2012 06 CFA L1 100forecast PDF

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2012 年 6 月 CFA 一级百题预测

1‐ETHICS .................................................................................................................................................. 2
2‐QUANTITATIVES ................................................................................................................................. 69
3‐ECONOMICS ....................................................................................................................................... 99
4‐FINANCIAL STATEMENT ANALYSIS ................................................................................................... 178
5‐CORPORATE FINANCE ...................................................................................................................... 276
6‐EQUITY ............................................................................................................................................. 307
7‐FIXED INCOME ................................................................................................................................. 368
8‐DERIVATIVES .................................................................................................................................... 391
9‐ALTERNATIVE INVESTMENTS ........................................................................................................... 410
10‐PORTFOLIO ..................................................................................................................................... 422

金程教育首席培训师汤震宇（博士，CFA，FRM，CTP，CAIA）：“对于 2012 年 6 月考试，从
全局来看，考试的难度在提高；另外，会计报表分析、Ethics 和数学必须认真掌握，经典题
目必须掌握；最后，Economics 发生了全新变化，且 Notes 对有些专题并未提及，所以，一
定要做原版书后的习题。为了全面应对考试，我们全面推出了的各种学习平台，如 Studysky
网上测试、手机测试和微博’私房菜’、金融城 BBS 答疑等活动，请各位充分利用。如有学术
问题，请登录至论坛提问。祝大家好运！”
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此预测为考点预测，考题仅为复习参考
内部使用资料，严禁传播，否则追究法律责任
金程教育 WWW.GFEDU.NET 专业·领先·增值
1‐Ethics
1‐1 The Process for the Enforcement of the Code and Standards
Q1‐1 After reviewing the material obtained during the investigation, then confirming violation,
the CFA Designated Officer will
A. issue a cautionary letter
B. conclude the inquiry with no disciplinary sanction
C. propose a disciplinary sanction

Solution: C
第一步是对于对方展开调查，如果 find violation 之后直接进行惩罚。

Q2‐1 ★Which of the following least likely reflects the two primary principles of the CFA
Institute Rules of Procedure for Proceedings Related to Professional Conduct?（Mock83）
A. Confidentiality of proceedings
B. Fair process to the member and candidate
C. Public disclosure of disciplinary sanctions

Solution: C
C is correct because the two principles of the Rules of Procedure for Proceedings Related to
Professional Conduct are confidentiality of proceedings and fair process to the member and
candidate.
Key points:
R1‐1 The process for the enforcement of the Code and Standards
The process for the enforcement of the Code and Standards:
Inquiry is initiated
Writted explanation from members/candidates
Investigation Interview the member/candidates
No disciplinary Violation
Collecting documents and records
sanction occurred
Issue a
Propose a disciplinary sanction
cautionary
letter Reject Accept
The matter is referred to a End

hearing by a panel of CFA
Institute members.

R2‐1 ★Primary Principles:
¾ (1) Fairness of the process to members and candidates
¾ (2) Confidentiality of the proceedings.
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R3‐1 ★Disciplinary Review Committee has overall responsibility for the Professional Conduct
program and enforcement of the code and standards.
R4‐1 How to detect
¾ Self‐disclosure on annual Professional Conduct Statements of involvement in civil
litigation or a criminal investigation, or that the member or candidate is the subject of a
written complaint.
¾ Written complaints about professional conduct received by the Professional Conduct
staff.
¾ Evidence of misconduct by a member or candidate that the Professional Conduct staff
received through public sources, such as a media article or broadcast.
¾ A report by a CFA exam proctor of a possible violation during the examination.

2‐1 Knowledge of Law
Q3‐1 ★Dorian Solot, CFA, is responsible for a team of research analysts at Apac Bank, located
in a country with strict laws prohibiting intellectual property transfers. Solot believes the
work of one of her analysts, Blaine Paddock, CFA, is not completed as carefully and
thoroughly as it should be. Solot completely reviews all of Paddock’s research and
confirms her suspicions. Solot then confronts Paddock about his poor quality research
and tells him he can leave Apac voluntarily or be fired. Paddock chooses to leave the bank,
walking out with his personal papers and research notes that were created prior to his
joining Apac. Subsequently, Paddock uses this intellectual property to help establish a
high‐net‐worth investment advisory firm. When a prospective client asks Paddock if he
left Apac because of questions on the quality of his work, Paddock says it was to start his
own business. Paddock least likely violated the CFA Institute Standards of Professional
Conduct concerning his: (2012 Mock84)
A. research.
B. intellectual property.
C. prospective client disclosure.

Solution: B
B is correct because the analyst has not violated Standard related to intellectual property
because there is no indication the analyst was ignorant of, or has violated, any law related to
intellectual property, because these documents were created by the analyst prior to his
employment at Apac.

Q4‐1 ★Jane and Joe work for an investment company and even in the same group. Jane, CFA,
always shares some latest information in the industry with Joe, who is studying for the
CFA level 2 exam. One day Joe discovered that Jane may conduct something that maybe
harmful to the company’s clients. What should Joe do with this situation?
A. Do nothing because he takes no supervisory duties and should appreciate the help from
Jane.
B. Report to the CFA committee.
C. Disassociate from the misconduct and report to the company’s compliance department
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Solution: C
如果发现同事有违规行为，采取的行动是首先保证自己不能参与，同时向 compliance
department or direct supvervisor 报告自己的发现。

Q5‐1 Charlie Mancini, CFA, is the Managing Director for Business Development at VES Financial
(VES), a large U.S.‐based mutual fund organization. Mancini has been under pressure
recently to increase revenues. In order to secure business from a large hedge fund
manager based in Asia, Mancini recently approved unusual terms for the fund’s client
agreement. To allow for time zone differences, the agreement allows the hedge fund to
trade in all of VES’s mutual funds six hours after the close of U.S. markets. According to
the Standards of Practice Handbook, did Mancini violate any CFA Institute Standards of
Professional Conduct?
A. No.
B. Yes, because he failed to inform his other clients of the unusual terms under the new client
agreement, thus not treating clients equally.
C. Yes, because he failed to review regulations on late‐trading and did not consult with VES’s
compliance director to determine if late‐trading was acceptable.

Solution: C
The Standards relating to Market Manipulation requires members/candidates not to engage in
practices that distort prices or artificially inflate trading volume with the intent to mislead market
participants. Mancini failed to follow regulations on late trading and allowed the hedge fund
client to manipulate the time of its trading and thereby misled other market participants and
benefited itself.

★About late trading: Late trading refers to the practice of placing orders to buy or redeem
mutual fund shares after the time as of which a mutual fund has calculated its net asset value
(NAV), usually as of the close of trading at 4:00 p.m. Eastern Time, but receiving the price based
on the prior NAV already determined as of that day. Late trading violates the federal securities
laws concerning the price at which mutual fund shares must be bought or redeemed and
defrauds innocent investors in those mutual funds by giving to the late trader an advantage not
available to other investors.
Key points of Knowledge of law：
R5‐1 必须了解与工作直接相关(directly governing their work) 的法律和规则，但不需要成为
expert on compliance;
R6‐1 总是遵守最严格的，但最低限度要遵守 CFA Institute 准则和标准；
R7‐1 如果有传递关系，遵循最后一个生效的 law or regulations；
work (applicable) live Comply with
Ms Æ Live Ls Ls < Code Æ Code
Ls Æ Live Ms Ms > Code Æ Ms
R8‐1 Guidance of compliance
¾ 如果你感觉(feel) 有人违法，你必须 consult for advice, but not exempt for consulting;
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¾ ★如果你知道(know)有人在违法，还可以采取分步骤的方法：向公司里的适当人员
汇报（ report ）；如果汇报后仍没有改进，则你必须与违法行为划清界限
（disassociate），甚至辞职；同时要进一步咨询以便采取进一步的行动；还可以(may
consider to persuade to stop)考虑劝说违法的人终止违法行为；（注：If you were a
supervisor, how to do?）
R9‐1 当发现有违法行为时，CFA Institute 并不要求你向政府管理机构汇报。汇报与不汇报给
监管当局完全取决于你个人的判断。但是，CFA 协会又说：such disclosure may be
prudent in certain circumstances；There is no requirement under Standards to report
violations to governmental authorities, but this may be advisable in some circumstances
and required by law in others.
R10‐1 ★Inaction combined with continuing association with those involved in illegal or unethical
conduct may be construed as participation or assistance in the illegal or unethical conduct.
R11‐1 ★进行跨境交易 cross‐board 时，要注意 law of origination and distribution, should be
understood by those responsible for the supervision，要注意 affiliated firm 是否遵守了法
律。
R12‐1 The formality and complexity of compliance procedures for firms depend on the nature
and size of the organization and the nature of its investment operations.

3‐1 Independence and Objectivity
Q6‐1 ★While at a bar in the financial district after work, Ellen Miffitt, CFA, overheard several
employees at one of her competitors discussing how they would manipulate down the
price of a thinly traded micro cap stock over the next few days. Miffitt’s clients had large
positions of this stock and when she arrived at work the next day, she immediately sold
all of these holdings. As she had determined that the micro cap stock was suitable for all
of her accounts, even at its previously higher price, Miffitt bought back her clients’
original exposure at the end of the week at the new, lower price. Which CFA Institute
Standards of Professional Conduct did Miffitt least likely violate（综合）
A. Market Manipulation
B. Preservation of Confidentiality
C. Material Nonpublic Information

Solution: B
Miffitt has not violated the confidentiality Standard. Even though she did not initiate the market
manipulation, Miffitt added to the stock’s price movement when she sold into a declining market.
By repurchasing the shares for her clients, she was seeking to take advantage of the
manipulation and was in violation of Standard II (B). Miffitt has attempted to benefit her clients
by trading on information that could affect the value of the micro cap stock and as such would be
classified as material nonpublic information. Information that is known regarding orders for large
trades before they are executed is considered material nonpublic information.

Q7‐1 ★Charlotte BILLO, a junior analyst in a regional brokerage firm, overheard three senior
managers of a large listed company talking about a staff restructuring plan while she was
waiting for her flight. The managers determined those who would be dismissed. Charlotte
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could not remember the names but was sure that they were just ordinary employees.
After returning from her journey, she made a thorough research on the company and
found that the company was likely to shut down a plant situated in her local town
because of a great loss on a new product line. She launched immediately a
recommendation Sell on the stock. Did she comply with the Standards?
A. Yes, because the recommendation was based on mosaic theory and she made a diligent
research.
B. No, because she did not reach her conclusion on a reasonable basis because she did not
remember the names of those who would be dismissed.
C. No, because she took advantage of non‐public material information.

Solution: C
The restructuring of staff should be considered material, and hierdetermination of ordinary can’t
change the nature of materiality, so she can’t make investment recommendation using
non‐public material information.

Q8‐1 An analyst has been writing research reports on a firm for many years. As part of the
analyst’s continuing research efforts, the analyst allowed the firm to fly him to the firm’s
headquarters 500 miles away and put him up in the guest quarters the firm had for all
corporate visitors. In the current year, the firm is planning a secondary share offering that
coincides with the tenth anniversary of the firm going public. When the analyst arrived at
the headquarters, he found a new set of high‐quality golf clubs as a gift to him. On the
golf clubs was the firm’s logo, and the firm was giving the clubs to all visitors this year in
honor of the anniversary and the IPO. Based upon this information, Standard I (B),
Independence and Objectivity, has:
A. been broken because of the value of the golf clubs and the value of the trip to the
headquarters
B. been broken because of the value of the golf clubs
C. not been broken because the trip is allowed and the firm is giving the clubs to all visitors

Solution: B
Modest gifts and entertainment are acceptable. Should commercial transportation be
unavailable, modestly arranged travel may be accepted to participate in appropriate information
gathering events.

Q9‐1 Romar Brockman, CFA, is a sell‐side analyst. Approximately half of Brockman’s
compensation comes from his firm’s Investment‐banking division. Brockman was asked to
write a report about Anacortes Concrete (AC), an Investment‐banking client. Despite
concerns about the slowdown in concrete demand, Brockman issued a very positive
report on AC. When issuing his report, Brockman least likely violates the CFA Institute
Standard relating to:
A. Loyalty to Employer.
B. Loyalty, Prudence, and Care.
C. Independence and Objectivity.
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Solution: A
The Standards require members to put client interests ahead of member and employer interests.
As Brockman’s compensation is dependent upon investment banking revenues, Brockman may
not be objective. When issuing the report, he is in jeopardy of violating Standards relating to
Independence and Objectivity; Loyalty, Prudence, and Care; and Disclosure of Conflicts.

Q10‐1 Lin YAO, an analyst in a brokerage firm, can get a bonus at the end of every year based on
the performance of the firm. Besides his salaries got from his own firm, he can also get
some additional compensation from his clients in writing recommendations and referral
fee from another companies. Lin disclosed all of the compensation, including his bonus,
additional compensation and referral fees, and got permission from all parties involved.
Which of these actions violate standards?
A. None of them
B. Additional compensation from clients who he is making a recommendation
C. Referral fees

Solution: A
He has disclosed all arrangement and got permission from all parties involved.

Q11‐1 ★Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry
conference, Xuan hears rumors that Green Run Software may have falsified its financial
results. When she returns to her office, Xuan conducts a thorough analysis of Green. Run.
Based on her research, including discussions with some of Green Gun's customers, Xuan
is convinced that Green Run's reported 50 percent increase in net income in recent
quarters is completely fictitious. So far, however, Xuan is the only analyst that is
suspicious about the company's reported earning. According to the CFA Institute Code of
Ethics and Standards of Professional Conduct, the least appropriate action for Xuan is to:
A. report her suspicions to Green Run's management.
B. do nothing, until her analysis is supported by other analysts.
C. Recommend that her clients sell their Green Run shares immediately.

Solution: B
Analysts are in the business of formulating opinions and insights that are not obvious to the
general investing public about the attractiveness of particular securities. In particular, under the
mosaic theory, and analyst is free to trade based upon information developed in the course of
her own research even if this information would have been material inside information had it
been communicated directly to the analyst by the company. In addition, members and
candidates should report to his supervisory or compliance department.

Key points of Independence and Objectivity：
R13‐1 Basic principle
¾ should evaluate both the actual effect of such solicitations on their independence
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and whether their objectivity might be perceived to be compromised in the eyes of
their clients.
R14‐1 Investment banking relationships
¾ Firewall—minimizes resulting conflicts of interest. The situation may be aggravated if
the head of the company sits on the bank or investment firm’s board and attempts
to interfere in investment decision making.
¾ ★Researcher co‐working with Investment Banking should disclose and manage
conflicts adequately and effectively.
¾ It is appropriate to have analysts work with investment bankers in “road show” only
when the conflicts are adequately and effectively managed and disclosed.
R15‐1 Public companies
¾ Analysts should not be pressured to issue favorable research by the companies they
follow.
¾ Don’t confine research to discussions with company management, but rather use a
variety of sources, including suppliers, customers, and competitions.
¾ 研究报告只卖给单一客户 may violate I (B): Independence and Objectivity.
¾ ★ 研究费最好是 flat fee ， cannot be directly linked to the conclusion or
recommendation.
R16‐1 Buy‐Side clients
¾ Sell‐side analyst should not be pressured by buy‐side firms to issue favorable
research on current or prospective investment‐banking clients.
¾ ★Analysts must engage in thorough, independent, and unbiased analysis and must
fully disclose potential conflicts, including the nature of their compensation.
R17‐1 Gift from client & Gift from the third party
¾ Reject gift that could be expected to compromise their own or another’s
independence and objectivity（best practice). Modest gift is OK, but as long as its
purpose is not to compromise the objectivity.
¾ ★判断的原则：第一是礼物的金额很少（modest）；第二是礼物不能是单独为你
准备的(arrangement not unusual)
¾ ★Gift from client 可以接受, but should disclose to employer and obtain consent
from all parties involved (IV(C)); if not disclose, violate I(B) and IV(C).
R18‐1 Fund manager relationships
¾ ★Members and candidates who are responsible for hiring and retaining outside
managers should not accepts gifts, entertainment, or travel funding that may be
perceived as impairing their decisions.
¾ For meeting sponsored by funds, members and candidates must review the merits of
each offer individually in determining whether they may attend yet maintain their
independence of conduct regarding the analytic process and the distribution of their
reports.
R19‐1 The rating agencies
¾ ★Need to develop the necessary firewalls and protections to allow the independent
operations of their different business lines.
¾ abide by their agencies’ and the industry’s standards of conduct regarding the
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analytical process and the distribution of their reports
¾ When using information provided by credit rating agencies, members and candidates
should be mindful of the potential conflicts of interest.
R20‐1 Travel Funding
¾ Members and candidates may be influenced by these discussions when flying on a
corporate or chartered jet.
¾ Best practice dictates that members and candidates always use commercial
transportation rather than accept paid travel arrangements from an outside
company.
¾ Should commercial transportation be unavailable, members and candidates may
accept modestly arranged travel to participate in appropriate information‐gathering
events, such as a property tour.
R21‐1 Procedures for compliance
¾ Protect the integrity of opinions: unbiased, design compensation systems with
integrity
¾ Create a restricted list: if unwilling to issue unfavorable, put it on a restricted list and
only issue factual information
¾ ★Restrict special cost arrangement: pay charges by themselves when visiting
headquarter, not reimbursed for air fees by corporate issuer, limit use firm’s aircraft
only when no commercial transportation, frequently meeting with corporate issuer
接触会是不好的，会给外人一个想法，觉得影响到主观性和独立性. Should not
always be hosted by issuer.
¾ ★Limit gifts: Customary, business‐related entertainment is okay as long as its
purpose is not to influence a member’s professional independence or objectivity;
based on local custom and whether the limit is per gift or annual total amount.
¾ ★Restrict invesments: encourage firms to develop formal policies about eployee
purchases of equity or equity‐related IPOs, require prior approval for employee to
participate in IPOs, disclose timely investment actions following the offering, strict
limit on private placements.
¾ Review procedures: emplement effective supervisory and review procedures about
personal investment activities
¾ Independence policy: formal written policy, not influenced by any parties that could
comprise their independence.
¾ ★Appointed officer: to supervise for compliance; provide procedures and policies
for reporting violation to every employee.

4‐1 Misrepresentation
Q12‐1 ★Bryan Barrett, CFA, provides investment advice on gold and other hard assets to
several large institutions. To broaden his business and meet increased interest in these
assets from retail customers, Barrett advertises his services in publications that serve a
general audience. As the client base for the institutions that Barrett serves is large, he is
comfortable stating in the ad that thousands of his clients have benefited from his advice.
Does Barrett’s advertisement violate any CFA Institute Standards of Professional Conduct?
9
A. No
B. Yes, related to Misrepresentation
C. Yes, related to Communication with Clients

Solution: B
As Barrett’s client base is made up of a small number of large institutions, stating in the
advertisement that his customer base is a larger number is a misrepresentation and a violation
of Standard I (C). In addition, since the advertisement focuses only on the benefits and does not
mention the potential risks of these investments, it is also potentially misleading to clients.

Q13‐1 ★★Colin Gifford, CFA, is finalizing a monthly newsletter to his clients, who are primarily
individual investors. Many of the clients’ accounts hold the common stock of Capricorn
Technologies. In the newsletter, Gifford writes, “Based upon the next six months earnings
of $1.50 per share and a 10% increase in the dividend, the price of Capricorn's stock will
be $22 per share by the end of the year.” Regarding his stock analysis, the least
appropriate action Gifford should take to avoid violating any CFA Institute Standards of
Professional Conduct would be to:
A. separate fact from opinion.
B. include earnings estimates.
C. identify limitations of the analysis.

Solution: B
While pro forma analysis may be standard industry practice, it is not required by the Standards.
Earnings estimates are opinions and must be clearly identified as such.

Q14‐1 Robert is responsible for the creation and distribution of ABC Company’s marketing
materials. In the materials, it says that the asset value of the company is 350 billion, but
actually the true value is 35 billion. Before Robert could make necessary change to the
data, his subordinates had distributed these materials to their clients without seeking
Roberts’ permission. Robert doesn’t know the distribution of the materials. Under this
circumstance, does Robert violate any CFA Standards of Professional Conduct?
A. No
B. Misrepresentation
C. Misconduct

Solution: A
这个属于打印错误，不是 Robert 故意为之，而且在他没有检查的情况下对外发布了，这个
不属于 Misrepresentation。可以参考 Handbook 第 29 页 Case 3, but he should correct the error
as soon as possible.

Q15‐1 ★Elis is a portfolio manager of high net worth clients. One day, she received a material
from her brokerage introducing an investment product that claimed to provide an insured
income. She quickly reviewed the product and sent out the emails to all her clients. The
email heading was "New fixed income product! Hot opportunity!”, And she also in‐closed
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the products prospectus in her email. Did Elis most likely violate which of the following
standards?
A. Misrepresentation the nature of the product only
B. Misrepresentation the nature of the product and fail to disclose the detail of the product
C. Fail to disclose the detail of the product

Solution: A
Insured income differs from fixed income. She in‐closed the products prospectus in her email,
she didn’t fail to disclose the detail of the product.

Q16‐1 ★Gardner Knight, CFA, is a product development specialist at an investment band. Knight
is responsible for creating collateralized debt obligations (CDOs) consisting of residential
mortgage bonds. In the marketing brochure for his most recent CDO, Knight provided a
list of the mortgage bonds that the CDO was created from. The brochure also states that
“ an independent third party, the collateral manger, had sole authority over the selection
of all mortgage bonds used as collateral in the CDO.” However, Knight met with the
collateral manager and helped her select the bonds for the CDO. Knight is least likely to
be in violation of which CFA Institute Standards of Professional Conduct? (Mock79‐8)
A. Suitability
B. Conflicts of interest
C. Communications with Clients and Prospective Clients

Solution: A. There is no indication the investment is unsuitable for investors.

