can consistently outperform the market
D. Only insiders earn profits
Correct Answer: B
Rationale: EMH asserts that asset prices incorporate all available information.
18. A call option gives the holder the right to:
A. Sell an asset
B. Buy an asset
C. Avoid taxes
D. Receive dividends
Correct Answer: B
Rationale: A call option provides the right to buy at a specified price.
19. Which type of financial analysis focuses on economic trends and industry conditions?
A. Technical analysis
QUESTIONS AND 100% VERIFIED ANSWERS 2026.
1. An analyst states that an increase in interest rates will most likely decrease the present
value of future cash flows. This relationship is best described as:
A. Direct
B. Inverse
C. Non-linear
D. Insignificant
Correct Answer: B
Rationale: Present value is inversely related to interest rates; as rates increase, the
discount factor increases, reducing present value. The other options do not correctly
describe this relationship.
2. Which of the following best describes the primary function of financial markets?
A. Minimize taxes
B. Allocate capital efficiently
C. Eliminate risk
D. Guarantee returns
Correct Answer: B
Rationale: Financial markets facilitate efficient capital allocation by connecting
savers and borrowers. They do not eliminate risk or guarantee returns.
3. A bond with a coupon rate lower than the market interest rate will most likely trade at:
A. Par
B. Premium
C. Discount
D. Book value
Correct Answer: C
Rationale: When the coupon rate is below the market rate, the bond is less attractive
and trades at a discount to compensate investors.
4. Which financial statement reports a company’s financial position at a specific point in
time?
A. Income statement
B. Cash flow statement
C. Balance sheet
D. Statement of retained earnings
Correct Answer: C
Rationale: The balance sheet shows assets, liabilities, and equity at a specific date,
unlike the others which cover a period of time.
,5. The time value of money concept is based on the assumption that:
A. Money loses value over time
B. Money has equal value at all times
C. Money today is worth more than in the future
D. Inflation is always constant
Correct Answer: C
Rationale: Money today can be invested to earn returns, making it more valuable than
the same amount in the future.
6. Which of the following is classified as systematic risk?
A. Business risk
B. Financial risk
C. Market risk
D. Operational risk
Correct Answer: C
Rationale: Market risk affects the entire market and cannot be diversified away,
unlike firm-specific risks.
7. A company reports revenue of $500,000 and expenses of $350,000. Its net income is:
A. $150,000
B. $200,000
C. $850,000
D. $350,000
Correct Answer: A
Rationale: Net income = revenue minus expenses = 500,000 − 350,000 = 150,000.
8. Which ratio measures a company’s ability to meet short-term obligations?
A. Debt-to-equity ratio
B. Current ratio
C. Return on equity
D. Price-to-earnings ratio
Correct Answer: B
Rationale: The current ratio assesses liquidity by comparing current assets to current
liabilities.
9. An increase in depreciation expense will most likely:
A. Increase net income
B. Decrease net income
C. Have no effect
D. Increase revenue
, Correct Answer: B
Rationale: Depreciation is an expense, so increasing it reduces net income.
10. Which of the following best describes a normal distribution?
A. Skewed distribution
B. Uniform distribution
C. Symmetrical bell-shaped curve
D. Random distribution
Correct Answer: C
Rationale: A normal distribution is symmetric and bell-shaped with mean = median =
mode.
11. The standard deviation of returns is a measure of:
A. Central tendency
B. Risk
C. Return
D. Liquidity
Correct Answer: B
Rationale: Standard deviation measures dispersion of returns, indicating risk.
12. Which ethical principle requires CFA candidates to place client interests above their
own?
A. Integrity of capital markets
B. Professionalism
C. Duties to clients
D. Independence
Correct Answer: C
Rationale: Duties to clients explicitly require prioritizing client interests.
13. If a company issues new shares, which account increases?
A. Retained earnings
B. Share capital
C. Liabilities
D. Expenses
Correct Answer: B
Rationale: Issuing shares increases equity through share capital.
14. Which monetary policy tool involves buying and selling government securities?
A. Reserve requirements
B. Discount rate
, C. Open market operations
D. Fiscal stimulus
Correct Answer: C
Rationale: Open market operations directly affect money supply through securities
transactions.
15. A higher beta indicates:
A. Lower risk than the market
B. Equal risk to the market
C. Greater volatility than the market
D. No risk
Correct Answer: C
Rationale: Beta > 1 means the asset is more volatile than the market.
16. Which of the following best defines GDP?
A. Total exports
B. Total imports
C. Total value of goods and services produced
D. Total government spending
Correct Answer: C
Rationale: GDP measures total economic output within a country.
17. The efficient market hypothesis states that:
A. Markets are always inefficient
B. Prices reflect all available information
C. Investors can consistently outperform the market
D. Only insiders earn profits
Correct Answer: B
Rationale: EMH asserts that asset prices incorporate all available information.
18. A call option gives the holder the right to:
A. Sell an asset
B. Buy an asset
C. Avoid taxes
D. Receive dividends
Correct Answer: B
Rationale: A call option provides the right to buy at a specified price.
19. Which type of financial analysis focuses on economic trends and industry conditions?
A. Technical analysis
