Cfa Level 1 Mock Exam 14 Mock Exam B Session 2
WITH CORRECT ANSWERS 100% 2024
1. Residential mortgage-backed securities issued in the US by
govern- ment-sponsored enterprises are guaranteed by:
A. External credit enhancements.
B. The government-sponsored enterprise.
C. The full faith and credit of the government.: B. The government-sponsored
enterprise.
Correct because for residential mortgage-backed securities (RMBS) issued by a GSE (government-
sponsored enter- prise), such as Fannie Mae and Freddie Mac, credit risk is reduced by the guarantee of
the GSE itself.
2. The concept of put-call parity best demonstrates the equivalence of:
A. Puts and calls.
B. A covered call and a protective put.
C. A fiduciary call and a protective put.: C. A fiduciary call and a
protective put. (Look at study guide)
,Correct because put-call parity shows that a protective put and a fiduciary call produce the same result.
That is, c0 + X (1 + r)T = p0 + S0, where c0 = long call, X (1 + r)T = discounted value of long bond, p0 =
long put, S0 = long underlying asset. A fiduciary call is strategy where the investor buys a call option on this
asset with an exercise price of X that expires at T and a risk-free zero-coupon bond with a face value of X
that matures at T. The call costs c0, and the bond costs the present value of X, which is X/(1 + r)T. On
the other hand, holding an asset and a put on the asset is a strategy known as a protective put, where
the put costs p0 and the stock's value is S0.
Option Replication Using Put-Call Parity
explain put-call parity for European
options
3. For an option-free, fixed-rate bond the coupon reinvestment risk
most likely dominates market price risk when the investment
horizon is:
A. Less than the Macaulay duration of the bond.
,B. Equal to the Macaulay duration of the bond.
C. Greater than the Macaulay duration of the bond.: C. Greater than the Macaulay
duration of the bond.
Correct because for an option-free, fixed-rate bond when the investment horizon is greater than the
Macaulay duration, the coupon reinvestment risk will tend to dominate market price risk. In such
situations, the investor's risk is to lower interest rates.
Interest Rate Risk and Return
Describe the relationships among a bond's holding period return, its Macaulay duration, and the
investment horizon;
4. Which of the following statements about reits is most accurate?
A. Equity reits primarily invest in mortgages
B. The main appeal of the REIT structure is the avoidance of corporate
income taxation
C. The REIT structure is ideal for companies that do not intend to
distribute their taxable net rental income to shareholders: B. The main appeal of
the REIT structure is the avoidance of corporate income taxation
Correct because the REIT structure avoids double (i.e., corporate level / shareholder level) taxation as their
earnings have been passed along as dividend payments. Reits are the preferred investment vehicles for
owning income-producing real estate for both private and public investors. The main appeal of the REIT
, structure is the elimination of double corporate taxation. Corporations pay taxes on their income, from
which they make dividend distribution to their owners from after-tax earnings. The shareholders, in turn,
are taxed at their personal tax rate. Reits can avoid corporate income taxation by distributing dividends
equal to 90%-100% of taxable net rental income.
5. Which of the following best describes an appropriate use of a
client's IPS by an investment manager?
A. Assessing the suitability of a particular investment for the client
B. Selecting investments that maximize a client's return irrespective of
risk
WITH CORRECT ANSWERS 100% 2024
1. Residential mortgage-backed securities issued in the US by
govern- ment-sponsored enterprises are guaranteed by:
A. External credit enhancements.
B. The government-sponsored enterprise.
C. The full faith and credit of the government.: B. The government-sponsored
enterprise.
Correct because for residential mortgage-backed securities (RMBS) issued by a GSE (government-
sponsored enter- prise), such as Fannie Mae and Freddie Mac, credit risk is reduced by the guarantee of
the GSE itself.
2. The concept of put-call parity best demonstrates the equivalence of:
A. Puts and calls.
B. A covered call and a protective put.
C. A fiduciary call and a protective put.: C. A fiduciary call and a
protective put. (Look at study guide)
,Correct because put-call parity shows that a protective put and a fiduciary call produce the same result.
That is, c0 + X (1 + r)T = p0 + S0, where c0 = long call, X (1 + r)T = discounted value of long bond, p0 =
long put, S0 = long underlying asset. A fiduciary call is strategy where the investor buys a call option on this
asset with an exercise price of X that expires at T and a risk-free zero-coupon bond with a face value of X
that matures at T. The call costs c0, and the bond costs the present value of X, which is X/(1 + r)T. On
the other hand, holding an asset and a put on the asset is a strategy known as a protective put, where
the put costs p0 and the stock's value is S0.
Option Replication Using Put-Call Parity
explain put-call parity for European
options
3. For an option-free, fixed-rate bond the coupon reinvestment risk
most likely dominates market price risk when the investment
horizon is:
A. Less than the Macaulay duration of the bond.
,B. Equal to the Macaulay duration of the bond.
C. Greater than the Macaulay duration of the bond.: C. Greater than the Macaulay
duration of the bond.
Correct because for an option-free, fixed-rate bond when the investment horizon is greater than the
Macaulay duration, the coupon reinvestment risk will tend to dominate market price risk. In such
situations, the investor's risk is to lower interest rates.
Interest Rate Risk and Return
Describe the relationships among a bond's holding period return, its Macaulay duration, and the
investment horizon;
4. Which of the following statements about reits is most accurate?
A. Equity reits primarily invest in mortgages
B. The main appeal of the REIT structure is the avoidance of corporate
income taxation
C. The REIT structure is ideal for companies that do not intend to
distribute their taxable net rental income to shareholders: B. The main appeal of
the REIT structure is the avoidance of corporate income taxation
Correct because the REIT structure avoids double (i.e., corporate level / shareholder level) taxation as their
earnings have been passed along as dividend payments. Reits are the preferred investment vehicles for
owning income-producing real estate for both private and public investors. The main appeal of the REIT
, structure is the elimination of double corporate taxation. Corporations pay taxes on their income, from
which they make dividend distribution to their owners from after-tax earnings. The shareholders, in turn,
are taxed at their personal tax rate. Reits can avoid corporate income taxation by distributing dividends
equal to 90%-100% of taxable net rental income.
5. Which of the following best describes an appropriate use of a
client's IPS by an investment manager?
A. Assessing the suitability of a particular investment for the client
B. Selecting investments that maximize a client's return irrespective of
risk