Q17‐1 Grey recommends the purchase of a mutual fund that invests solely in long¬term U.S.
Treasury bonds. He makes the following statements to his clients: （原版书 Reading2‐16）
Statement 1: "The payment of the bonds is guaranteed by the U.S. government; therefore,
the default risk of the bonds is virtually zero."
Statement 2: "If you invest in the mutual fund, you will earn a 10 percent rate of return
each year for the next several years based on historical performance of the market."
Did Grey's statements violate the CFA Institute Code and Standards?
A. Neither statement violated the Code and Standards.
B. Only Statement 1 violated the Code and Standards.
C. Only Statement 2 violated the Code and Standards.

Solution：C
This question involves Standard I(C)—Misrepresentation. Statement 1 is a factual statement that
discloses to clients and prospects accurate information about the terms of the investment
instrument. Statement 2, which guarantees a specific rate of return for a mutual fund, is an
opinion stated as a fact and, therefore, violates Standard I(C). If Statement 2 were rephrased to
include a qualifying statement, such as "in my opinion, investors may earn. . .," it would not be in
violation of the Standards.

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Key points of Misrepresentation：
R22‐1 下面的形式都与 Misrepresentation 相关
¾ Oral representations, advertising, electronic communications, or written materials.
（written materials include research reports, market letters, newspaper columns,
and books; electronic communications includes internet communications, web
pages, chat room, and e‐mail）
R23‐1 Guarantee the investment performance:
¾ ★I(C) prohibit members and candidates from guaranteeing clients specific return
which is inherently volatile.
¾ But I(C) does not prohibit from guaranteeing the return which is built into the
structure of the product itself or for which an institution has agreed to cover any
losses. 如,联邦储蓄利率是 2%，那么保证 2%利率是可以的
R24‐1 Misrepresentation of service and qualification
¾ 不可以对客户说“我们可以提供你需要的所有服务”，正确的做法是提供一个公司
所能提供的服务清单；
¾ 对于发行人付费的研究报告，分析师必须披露被雇做研究这个事实，如果隐瞒
这个事实，就违反了 I(C)；
¾ List the qualification of individual and firm.
R25‐1 Plagiarism
¾ ★Use excerpts from others either verbatim or with only slight changes in wording,
no specific quotations with “leading experts”, present statistical estimates of
forecasts prepared by others and identify the source without caveats, charts and
graphs without stating their source, copying proprietary computerized spreadsheets
or algorithms without seeking cooperation or quthorization of their creators；
¾ 引用别人的思想需要鸣谢(credit or acknowledgement), 否则就是 Plagiarism；
¾ 引用他人的模型，分析师作了少许修改，把模型作为自己的，属于 plagiarism 行
为，违反了 I(C)，正确的做法是鸣谢这个模型的出处来源；
¾ 引用媒体的引用, best practice cite author or to use the information provided in
media and cite the two；
¾ 无心的打字错误不违反 misrepresentation，但是如果发现错误，却没有纠正，那
么就违反了 misrepresentation
¾ 自己在业余时间开发的模型属于自己所有，可以使用；
R26‐1 ★The firm retains the right to continue using the work completed after a member or
candidate has left the organization. Members cannot, however, reissue a previously
released report solely under his or her name.
R27‐1 Procedures
¾ Verify outside information: verify for the third may impact its integrity. Encourage to
develop policy to verify.
¾ Maintain webpage: current information; protect site’s integrity, confidentiality, and
security; not misrepresent and fully disclose.
¾ ★Plagiarism policy: maintain copies of all research reports with research ideas,
material with new methodologies, and other materials being relied on in preparing
the research report; attribute quotations, including projections, talbes ,statistics,
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model/product ideas, and new methodologies prepared by persons other than
recognized financial and statistical reporting service or similar service; attribute
summaries or paraphrase.

5‐1 Misconduct
Q18‐1 ★Gabrielle Gabbe, CFA, has been accused of professional misconduct by one of her
competitors. The allegations concern Gabbe’s personal bankruptcy filing when she was a
college student ten years ago and had a large amount of uninsured medical bills. By not
disclosing the bankruptcy filing to her clients, did Gabbe violate any CFA Institute
Standards of Professional Conduct?
A. No
B. Yes, related to Misconduct
C. Yes, related to Misrepresentation

Solution: A
A personal bankruptcy does not necessarily constitute a violation of Standard I (D). If the
circumstances of the bankruptcy involve fraudulent or deceitful business conduct, failing to
disclose it may constitute a violation of the Standards.

Q19‐1 A CFA Candidate purchased copyrighted CFA exam preparatory study guide from a
publisher. Two weeks prior to the exam, the Candidate lost the study guide, so he
photocopied a copy that his friend had purchased. According to the Standards of Practice
Handbook, did the Candidate most likely violate the CFA Institute Standards of
A. Yes.
B. No, because he had purchased his own copy.
C. No, because both had purchased their own copies.

Solution: A
The Candidate violated Standard I (A)‐Knowledge of the Law and Standard I (D)‐Misconduct. By
photocopying the material without the permission of the author and publisher, the Candidate
violated copy write laws and effectively stole the intellectual property of the author and
publisher, hence acted in a dishonest way.

Q20‐1 As a condition of his employment with an investment bank, Abasi Hasina, CFA, was
required to sign an employment contract, including a non‐compete clause restricting him
from working for a competitor for three years after leaving the employer. After one year,
Hasina quits his job for a comparable position with an investment bank in a country
where non‐compete clauses are illegal. Lawyers with whom he consulted prior to taking
the new position determined the non‐compete clause was a violation of human rights
and thus illegal. Did Hasina most likely violate the CFA Institute Code of Ethics? （2012
Mock84）
A. Yes
13
B. No, because the non‐compete clause violates his human rights
C. No, because the non‐compete clause is illegal in the new country of employment

Solution: A
A is correct because by failing to adhere to the non‐compete clause he agreed to abide by when
signing his employment contract, Hasina shows a lack of professional integrity toward his
employer. This behavior reflects poorly on the good reputation of members and is a violation of
the Code of Ethics, which states that members and candidates must act with integrity, and
Standard I (D) Misconduct, which states that members and candidates must not engage in any
professional conduct involving dishonesty, fraud, or deceit or commit any act that reflects
adversely on their professional reputation, integrity, or competence. The Code of Ethics at times
requires a member or candidate to uphold a higher standard than that required by law, rule, or
regulation, or in this case the strict application of the employment agreement.

Key points of Misconduct：
R28‐1 Scope of application
¾ 凡是有关于欺诈的(lying, cheating, stealing and other dishonest activities)都是
misconduct；所有作弊行为都是 misconduct.
¾ 但是职业无关的除欺诈以外的行为是不违反 misconduct 的，比如作为某一环保
组织成员进行游行, Do not abuse this standard to settle personal, political, or other
disputes unrelated to professional ethics.
R29‐1 Excessive drinking at lunch during work making negative effect on your ability to make
sound investment decisions is a violation of Standard I(D).
R30‐1 ★成员和考生不能使用 photocopy，并不要将拷贝资料带到考场！
R31‐1 ★个人破产是否需要 disclose？
¾ 如果是经营破产（如与欺诈无关），不算；
¾ 如果是因欺诈引起的高额罚金而导致的破产，算。
¾ 如果是自己的妻子在经营公司的时候由于欺诈原因破产，不算。
R32‐1 Recommended procedures
¾ Code of ethics: every employee should subscribe and make clear that the un‐ethical
activities will not be tolerated.
¾ List of violations: potential violations and associated disciplinary sanctions.
¾ Employee references: good character and eligible for work.

6‐1 Material Nonpublic Information
Q21‐1 ★Diana Fairbanks, CFA, is married to an auditor employed at a large accounting firm.
When her husband mentioned that a computer firm he was auditing would receive a
qualified opinion, she thought nothing of it. Later that week, when she reviewed a new
client’s account, she noticed that there were substantial holdings of this company. When
she did an Internet search for news on the company, she did not find anything about its
most recent audit or anything adverse. Which of the following actions concerning the
computer stock should Fairbanks most likely take to avoid violating the CFA Institute
14
A. Take no investment action.
B. Complete a thorough and diligent analysis of the company and then sell the stock
C. Sell the stock immediately as she has a reasonable basis for taking this investment action.

Solution: A
The information concerning the qualified opinion is nonpublic and material. She would be in
violation of Standard II (A) if she took investment action based on the information. She should
also make reasonable efforts to achieve public dissemination of the information.

Q22‐1 According to the CFA Institute Standards of Practice handbook, insider trading is the least
likely to be prevented by establishing:
A. watch list
B. restricted list
C. selective disclosure

Solution: C
A firewall restricts the flow of confidential information to those who need to know the
information to make more appropriate decision. If the firm is not willing to disclose negative
recommandation on its clients, a restricted list should be established to dismiss only factual
information. The disclosure of information to a selected groups of analysts in a meeting room
cannot be considered as public.

Q23‐1 According to the Standards of Practice Handbook, may a member who inadvertently
learns about an unannounced tender offer:
Trade on the information? Cause others to trade on the information?
A. No No
B. No Yes
C. Yes No

Solution: A
A member in possession of MNI that could affect the value of an investment may not act or
cause others to act on the information.

Q24‐1 Oliver Opdyke, CFA, works for an independent research organization that does not
manage any client money. In the course of his analysis of Red Ribbon Mining he hears
rumors the president of Red Ribbon, Richard Leisberg, has recently been diagnosed with
late stage Alzheimer’s disease, a fact not publicly known. The final stage of Alzheimer’s is
when individuals lose the ability to respond to their environment, the ability to speak,
and, ultimately, the ability to control movement. Leisberg is the charismatic founder of
Red Ribbon, and under his leadership the company grew to become one of the largest in
the industry. According to the CFA Institute Code of Ethics and Standards of Professional
Conduct, the most appropriate action for Opdyke is to: （2012 Mock84）
A. immediately publish a sell recommendation for Red Ribbon Mining.
B. confirm the president’s diagnosis before publishing his research report.
15
C. encourage Red Ribbon Mining management to disclose the president’s medical condition.

Solution: C
C is correct because members and candidates should make reasonable efforts to achieve public
dissemination of information that is material and nonpublic, as required by Standard II (A)
Material Nonpublic Information. This effort usually entails encouraging the issuer company to
make the information public. In this case, if the diagnosis is fact and not rumor, then this
information is material and should be disclosed.

Q25‐1 ★Andrews, a private wealth manager, is conducting interviews for a new research analyst
for his firm. One of the candidates is Wright, an analyst with a local investment bank.
During the interview, while Wright is describing his analytical skills, he mentions a current
merger in which his firm is acting as the adviser. Andrews has heard rumors of a possible
merger between the two companies, but no releases have been made by the companies
concerned. Which of the following actions by Andrews is least likely a violation of the
Code and Standards? (原版书 Reading2‐32)
A. Waiting until the next day before trading on the information to allow time for it to become
public.
B. Notifying all investment managers in his firm of the new information so none of their clients
are disadvantaged.
C. Placing the securities mentioned as part of the merger on the firm's restricted trading list.

Solution：C
The guidance to Standard II(A)—Material Nonpublic Information recommends adding securities
to the firm's restricted list when the firm has or may have material nonpublic information. By
adding these securities to this list, Andrews would uphold this standard. Because waiting until
the next day will not ensure that news of the merger is made public, answer A is incorrect.
Negotiations may take much longer between the two companies, and the merger may never
happen. Andrews must wait until the information is disseminated to the market before he trades
on that information. Answer B is incorrect because Andrews should not disclose the information
to other managers; no trading is allowed on material nonpublic information.

Q26‐1 ★James Simone, CFA, the CFO of a publicly listed company, seeks to improve the quality
of his company’s communication with institutional fund managers. He holds an investor
briefing with this group the evening before the company earnings are announced. The
company’s quarterly earnings are broadcast in a press release the next day before the
market opens. The earnings information in the investor briefing is identical to that in the
press release. Did Simone most likely violate the CFA Institute Standards of Professional
Conduct? （2012 Mock83）
A. Yes
B. No, because investor briefing and press release information are identical
C. No, because the company releases information while the market is closed

Solution: A
16
A is correct because Simone violated Standard II (A) Material Nonpublic Information by giving
institutional fund managers access to material nonpublic information prior to public
dissemination (i.e., the press release). By releasing earnings results to a select group of
institutional fund managers prior to a public press release, Simone allows the institutional fund
managers a time advantage over other investors not invited to the investor briefing.

Q27‐1 ★Zhao Xuan, CFA, is a sell side investment analyst. While at a software industry
conference, Zhao hears rumors that Green Run Software may have falsified its financial
results. When she returns to her office, Zhao conducts a thorough analysis of Green Run.
Based on her research, including discussions with some of Green Run’s customers, Zhao is
convinced that Green Run’s reported 50% increase in net income during recent quarters is
completely fictitious. So far, however, Zhao is the only analyst suspicious about Green
Run’s reported earnings. According to the CFA Institute Code of Ethics and Standards of
Professional Conduct, the least appropriate action for Zhao is to: （2012 Mock84）
A. report her suspicions to Green Run’s management.
B. do nothing, until other analysts support her analysis.
C. recommend her clients sell their Green Run shares immediately.

Solution: B
B is correct because the analyst has conducted thorough research that indicates the company
falsified its financial results, and she should request the company address this issue publicly as
recommended by Standard II (A) Material Nonpublic Information. If a member or candidate
determines that information is material, the member or candidate should make reasonable
efforts to achieve public dissemination of the information. This effort usually entails encouraging
the issuer company to make the information public. If public dissemination is not possible, the
member or candidate must communicate the information only to the designated supervisory
and compliance personnel within the member’s or candidate’s firm and must not take
investment action on the basis of the information.

Q28‐1 An investment banking department of a brokerage firm often receives material nonpublic
information that could have considerable value if used in advising the firm's brokerage
clients. In order to conform to the Code and Standards, which one of the following is the
best policy for the brokerage firm? （原版书 Reading2‐8）
A. Permanently prohibit both "buy" and "sell" recommendations of the stocks of clients of the
investment banking department.
B. Establish physical and informational barriers within the firm to prevent the exchange of
information between the investment banking and brokerage operations.
C. Monitor the exchange of information between the investment banking department and the
brokerage operation.

Solution：B
The best policy to prevent violation of Standard II(A)‐Material Nonpublic Information is the
establishment of firewalls in a (inn to prevent exchange of insider information. The physical and
informational barrier of a firewall between the investment banking department and the
17
brokerage operation prevents the investment banking department from providing information to
analysts on the brokerage side who may be writing recommendations on a company stock.
Prohibiting recommendations of the stock of companies that are clients of the investment
banking department is an alternative, but answer A states that this prohibition would be
permanent, which is not the best answer. Once an offering is complete and the material
nonpublic information obtained by the investment banking department becomes public,
resuming publishing recommendations on the stock is not a violation of the Code and Standards
because the information of the investment banking department no longer gives the brokerage
operation an advantage in writing the report. Answer C is incorrect because no exchange of
information should be occurring between the investment banking department and the brokerage
operation, so monitoring of such exchanges is not an effective compliance procedure for
preventing the use of material nonpublic information.

Key points of Material nonpublic information：
R33‐1 ★判断 material 的条件（竞争对手的估计不可靠）: reliable and unambiguous，对股
价有影响的 information 是 material 的，
R34‐1 比如：Substance and materiality
¾ Earnings
¾ M&A, acquisitions, tender offers, or joint ventures
¾ Changes in assets, Changes in management
¾ Innovative products, processes, or discoveries
¾ New licenses, patents, registered trademarks, or regulatory approval/rejection of a
product
¾ Developments regarding customers or suppliers (e.g., the acquisition or loss of a
contract)
¾ Changes in auditor notification or the fact that the issuer may no longer rely on an
auditor’s report or qualified opinion
¾ Events regarding the issuer’s securities (e.g., defaults on senior securities, calls of
securities for redemption, repurchase plans, stock splits, changes in dividends,
changes to the rights of security holders, public or private sales of additional
securities, and changes in credit ratings)
¾ Bankruptcies
¾ Significant legal disputes
¾ Government reports of economic trends (employment, housing starts, currency
information, etc.)
¾ Orders for large trades before they are executed
R35‐1 Material 的其他情形：
¾ 有名的公司或者分析师对股价的研究对市场有影响，算是 material。If not a client,
she/he can obtain early access to the MNI prior to publication, however, can’t use
MNI for trading.
¾ 在职过程中所获取的信息，自己不能使用也不能促使他人使用 ,
misappropriation。
¾ suppliers：从供应商处了解到一个公司的信息，如果来源是可靠的，则算是 MNI，
18
不能使用；如果是自己观察到的，属于 Mosaic 理论，可以使用。竞争者的分析，

不算 material。
¾ 不管通过什么途径，公开发行的报告就是 public（失误引起的提前发行，算不算
做已经发布？算, can use for trading）
¾ 如果公司在分析师会议上内幕信息，怎么办？Can’t use.
¾ 一个原来是 researcher，现在调到投行部门工作，不能分享部门的信息
R36‐1 Mosaic Theory ：使用 material public information and non‐material non‐public
information.
R37‐1 Selective disclosure may violate MNI. Analysts must be aware that a disclosure made to a
room full of analysts does not necessarily make the disclosed information “public.”
Analysts should also be alert to the possibility that they are selectively receiving material
nonpublic information when a company provides them with guidance or interpretation
of such publicly available information as financial statements or regulatory filings.
R38‐1 ★如果公司拥有 MNI
¾ 一定是不允许有自营交易；
¾ 如果做 market maker，firms that continue market‐maker activity should instruct
their market makers to remain passive to the market‐that is, take only the contra
side of unsolicited customer trades；
¾ In risk arbitrage trading, The most prudent course is to suspend arbitrage activity；If
continue arbitrage activity, the firm face a high hurdle in proving the adequacy of
their internal procedures and must demonstrate stringent review and
documentation of firm trades.
R39‐1 Watch list shown to solely the few people in compliance department is used to review
the transaction of specific securities.
R40‐1 Even at small firms, procedures concerning interdepartmental communication, the
review of trading activity, and the investigation of possible violations should be compiled
and formalized.
R41‐1 ★Achieve public dessemination
¾ If material, should try to achieve public dissemination.
¾ Encourage the firm to make it public, if not possible, report only to designated
supervisory and compliance personeel within her firm.
¾ not invest on MNI, or induce insider to disclose MNI
R42‐1 Adopt compliance procedures.
¾ Members and candidates should encourage their firms to adopt compliance
procedures to prevent the misuse of MNI.
¾ Particularly important is improving compliance in such areas as the review of
employee and proprietary trading, documentation of firm procedures, and the
supervision of interdepartmental communications in multi‐service firms.
¾ Compliance procedures should suit the particular characteristics of a firm, including
its size and the nature of its business.
R43‐1 The minimum elements of such firewall include, but are not limited to, the following:
¾ ★substantial control of relevant interdepartmental communications, preferably
through a clearance area within the firm in either the compliance or legal
19
department;
¾ review of employee trading through the maintenance of “watch,” “restricted,” and
“rumor” lists;
¾ documentation of the procedures designed to limit the flow of information between
departments and of the actions taken to enforce those procedures;
¾ heightened review or restriction of proprietary trading while a firm is in possession
of material nonpublic information.
R44‐1 Physical separation of departments
R45‐1 Prevention of personnel overlap
R46‐1 ★A reporting system
¾ authorized people review and approve communications between departments.
¾ consult a designated compliance officer to determine whether sharing the
information is necessary and how much information should be shared.
¾ If the sharing is necessary, the compliance officer should coordinate the process of
“looking over the wall”
¾ A single supervisor or compliance officer should have the specific authority and
responsibility of deciding whether or not information is material and whether it is
sufficiently public to be used as the basis for investment decisions.
¾ Ideally, the officer is independent.
R47‐1 ★Personal trading limitations.
¾ Firms should consider restrictions or prohibitions on personal trading by employees
and should carefully monitor both proprietary trading and personal trading by
employees.
¾ require employees to make periodic reports (to the extent that such reporting is not
already required by securities laws) of their own transactions and transactions made
for the benefit of family members.
¾ Securities should be placed on a restricted list when a firm has or may have material
nonpublic information.
¾ a watch list shown to only the few people responsible for compliance should be used
to monitor transactions in specified securities.
¾ The use of a watch list in combination with a restricted list is an increasingly
common means of ensuring effective control of personal trading.
R48‐1 ★Record maintenance.
¾ Multi‐service firms should maintain written records of the communications between
various departments.
¾ Firms should place a high priority on training and should consider instituting
comprehensive training programs, particularly for employees in sensitive areas.
R49‐1 ★Communication to all employees.
¾ Written compliance policies and guidelines should be circulated to all employees of a
firm.
¾ Policies and guidelines should be used in conjunction with training programs aimed
at enabling employees to recognize MNI.
¾ Such information is not always clearly identifiable. Employees must be given
20
sufficient training to either make an informed decision or to realize they need to
consult a supervisor or compliance officer before engaging in questionable
transactions.

7‐1 Market Manipulation
Q29‐1 A. L. Guzdar is a portfolio manager at Woodstock Investments (WI). Guzdar manages a
billion‐dollar hedge fund and two large mutual funds. Market declines caused significant
losses for all of the accounts. Unable to find bids for certain thinly‐traded stocks, Guzdar
traded the stocks between the accounts to provide liquidity and pricing. Guzdar least
likely violates the CFA Institute Standard relating to:
A. Misrepresentation.
B. Market Manipulation.
C. Loyalty, Prudence, and Care.

Solution: C
Guzdar least likely violated the Standards relating to Loyalty, Prudence, and Care as he attempted
to provide liquidity to his clients. However, Guzdar’s actions inflated trading volumes and
distorted prices and thus violated the Standards relating to Market Manipulation. Guzdar
violated the Standards relating to Misconduct because market manipulation reflected adversely
on his professional integrity. Guzdar may also violate the Standards relating to Misrepresentation
if he misrepresented the actual liquidity and value of the stocks held in the portfolios.

Q30‐1 ★Sheila Schleif, CFA, is an equity analyst at an investment bank. Schleif uses a
data‐driven computer model in making her stock recommendations. Schleif discovers the
model contains a coding error. If the coding error were corrected, her most recent buy
recommendation would change to a sell. Schleif corrects the coding error, issues a
bank‐wide revision of her recommendation changing the buy to a sell, and then forwards
the revision to all bank clients who received the initial recommendation. Concerning her
actions related to the coding error, Schlief most likely violated which of the following CFA
Institute Standards of Professional Conduct? （2012 Mock85）
A. Fair Dealing.
B. Priority of Transactions.
C. Diligence and Reasonable Basis.

Correct Solution: A
A is correct as the analyst violated Standard III(B) Fair Dealing by selectively distributing the
recommendation internally at the investment bank prior to communicating her recommendation
to clients. This might also be a violation of Standard III(A) Loyalty, Prudence, and Care, which
requires that members must act for the benefit of their clients and place their clients’ interests
before their employer’s or their own interests.

Q31‐1 ★Lin Liang, CFA, is an investment manager and an auto industry expert. Last month,
Liang requested securities regulators to open an investigation into accounting
21
irregularities at Road Rubber Company (RRC) despite having no basis for the request.
Shortly before he spoke to the regulators, Liang shorted RRC stock for his clients. Once
the regulators opened an investigation, Liang leaked this information to multiple sources
in the media. When news of the investigation became public, ‘the share price of RRC
immediately dropped 30%. Liang then covered the short positions and made $5 per share
for his clients. Liang least likely violated which of the CFA Institute Standards of
Professional Conduct? （2012 Mock85）
A. Misconduct.
B. Market Manipulation.
C. Priority of Transactions.

Correct Solution: C
C is correct because the member has engaged in information‐based manipulation of RRC stock.
Members and candidates must refrain from “pumping up” (or down in this case) the price of an
investment by issuing misleading positive (negative) information for their or their clients’ benefit.
In addition, the member would be in violation of Standard I (A) Knowledge of the Law, because
he has not acted with professionalism and integrity. The member has not violated Standard VI (B)
Priority of Transactions because this concerns client investment transactions having priority over
member or candidate investment transactions and is not applicable here.

Q32‐1 ★Richard Cardinal, CFA, is the founder of Volcano Capital Research, an investment
management firm whose sole activity is short selling. Cardinal seeks out companies
whose stocks have had large price increases. Cardinal also pays several lobbying firms to
update him immediately on any legislative or regulatory changes that may impact his
target companies. Cardinal sells short those target companies he estimates are near the
peak of their sales and earnings and that his sources identify as facing legal or regulatory
challenges. Immediately after he sells a stock, Cardinal conducts a public relations
campaign to disclose all of the negative information he has gathered on the company,
even if the information is not yet public. Which of Cardinal’s following actions is least
likely to be in violation of the CFA Institute Standards of Professional Conduct? （2012
Mock84）
A. Selling stock short
B. Trading on information from lobbyists
C. Disclosing information about target companies

Solution: A
A is correct because selling stock short is a management strategy and does not necessarily
violate any aspect of the Code and Standards.

Key points of Market manipulation:
R50‐1 ★The intent of the action is critical to determine whether it is a violation of this
standard. 需要注意什么时候是违反的，出于什么样的目的是不违反的: (for tax and
inefficiency) 利用市场的非有效赚钱，是否违反？为了税收的目的，是否违反？No!!!
22
R51‐1 以操纵为目的的信息发布（information based)和交易(trading based)都是违反的；
R52‐1 如果是为了误导市场从而增加自己或者自己管理的账户的收益就是违反；
R53‐1 一家交易所与做市商签署协议，要求做市商保证最低交易量，同时，交易所承诺佣
金折让。如果他们的目的旨在操纵市场，则违反了 II(B)；如果他们的目的旨在活跃
市场，且此协议对外公布，则不违反 II(B)。

8‐1 Loyalty, Prudence and Care
Q33‐1 According to the Standards of Practice Handbook, a member who is an investment
manager is most likely to breach his duty to clients by: (Vote proxies in the best interest of
beneficiaries and clients)
A. habitually voting with management on proxies that relate to non‐routine governance issues
B. disclosing confidential client information to the CFA Institute PCP
C. using client brokerage to purchase goods or services that are used in the investment
decision making process

Solution: A
A fiduciary who votes blindly with management on non‐routine governance issues may breach
their duty to clients by violating the standard that relates to loyalty, prudence, and care.
Permitted by laws, members/candidates should provide information to PCP investigation.

Q34‐1 ★Charlotte Everett, a struggling independent investment advisor, serves as investment
manager for the pension plans of several companies. One of her brokers, Scott Company,
is close to consummating management agreements with prospective new clients
whereby Everett would manage the new client accounts and trade the accounts
exclusively through Scott. One of her existing clients, Crayton Corporation, has directed
her to place securities transactions for Crayton’s account exclusively through Scott. But to
induce Scott to exert efforts to land more new accounts for her, Everett also directs
transactions to Scott from other clients without their knowledge.

Comment: Everett has an obligation at all times to seek best price and execution on all
trades. She may direct new client trades exclusively through Scott Company as long as
Everett receives best price and execution on the trades or receives a written statement
from new clients that she is not to seek best price and execution and that they are aware
of the consequence for their accounts.
Everett may trade other accounts through Scott as a reward for directing clients to Everett
only if the accounts receive best price and execution and the practice is disclosed to the
clients. As Everett did not disclose the directed trading, she has violated Standard III (A).

Q35‐1 ★Jorge Lopez, CFA, is responsible for his bank’s proxy voting on behalf of the bank’s asset
management clients. Lopez recently performed a cost‐benefit analysis, showing that
voting all proxies might not benefit the bank’s clients. Based on this analysis, Lopez
changes the proxy voting policies and procedures without informing anyone else of the
change. Lopez now votes client proxies on the side of management on all issues with the
23
exception of major mergers where a significant impact on the stock price is expected.
Lopez least likely violated the CFA Institute Standards of Professional Conduct regarding:
（2012 Mock85）
A. cost‐benefit analysis.
B. voting with management.
C. proxy voting policy disclosures.

Solution: A
A is correct because there is no violation of Standard III (A) Loyalty, Prudence, and Care by
performing a cost‐benefit analysis showing that voting all proxies might not benefit the client,
and concluding voting proxies may not be necessary in all instances.

Q36‐1 ★One of the discretionary accounts managed by Farnsworth is the Jones Corporation
employee profit‐sharing plan. Jones, the company president, recently asked Farnsworth
to vote the shares in the profit‐sharing plan in favor of the slate of directors nominated by
Jones Corporation and against the directors sponsored by a dissident stockholder group.
Farnsworth does not want to lose this account because he directs all the account's trades
to a brokerage firm that provides Farnsworth with useful information about tax‐free
investments. Although this information is not of value in managing the Jones Corporation
account, it does help in managing several other accounts. The brokerage firm providing
this information also offers the lowest commissions for trades and provides best
execution. Farnsworth investigates the director issue, concludes that the
management‐nominated slate is better for the long‐run performance of the company
than the dissident group's slate, and votes accordingly. Farnsworth: （原版书
Reading2‐14）
A. violated the Standards in voting the shares in the manner requested by Jones but not in
directing trades to the brokerage firm.
B. did not violate the Standards in voting the shares in the manner requested by Jones or in
directing trades to the brokerage firm.
C. violated the Standards in directing trades to the brokerage firm but not in voting the shares
as requested by Jones.

Solution：B
This question relates to Standard III (A) Loyalty, Prudence, and Care—specifically, a member's or
candidate's responsibility for voting proxies and the use of client brokerage. According to the
facts stated in the question, Farnsworth did not violate Standard III(A). Although the company
president asked Farnsworth to vote the shares of the Jones Corporation profit‐sharing plan a
certain way, Farnsworth investigated the issue and concluded, independently, the best way to
vote. Therefore, even though his decision coincided with the wishes of the company president,
Farnsworth is not in violation of his responsibility to be loyal and to provide care to his clients. In
this case, the participants and the beneficiaries of the profit‐sharing plan are the clients, not the
company's management. Had Farnsworth not investigated the issue or had he yielded to the
president's wishes and voted for a slate of directors that he had determined was not in the best
interest of the company, Farnsworth would have violated his responsibilities to the beneficiaries
24
of the plan. In addition, because the brokerage firm provides the lowest commissions and best
execution for securities transactions, Farnsworth has met his obligations to the client in using
this brokerage firm. It does not matter that the brokerage firm also provides research
information that is not useful for the account generating the commission, because Farnsworth is
not paying extra money of the client's for that information.

Q37‐1 ★Carter works for Invest Today, a local asset management firm. A broker that provides
Carter with proprietary research through client brokerage arrangements is offering a new
trading service. The broker is offering low‐fee, execution‐only trades to complement its
traditional full‐service, execution‐and‐research trades. To entice Carter and other asset
managers to send additional business its way, the broker will apply the commissions paid
on the new service toward satisfying the brokerage commitment of the prior full‐service
arrangements. Carter has always been satisfied with the execution provided on the
full‐service trades, and the new low‐fee trades are comparable to the fees of other
brokers currently used for the accounts that prohibit soft dollar arrangements. （原版书
Reading2‐28）
A. Carter can trade for his accounts that prohibit soft dollar arrangements under the new
low‐fee trading scheme.
B. Carter cannot use the new trading scheme because the commissions are prohibited by the
soft dollar restrictions of the accounts.
C. Carter should trade only through the new low‐fee scheme and should increase his trading
volume to meet his required commission commitment.

Solution：A
The question relates to Standard III(A)—Loyalty, Prudence, and Care. Carter believes the broker
offers effective execution at a fee that is comparable with those of other brokers, so he is free to
use the broker for all accounts. Answer B is incorrect because the accounts that prohibit soft
dollar arrangements do not want to fund the purchase of research by Carter. The new trading
scheme does not incur additional commissions from clients, so it would not go against the
prohibitions. Answer C is incorrect because Carter should not incur unnecessary or excessive
"churning" of the portfolios (excessive trading) for the purpose of meeting the brokerage
commitments of soft dollar arrangements.

Key points of Loyalty, prudence and care:
R54‐1 ★The first step is to determine the identity of the “client” to whom the duty of loyalty is
owed. For the pension fund, trustee owes fiduciary to beneficiary rather than to sponsor.
¾ For the personal assets of an individual, the client is the individual.
¾ For the portfolios of pension plans or trusts, the client is the beneficiaries of the plan or
trust, not the sponsor. The duty of loyalty is owed to the ultimate beneficiaries.
¾ For managing a fund to an index or an expected mandate owe the duty of loyalty,
prudence, and care to invest in a manner consistent with the stated mandate.
R55‐1 Develop client’s portfolios
¾ should ensure that the client’s objectives and expectations for the performance of the
25
account are realistic and suitable to the client’s circumstances and that the risks
involved are appropriate.
¾ In most circumstances, should relate to the long‐term objectives and circumstances of
the client.
R56‐1 ★Soft Commission Policies.
¾ “soft dollars” or “soft commissions” should benefit clients, not investment manager.
¾ If pays a higher commission without corresponding benefit to the client, violates
¾ If not benefit the client, they should disclose to clients the methods or policies followed
in addressing the potential conflict. (benefit other clients)
¾ Under “directed brokerage” is OK, still obligated to seek “best price” and “best
execution,” however, and assured by the client that the goods or services purchased
from the brokerage will benefit the account beneficiaries. In addition, should disclose
to the client that the client may not be getting best execution from the directed
brokerage.
¾ “Best execution” refers to a trading process that seeks to maximize the value of the
client’s portfolio within the client’s stated investment objectives and constraints.
¾ 如果 manager 自己受益于 higher commission，是否违反 standard？It depends.
R57‐1 ★Regular account information.should submit to each client, at least quarterly, an
itemized statement showing:
¾ the funds and securities in the custody or possession plus all debits, credits, and
transactions that occurred during the period;
¾ where the assets are to be maintained, as well as where or when they are moved;
¾ should separate the client’s assets from any others’ and their own assets.
R58‐1 Client approval.
¾ If uncertain, should ask what he/she would expect or demand if the member/candidate
was the client.
¾ If in doubt, should disclose the questionable matter in writing to the client and obtain
client approval.
R59‐1 ★Should diversify unless diversification is not consistent with plan guidelines or is
contrary to the account objectives
R60‐1 Vote proxies in the best interest of beneficiaries and clients，并不是任何时候使用 vote
proxies 都是有益的，如果考虑到成本和收益之间关系的话,可以放弃每次都投票。
(Blind voting 是违反的). Should determine who is authorized and for the benefit of
beneficiaries, should disclose any change in voting proxy policy.
R61‐1 Standard III(A), however, is not a substitute for a member’s or candidate’s legal or
regulatory obligations. The duty required in fiduciary relationships exceeds what is
acceptable in many other business relationships because a fiduciary is in an enhanced
position of trust.

9‐1 Fair Dealing
Q38‐1 ★David Gunard, CFA, is an equity analyst at Curry Securities. He received an assignment
to analyze Enterloch Corporation, of which the stocks were held by several of Curry’s
clients. Gunard completed a thorough, fundamental analysis of Enterloch. Given his
26
analysis and the sharp rise in the company’s stock price during the past year, Gunard
concluded that the shares were substantially overvalued. After the approval of the report
by Gunard’s supervisor, but prior to the release, Gunard called his father to suggest that
he sell his Enterloch shares immediately. Gunard’s father informed him that he had
disposed of his holding. According to the Standards of Practice Handbook, has Gunard
violated the CFA Institute Standard of Professional Conduct relating to:
Duties to clients? Reasonable basis?
A. No Yes
B. Yes No
C. Yes Yes

Solution: B
By communicating this information to his father prior to the release of the report, Gunard failed
to put the firm’s clients’ interests above his own. Nothing in the question indicates that he did
not have a reasonable basis for his recommendation; he conducted a thorough fundamental
analysis and his report was approved. The fact that Gunard’s father had disposed of the shares
does not negate the fact that Gunard violated a duty to the firm’s clients.

Q39‐1 Clive Bowers, CFA, is a portfolio manager at Burlington Advisors (BA). Bowers manages
two mutual funds along with a number of individual accounts. All of the portfolios,
including the mutual funds, have similar return objectives, risk tolerances, and tax
constraints. When Bowers allocates shares from lock trades, he fills the mutual fund
orders first and often allocates the remaining shares to the individual accounts based on
their portfolio size. When allocating shares from block trades, does Bowers violate any
CFA Institute Standards?
A. No
B. Yes, with respect to suitability
C. Yes, with respect to fair dealing

Solution: C
Members must deal fairly with clients when taking investment actions for them. By treating the
mutual funds more favorably than the individual portfolios, Bowers violates the standard relating
to fair dealing. Additionally, shares should be allocated on order size basis.

Q40‐1 ★★Monique Gretta, CFA, is a research analyst at East West Investment Band. Gretta has
several long‐standing relationships with mutual funds and institutional investors. Gretta
often provides these clients with draft copies of her research before disseminating the
information to all of the bank’s clients. This practice has helped Gretta avoid several
errors in her reports and she believes it is beneficial to the rest of her client base.
Regarding her research, Gretta least likely violated the CFA Institute Code of Ethics and
Standards of Professional Conduct because: (Mock79‐9)
A. her report is a draft.
B. Of her conflicts of interest
C. this practice benefits clients.
27

Solution: B.
Even though the analyst is not treating all clients in an equitable manner, there is no indication
she has breached any conflicts of interest.

Q41‐1 ★ Henrietta Huerta, CFA, writes a free investment newsletter widely followed by
individual investors. Huerta is not aware of who receives the newsletter but it is the
primary marketing tool she uses to obtain investment management clients for those who
contact her and are willing to pay management fees. For Huerta, the newsletter
recommendations serve as the basis for most of her investment actions. Huerta recently
completed research on East‐West Coffee Roasters (ECR) and has decided to change her
initial buy recommendation on ECR to a sell. To avoid violating the CFA Institute Standards
of Professional Conduct, Huerta should most likely ensure that the changed investment
recommendation reaches: （2012 Mock85）
A. newsletter recipients first.
B. asset management clients first.
C. asset management clients and newsletter recipients simultaneously.

Correct Solution: B
Because, according to Standard III(B) Fair Dealing, members and candidates may provide more
personal, specialized, or in‐depth service to clients willing to pay for premium services through
higher management fees or higher levels of brokerage. Members and candidates can
differentiate their services to clients, but different levels of service must not disadvantage or
negatively affect clients. In addition, the different service levels should be disclosed to clients and
prospective clients and be available to everyone (i.e., different service levels should not be
offered selectively). The newsletter recipients are not even clients, because the newsletter is free,
and the manager does not even know if the recipients of the newsletter have acted on her
recommendations, nor does she know whom these recipients are, so the manager’s obligation is
to first serve clients who are paying her a management fee.

Q42‐1 ★Wouter Duyck, CFA, is the sole proprietor of an investment advisory firm serving a
middle‐class retail clientele. Duyck claims to be different from his competitors because he
conducts his own independent research. Duyck has hundreds of clients. He fully discloses
that to simplify the management of all these accounts he has created a recommended list
of stocks, from which he selects investments for all of his clients. Duyck's recommended
list of stocks is obtained from his primary broker, who has completed due diligence on
each stock. Duyck's recommended list least likely violates which of the following CFA
Institute Standards of Professional Conduct? （2012 Mock85）
A. Fair Dealing.
B. Misrepresentation.

Solution: A
A is correct because Standard III (B) Fair Dealing concerns the fair treatment of clients when
28
making investment recommendations or taking investment action, but there is no indication the
advisor has discriminated against any clients regarding his recommendations as he invests all
clients in the same universe of stocks. Possibly violate Suitability.

Q43‐1 ★Monique Gretta, CFA, is a research analyst at East West Investment Bank. Previously,
Gretta worked at a mutual fund management company and has a long‐standing client
relationship with the managers of the funds and their institutional investors. Gretta often
provides fund managers, who work for Gretta’s former employer, with draft copies of her
research before disseminating the information to all of the bank’s clients. This practice
has helped Gretta avoid several errors in her reports, and she believes it is beneficial to
the bank’s clients, even though they are not aware of this practice. Regarding her
research, Gretta least likely violated the CFA Institute Code of Ethics and Standards of
Professional Conduct because: （2012 Mock84）
A. her report is a draft.
B. this practice benefits all clients.
C. the long‐standing client relationships are not disclosed.

Solution: C
C is correct because the analyst does not violate any of the Standards of Professional Conduct by
having long‐standing client relationships and generally is not required to disclose such
relationships. However, the analyst is not treating all clients fairly as required by Standard III (B)
Fair Dealing when disseminating investment recommendations; disclosure of the relationship
with long‐standing clients is not the issue. The analyst has advantaged some clients over others
by providing advance information, and all clients do not have a fair opportunity to act on the
information within the draft report. Members and candidates may differentiate their services to
clients, but different levels of service must not disadvantage or negatively affect clients.

Q44‐1 ★Robin Herring, CFA, is a government bond research analyst at an independent credit
rating agency. A competitor credit rating agency just downgraded the bonds of a
government Herring follows. Herring notes all of the information in the competitor’s
report was covered in his analysis published last week. In the past, Herring has been slow
to downgrade bonds, so he starts to doubt his own analysis after seeing the competitor’s
report. Herring decides to reissue his credit rating of this government bond and match
the competitor’s downgrade. In his revised report, Herring states that new information
has been made available to justify the downgrade. Herring posts the revision on the
credit rating agency’s website and provides it by e‐mail to all clients who received the
original. Herring’s rating change least likely violated which of the following CFA Institute
Code of Ethics and Standards of Professional Conduct? （2012 Mock84）
A. Fair Dealing
B. Communication with Clients
C. Diligence and Reasonable Basis

Solution: A
A is correct because the analyst has dealt fairly with all clients by sending them an e‐mail and
29
posting his rating change on the credit rating agency’s website when making material changes to
his prior investment recommendation; therefore, he has not violated Standard III (B) Fair Dealing.
Clients should be treated fairly when material changes in a member’s or candidate’s prior
investment recommendations are disseminated, which has been done.

Key points of Fair dealing：
R62‐1 最重要的两个考点；fair 不等于 equal；如果 equally，有可能违反 fair dealing.
R63‐1 可以为不同的客户设置不同的服务等级，但是必须不对顾客不利的或者是有负面影
响
R64‐1 investment recommendation 的发表可以有多种方式：brief update report, by addition
to or deletion from a recommended list, or simply by oral communication，都必须遵循
fair dealing 的准则。
R65‐1 投资建议时，disclosure of inequitable allocation system, even accepted by clients,
can’t be exempt from fair dealing for disclosure and acceptance. Disclose trade allocation
procedures 需要注意 disclosure of inequitable allocation methods does not relieve the
member of this obligation
R66‐1 ★把新的投资建议 e‐mail 给顾客之后找大机构客户讨论细节，没有违反 fair dealing
R67‐1 ★Investment action
¾ Should distribute the issues to all customers for whom the investments are appropriate
in a manner consistent with the policies of the firm for allocating blocks of stock.
¾ If the issue is oversubscribed, the issue should be prorated to all subscribers.
¾ This action should be taken on a round‐lot basis to avoid odd‐lot distributions.
¾ If the issue is oversubscribed, members/candidates should forgo any sales to
themselves or their immediate families in order to free up additional shares for clients.
¾ If the investment professional’s family‐member accounts are managed similarly to thse
of other clients of the firm, should not be excluded from buying such shares.
R68‐1 Procedures
¾ communicate recommendations both within the firm and to customers simultaneously.
¾ Disseminate a short summary report including the conclusion might be published in
advance.
¾ processing and executing orders on a first‐in, first‐out basis
¾ giving all client accounts participating in a block trade the same execution price and
charging the same commission
¾ ★When the full amount of the block order is not executed, allocating partially
executed orders among the participating client accounts pro rata on the basis of order
size while not going below an established minimum lot size for some securities.
¾ When allocating trades for new issues, obtaining advance indications of interest,
allocating securities by client (rather than portfolio manager), and providing for a
method for calculating allocations.
¾ Establish review procedures to detect whether trading in one account is being used to
benefit a favored client

10‐1 Suitability
30
Q45‐1 ★Abigail Unger, CFA, is a portfolio manager at Cascade Investments (CI). After thoroughly
researching MBS and checking client investment objectives for appropriateness, Unger
purchased two of the bonds for several clients. Following steep declines in MBS, several
clients complain to CI, claiming the bonds were unsuitable investments. Has Unger
violated any CFA Institute Standards?
A. No.
B. Yes, with respect to suitability.
C. Yes, with respect to diligence and reasonable basis.

Solution: A
Unger exercised diligence in her research, had a reasonable basis for the investment, and
confirmed the suitability of the investment for her clients. Her actions were consistent with the
Standards.

Q46‐1 ★Mailaka Securities (MS) advertises the use of a “bottom up” investment style in its
marketing material. Recently, MS senior management decided to switch to a “top down”
approach, citing the fact that it is less labor intensive. All other aspects of the research
process are to remain the same. The head of research at MS, Mara Cherogony, CFA, was
instructed to supervise the implementation of the new procedures, to notify clients of the
changes, and to revise the text of marketing materials when new material was produced.
Which of the following CFA Standards pertaining to Investment Analysis,
Recommendations and Actions is Cherogony least likely in danger of violating?
A. Supervisory Responsibility.
B. Communication with Clients.

Solution: C
Research can still be considered diligent and having a reasonable basis if done using a “top
down” research methodology as opposed to a “bottom up” methodology. Violates Standard V (B)
– Communication with Clients for not promptly disclosing the change. As a supervisor,
Cherogony is responsible for ensuring compliance with the Code and Standards.

Q47‐1 ★One fund manager found that a product was suitable for his clients and made a
purchase for the clients. The transaction did not correspond exactly to the strategy of the
firm determined at the beginning of the year which the client understood well. The
manager decided to inform the client of the modification of the strategy in three months,
when they would communicate with their clients about the strategies of the new years.
Which standard did he most likely violate?
A. Suitability
B. Communication with clients
C. Fair dealing

Solution: A
Standard III (C) Suitability requires that when members/candidates are responsible for managing
31
a portfolio, they make only investment recommendations consistent with the stated objectives
and constrains of the portfolio. The fund manager must have informed his/her clients and
received permission before he made the investment which did not correspond exactly to the
original strategy. By the way, not disclosing the change in strategy, violate V (B) communication.

Q48‐1 ★Frederic LUTHER, a salesperson, established an IPS for a client when he persuaded the
client to direct his transactions to their firms. All Frederic is doing is execute orders with
some recommendations on choices made by the client. One day, the client made an order
on purchase of some stocks that are not suitable for him. Frederic recommended the
client take a second thought of his order, but the client insisted. At last, Frederic agreed to
execute the order. Did Frederic comply with the Standards?
A. Yes, because it is the client himself who is responsible for his own decision.
B. No, because Frederic should assure all his client’s investments comply with the IPS.
C. No, because Frederic should make his client understand what he is doing.

Solution: B
The responsibilities to gather information and to make a suitability analysis before making a
recommendation or taking investment advice fall on those members/candidates in advisory
relationship with clients.
For unsolicited trade for individuals, if unsuitable, should refrain from trading or seek an
affirmative statement from the client that suitability is not a consideration.

Q49‐1 ★Noor Mawar, CFA, manages a trust fund with the beneficiary being an orphaned
18‐year‐old student. The investment policy dictates that trust assets are expected to
provide the student with a stable low risk source of income until she reaches the age of
30 years. Based on information from an internet blog, the student asks Mawar to invest in
a new business venture she expects will provide high returns over the next 5 years.
Mawar ignores the request, instead securing conservative investments to provide
sufficient income. Did Mawar most likely violate the CFA Institute Code of Ethics and
Standards of Professional Conduct? （2012 Mock83）
A. Yes
B. No, because the client’s objectives were met
C. No, because the investment time frame does not match the investment horizon

Solution: B
B is correct because the client is the trust/trustees, not the beneficiary. Mawar followed
Standard III (C) Suitability by managing the trust assets in a way that would likely result in a
stable source of income while keeping the risk profile low, thereby complying with the
investment objectives of the trust.

Q50‐1 Molly Burnett, CFA, is a portfolio manager for a fund that only invests in environmentally
friendly companies. A multinational utility company recently acquired one of the fund’s
best performing investments, a wind power company. The wind power company’s
shareholders received utility company shares as part of the merger agreement. The utility
32
has one of the worst environmental records in the industry, but its shares have been one
of the top performers over the past 12 months. Because the utility pays a high dividend
every three months, Burnett holds the utility shares until the remaining two dividends
are paid for the year then sells the shares. Burnett most likely violated the CFA Institute
Standard of Professional Conduct concerning:（2012 Mock83）
A. suitability.
B. disclosure of conflicts.
C. independence and objectivity.

Solution: A
A is correct because the utility is not a suitable investment for a fund that only invests in
companies with good environmental records. Continuing to hold this investment, therefore, was
a violation of Standard III (C) Suitability.

Q51‐1 Gardner Knight, CFA, is a product development specialist at an investment bank. Knight is
responsible for creating and marketing collateralized debt obligations (CDOs) consisting of
residential mortgage bonds. In the marketing brochure for his most recent CDO, Knight
provided a list of the mortgage bonds that the CDO was created from. The brochure also
states “an independent third party, the collateral manager, had sole authority over the
selection of all mortgage bonds used as collateral in the CDO.” However, Knight met with
the collateral manager and helped her select the bonds for the CDO. Knight is least likely
to be in violation of which of the following CFA Institute Standards of Professional
A. Suitability
B. Conflicts of Interest
C. Client Communication

Solution: A
A is correct because there is no indication the investment is unsuitable for investors and in
violation of Standard III (C) Suitability.

Key points of Suitability：
R69‐1 ★When advisory, know clients, suitable and under portfolio; when to a specific
mandate, consistent with stated objectives and constraints; suitality doesn’t prevent
from losing value.
R70‐1 ★If unsolicited trade is known unsuitable:
¾ To individual, should refrain from trade or seek an affirmative statement from the client
that suitability is not a consideration.
¾ To funds manager managing to index, the duty of suitability is conferred to advisor for
clients.
R71‐1 IPS should be updated at least annually and prior to material changes to any specific
investment recommendations or decisions on behalf of the client.
R72‐1 Suitability analysis conducted by members and candidates can not be expected to be
33
complete but must be done based on the information provided.
R73‐1 Leverage and limited liquidity, depending on the degree to which they are hedged, bear
directly on the issue of suitability for the client.
R74‐1 The two clients have different circumstances and objectives. Should Not recommend the
same.
R75‐1 Managing to an Index or Mandate
¾ Her responsibility is to invest consistently with the stated mandate, no specific clients
¾ The responsibility for determining the suitability of an investment for clients can only
be conferred on members and candidates who have an advisory relationship with
clients.
R76‐1 Regular updates.
¾ The investor’s objectives and constraints should be maintained and reviewed
periodically to reflect any changes in the client’s circumstances.
¾ should regularly compare client constraints with capital market expectations to arrive
at an appropriate asset allocation. Changes in either factor may result in a fundamental
change in asset allocation.
¾ Annual review is reasonable unless business or other reasons, such as a major change
in market conditions, dictate more frequent review.
¾ Members and candidates should document attempts to carry out such a review if
circumstances prevent it.
R77‐1 ★The suitability test procedures should require the investment professionals to look
beyond the potential return of the investment and include the following:
¾ an analysis on the impact on the portfolio’s diversification,
¾ a comparison of the investment risks with the client’s assessed risk tolerance,
¾ the fit of the investment with the required investment strategy.

11‐1 Performance Presentation
Q52‐1 ★Sisse Brimberg, CFA, is responsible for performance presentations at her investment
firm. The presentation that Sisse uses states her firm:
(1) deducts all fees and taxes;
(2) uses actual and simulated performance results;
(3) bases the performance on a representative individual account.
Based on the above information, which of the following is the most appropriate
recommendation to help Brimberg meet the CFA Institute Standards of Professional
Conduct in her performance presentations? She should present performance based on:
A. a gross of fee basis.
B. actual not simulated results.
C. a weighted composite for all similar portfolios.

Solution: C
In order to meet their obligations under Standard III (D), members should present the
performance of the weighted composite of similar portfolios rather than using a single
representative or all accounts, so this is the best selection of the options provided.
34
Q53‐1 ★ ABC Investment Management acquires a new, very large account with two
concentrated positions. The firm's current policy is to add new accounts for the purpose
of performance calculation after the first full month of management. Cupp is responsible
for calculating the firm's performance returns. Before the end of the initial month, Cupp
noticed that one of the significant holdings of the new accounts was acquired by another
company, causing the value of the investment to double. Because of this holding, Cupp
decided to account for the new portfolio as of the date of transfer, thereby allowing ABC
Investment to reap the positive impact of that month's portfolio return.
A. Cupp did not violate the Code and Standards because the GIPS standards allow composites
to be updated on the date of large external cash flows.
B. Cupp did not violate the Code and Standards because companies are allowed to determine
when to incorporate new accounts into their composite calculation.
C. Cupp violated the Code and Standards because the inclusion of the new account produces
an inaccurate calculation of the monthly results according to the firm's stated policies.

Solution：C
Cupp violated Standard III (D)‐Performance Presentations when he deviated from the firm’s
stated policies solely to capture the gain from the holding being acquired.

Q54‐1 Which of the following is a recommended procedure to make performance presentation?
A. To prepare a format presentation of performance to audience.
B. To clearly disclose whether performance is gross of fee or net of fee.
C. To present performance based on a representative portfolio.

Solution: B
To meet Standard III (D), members/candidates should include disclosures that fully explain the
performance results being reported, such as gross of fee or net of fee.

Q55‐1 ★Sam Snead, CFA, is the founder and portfolio manager of the Everglades Fund. In its
first year the fund generated a return of 30%. Building on the fund’s performance, Snead
created new marketing materials that showed the fund’s gross 1‐year return as well as
the 3‐, and 5‐year returns which he calculated by using back‐tested performance
information. As the marketing material is used only for presentations to institutional
clients, Snead did not mention the inclusion of back‐tested data. According to the
Standards of Practice Handbook, did Snead violate any CFA Institute Standards of
A. No.
B. Yes, because he did not disclose the use of back‐tested data.
C. Yes, because he failed to deduct all fees and expenses before calculating the fund’s track
record.

Solution：B
The Standard III (D) Performance Presentation prohibits members/candidates from making any
statements that misrepresent the performance achieved by them or their firms and requires
35
every reasonable effort to be made to ensure that performance information is fair, accurate, and
complete. By failing to identify the simulated performance results, Snead violated the standard.
Snead should have disclosed the fact that the returns were generated only in one year of the
fund’s operation and the other performance information is back‐tested. .

Q56‐1 ★David Bravoria, CFA, is an independent financial advisor for a high net worth client with
whom he had not had contact in over two years. During a recent brief telephone
conversation, the client stated he wanted to increase his risk exposure. Bravoria
subsequently recommended and invested in several high‐risk funds on behalf of the client.
Bravoria continued, as he had done in the past, to send to his client monthly, detailed
itemized investment statements. Did Bravoria most likely violate any CFA Standards?
A. No.
B. Yes, with regard to investment statements.
C. Yes, with regard to purchasing venture capital funds.

Solution: C
Bravoria violated Standard III (A) in not exercising Loyalty, Prudence and Care. Bravoria had not
updated his client’s profile in over two years thus should not have made further investments,
particularly in high risk investments until such time as he updated the client’s risk and return
objectives, financial constraints and financial position. Bravoria provided his client with
investment statements more frequently than that which is required; i.e. quarterly so was not in
violation of regular account information.

Q57‐1 ★Paper was recently terminated as one of a team of five managers of an equity fund.
The fund had two value‐focused managers and terminated one of them to reduce costs.
In a letter sent to prospective employers, Paper presents, with written permission of the
firm, the performance history of the fund to demonstrate his past success. (原版书
Reading2‐39)
A. Paper did not violate the Code and Standards.
B. Paper violated the Code and Standards by claiming the performance of the entire fund as his
own.
C. Paper violated the Code and Standards by including the historical results of his prior
employer.

Solution：B
Paper has violated Standard III(D)—Performance Presentation by not disclosing that he was part
of a team of managers that achieved the results shown. If he had also included the return of the
portion he directly managed, he would not have violated the standard. Thus, answer A is
incorrect. Answer C is incorrect because Paper received written permission from his prior
employer to include the results.

Key points of Performance presentation:
R78‐1 Should be accurate, complete and fair;
36
¾ 不可以以投资业绩误导客户或潜在客户;
¾ 不可误陈述过去业绩或合理预期业绩;
¾ 不可以说明或暗示有能力与过去业绩相同的收益;
R79‐1 If the presentation is brief, the member or candidate must make available to clients and
prospects, upon request, the detailed information supporting that communication; that
brief presentations include a reference to the limited nature of the information provided.
R80‐1 terminated accounts as part of performance history 违反 performance presentation;
R81‐1 No prohibition of showing past record but it should be fully disclosed where the
performance comes from and the person’s role in it.
R82‐1 ★disclosures that would fully explain the performance results being reported:
¾ stating when appropriate, that results are simulated when model results are used
¾ clearly indicating when the performance record is that of a prior entity,
¾ or disclosing whether the performance is gross of fees, net of fees, or after tax

12‐1 Preservation of Confidentiality
Q58‐1 Jimmy Lee, CFA, is an investment banker in a country with strict confidentiality laws. He is
working on an acquisition for Panda Mining Co. (PMC). While performing due diligence,
Lee noticed that PMC had a number of questionable offshore partnerships. He
investigated the legality of the partnerships and found evidence of illegal activity.
According to the Standards of Professional Conduct, Lee’s best course of action would be
to:
A. Alert CFA institute.
B. consults outside counsel.
C. notify regulatory authorities.

Solution: B
Members must keep client information confidential and comply with applicable laws. If the
applicable law requires disclosure of client information in certain circumstances, members must
comply with the law. If applicable law requires members to maintain confidentiality, even if the
information concerns illegal activities on the part of the client, members should not disclose such
information. Lee’s best course of action would be to consult with outside counsel to determine
applicable law.

Q59‐1 ★Townsend was recently appointed to the board of directors of a youth golf program
that is the local chapter of a national not‐for‐profit organization. The program is
beginning a new fund‐raising campaign to expand the number of annual scholarships it
provides. Townsend believed that many of her clients made annual donations to charity.
The next week in her regular newsletter to all clients, she included a small section
discussing the fund¬raising campaign and her position on the organization's board.
A. Townsend did not violate the Code and Standards.
B. Townsend violated the Code and Standards by soliciting donations from her clients through
the newsletter.
C. Townsend violated the Code and Standards by not getting approval of the organization
37
before soliciting her clients.

Solution: A
¾ Townsend did not provided any information about her clients to the leaders or managers of
the golf program; thus, she has not violated Standard III (E) Preservation of Confidentiality.
Providing contact information about her clients for a direct‐mail solicitation would have
been a violation.
¾ Answer B is incorrect because the notice in the newsletter did not violate Standard III (E).
Answer C is incorrect because the golf program’s fund‐raising campaign had already begun,
so discussing the opportunity to donate was appropriate.

Key points of Preservation confidentiality：
R83‐1 Confidentiality comes from: 1) member’s ability to conduct business on behalf of clients;
2) special or confidential relationship with others.
R84‐1 ★Illegal vs disclosed
¾ Disclosure is required by law, should disclose.
¾ If applicable law requires to keep confidentiality, even if illegal, should preserve
confidentiality;
R85‐1 ★When in doubt, should consult with their employer’s compliance personnel or outside
counsel before disclosing confidential information about client;
R86‐1 Preserve confidential information even if the person or entity is no longer a client;
R87‐1 When applicable law permits, members should consider the PCP an extension of
themselves when requested to provide information about a client, which will be kept in
strict confidence.
R88‐1 ★The simplest, most conservative, and most effective way to comply with Standard III
(E) is to avoid disclosing any information received from a client except to authorized
fellow employees who are also working for the client.
R89‐1 In some instances, however, a member/candidate may want to disclose information
received from clients outside the scope of the confidential relationship and does not
involve illegal activities. Before making such a disclosure, a member/candidate should
ask the following:
¾ In what context was the information disclosed? If disclosed in a discussion of work
being performed for the client, is the information relevant to the work?
¾ Is the information background material that, if disclosed, will enable the member or
candidate to improve service to the client?

13‐1 Loyalty to Employer
Q60‐1 An employee is planning to leave his current employer and established a competitive
company. He did not sign any non‐compete agreement with his employer. According to
the Standards, the employee should:
A. Take advantage of client list of his current employer.
B. Communicate with the clients of his current employer without using client list.
C. Communicate with the clients one year after his resignation.
38

Solution: C
Standard IV (A) Duties to Employers prohibits soliciting employer’s clients prior to leaving.
However simple knowledge of names of the clients is not confidential. Therefore, employees can
contact clients as long as they do not use any materials from his former employer, or have signed
a non‐compete agreement.

Q61‐1 ★Rene Whatcom, CFA, is an independent contractor, who writes research reports for
several investment publications. Whatcom refuses to sign contracts with exclusivity
clauses. Whatcom sometimes revises work he submits to one publication and sends
slightly altered versions of the report to additional publications. Does Whatcom violate
any CFA Institute Standards?
A. No.
B. Yes, with respect to loyalty.
C. Yes, with respect to disclosure of conflicts.

Solution: A
A member’s duties within an independent contractor relationship are governed by the oral or
written agreement between the member and the client. Members should take care to define
clearly the scope of the responsibilities and the expectations of each client within the context of
each relationship. Members have a duty to abide by the terms of the agreement.

Q62‐1 Scott Campbell, CFA, developed a complex quantitative model for selecting mortgage
bonds. Campbell was careful to document in writing all assumptions in the model and his
reasoning for the assumptions. Another firm offered Campbell a position leading the
startup of a mortgage bond research department. In his new position, Campbell created a
similar model and supporting documents. Does Campbell violate any CFA Institute
Standards?
A. No.
B. Yes, with respect to record retention.
C. Yes, with respect to loyalty to employer.

Solution: A
The Standards do not impose a prohibition on the use of experience or knowledge gained at one
employer from being used at another employer. As records created on behalf of an employer are
the property of the firm and not the member, Campbell must take care not to use the property
or records of his former employer when creating a model for his new employer.

Q63‐1 ★Jan Loots, CFA, quit his job as a portfolio manager at an investment firm with whom he
had a non‐solicitation agreement he signed several years ago. Loots received permission
to take his investment performance history with him and also took a copy of the firm’s
software‐trading platform. Subsequently, Loots sent out messages on social media sites
announcing he was looking for clients for his new investment management firm. Access
to Loots’ social media sites is restricted to friends, family, and former clients. Loots least
39
likely violated the CFA Institute Standards of Professional Conduct concerning his: （2012
Mock84）
A. trading software.
B. non‐solicitation agreement.
C. investment performance history.

Solution: C
C is correct because the portfolio manager received permission to use his investment
performance history from his prior employer. The member violated his non‐solicitation
agreement by indicating his availability to new clients on several social media sites accessible by
clients of his former employer, a violation of Standard IV(A) Loyalty, because he did not act for
the benefit of his former employer. In this case, the member may cause harm to his former
employer if his weekend messages result in clients moving to his new business from his former
employer. The member also violated this standard by taking his employer’s property, trading
software.

Key points of Loyalty to employer：
R90‐1 Principle to judge is not to injure the firm, deprive of its profit, or deprive of the
employee’s advantage of ability and skills
R91‐1 Independence practice for compensation is allowed if a notification is provided to the
employer fully describing all aspects of the activities and if the employer and the 3rd
party consents to all terms of the proposed independent practice before it begins.
R92‐1 投资分析师，同时担任市长要披露吗？兼职教书可以吗？
R93‐1 揭发(whistleblowing). 如果为保护客户利益、市场诚信和其他非个人利益目标，是可
以不将雇主利益放在首位的；In such instances, activities that would normally violate a
member’s/candidate’s duty to his/her employer (such as contradicting employer
instructions, violating certain policies and procedures, or preserving a record by copying
employer records) may be justified.
R94‐1 ★独立的合同承包商(independent contractors)必须遵守与雇主所达成的协议 (oral or
written agreement)；如果没有协议，则没有遵守的问题；
R95‐1 在辞职前，雇员不可以做的行为包括但不限于以下所列：
¾ 盗用(misappropriation)客户的商业秘密(trade secrets)；
¾ 盗用(misuse)保密信息(confidential information)；
¾ 辞职前劝诱(solicit)客户转移业务；
¾ 盗用(misappropriation)客户资料；
¾ Self‐dealing (appropriating for one’s own property a business opportunity or
information belonging to one’s employer)
¾ 拿走雇主的财产(property of the Employer)。
R96‐1 ★仅仅知道原雇主的客户名字是不属于机密 unless deemed such by contract or law;
R97‐1 在雇主那儿学习的工作经验和技能是可以使用的, even if contract exists.（比如和原雇
主签订合同说离职之后不能使用这些技能，但是实际是可以用的，因为这个合同本
身就存在问题）；但是，在职过程中自己开发的模型不可以带走。
R98‐1 After leaving can solicit prior employer’s clients as long as contact information is not
40
from records of the former employer or violate an applicable non‐compete agreement;
before leaving, shouldn’t solicit the former employer’s clients.
R99‐1 must not engage in any activities that would conflict with this duty until their resignation
becomes effective，如果自己成立公司，可以用自己的时间去准备自己的公司。前提：
不能与雇主发生竞争，必须预先通知雇主。
R100‐1 ★Incident‐reporting procedures. Be aware of firm’s whistleblowing policies, encourage
to adopt industry best practice, many firms are required by regulatory mandates to
establish confidential and anonymous reporting procedures.

14‐1 Additional Compensation Arrangements
Q64‐1 ★Alexandra Zagoreos, CFA, is the head of a government pension plan. Whenever
Zagoreos hires amoney management firm to work with the pension plan, she finalizes the
deal over dinner at a nice restaurant. At these meals, Zagoreos also arranges for the
money manager to provide her payments equal to 10% of the management fee the
manager receives from the pension plan. Zagoreos keeps half of the payments for her
own use and distributes the remainder as cash incentives to a handful of her most trusted
staff. Zagoreos least likely violated which of the following CFA Institute Code of Ethics and
A. Referral fees.
B. Loyalty, Prudence and Care.
C. Additional Compensation Arrangements.

Solution：A
As the money should not be accepted without receiving written consent from all parties involved,
therefore Zagoreos is in violation of Standard IV (B) Additional Compensation Arrangements.
However, there is no indication that the member has received compensation, consideration, or
benefit received from, or paid to, others for the recommendation of products or services and
therefore has not violated Standard VI (6) Referral Fees.

Q65‐1 Rachel Pederson, CFA, has managed the account of Olga Stefansson for the past decade
and has a very good relationship with her client. Stefansson has a beach house in the
Bahamas and offers Pederson and her family two free weeks at the house as a reward for
the excellent returns generated in her account. Pederson is so busy at work that she does
not tell anyone where she is going for vacation. When accepting Stefansson's offer,
Pederson least likely violates the CFA Institute Standard relating to:
A. Loyalty to Employer.
B. Disclosure of Conflicts.

Solution：A
The Standards require that members not accept gifts or compensation that might reasonably
compete with their employer’s interest unless they obtain written consent from all parties
involved. Arrangements such as that offered to Pederson may cause a conflict of interest or result
41
in partiality that could impede Pederson’s independence and objectivity. By the way, all the
conflict should be disclosed in order to maintain independence and objectivity if the conflict
can’t be avoided.

Q66‐1 ★Buta Singh, CFA, has a large extended family and manages the portfolios of several
family members. Singh does not charge the family members a management fee, but
receives a small percentage of each portfolio’s profits. Singh accepted a position as
portfolio manager for Bhotmange Investments to manage high net worth accounts .As
the family portfolios were not normal client relationships, Singh did not inform his new
employer of his side activity .With respect to the family portfolios; did Singh violate any
CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, because he failed to obtain consent from his employer.
C. Yes, because he failed to disclose his new employment to his existing clients.

Solution: B
Members who plan to engage in independent practice for compensation should not render
services until receiving written consent from their employer.
Key points of Additional compensation arrangement：
R101‐1 礼物包括从顾客或其他第三方收取的直接和间接的好处；
R102‐1 所有安排必须得到雇主的同意(No arrangement without the employer's approval)，从
雇主之外收取的其他收益必须立即以书面形式(immediate written report)向雇主说明
所收到收益和服务的详细情况 (amount and nature of consideration)；
R103‐1 披露的目的在于：雇主有权知道雇员的报酬情况来评估服务的真实成本和对雇员忠
诚和客观的影响。
R104‐1 Members/candidates must obtain permission for additional compensation/benefits
because such arrangements may affect loyalty and objectivity and create potential
conflicts of interest.
disclose consent violate
√ × IV(B)
√ √ ‐‐

× × IV(B),VI(A), I(B),

15‐1 Responsibility of Supervisors
Q67‐1 ★Wayne RUBY, a CFA Charterholder, is a director of brokerage department of a large
investment bank. Someone told him that a member in his team, Max CHANG, often
front‐ran their clients. However, Max assured that the blow‐whistler wanted to take his
place. Wayne was going to lead an investigation on the affair. Before he could arrive at
any conclusion, he permitted Max to stay on his current position with more closely
supervision. Did Wayne comply with the Standards?
A. Yes, because he was making an investigation.
B. Yes, because he had strengthened the supervision.
C. No, because he just permitted Max to stay on the current position before a conclusion was
42
arrived.

Solution: B
According to Standard IV (C) Responsibilities of Supervisors, once a supervisor learns that an
employee has violated or may have violated the law or the Code and Standards, the supervisor
must promptly initiate an investigation to ascertain the extent of the wrongdoing while placing
limitations on the wrongdoer’s activities.

Q68‐1 According to the Standards of Practice Handbook, a member with supervisory
responsibilities violates the CFA Institute Standards of Professional Conduct when:
A. delegating supervisory duties.
B. failing to prevent violations of the CFA Code and Standards.
C. failing to establish and implement written compliance procedures.

Solution: C
Members with supervisory responsibility must make reasonable efforts to detect violations of
laws, rules, regulations, and the Code and Standards. They exercise reasonable supervision by
establishing and implementing written compliance procedures.

Q69‐1 ★Ileana Inkster, CFA, was recently offered a senior management position with the trust
department of a regional bank. The department is now but the bank has plans to expand
it significantly over the next few months; Inkster has been told she needs to aid that
growth and has been asked to have her department conduct educational seminars and
then pursue new business by follow‐up contacts with the attendees. Inkster notices that
advertisements for upcoming seminars, prepared by the marketing department, do not
mention any investment products. The ads indicate attendees can "learn how to
immediately earn $100,000 to their net worth." What is the first action Inkster most likely
should take to avoid violating any CFA Institute Standard of Professional Conduct?
(Mock79‐16)
A. Decline to accept the new position,
B. Accept the position and revise the marketing material.
C. Accept the position but bring the lack of procedures to the attention of senior management.

Solution: A. The prospective supervisor's first step should be to bring the inadequate compliance
system to the attention of the firm's senior managers and recommend corrective action before
taking the position. This may be accomplished by the supervisor taking on an interim consulting
role with the bank in order to implement adequate procedures before taking on the supervisory
role.

Q70‐1 ★Kim Klausner, CFA, manages several hundred employees as the head of research for a
large investment advisory firm. Klausner is a former securities regulatory official who,
until recently, ensured that his department’s compliance program always met or
exceeded those of its competitors. Klausner has delegated his supervisory responsibilities
concerning compliance issues to Sue Chang. Klausner informed Chang that her
43
responsibilities include ensuring that the firm has appropriate compliance procedures
and is making reasonable efforts to detect and prevent violations of Rules, Regulations,
and the Code and Standards. Klausner most likely violated the CFA Institute Standards of
Professional Conduct by not telling Chang to consider（2012 Mock85）
A. firm policies.
B. legal restrictions.
C. industry standards.

Correct Solution: B
B is correct because a supervisor’s responsibilities under Standard IV (C) Responsibilities of
Supervisors include instructing those subordinates to whom supervision is delegated about
methods to prevent and detect violations of laws, rules, regulations, and the Code and Standards.
Laws would also include legal restrictions.

Q71‐1 Ileana Inkster, CFA, was recently offered a senior management position within the trust
department at a regional bank. The department is new, but the bank has plans to expand
it significantly over the next few months. Inkster has been told she will be expected to
help grow the client base of the trust department. She is informed the trust department
plans to conduct educational seminars and pursue the attendees as new clients. Inkster
notices recent seminar advertisements prepared by the bank’s marketing department do
not mention investment products will be for sale at the seminar. The ads indicate
attendees can “learn how to immediately add $100,000 to their net worth.” What should
Inkster most likely do to avoid violating any CFA Institute Standards of Professional
A. Decline to accept the new position
B. Accept the position and revise the marketing material
C. Accept the position and inform senior management of inadequate compliance procedures

Solution: A
A is correct because the prospective supervisor’s first step should be to not take the position.
Accepting the position with inadequate procedures in place or improper marketing material
would leave Inkster at risk of incurring a violation of the Code and Standards—Standard IV (C)
Responsibilities of Supervisors. She could agree to be hired as an interim consultant with the
bank in order to implement adequate procedures before taking on any supervisory role.

Key points of Responsibility of Supervisor：
R105‐1 By establishing and implementing the written compliance system and ensuring such
system is followed through periodic review。
R106‐1 在建立制度时，必须明确：What an adequate system is。
R107‐1 如果将管理的职责委托给（delegate）他人，管理者不能免除监督管理的职责，且必
须 instruct 被委托的人 how to detect and prevent the violations of laws,rules and code。
R108‐1 对于不合理(inadequate)的管理制度，管理者应提请上层注意并提出改进(corrective)
建议。
44
R109‐1 如果由于不存在（nonexistent）制度或制度不完善(poor)，管理者必须以书面形式拒
绝接受管理职责 until the firm adopts adequate system
R110‐1 公司有了严格的规章制度，也进行了严格监督，supervisor 不违反这条 standard
R111‐1 Codes of ethics should be written in plain language and consist of fundamental,
principle‐based ethical and fiduciary concepts that are applicable to all of the firm’s
employees, unencumbered by numerous detailed procedures directed to the day‐to‐day
operation of the firm.
R112‐1 Supervisor should continually educate personnel regarding the compliance procedures
R113‐1 Enforcement of Non‐Investment‐Related Policies.
¾ A member/candidate with supervisory responsibility should enforce policies related
to investment and non‐investment‐related activities equally.
¾ Firms regularly establish policies related to attendance and acceptable workplace
actions, such as mandatory vacations for specific positions.
¾ The equal enforcement of all firm policies assists in creating a strong ethical work
environment where all rules are demonstrated to be important.
R114‐1 ★如果发现有人违反制度，管理者必须：
¾ Promptly respond
¾ Thoroughly investigate
¾ Appropriately limit the actions of wrongdoer or increase monitoring, just warning
the wrongdoer, or get promise and explanation, are NOT enough.
R115‐1 Adequate procedure
¾ Be clearly written;
¾ Easy to understand;
¾ Designate a compliance officer;
¾ Create a system of checks and balances;
¾ Outline the scope of the procedures;
¾ Outline permitted conduct;
¾ Procedure for reporting violations and sanctions.
R116‐1 Once the compliance program is instituted, the supervisor should:
¾ Distribute it to the proper personnel;
¾ Update it as needed;
¾ Continually educate staff regarding procedures;
¾ Issue remainders as necessary;
¾ Require professional conduct evaluations;
¾ Review employee actions to monitor compliance and identify violations;
¾ Enforce procedures once a violation occurs.

16‐1 Diligence and Reasonable Basis
Q72‐1 ★★Meshack Bradovic, CFA, was recently hired as a credit analyst at a credit rating
agency whose major clients include publicly listed companies on the local stock exchange.
One of the clients is preparing to issue new bonds to finance a major factory project.
Analysts are speculating that without the new factory the company would not survive the
onslaught of competition from increasing imports; therefore, the company is counting on
45
an upgraded credit rating to enhance the subscription level of the issue. Bradovic’s
research suggests the creditworthiness of the company has severely deteriorated over
the last year due to negative operating cash flows. Without conducting extensive
research, Bradovic’s boss puts pressure on him to upgrade the credit rating to an
investment grade rating. What course of action is most appropriate for Bradovic to
prevent any violation of the CFA Code or Standards?
A. Quit his position with the firm.
B. Upgrade the rating but note his objections in writing.
C. Disassociate with the credit rating report, the bond issue and the client.

Solution A
The boss’ insistence that all credit ratings be given an investment grade rating irrespective of the
analysis undertaken indicates a systemic disregard for due diligence, reasonable basis and true
representation. This shows a total disregard for the CFA Standards. Bradovic’s best course of
action is to resign, as the company’s current practice of giving false credit ratings is likely to
continue.

Q73‐1 ★Joyce La Valle, CFA is a portfolio manager at a global bank. La Valle has been told she
should use a specific vendor for equity investment research that has been approved by
the bank's headquarters. As La Valle is located in a different country, she is uncomfortable
with the validity of the research provided by this vendor when it applies to her country
and would like to use a local vendor on whom she has conducted due diligence. Which of
the following actions concerning the research vendor should La Valle most likely take to
avoid violating the CFA Institute Standards of Professional Conduct?
A. Use the local research vendor.
B. Use the bank‐approved research vendor.
C. Use both the local and the bank‐approved research vendors.

Solution: A
When a member has reason to suspect that either secondary or third‐party research or
information comes from a source that lacks a sound basis, he/she must not rely on that
information as indicated by Standard V(A) Diligence and Reasonable Basis.

Q74‐1 ★★Kirsten Kelso, CFA, is a research analyst at an independent research firm. Kelso is
part of a team of analysts who focus on the automobile industry. Recently, Kelso
disagreed with two research "sell" recommendations written by her team even though
she felt confident the research process was properly conducted. In discussions with
several clients, Kelso states "even though my name is on the sell reports, these stocks are
a buy because sales and share prices for both auto companies will rise significantly due to
strong demand for their vehicles." Concerning the "sell" recommendations, which of
Kelso's following actions would most likely violate the CFA Institute Standards of
Professional Conduct? (Mock79‐7)
A. Dissociating from the report
B. Distinguishing between fact and opinion
46
C. Sharing her personal opinion of the stocks

Solution: C. The analyst can express her disagreement with the team by documenting her
difference of opinion, but it is inappropriate for the analyst to make selective disclosure.
Members and candidates must make every effort to treat all individual and institutional clients in
a fair and impartial manner.

Q75‐1 ★Sallie Lewis, CFA, is a research analyst covering the mining industry. Along with other
analysts, Lewis visited the primary mine of Gold Rush Mines (GR). During the visit, a
major piece of equipment failed and Lewis overheard an unidentified employee state that
production would be stalled for six months. Lewis immediately filed a sell
recommendation on GR without any additional research. Has Lewis violated any CFA
Institute Standards?
A. No.
B. Yes, with respect to diligence and reasonable basis.
C. Yes, with respect to material nonpublic information.

Solution: B
Lewis must investigate the reliability of the information before making an investment
recommendation based on the information.

Q76‐1 After work each day, Shinichi Takada, CFA, runs a popular Internet blog where he
comments on micro‐cap stocks. The blog includes biology of Takada with his education
and employment history. He receives no compensation for the blog. On the blog, Takada
recommends purchases and sales of stocks based upon astrology. When blogging, Takada
least likely violates CFA Institute Standard relating to:
A. Fair Dealing.
B. Loyalty, Prudence, and Care.

Solution: A
Takada’s use of astrology as a research methodology violates the Standards relating to Loyalty,
Prudence, and Care as well as Diligence and Reasonable Basis. His research methodology and
blog may also reflect poorly on his employer and cause the employer harm. Takada is least likely
to violate the Standard relating to Fair Dealing because the blog is a method of mass
communication that makes Takada’s investment recommendations available to all readers
simultaneously.

Q77‐1 ★★Rodney Rodrigues, CFA, is responsible for identifying managers to manage specific
asset classes for his firm. In selecting external advisers or subadvisers, Rodrigues reviews
the adviser’s investment process, established code of ethics, the quality of their published
return information, and their compliance and internal control procedures. In completing
his review, Rodrigues most likely violated the CFA Institute Standards of Professional
Conduct regarding his due diligence on: （2012 Mock85）
47
A. adherence to strategy.
B. performance measures.
C. internal control procedures.

Correct Solution: A
A is correct because Standard V (A) Diligence and Reasonable Basis applies to the level of review
necessary in selecting an external adviser or subadviser and would include reviewing the
adviser’s adherence to its stated strategy.

Q78‐1 Kirsten Kelso, CFA, is a research analyst at an independent research firm. Kelso is part of a
team of analysts who focus on the automobile industry. Recently, Kelso disagreed with
two research sell recommendations written by her team even though she felt confident
the research process was properly conducted. In a webcast open to all institutional but
not retail clients, Kelso states “even though my name is on the sell reports, these stocks
are a buy in part because sales and share prices for both auto companies will rise
significantly due to strong demand for their vehicles.” Kelso’s actions would least likely
violate which of the following CFA Institute Standards of Professional Conduct? （2012
Mock84）
A. Fair Dealing
B. Communication with Clients
C. Diligence and Reasonable Basis

Solution: C
C is correct because the recommendation is based on a reasonable and adequate research
process, so the analyst could follow the research team’s opinion, as required by Standard V (A)
Diligence and Reasonable Basis.

Key points of Diligence and Reasonable basis：
R117‐1 ★如果是 group 的 report, 只要 opinion has a reasonable and adequate basis,
¾ 如果同意结论，就不需要从中分离；
¾ 如果不同意结论，can keep the name on the report, but should document difference
of opinion with the team, 或者，如果要求将名字移走，should document the
request of removal of the name.
R118‐1 Should check the database in a timely manner and updating her report to the client.
R119‐1 always recommend “hot” issues，违反 V(A)；always buy “hot” issues for all clients, 也
违反 suitability.
R120‐1 ★When selecting external managers，standard criteria need to be ensured:
¾ reviewing the adviser’s established code of ethics,
¾ understanding the adviser’s compliance and internal control procedures,
¾ assessing the quality of the published return information
¾ reviewing the adviser’s adherence to its stated strategy
R121‐1 Test the quality of research
¾ Have a policy requiring that all research reports be supported by reasonable and
48
adequate basis;
¾ Have detailed written guidance for proper research and due diligence;
¾ Have measurable criteria for judging the quality of research.
R122‐1 ★Members/candidates need to ensure that their firms have standardized criteria for
reviewing external information provider.
¾ measurable criteria for assessing outside providers, including the quality of
information being provided, the reasonableness and adequacy of the provider’s
collection practices, and the accuracy of the information over time.
¾ should outline how often the provider’s products are reviewed.
R123‐1 ★Quantitatively Oriented Research.
¾ Including computergenerated screening and ranking of equity securities and the
creation or valuation of derivative instruments.
¾ Models are being used for more than the back testing of investment strategies, and
the continued development of models is an important part of capital market
developments
¾ Develop detailed, written guidance that establishes minimum levels of scenario
testing of all computer‐based models used in developing, rating, and evaluating
financial instruments. The policy should contain criteria related to the breadth of
the scenarios tested, the accuracy of the output over time, and the analysis of cash
flow sensitivity to inputs.

17‐1 Communication with Clients and Prospect Clients
Q79‐1 ★Jimmi Alvarez, CFA, is the founder of an investment advisory firm serving high net
worth investors. For the past decade, Alvarez has invested his clients’ money in mid‐cap
stocks. After much research, Alvarez determines that small‐cap stocks are undervalued
and moves a portion of all of his clients’ assets into these stocks. Alvarez plans to inform
his clients of this change with their year‐end statements in three months. Has Alvarez
violated any CFA Institute Standards?
A. No.
B. Yes, with respect to misrepresentation.
C. Yes, with respect to communication with clients and prospective clients.

Solution: C
According to the Standards, members must promptly disclose to clients any changes to their
investment process. Alvarez should notify his clients promptly of the change in his investment
process and strategy.

Q80‐1 ★★Colin Caldwell, CFA, is the chief investment officer of Northwest Mutual Fund, whose
investment objective is to invest in fixed income emerging market securities. Caldwell
allocates the fund’s assets primarily to bonds of commodity producers in emerging
markets and invests in a combination of several different investments to ensure an
acceptable level of risk. The allocation is clearly disclosed in all fund communications.
High volatility in the commodities markets at the start of the year makes Caldwell
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pessimistic about returns, so he shifts the fund into emerging market and U.S.
government securities, positions he maintains at the end of the year. This change is noted
in the next annual report to fund shareholders. Caldwell’s investment change least likely
violated the CFA Institute Code of Ethics and Standards of Professional Conduct
concerning: （2012 Mock84）
A. diversification.
B. communication with clients.
C. investments outside his mandate.

Solution: A
A is correct because the investment officer has invested in a combination of several different
investments to ensure an acceptable level of risk rather than having all assets in a single
investment, and he has sought a reasonable amount of diversification. However, the shift into
emerging market and U.S. government securities was communicated to clients in the annual
report and not on an ongoing basis, in violation of Standard V (B) Communication with Clients
and Prospective Clients. Additionally, the investment officer has not followed the investment
style previously communicated to fund investors (i.e., to invest in fixed income emerging market
securities), specifically, when he invested in U.S. government securities, a violation of Standard III
(C) Suitability.

Key points of Communication with Clients and Prospective Clients:
R124‐1 Content: Basic format and general principles, relevant factors, opinion vs. fact.
R125‐1 ★交流有很多方式，包括 in‐person recommendation, telephone conversation, media
broadcast, or transmission by computer (e.g., on the Internet);
R126‐1 Brief communications must be supported by background reports or data that can be
made available to interested parties on request;
R127‐1 If recommendations are contained in capsule form (such as a recommended stock list),
members/candidates should notify clients that additional information and analyses are
available from the producer of the report;
R128‐1 ★在之前做过充分调查后，report writer 可以 omit 一些不重要得部分，但是 clearly
stipulate the limits to the scope of the report. Must disclose the omitions.
R129‐1 Changes in style, ceilings, committee, universe of investment should disclose to the
clients and prospect clients.
R130‐1 Distinguish between statistical conjecture (opinion) and facts.

18‐1 Record Retention
Q81‐1 Guillermo Sandoval, CFA, owns an asset management firm with offices downtown, To
minimize rent expenses, each year Sandoval ships the previous year’s research records to
a nearby warehouse. There, the reports are digitized and stored in both electronic and
hard‐copy forms. After five years, all paper copies are destroyed and only electronic
copies are retained. Are Sandoval’s record‐retention procedures in compliance with the
CFA Institute Standards of Practice?
A. Yes.
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B. No, because he did not retain the copies in his offices.
C. No, because he failed to retain the original documents.

Solution: A
The Standards do not require on‐site storage.

Q82‐1 ★An analyst made a recommendation. As required by the firm, all documents written on
paper are destroyed in five years but the documents in hard disk should be retained for
ten years. The analyst recorded all documents in a movable hard disk while keeping paper
documents as required. Did the analyst comply with the Standards?
A. Yes, because he keep record retention for a sufficient period.
B. No, because he destroyed paper documents in less than seven years.
C. No, because he should not use a movable hard disk to record documents.

Solution: A
Trap: Seven years is recommended not required if no legal requirement for record retention.

Key points of Record Retention:
R131‐1 ★必须保留得出投资结论和投资操作的所有研究记录，这些记录是公司的财产；
¾ 如果当地没有明确的规定，CFA 协会要求记录必须保留 7 年;
¾ If applicable law requires 5‐year record, 5‐year record retention is OK.
R132‐1 Records can be maintained either in hard copy or electronic form;
R133‐1 Without re‐creating the records at the new firm, the member/candidate can’t use
historical recommendations or research reports created at the previous firm;
R134‐1 ★Performance of past firm’s
¾ Cannot use without supporting documentation
¾ For future use, the member/candidate must re‐create the supporting records at the
new firm with information: 1) gathered through public sources; 2) or directly from
the covered company and not from memory or sources obtained at the previous
employer. (unless with permission of prior employer)

19‐1 Disclosure of Conflicts
Q83‐1 ★★Yao Tsang, CFA, has a large percentage of his net worth invested in the Australian
mining company Outback Mines, which he has held for many years. Tsang is in the
process of moving to a new employer where he will be responsible for initiating research
on U.S. domestic mining companies. Shortly after his move, Tsang is asked to complete a
research report on Outback Mines. In order to meet the CFA Institute Standards of
Professional Conduct concerning his stock holding, which of the following is the most
appropriate action for Tsang to take?
A. Disclose his stock holding to his employer and to clients.
B. Sell his stock holdings to eliminate any potential conflict of interest.
C. Refuse to write the report and ask his employer to assign another analyst to complete the
analysis.
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Solution: A
Even though the best practice is to avoid conflicts, when conflicts cannot be reasonably avoided,
full disclosure should be made as required by Standard VI (A). As the stock in question has been
held for many years, it may not be practical to sell it due to things like tax consequences. Since
the analyst has been hired to initiate coverage of mining companies, it is unlikely that another
analyst at that firm would be as competent in completing a research report on mining
companies.

Q84‐1 As the Managing Director of a commercial bank, a CFA charterholder sat on a board
meeting of a publicly listed company that the bank had lent a large sum of money. The
purpose of the board meeting was to renegotiate the terms of the loan due to the
pending restructuring of the company. The next day, all of the Managing Director’s shares
of the publicly listed company are sold on the stock exchange, the sell order having been
given two days prior to the meeting. According to the Standards of Practice Handbook,
the CFA charterholder was least likely in violation of which CFA Institute Standards of
A. Disclosure of Conflicts.
C. Material Nonpublic Information.

Solution: B
The Candidate did not violate Standard VI (B) Priority of Transactions as he was only trading on
his own account, not those of his clients or employer.

Q85‐1 Carolina Ochoa, CFA, is the chief financial officer at Pantagonia Computing. Ochoa is
currently the subject of an inquiry by Pantagonia’s corporate investigations department.
The inquiry is the result of an anonymous complaint accusing Ochoa of falsifying travel
expenses for senior management related to a government contract. According to the CFA
Institute Code of Ethics and Standards of Professional Conduct, it is most appropriate for
Ochoa to disclose the allegations:（2012 Mock84）
A. on her Professional Conduct Statement.
B. to CFA Institute when the investigation concludes.
C. to CFA Institute if the allegations are proven correct.

Solution: A
A is correct because members and candidates must self‐disclose on the annual Professional
Conduct Statement all matters that question their professional conduct, such as involvement in
civil litigation or criminal investigations or being the subject of a written complaint.

Q86‐1 ★★Beth Kozniak, a CFA candidate, is an independent licensed real estate broker and a
well‐known property investor. She is currently brokering the sale of a commercial
property on behalf of a client in financial distress. If the client’s building is not sold within
30 days, he will lose the building to the bank. A year earlier, another client of Kozniak’s
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had expressed interest in purchasing this same property. However, she is unable to
contact this client, nor has she discovered any other potential buyers. Given her
distressed client’s limited time frame, Kozniak purchases the property herself and
foregoes any sales commission. Six months later, she sells the property for a nice profit to
the client who had earlier expressed interest in the property. Does Kozniak most likely
violate the CFA Institute Standards of Professional Conduct? （2012 Mock83）
A. No
B. Yes, she did not disclose her potential conflicts of interest to either client.
C. Yes, she profited on the real estate to the detriment of her financially stressed client.

Solution: A
A is correct because Kozniak does not appear to have violated any CFA Institute Standards of
Professional Conduct. Because she is known in the market for investing and brokering property
and both parties have worked with Kozniak in the past, both parties would know of her interests.
In addition, in both cases she acts for her own account as a primary investor, not as a broker. She
buys the property for her own portfolio and then sells the property from her own portfolio.
Therefore, Kozniak did not violate Standard VI (A) Disclosure of Conflicts. When she purchased
the property for her portfolio, she saved her client from losing the building to the bank and did
not charge a sales commission. Because the sale of the property to her other client did not take
place until six months after her purchase and she was unable to contact the client who had
earlier expressed interest prior to her purchase, she cannot be accused of violating any loyalty,
prudence, or care to either client (Standard III (A) Loyalty, Prudence, and Care).

Q87‐1 ★Raymond Ortiz, CFA, provides investment advice to high‐net‐worth investors. Ortiz has
just completed an analysis of Continental Wheat, a manufacturer of wheat‐based food
products. He rated the company a long‐term hold for investors seeking growth and
income. Ortiz’s analysis included a review of the company’s management team, financial
data, pro forma financial positions, dividends and dividend policy, and a comparison of
Continental with its competitors. Although he does not tell anyone, five years ago, Ortiz
worked for and managed the commodities derivatives trading unit of Continental. As part
of his compensation at Continental, he received stock, which he still owns. Based upon
his research, Ortiz recommends Continental to clients who have a moderate risk
tolerance. Two weeks later Continental announces its quarterly earnings are 30% less
than a year ago. Consequently, shares of Continental drop by 50%. Ortiz most likely
violated the CFA Institute Code of Ethics and Standards of Professional Conduct related to
his stock: （2012 Mock84）
A. research.
B. ownership.
C. recommendation.

Solution: B
B is correct because there is a violation of Standard VI (A) Disclosure of Conflicts; the analyst
worked for Continental and still has ties to the company in the form of his stock ownership.

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Q88‐1 ★Jamison is a junior research analyst with Howard & Howard, a brokerage and
investment banking firm. Howard & Howard's mergers and acquisitions department has
represented the Britland Company in all of its acquisitions for the past 20 years. Two of
Howard & Howard's senior officers are directors of various Britland subsidiaries. Jamison
has been asked to write a research report on Britland. What is the best course of action
for her to follow? （原版书 Reading2‐3）
A. Jamison may write the report but must refrain from expressing any opinions because of the
special relationships between the two companies.
B. Jamison should not write the report because the two Howard & Howard officers serve as
directors for subsidiaries of Britland.
C. Jamison may write the report if she discloses the special relationships with the company in
the report.

Solution：C
This question involves Standard VI(A)—Disclosure of Conflicts. The question establishes a conflict
of interest in which an analyst, Jamison, is asked to write a research report on a company that is
a client of the analyst's employer. In addition, two directors of the company are senior officers of
Jamison's employer. Both facts establish that there are conflicts of interest that must be
disclosed by Jamison in her research report. Answer B is incorrect because an analyst is not
prevented from writing a report simply because of the special relationship the analyst's
employer has with the company as long as that relationship is disclosed. Answer A is incorrect
because whether or not Jamison expresses any opinions in the report is irrelevant to her duty to
disclose a conflict of interest. Not expressing opinions does not relieve the analyst of the
responsibility to disclose the special relationships between the two companies.

Key points of Disclosure of interest：
R135‐1 ★Members and candidates mush make full and fair disclosure of all matters that could
reasonably be expected to impair their independence and objectivity or interfere with
respective duties to their clients. Members and candidates must ensure that such
disclosures are prominent, delivered in plain language, and communicate the relevant
information effectively.
R136‐1 ★Best practice is to avoid conflicts of interest when possible; and when conflicts cannot
be reasonably avoided, disclosure of their existence is necessary. 必须披露在董事会的
任职情况，否则违反了 VI(A)；个人持有股票的事实必须对外披露，否则违反了 VI(A)。
R137‐1 If inadvertently have conflict, disclose to clients, potential clients, and employers all
actual and potential conflicts of interest
R138‐1 ★ Special compensation arrangements, such as bonuses based on short‐term
performance criteria, commissions, incentive fees, performance fees, and referral fees,
are potentially in conflict with client’s interests，应作及时地披露；if employers not
permit to disclose, should separate from such arrangement, even quitting the job.
R139‐1 Disclose all matters that reasonably could be expected to impair the
member/candidate’s objectivity allows clients and prospects to judge motives and
possible biases for themselves.
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R140‐1 如果和雇主之间存在冲突，must report them promptly so that the employer and the
member/candidate can resolve them as quickly and effectively as possible.
R141‐1 If a member or candidate manages a portfolio for which the fee is based on a share of
capital gains or capital appreciation (a performance fee), this information should be
disclosed to clients.
R142‐1 If a member/candidate, or a member/candidate’s firm has outstanding agent options to
buy stock as part of the compensation package for corporate financing activities, the
amount and expiration date of these options should be disclosed as a footnote to any
research report published by the member or candidate’s firm.
R143‐1 ★If asked to cover the company, when inherit the shares of the company in subject, can
write report but should disclose, OR best to assign another to follow up the company.
An exception is that you are the only researcher with exception to Q86‐1
R144‐1 ★Disclosure of performance arrangement
¾ Firms are encouraged to include information on compensation package in firms’
promotional literature.
¾ If fee based on capital gains or capital appreciation (a performance fee), should
disclose;
¾ If outstanding agent options exist for the performance incentives, should disclose
the amount and expiration date of these options as a footnote to any research
report published.

20‐1 Referral Fees
Q89‐1 ★Yip Wai Yin, a CFA Candidate, is an independent mutual fund sales agent. For every
front‐end load product she promotes, Yip receives a portion of the front‐end fee as
commission at the time of sale. For every back‐end load fund she sells, Yip receives a
smaller commission paid at the end of the year. Yip always informs her clients she is paid
a commission as an agent, but does not provide details of the compensation structure.
When pitching her favored front‐end load product line, she tells clients 20% of her
commission is always invested in the same fund as proof of her confidence in the fund
she recommends. Which CFA Code of Standards with regard to Conflicts of Interest does
Yip least likely violate?
A. Referral Fees.
B. Disclosure of Conflicts.
C. Priority of Transactions.

Solution: C
Yip’s investments do not adversely affect the interest of the clients and therefore do not violate
the Priority of Transactions requirement. A Candidate having the same investment positions does
not always create a conflict of interest and in some instances, having an aligned investment
portfolio can be beneficial to the client.

Q90‐1 ★Fred Brubacher, CFA, is an analyst at Van City Bank (VCB). Brubacher receives
compensation for referrals to the banks brokerage and personal financial‐planning
55
divisions. His recent referrals are long‐time clients from his previous employer, and
Brubacher does not mention VCB’s referral arrangement. Does Brubacher violate any CFA
Institute Standards?
A. No.
B. Yes, with respect to misrepresentation.
C. Yes, with respect to conflicts of interest.

Solution: C
Compensation or other benefits received for the recommendation of products or services
represents a conflict of interest. According to the Standards, Brubacher must disclose the referral
fee arrangement.

Q91‐1 Which of the following statements is a stated purpose of disclosure in Standard
VI(C)—Referral Fees? （原版书 Reading2‐25）
A. Disclosure will allow the client to request discounted service fees.
B. Disclosure will help the client evaluate any possible partiality shown in the recommendation
of services.
C. Disclosure means advising a prospective client about the referral arrangement once a
formal client relationship has been established.

Solution: B
Answer B gives one of the two primary reasons listed in the Handbook for disclosing referral fees
to clients under Standard VI(C)¬Referral Fees. (The other is to allow clients and employers to
evaluate the full cost of the services.) Answer A is inconsistent because Standard VI(C) does not
require members or candidates to discount their fees when they receive referral fees. Answer C
is inconsistent with Standard VI(C) because disclosure of referral fees, to be effective, should be
made to prospective clients before entering into a formal client relationship with them.

Key points of Referral Fee：
R145‐1 disclosure 的目的在于：1）any partiality shown in any recommendation of services ；2）
the full cost of the services;
R146‐1 Disclose to the clients being referred and employer if necessary;
R147‐1 ★must disclose the nature of the consideration or benefits, Consideration includes all
fees, whether paid in cash, in soft dollars, or in kind;
R148‐1 Summary: disclosure of referral fee to clients or employers
Situations Employer Clients and prospects
Inter‐firm referral √ √
Inter‐department referral × √
Salesperson promotion × ×

Funds manager promotion × ×(best practice √)

21‐1 Priority of Transaction
Q92‐1 ★Teresa Avila, CFA, is a micro cap investment analyst at a hedge fund. The fund requires
56
Avila to hold any securities that she recommends for the fund in her own account as well.
The president of the fund has stated, “We require our analysts to eat their own cooking”.
As Avila has such a small account, whenever she trades for her own portfolio, she
combines the transactions with those of the hedge fund, so that she is sure to have her
account aligned with the fund. Has Avila violated any CFA Institute Standards of
A. No.
B. Yes, related to Misconduct.
C. Yes, related to Priority of Transactions.

Solution: C
Standard VI (B) requires that investment transactions for clients and employers have priority
over transactions in which members have beneficial ownership. By executing her own accounts
transactions with those of the hedge fund, the analyst has violated this standard. Micro cap
securities can be thinly traded and easily influenced by changes in the volume of activity, so the
analyst may benefit when she combines her transactions with the funds, and she should let the
fund execute its orders before she makes changes to her account.

Q93‐1 ★Eric Pantoja is enrolled as a candidate in the CFA examination program. He works as an
assistant for Chehalis Investments (CI). Pantoja saw CI’s purchase list and purchased
several of the recommended stocks. Pantoja least likely violates the CFA Institute
Standard relating to:
A. Misconduct.

Solution: C
Pantoja least likely violates the Standard relating to Diligence and Reasonable Care because he is
taking investment actions on his own behalf rather than on behalf of clients. His actions violate
the Standards relating to Priority of Transactions (he trades ahead of his employer and its clients),
Loyalty to Employer (his actions cause harm to his employer), and Misconduct (his actions reflect
adversely on his professional integrity).

Q94‐1 ★Spencer Rivers, CFA charterholder, manages the accounts of an institution, the
employer and his parents. His father does not pay for the investment service fee. When
IPOs become available, how should he do?
A. Allocate to the institution client and to the employer.
B. Allocate to the institution client, his father and the employer.
C. Allocate to the institution client, the employer and his father

Solution: A
Investment transaction for clients must have priory over investment transactions for employers.
Although his father dose not pay for the investment service fee, his father’s account still is not
client comparable to other clients (normal fee‐paying account).
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Q95‐1 ★★Kazuya Kato, CFA, is a widely followed economist at a global investment bank. When
Kato opines on economic trends, markets react by moving stock valuations considerably.
When Kato received information of a temporary oversupply of rare earth metals, he
issued a forecast that price trends for rare earth metals would be down significantly on a
long‐term basis. Kato also secretly sold his report to a widely followed Internet site. Prior
to issuing this forecast, Kato emailed all portfolio managers at his bank with a copy of his
report indicating that his opinion would be reversed shortly so there would be trading
opportunities. Kato least likely violated which of the following CFA Institute Code of Ethics
and Standards of Professional Conduct?
A. Market Manipulation.

Solution: B
The Priority of Transactions Standard has not been violated as it relates to investment
transactions for clients and employers having priority over Member/Candidate transactions.
There is no indication in this case that transactions have occurred as a result of the report being
issued by the economist. Although it is reasonable to expect there will be transactions, it is only
when these happen that a violation will have occurred.

Q96‐1 ★A broker overheard that his firm was going to execute a block of large order on a thinly
traded stock. The order was so large that it would pull the stock price to a historically high
level. He retuned and made a front‐running. Which of the Standards did he violate?
A. Standard II (A): Material Non‐public Information
B. Standard VI (B): Priority of Transactions
C. Both Standard II(A): Material Non‐public Information and Standrd VI(B): Priority of
transactions

Solution: C
The activity his firm intends to do will significantly influence the price of that stock, so it is
considered an MNI. He should place his clients and employer’s interest before himself. So he
violates Standard VI (B): Priority of Transactions.

Q97‐1 Chan Liu, CFA, is the new research manager at the Pacific MicroCap Fund. Liu observed
the following activities after she published a research report on a thinly traded micro cap
stock that included a “buy” recommendation: （2012 Mock84）
z Pacific traders purchased the stock for Pacific’s proprietary account and then
purchased the same stock for all client accounts; and
z Pacific marketing department employees disseminated positive, but false,
information about this stock in widely read Internet forums.
Liu notes the stock’s price increased more than 50% within a period of two days and was
then sold for Pacific’s account. Which of the following steps is most appropriate for Liu to
take to avoid violating the CFA Institute Code of Ethics and Standards of Professional
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Conduct?
A. Report the observed activities to her employer.
B. Remove her name from the micro cap stock research report.
C. Publicly refute the false information posted on Internet forums.

Solution: A
A is correct because certain staff at Liu’s employer appear to be engaged in front running, a
violation of Standard VI (B) Priority of Transactions, and market manipulation, a violation of
Standard II (B) Market Manipulation. If Liu observes these violations without taking steps to
notify her employer, she will be in violation of Standard I (A) Knowledge of the Law. Liu should
know that the conduct observed is likely a violation of applicable laws, rules, and regulations and
is a violation of the CFA Institute Code and Standards. Her first step, therefore, should be to
attempt to stop the behavior by bringing it to the attention of the employer through a supervisor
or the firm’s compliance department. Inaction may be construed as participation or assistance in
the illegal or unethical conduct.

Q98‐1 ★Margie Germainne, CFA, is a risk management consultant who has been asked by a
small investment bank to recommend policies to prevent bank employees from front
running client orders. These clients generally invest in one or more of the bank’s large cap
equity unit trusts. To ensure compliance with the CFA Institute Standards of Professional
Conduct, Germainne should least likely recommend which of the following? Employees
should be restricted from trading: （2012 Mock83）
A. equity related securities.
B. without prior permission.
C. during established time periods.

Solution : A
A is correct because while Standard VI (B) Priority of Transactions is designed to prevent any
potential conflict of interest or the appearance of a conflict of interest with respect to personal
transactions, it does not ban employees from trading securities. A ban on all equity related
securities could be excessively restrictive to employees and unnecessary if appropriate personal
transaction policies and procedures are in place.

Key points of Priority of Transaction:
R149‐1 Clients>employer>individual
R150‐1 ★Transactions for clients and employers must have priority over transactions in
securities or other investments of which a member or candidate is the beneficial owner
so that such personal transactions do not adversely affect the interests of their clients or
employers.
R151‐1 ★Family accounts
¾ Those are client accounts should be treated like any other firm account and should
neither be given special treatment nor be disadvantaged because of the family
relationship.
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¾ If a member/candidate has a beneficial ownership in the account, however, the
member or candidate may be subject to pre‐clearance or reporting requirements of
the employer or applicable law.
R152‐1 Although conflicts of interest exist, nothing is inherently unethical about individual
managers, advisers, or mutual fund employees making money from personal
investments as long as:
¾ (1) the client is not disadvantaged by the trade,
¾ (2) the investment professional does not benefit personally from trades undertaken for
clients,
¾ (3) the investment professional complies with applicable regulatory requirements.
R153‐1 Limited participation in equity IPOs
R154‐1 Restrictions on private placements
R155‐1 Disclosure of holdings in which the employee has a beneficial interest.
R156‐1 如果 analyst 在发布分析报告后得第 7 天进行交易，是否违反？不违反
R157‐1 如果 analyst 在发布分析报告之前进行交易，可能违反 3 条 standard（priority of
transaction, material nonpublic information 和 responsibility of supervisor.

22‐1 Responsibilities as a CFA Institute Member or CFA Candidate
Q99‐1 ★The basic structure for enforcing the CFA Institute Code and Standards under its
Professional Conduct Program is not formed by which of the following? The CFA
Institute’s:
A. Bylaws
B. Rules of procedures
C. Board of Governors

Solution: C
Although the Board of Governors maintains oversight and responsibility for the PCP, the
Institute’s Bylaws and Rules of Procedure form the basic structure for enforcement of the Code
and Standards.

Q100‐1 Tammi Holmberg is enrolled to take the Level I CFA exam. While taking the exam, the
candidate on Holmberg's immediate right took a stretch break and a piece of paper from
his pocket fell onto Holmberg's desk. Holmberg glanced at the paper and realized there
was information written on the paper, which included a formula Holmberg needed for the
question she was working on. Holmberg had not memorized this formula and could not
complete the question without this information. Holmberg pushed the paper off her desk
and used the formula to complete the question. According to the CFA Institute Code of
Ethics and Standards of Professional Conduct, Holmberg most likely:
A. compromised her exam.
B. was free to act on the information that fell on her desk.
C. is responsible for notifying exam proctors of her neighbor's violation.

Solution: C
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Holmberg's conduct compromised the validity of her exam and violated Standard VII (A). Her
conduct was also a violation of the rules and regulations of the CFA Program, the Candidate
pledge, and the CFA Institute Code and Standards.

Q101‐1 ★A CFA charterholder is the fund manager for a non‐profit organization. During a
presentation regarding the restructuring of their investment portfolio’s asset allocation,
the Head of the Finance Committee questions the manager. As part of his response, the
manager states, “I am a CFA charterholder. I know what I’m talking about, and you should
do what I say”. According to the Standards of Practice Handbook, has the charterholder
violated any of the CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, Responsibilities as a CFA Institute Member.
C. Yes, Communication with Clients and Prospective Clients.

Solution: B
由于他在和 Head of the Finance Committee 交流的时候说“I am a CFA charterholder. I know
what I’m talking about, and you should do what I say”，这违反了 Responsibilities as a CFA
Institute Member，因为作为 CFA charterholder 应该对自己的 designation 和 reference 做出合
理的表述，例如“CFA charterholders achieve better performance results”，而不能没有任何原
因的，而且毫不客气的，牛气冲冲地只说我是 CFA charterholder，我知道我自己在说什么，
你只要按照我说的去做就可以了。这样违反了 Responsibilities as a CFA Institute Member。

Q102‐1 Dorre, CFA, just founded her own investment company. On a TV advertisement, she
said: “through the CFA program, I improved my investment skill”. On that TV show, she
also assured that all her client’s investment return will increase with higher level
investment skill gained from CFA program. According to Code and Ethics and Standards of
Practice Handbook, which of following is allowed?
Improve my investment skill Increase clients’ investment return
A. yes no
B. no no
C. no yes

Solution: A
Standard VII is intended to prevent promotional efforts that make promises or guarantees that
are tied to the designation. Statement referencing CFA institute, the CFA designation, or the CFA
program must not over‐promise the competency of an individual or over promise future
investment result. “Improving skill” is allowed as long as this statement is true and is not linked
to performance or does not imply superior ability. The “assure” statement prominently links the
first statement to superior performance is not allowed.

Q103‐1 The Standards of Practice Handbook is least likely to require a member to disclose
which of the following to clients and prospective clients?
A. Underwriting relationships.
B. Service on a publicly‐traded company’s board of directors.
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C. Obligation to abide by CFA Institute Code of Ethics and Standards of Professional Conduct.

Solution: C
The Standards do not require members to disclose to clients and prospective clients their
obligation to abide by the Code and Standards.

Q104‐1 ★Vishal Chandarana, an unemployed research analyst, recently registered for the CFA
Level I exam. After two months of intense interviewing, he accepts a job with a stock
brokerage company in a different region of the country. While posting on his social
networking webpage he brags about how being a CFA Candidate really helped him get a
job. He adds he was so relieved his new employer didn't ask about his being fired from his
former employer. Which CFA Code of Ethics or Standards of Professional Conduct did
Chandarana least likely violate? (Mock79‐14)
A. Integrity
B. Duties to Employers
C. Reference to the CFA Program

Solution: C. There is no evidence that Chandarana violated Standard VII(B) with regard to his
being a CFA Candidate. It does appear that Chandarana did not act with integrity when he hid
information that could potentially harm his new employer's reputation, thus violating Standard
I(C), Professionalism (Misrepresentation), and Standard IV(A), Duty to Employers (Loyalty).

Q105‐1 ★Vishal Chandarana, an unemployed research analyst, recently registered for the CFA
Level I exam. After two months of intense interviewing, he accepts a job with a stock
brokerage company in a different region of the country. Chandarana posts on a social
media blog how being a CFA candidate really helped him get a job. He also notes how
relieved he was when his new employer didn’t ask him about being fired from his former
employer. Which CFA Institute Code of Ethics or Standards of Professional Conduct did
Chandarana least likely violate? （2012 Mock83）
A. Misconduct
B. Loyalty to Employers
C. Reference to the CFA Program

Solution: C
C is correct because there is no evidence Chandarana violated Standard VII (B) with regard to his
being a CFA candidate. Specifically, Chandarana does not overstate his competency or imply he
will achieve superior performance as a result of his CFA designation. It does appear Chandarana
did not act with integrity when he hid information that could potentially harm his new
employer’s reputation, thus violating Standard I (D) Professionalism (Misconduct) and Standard
IV (A) Duty to Employers (Loyalty).

Q106‐1 Pia Nilsson is a sole proprietor investment advisor. The economic recession has reduced
the number of clients she advises and caused revenues to decline. As a result, Nilsson has
not paid her CFA Institute membership dues for the past two years. When a national
62
financial publication recently interviewed Nilsson, she indicated that up until two years
ago she had been a CFA charterholder and a CFA Institute member in good standing. In
addition, she stated the completion of the CFA Program enhanced her portfolio
management skills and enabled her to achieve superior returns on behalf of her clients.
Which of Nilsson's following actions most likely violated the CFA Institute Standards of
Professional Conduct? （2012 Mock83）
A. Nonpayment of CFA Institute membership dues
B. Attributing her superior returns to participation in the CFA Program
C. Indicating that being a CFA charterholder has enhanced her portfolio management skills

Solution: B
Because it is a violation of Standard VII (B) Responsibilities as a CFA Institute Member or CFA
Candidate to claim the CFA charter helped her to achieve superior returns.

Q107‐1 Rule has worked as a portfolio manager for a large investment management firm for the
past 10 years. Rule earned his CFA charter last year and has decided to open his own
investment management firm. After leaving his current employer, Rule creates some
marketing material for his new firm. He states in the material, "In earning the CFA charter,
a highly regarded credential in the investment management industry, I further enhanced
the portfolio management skills learned during my professional career. While completing
the examination process in three consecutive years, I consistently received the highest
possible scores on the topics of Ethics, Alternative Investments, and Portfolio
Management." Has Rule violated Standard VII(B)—Reference to CFA Institute, the CFA
Designation, and the CFA Program in his marketing material? （原版书 Reading2‐29）
A. Rule violated Standard VII(B) in stating that he completed the exams in three consecutive
years.
B. Rule violated Standard VII(B) in stating that he received the highest scores in the topics of
Ethics, Alternative Investments, and Portfolio Management.
C. Rule did not violate Standard VII(B).

Solution: B
According to Standard VII(B)—Reference to CFA institute, the CFA Designation, and the (TA
Program, CFA Program candidates do not receive their actual scores on the exam. Topic and
subtopic results are grouped into three broad categories, and the exam is graded only as "pass"
or "fail”. Although a candidate may have achieved a topical score of "above 70 percent," she or
he cannot factually state that she or he received the highest possible score because that
information is not reported. Thus, answer C is incorrect. Answer A is incorrect as long as the
member or candidate actually completed the exams consecutively. Standard VII(B) does not
prohibit the communication of factual information about completing the CFA Program in three
consecutive years.

63
Key points of Responsibilities as a CFA Institute Member/Candidate：
R158‐1 ★Activities belong to violations:
¾ Cheating on the CFA exam or other CFA Institute’s exams.
¾ Not complying with rules and policies of the CFA program.
¾ Divulging the confidential information to others.
¾ Improperly using the designation.
¾ Misrepresenting information on PCS of the CFA.
¾ Cheating on the CFA exam, violate VII(A), I(D).
¾ Cheating on the CPA, violate I(D).
R159‐1 VII(A) 会员或候选人的行为（Conduct as Members and Candidates)。成员或候选人不
得从事任何有损于 CFA 协会和 CFA 称号名誉和声望，以及 CFA 考试公正性和含金量
的行为。CFA 考试或者其它任何考试中作弊都属于违反。
R160‐1 over‐promise the competency of an individual 和 over‐promise future investment results
as lower risk, higher performance 都不可以。
R161‐1 The order of CFA and CPA has nothing to do.
R162‐1 如果要获得使用 CFA 称号的权利，必须满足几个条件：是 CFA 协会的在册会员，按
时交会费（Membership due），依次通过 CFA 的三次考试，按时完成并提交年度述职
报告（annual conduct report）
R163‐1 在名片上，CFA 的字体大小不能超过自己名字的字体大小
R164‐1 CFA 是形容词，不是名词，不能说有几个 CFAs
R165‐1 唯一正确的表述是：CFA，Chartered Financial Analyst；其他说法都不对，如 cfa, C.F.A,
CFA‐typed, China‐CFA
R166‐1 CFA mustn't be used as part of the name of the firm.
R167‐1 Shoundn't cite the expected date of exam completion and award of charter.
R168‐1 只通过三级考试，没有持证的人不可以自称 CFA.
R169‐1 广告中，如果说明三次考试一次就通过，只要陈述是事实就可以了；但是，如果说
CFA 持证人有高超的投资业绩，则违反了 VII (B)；
R170‐1 如果好几年没交会费，虽然以前是持证人，在名片后如果写 CFA，违反了 VII (B)。
R171‐1 成员不需要向 clients and prospective clients 披露 duty to comply with the Code。
R172‐1 持证人可以在个人的名片和个人的 letter head 上使用 CFA，但公司不可以。

23‐1 GIPS Verification
Q108‐1 ABC Investment Management Company claims compliance with GIPS, but the GIPS
compliance is not verified. Does this company comply with GIPS?
A. Yes.
B. No, because the company should be verified.
C. No, because the internal control personnel should conduct the verification work.

Solution: A.
Firms are encouraged to pursue independent verification from a third party on a firm‐wide basis,
verification is not an obligation.

24‐1 GIPS Composite
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Q109‐1 ★A GIPS‐compliant investment firm presents its historical record for a global growth
stock composite. Which of the following method is least likely to violate the CFA institute
Standard?
A. Excluded terminated accounts.
B. No portfolio below minimum asset level is included.
C. Use a top‐performing portfolio as representative of firm’s results.

Solution: B
According to GIPS composite construction, A, C are not permitted.

Q110‐1 Which of the following is a key characteristic of the Global Investment Performance
Standards (GIPS)? The GIPS Standards:
A. rely on the integrity of input data.
B. consist of required provisions for firms to follow to achieve best practice.
C. must be applied with the goal of achieving excellence in performance presentation.

Solution: A
A key characteristic of the Standards is that the Standards rely on the integrity of input data. The
accuracy of input data is critical to the accuracy of the performance presentation.

Q111‐1 ★★Fundamental Asset Managers (FAM) claims compliance with the CFA Institute
Global Investment Performance Standards (GIPS) and manages both discretionary and
nondiscretionary accounts. Alma Dzuya, CFA, includes all discretionary, fee‐paying value
and growth accounts when constructing a composite for FAM. Does the composite Dzuya
constructed most likely meet GIPS criteria? (Mock79‐11)
A. Yes.
B. No, because value and growth accounts are included,
C. No, because nondiscretionary accounts are not included.

Solution: B.
A composite must include all actual, fee‐paying, discretionary portfolios managed in accordance
with the same investment mandate, objective, or strategy. By including both value and growth
accounts, the composite is made up of portfolios with different investment mandates or
strategies.

Q112‐1 ★★For periods beginning on or after 1 January 2011, the aggregate fair value of total
firm assets most likely includes all: （2012 Mock83）
A. fee‐paying discretionary accounts.
B. fee‐ and non‐fee‐paying discretionary accounts.
C. fee‐ and non‐fee‐paying discretionary and non‐discretionary accounts.

Solution: C
C is correct because for periods beginning on or after 1 January 2011, total firm assets must
include the aggregate fair value of all discretionary and non‐discretionary assets managed by the
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firm. This includes both fee‐paying and non‐fee‐paying portfolios (0.A.13).

Q113‐1 Firms claiming GIPS compliance must make every reasonable effort to provide a
compliant presentation to which of the following? （2012 Mock83）
A. Existing clients
B. Prospective clients
C. Both existing and prospective clients

Solution: B
B is correct because GIPS standards (0.A.9) state “firms must make every reasonable effort to
provide a compliant presentation to all prospective clients. As long as a prospective client has
received a compliant presentation within the previous 12 months, the firm has met this
requirement. It is a GIPS recommendation, not a requirement, that all clients receive a compliant
presentation on an annual basis (0.B.4).

Key points of GIPS：
R173‐1 In the past, a variety of reporting procedures were misleading at best. Some include:
¾ Representative accounts‐showing a top‐performing protfolio as representative of firm's
results.
¾ Survivorship bias‐excluding wark performance.
¾ Varing time periods‐ showing performance for selected time periods with outstanding
returns.
R174‐1 GIPS apply to investment management firms and are intended to serve prospective and
existing clients of investment firms.
R175‐1 Fundamentals of compliance: firm‐wide basis, voluntary
R176‐1 ★关于 composite
¾ Composite definition: a grouping of individual discretionary portfolios representing a
similar investment strategy, objective, or mandate.
¾ Include all actual fee‐paying, discretionary portfolios in composites for a minimum of
five years or since firm or composite inception. After presenting five years of
compliant data , the firm must add annual performance each year going forward up
to a minimum of ten years.
¾ The firm asset is the aggregate of Fair Value of discretionary and un‐discretionary
portfolios, including fee‐paying and non‐fee‐paying portfolios.
¾ Terminated portfolio must be included in the composite.
¾ calculation methodology: portfolio 使用 time‐weighted and geometrically linked；
composite 使用 asset‐weighted
¾ 不可以用 model 或者 simulated 来报告收益率
R177‐1 Historical performance record
¾ Firms are required to present, at a minimum, 5 years of annual investment
performance that is compliant with the GIPS standards.
¾ If the firm or composite has been in existence less that 5 years, the firm must
present performance since the inception of the firm or composite.
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¾ After a firm presents 5 years of compliant history, the firm must present additional
annual performance up to 10 years, at a minimum. For example, after a firm
presents 5 years of compliant history, the firm must add an additional year of
performance each year so that after 5 years of claiming compliance, the firm
presents a 10‐year performance record.
¾ Firms may link a non‐GIPS‐compliant performance is presented after 1 January 2000
and the firm discloses the periods of noncompliance and explains how the
presentation is not in compliance with the GIPS.
R178‐1 ★关于 verification
¾ Verification 是自愿的(GIPS verification: recommended, not required.)，Without such
a report from the verifier, the firm cannot state that its claim of compliance with the
GIPS Standards has been verified.
¾ A verification report must confirm that: the firm has complied with all the composite
construction requirements of the GIPS standards on a firm‐wide basis.
¾ The firm's processes and procedures are designed to calculate and present
performance results in compliance with the GIPS standards.
¾ Verification of construction procedures and calculation method on firm‐wide not on
specific composite.
¾ Verified by independent third party
R179‐1 100% compliance: 绝对不说 “expect for”
R180‐1 should disclose currency, creation data, a list of composite on require minimum asset
level。
R181‐1 Nine major sections of the GIPS standards: fundamental compliance, input data,
calculation methodology, composite construction, disclosure, reporting, real estate,
private equity, warped fee/separately managed account （注意没有 alternative
investment）
¾ P/E: closed‐end fund
¾ R/E: not including debt, CMBS, REITs; not include open‐end and ever‐green
R182‐1 ★Summary of GIPS
¾ Why GIPS: representative account, time period, cherry‐picking
¾ GIPS Objectives: to obtain worldwide acceptance of a standard for performance and
presentation; to ensure accurate and consistent investment performance data for
reporting, record keeping, marketing, and presentation; to promote fair, global
competition among investment firms for all markets without creating barriers to
entry for new firms; to foster the notion of industry self‐regulation on a global basis.
¾ GIPS standards apply to Investment firms, and clients and prospects of investment
firms is served by the standards
¾ fundamentals of compliance: firm‐wide basis, voluntary
¾ The firm must be defined as an investment firm, subsidiary, or division held out to
clients and prospective clients as a distinct business entity.
¾ Total firm assets must be the aggregate of the Fair Value of all discretionary and
nondiscretionary assets under management within the defined firm. This includes
both fee‐paying and non‐fee‐paying assets.
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¾ ★ composite definition: a grouping of individual discretionary portfolios

representing a similar investment strategy, objective, or mandate.
¾ The GIPS standards require that firms must include all actual fee‐paying,
discretionary portfolios in at least one composite for a minimum of five years or
since firm or composite inception. cannot use model or simulated; Although
non‐fee‐paying discretionary portfolios may be included in a composite,
nondiscretionary portfolios are not permitted to be included in a firm’s composites
¾ calculation methodology: portfolio with time‐weighted, composite with
asset‐weighted
¾ Firms are encouraged to implement independent third‐party verification. The
verification report must be issued to the whole firm and cannot be carried out for a
single composite
¾ ★The GIPS standards require firms to follow the local law when the two conflicts,
but must disclose the situation and reasons
¾ The GIPS standards are divided into Nine sections that reflect the basic elements
involved in presenting performance information: fundamentals of compliance, input
data, calculation methodology, composite construction, disclosures, presentation
and reporting, REAL ESTATE, real estate , private equity, wrap fee/Seperately
Managed Account
¾ Firms are encouraged to comply with the recommendations and must comply with
all applicable requirements of the GIPS standards.
¾ The composite return is calculated using the asset‐weighted average of the
performance results
¾ The firm cannot represent that it is “in compliance with the Global Investment
Performance Standards except for...”, should be 100% ‐compliance
¾ The firm cannot represent that the performance is calculated according to GIPS with
exception to GIPS‐compliant firm to disclose performance to specific clients
¾ Terminated portfolio must be included in the composite of past performance
¾ Can set a minimum asset level consistently and should disclose if any
¾ Firms must list “discontinued” composites on the firm’s list of composites for at least
5 years after discontinuation.
¾ Real estate includes land, buildings under development, completed buildings, and
other structures or improvements held for investment purposes. The provisions
apply irrespective of whether a real estate asset or investment is producing revenue.
They also apply to real estate investments.
¾ These provisions of Private Equity apply to private equity investment other than
open‐ended or evergreen funds.

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2‐Quantitatives
1‐2 Interest rate
Q1‐3 ★The nominal (quoted) annual interest rate on an automobile loan is 10%. The effective
annual rate of the loan is 10.47%. The frequency of compounding periods per year for
the loan is closest to:（mock85‐19）
A. weekly.
B. monthly.
C. quarterly.

Solutions: B
The effective annual return is: EAR = (1 + Periodic interest rate)m‐1
For weekly compounding, (1 + 0.10 / 52)52 — 1 = 0.10506 = 10.50%
For monthly compounding, (1 + 0.10 / 12)12 — 1 = 0.10471 = 10.47%
For quarterly compounding, (1 + 0.10 / 4)4 — 1 = 0.10381 = 10.38%
Thus, the correct answer is monthly compounding.
R1‐2 Required rate of return: the return that investors and savers require to get them to willing
lend their funds; affected by the supply and demand of funds in the market.
¾ Discount rate: the interest rate we use to discount payments to be made in the future.
¾ Opportunity cost: the benefit from the second best choice at the same risk level.
¾ B 两个证券公司对同一个股票估值，使用相同的现金流预测，得出不一样的价格。
原因：使用的 required rate of return 不一样。
R2‐2 Decompose required rate of return:
Interest rate = real risk free rate + expected inflation rate + risk premium
¾ Real risk free rate: compensation for consumption delay
¾ Expected inflation rate: 要注意不是 historical inflation rate, 因为利率是向前看的。
¾ Risk premium: Default risk premium, liquidity risk premium, maturity risk premium.
∙Real risk free risk=(1)
∙Nominal risk free risk=(1)+(2), also called risk free rate.
∙Required rate of return=(1)+(2)+(3)
R3‐2 ★EAR calculation: EAR = (1 + periodic rate) − 1

m
¾ If interests are compounded annually, given the quoted interest rate , r,
FV = PV(1 + r) N
¾ If interests are compounded m times per year,
FV = PV(1 + r/m) mn
¾ When we calculate the future value of continuously compounding, the formula is
FV = PVe nr
¾ Annuity due calculation: treated as ordinary annuity and simply multiple the resulting
PV by (1+I/Y).
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2‐2 Time Value of Money
Q2‐3 Rachel Kelly, 24 years old, is planning for retirement. Kelly’s annual consumption
expenditures are currently $30,000. She assumes her consumption expenditures will
increase with the rate of inflation, and she expects the average inflation rate is 3% until
she retires at the age of 68.Given a life expectancy of 93 years and constant
expenditures in retirement, the amount Kelly must accumulate by her retirement date,
assuming an 8% rate of return on her retirement account, is closest to:
A. $423,000.
B. $1,176,000.
C. $1,552,000.

Solution: B
The annual expense will go to 30,000×1.0344=110,143.57. Since her expenditure is constant after
she retires. PMT=‐110，143.57，FV=0，T=25，I/Y=8， CPT PV=1,175,758.

Q3‐3 A couple plans to pay their child’s college tuition for 4 years starting 18 years from now.
The current annual cost of college is C$7,000, and they expect this cost to rise at an
annual rate of 5 percent. In their planning, they assume that they can earn 6% annually.
How much must they put aside each year, starting next year, if they plan to make 17
equal payments?

Solution:
Step1: calculate the CF since 18,
CF18=7000*(1+5%)18=16846, CF19=7000*(1+5%)19=17689,…
Step 2: PV of tuition (4 CF since 18) at year 17
C$16,846 (1,06)‐1 + C$17,689 (1.06)‐2 + C$18,573 (1.06)‐3 + C$19,502 (1.064 )‐4=$62,677
Step 3: Calculate PMT
Input FV=C$62,677, PV=0, I/Y=6, N=17, then CPT PMT= C$2,221.58
In summary, the couple will need to put aside C$2,221.58 each year if they start next year and
make 17 equal payments.

Q4‐3 For planning purposes, an individual wants to be able to spend €80,000 per year, at the
end of each year, for an anticipated 25 years in retirement. In order to fund this
retirement account, he will make annual deposits of €6,608 at the end of each of his
working years. What is the minimum number of such deposits he will need to make to
fund his desired retirement? Use 6% interest compounded annually for all calculations.
A. 29 payments
B. 40 payments
C. 51 payments

Solution: B
B is correct. Using a financial calculator, first calculate the needed funds at retirement:
N = 25, I/Y = 6, PMT = 80,000, FV = 0; calculate PV to be 1,022,668.
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Then use 1,022,668 as the FV of the accumulation phase annuity as per:
I/Y = 6, PV = 0, PMT = 6,608, FV = 1,022,668; calculate N. N is 40.

Key points:
R4‐2 EAR(考察方法：计算——算 EAR，或者是算计息次数)
¾ EAR = (1+ periodic rate)m – 1
¾ 那么如果是 semi, m=2; 如果是 quarterly, m=4; 如是 weekly, m=52
¾ 如果是连续复利，公式则变为 EAR = e annual int yr
R5‐2 Required interest rate on a security 的组成
¾ Real risk‐free rate = nominal risk‐free rate + expected inflation rate
¾ Required interest rate on a security = nominal risk‐free rate + default risk premium +
liquidity premium + maturity risk premium
R6‐2 Annuities 的计算：FV, PV, required payment
¾ N = number of periods
¾ I/Y = interest rate per period
¾ PMT = amount of each periodic payment
¾ FV= 0
¾ Compute (CPT) present value (PV)
考察方法：计算——N, I/Y, PMT, FV, PV 中任意给定四个，求另外一个

3‐2 Time‐weighted and Money‐weighted Return
Q5‐3 ★A fund’s holding period yield is as follows:
Quarter 1 10%
Quarter 2 9%
Quarter 3 3%
The value of the fund is $6,700,000 at the beginning of the fourth quarter, and the
investor receives dividend of $200,000 at the end of 2007. At the end of the fourth
quarter, the value of the fund is $6,100,000, the time‐weighted return of 2007 is:
A. 13%.
B. 15%.
C. 16%.

Solution: C
Yield in Quarter 4: (200,000+6,100,000‐6,700,000)/6,700,000= ‐5.97%
Time‐weighted return: (1+10%)(1+9%)(1+3%)(1‐5.97%) – 1=16%

Q6‐3 ★★An analyst collected the return of a portfolio for consecutive three years:
Year 1 10%
Year 2 4%
Year 3 ‐2%
The fund manager made an investment at the beginning of every year. Compared with
the money‐weighted return, the time‐weight return is:
A. Greater.
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B. Less.
C. Same.

Solution: A
Time‐weighted return: 3
1.1× 1.04 × 0.98 − 1 = 3.8%
Money‐weighted return is influenced by the timing of cash inflows and outflows, giving a lower
weight to the later cash flows. So compared with the money‐weighted return, the time‐weighted
return is greater.

Q7‐3 Which of the following statements least likely represents a characteristic of the
time‐weighted rate of return? It is:
A. not affected by the timing of cash flows.
B. used to measure the compound rate of growth of $1 over a stated measurement period.
C. defined as the internal rate of return on an investment portfolio, taking into account all
inflows and outflows.

Solution: C.
The money‐weighted rate of return is the IRR of an investment’s net cash flows.
Use the following data to answer Questions 12 and 13.（B1‐156）
Assume an investor purchases a share of stock for $50 at time t = 0, and another share at $65 at
time t = 1, and at the end of Year 1 and Year 2, the stock paid a $2 dividend. Also, at the end of
Year 2, the investor sold both shares for $70 each.

Key points:
R7‐2 HPR1‐n=(1+HPR1)*(1+HPR2)*…*(1+HPRn)
R8‐2 TWRR and MWRR:
¾ Time‐weighted rate of return:几何平均
¾ Money‐weighted rate of return: IRR
¾ TWRR: Not be influenced by the timing and direction of CF, so it’s an objective indicator
of investment managers’ performance;
¾ MWRR: However, if can control the timing and direction, MWRR is the best indicator to
measure the return.

4‐2 Returns comparison and transformation
Q8‐3 ★An analyst gathered the following information about a common stock investment:
Date Amount
Stock purchase (1) 15 January 2006 €86.00
Stock purchase (1) 15 January 2007 €94.00
Stock sale (2@106) 15 January 2008 €212.00
The stock does not pay a dividend. The money‐weighted and time‐weighted rates of return on
the investment are closest to:

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Money‐weighted rate Time‐weighted rate
of return of return
A. 11.02% 8.53%
B. 11.02% 11.02%
C. 11.60% 11.02%

Solution: C
Cash outflow of €86 occurs at t=0, another outflow of €94 occurs at t=1, and an inflow of €212
occurs at t=2. Using a financial calculator, the IRR of these cash flows is 11.60%. The
time‐weighted rate of return is the geometric mean of the annual rates of return in the stock
irrespective of the amounts invested in the various time periods. The rate of return for the first
period is (94 ‐ 86)/ 86 = 9.3023% and for the second period is (106 ‐ 94)/ 94 = 12.7660%. The
geometric mean is (1.093023 x 1.127660) 0.5 ‐ 1 = 11.02%.

Q9‐3 An investor purchases one share of stock for $85. Exactly one year later, the company
pays a dividend of $2.00 per share. This is followed by two more annual dividends of
$2.25 and $2.75 in successive years. Upon receiving the third dividend, the investor sells
the share for $100. The money‐weighted rate of return on this investment is closest to:
A. 7.97%.
B. 8.15%.
C. 8.63%.

Solution: B
The money‐weighted rate of return is the internal rate of return (IRR) of the cash flows
associated with the investment. Use the cash flow (CF) function of a financial calculator and
enter CF0 = –85, CF1 = 2, CF2 = 2.25, and CF3 = 102.75. Calculate the IRR. The answer is 8.15%.

Q10‐3 An investor purchases one share of stock for $85. Exactly one year later, the company
pays a dividend of $2.00 per share. This is followed by two more annual dividends of
$2.25 and $2.75 in successive years. Upon receiving the third dividend, the investor sells
the share for $100. The money‐weighted rate of return on this investment is closest to:
(mock84‐29)
A. 7.97%.
B. 8.15%.
C. 8.63%.

Solution: B
The money‐weighted rate of return is the internal rate of return (IRR) of the cash flows associated with
the investment. Use the cash flow (CF) function of a financial calculator and enter CF0 = –85, CF1 = 2, CF2
= 2.25, and CF3 = 102.75. Calculate the IRR. The answer is 8.15%.

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Money‐Weighted Return 掌握概念及公式：
R1‐2 概念：the money weighted return applies the concept of IRR to investment portfolio. The
IRR based on the cash flows related to the investment.
R2‐2 步骤及公式：Firstly, determine the timing of each cash flow; then, using the calculator to
compute IRR, or using geometric mean.
R3‐2 ★Only appropriate for the investment when manager can control the timing and direction
of CF.
R4‐2 rBD is not representative of the return earned by the investor, the reason is as following:
¾ It is simple interest, not compounded interest
¾ It's based on face value, not purchase price‐‐it is not the true yields
¾ It's based on 360‐day year, rather than 365.
R5‐2 ★Performance measurement with means
¾ The geometric mean of past annual return is the appropriate measure of past
performance
¾ The arithmetic mean is the statistically best estimator of the next year’s returns

5‐2 Skewness
Q11‐3 A distribution with mode 2.6, median 2.2, mean 2, the distribution can be described as:
A. long tail in the left and positively skewed.
B. long tail in the right and negatively skewed.
C. long tail in the left and negatively skewed.

Solution: C
As mean < median < mode, the distribution has long tail in the left and negatively skewed.

6‐2 Kurtosis
Q12‐3 An analyst gathered the following information about the return distribution for two
portfolios during the same time period：
Portfolio skewness kurtosis
A ‐1.3 2.2
B 0.5 3.5
The analyst stated that the distribution for Portfolio A is more peaked than a normal distribution
and that the distribution for Portfolio B has a long tail on the left side of the distribution. Is the
analyst’s statement correct with respect to:
Porfolio A Portfolio B
A. No No
B. No Yes
C. Yes No

Solution: A
The kurtosis of a normal distribution is 3. If the kurtosis is greater than 3, the distribution is more
peaked than a distribution with a kurtosis less than 3. A distribution with a positive skewness has
long right tail while that with a negative skewness has a long left tail.
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Q13‐3 Which of the following statements is least likely accurate?
A. A distribution has leptokurtic if its kurtosis is 3.
B. A lognormal distribution has a positive skewness.
C. A lognormal distribution is bounded by zero at left tail.

Solution: A.
A normal distribution has a kurtosis of 3. Leptokurtic describes a distribution that is more peaked
than a normal distribution when kurtosis is more than 3. A lognormal distribution has a range
that is greater than zero.

Skewness 掌握概念：
R6‐2 概念：refer to the extent to which a distribution is not symmetrical.
R7‐2 种类：Positively skewed – skewed right and long right tail (mean>median>mode)
Negatively skewed – skewed left and long lower tail (mean<median<mode)
R8‐2 理解：Positive skewness is good choice for investors.(Because the surprise values are
mostly on the positive side.)
R9‐2 Kurtosis 掌握概念：
¾ 概念：refer to the extent to which a distribution is not symmetrical.
¾ 种类：leptokurtic，normal and platykurtic
理解：kurtosis>3，也就是 leptokurtic 代表尖峰肥尾:more peak, extreme outcome is
greater 可能在考试中会和 skew 合并考核综合知识

7‐2 Describe, calculate, and interpret quartiles, quintiles, deciles, and percentiles
Q14‐3 Which of the following statements is most accurate?

A. The first quintile generally exceeds the median.
B. The first quintile generally exceeds the first decile.
C. The first quintile generally exceeds the first quartile.

Solution: B
The first quintile is the 20th percentile. The first decile is the 10th percentile, the first quartile is
the 25th percentile, and the median is the 50th percentile. While it is possible that these various
percentiles or some subsets of them be equal (for example the 10th percentile possibly could be
equal to the 20th percentile), in general the order from smallest to largest would be: first decile,
first quintile, first quartile, median.

8‐2 MAD 和 Var 计算
Q15‐3 An analyst gathered the following annual return information about a portfolio since its
inception on 1 January 2003:

75
Year Portfolio return
2003 8.6%
2004 11.2%
2005 12.9%
2006 15.1%
2007 ‐9.4%
The portfolio’s mean absolute deviation and variance of annual returns, respectively, for
the five‐year period are closest to:
Mean absolute deviation variance
A. 6.83% 77.5
B. 6.83% 96.8
C. 7.68% 77.5

Solution: A
1. Compute the mean portfolio return = (8.6 + 11.2 + 12.9 + 15.1 ‐ 9.4)/ 5 = 7.68%；
2. MAD = (|8.6‐7.68| + |11.2‐7.68| + |12.9‐7.68| + |15.1‐7.68| + |‐9.4 ‐7.68|) / 5 = 6.83%
3. Variance= [(8.6 – 7.68)2 + (11.2 – 7.68)2 + (12.9 – 7.68)2 + (‐9.4 – 7.68)2] / 5 ≈ 77.5
4. The population variance calculation is appropriate because the analyst is analyzing all the
annual returns on the portfolio since its inception.

R10‐2 Measure of dispersion:
¾ Range=highest value‐lowest value
N
∑X i −μ
¾ MAD = i =1

N
∑(X i − μ)
¾ σ =
2 i =1
(for population)
N
∑(X i − X)
¾ S = 2 i =1
(for sample)
n −1
¾ ★Coefficient of variation: measures the amount of dispersion in a distribution relative
to the distribution's mean. It can be used to measure the risk per unit of return.
R11‐2 MAD 和 Variance 掌握计算和比较：
n
∑X i -X
¾ MAD = i =1

n
76
∑(X i - X )2
¾ s = 2 i =1

n −1
¾ ★理解：variance 比 MAD 要好，因为 variance 是连续的，处处可导。MAD 计算的
是绝对值，相对比较繁琐。但是 variance 和 MAD 都是表示风险的。考到 MAD 的
计算，这是好几年没有预估到的考点，一定要注意到 MAD＜= σ

9‐2 HPR 计算
Q16‐3 An analyst gathered the following information about a common stock investment:
Date Amount
Stock purchase 15 January 2007 48.00
Cash dividend 14 July 2007 4.00
Stock sale 15 July 2007 54.00
The holding period return on the common stock investment is closest to:
A. 12.5%
B. 20.8%
C. 25.0%

Solution: B
HPR = (P1 – P0 + D1)/P0, where P0 is the initial investment, P1 is the price received at the end of
the holding period, and D1 is the cash paid by the investment at the end of the holding period. In
this case: HPR = (54 ‐ 48 + 4) / 48 = 20.8%. The HPR is not annualized for holding periods shorter
than a year.

HPR 掌握概念及公式：
R12‐2 概念：Total return an investor earns between the purchase date and the sale or maturity
date.
P1 ‐ P0 + D0 P1 + D0
R13‐2 公式：HPR = = ‐1
P0 P0
Notes: 这个指标没有年度化，所以不同的 HPR 是不具可比性的。

10‐2 Relative Frequencies and Cumulative Relative Frequencies
Q17‐3 An analyst gathered the following information about the price‐earning (P/E) ratios for
the common stocks held in a foundation’s portfolio:
Interval P/E range Frequency
I 8.00‐16.00 24
II 16.00‐24.00 48
III 24.00‐30.00 22
IV 30.00‐38.00 16
The relative frequency and the cumulative relative frequency, respectively, for interval III are
closest to:
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Relative frequency Cumulative relative frequency
A. 20% 85%
B. 22% 36%
C. 22% 85%

Solution: A
The relative frequency is the number of observations in an interval divided by the total number
of observations. For Interval III, relative frequency = 22 / 110 = 20%. The cumulative relative
frequency is the sum of the relative frequencies of the relevant class and all the classes before it.
For Interval III, the cumulative relative frequency = (24 + 48 + 22) / 110 =85.45%≈ 85%.

Relative Frequencies and Cumulative Relative Frequencies：
R14‐2 Relative frequency is calculated by dividing the absolute frequency of each return interval
by the total number of observations.
R15‐2 Cumulative relative frequency is calculated by summing the absolute or relative
frequencies at the lowest interval and progressing through the highest.

11‐2 Properties of Probability
Q18‐3 ★If an analyst estimates the probability of an event for which there is no historical
record, this probability is best described as：
A. Objective.
B. Empirical.
C. Subjective.

Solution: A

Q19‐3 ★★Label each of the following as an empirical, a priori, or subjective probability.(原版
书 R8‐3)
A. The probability that U.S. stock returns exceed long‐term corporate bond returns over a
10‐year period, based on Ibbotson Associates data.
B. An updated (posterior) probability of an event arrived at using Bayes' formula and the
perceived prior probability of the event.
C. The probability of a particular outcome when exactly 12 equally likely possible outcomes
exist.
D. A historical probability of default for double‐B rated bonds, adjusted to reflect your
perceptions of changes in the quality of double‐B rated issuance.

Solution：
A. The probability is an empirical probability.
B. The probability is a subjective probability.
C. The probability is an a priori probability.
D. The probability is a subjective probability.

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Solution: C
An empirical probability cannot be calculated for an event not in the historical record. In this case,
the analyst can make a personal assessment of the probability of the event without reference to
any particular data. This is a subjective probability.

Q20‐3 The probability of price change is as follows:
Price change 0.8
Price increase 0.4
What is the probability that the two situations happen simultaneously?
A. 0.32
B. 0.4
C. 0.8

Solution: B.
注意陷阱！Price change includes price increase.

Q21‐3 ★If events A and B are mutually exclusive, then:
A. P(A|B)=P(A).
B. P(AB) = P(A) ×P(B).
C. P(A or B)= P(A) + P(B).

Solution: C
There is no intersection of events when events are mutually exclusive, P(AB) = P(A) x P(B) is only
true for independent events. Note that since A and B are mutually exclusive (cannot both
happen), P(A |B) and P(AB) must both be equal to zero.

Q22‐3 If two events, A and B, are independent and the probability of A does not equal the
probability of B (i.e., P (A)≠ P(B)), then the probability of event A given that event B
has occurred (i.e., P(A∣B)) is most accurately described as:（Mock 79 – 24）
A. P(A)
B. P(B)
C. P(A I B)

Solution: A
Two events, A and B, are independent if and only if P(Al B)=P(A) or, equivalently, P(A I B)=P(B).
The wording of the question precludes P(A)=P(B); therefore, responses B and C cannot be
correct.

Q23‐3 Assume that a stock’s price over the next two periods is as shown below.
Time=0 Time=1 Time=2
S0=80 Su=88 Suu=96.8
Sd=72 Sud,du=79.2
Sdd=64.8
79
The initial value of the stock is $80. The probability of an up move in any given period is 75% and
the probability of a down move in any given period is 25%. Using the binomial model, the
probability that the stock’s price will be $79.20 at the end of two periods is closest to:
A. 18.75%.
B. 37.50%.
C. 56.25%.

Correct answer: B
Across two periods, there are four possibilities: an up move followed by an up move ($96.8 end
value), an up move followed by a down move ($79.2 end value), a down move followed by an up
move ($79.2 end value), and a down move followed by a down move ($64.8 end value).
The probability of an up move followed by a down move is 0.75 times 0.25 equals 0.1875. The
probability of a down move followed by an up move is 0.25 times 0.75 also equals 0.1875. Both
of these sequences result in an end value of $79.2. Therefore, the probability of an end value of
$79.2 is (0.1875 + 0.1875) = 37.5%.

Properties of Probability 掌握基本公式：
R16‐2 “×” rule: P(AB)=P(B)×P(A|B); if A and B are independent: P(A|B)=P(A), P(B|A)=P(B), P(AB)
= P(A) × P(B)
R17‐2 “+” rule: P(A or B)=P(A) + P(B) ‐ P(AB)
R18‐2 mutually exclusive vs. independent events
¾ For mutually exclusive events: P(A or B) = P(A)+ P(B)
¾ For independent events: P(A or B) = P(A)+ P(B)‐ P(A)×P(B)
¾ 注意：不独立未必互斥，互斥一定不独立。
R19‐2 Odds for an event: 表示一个事件发生的相对可能性。
¾ Odds for an event: P(E)/(1‐P(E))
¾ Odds against an event: (1‐P(E)) /P(E)

12‐2 Uniform Random Variable and a Binomial Random Variable
Q24‐3 Which of the following best describes the discrete uniform distribution? The discrete
uniform distribution:
A. has a finite number of specified outcomes.
B. is based on the Bernoulli random variable.
C. has an infinite number of unspecified outcomes.

Solution: A
The discrete uniform distribution is known as the simplest of all probability distributions. It is
made up of a finite number of specified outcomes and each outcome is equally likely.

Uniform Random Variable and A Binomial Random Variable 掌握概念及理解：
R20‐2 Uniform random variable is one for which the probabilities for all possible outcomes for a
discrete random variable are equal. F(Xn) = np(X)
R21‐2 Binomial random variable defined as the number of “successes” in a given number of
80
trials, whereby the outcome can be either “success” or “failure”.
x x n‐ x
P(x)=P(X=x)= C n p (1 ‐ p)

13‐2 Central Limit Theorem
Q25‐3 According to the central limit theorem, a sampling distribution of the sample mean will
be approximately normal only if the:
A. sample size n is large.
B. variance of the underlying distribution is known.
C. population mean of the underlying distribution is known.

Solution: A
According to the central limit theorem, the sample mean of a population described by any
probability distribution can be determined if the sample size n is sufficiently large, e.g., equal to
or greater than 30. This process is used to estimate the population mean and standard deviation,
which usually are unknown.

Q26‐3 If the distribution of the population from which the samples are drawn is positively
skewed, and given that the sample size is large, the sampling distribution of the sample
means is most likely: (mock84‐20)
A. A. approximately normally distributed.
B. B. to have a variance equal to that of the entire population.
C. C. to have a mean smaller than the mean of the entire population.

Solution: A
The central limit theorem establishes that the sampling distribution of sample means will be
approximately normal, will have a mean equal to the population mean, and will have a variance
equal to the population variance divided by the sample size.
R22‐2 Normal distribution:
¾ Standardization: if X~N(µ , σ²), then X~ N(0,1)
¾ Symmetrical distribution: skewness=0, kurtosis=3
¾ A linear combination of normally distributed random variable is also normally
distributed.
¾ The tails get thin and go to zero but extend infinitely.
R23‐2 Central Limit Theorem
¾ Definition: The sampling distribution of the sample mean approaches a normal
distribution as the sample size becomes large(>=30);
¾ The mean of sample mean distribution=μ，The variance of sample mean distribution
=σ2/n
R24‐2 Standard error of the sample mean
¾ Known population variance =σ/n1/2
¾ Unknown population variance=s/n1/2
14‐2 EAR
81
Q27‐3 A money manager has $1,000,000 to invest for one year. She has identified two
alternative one‐year certificates of deposit (CD) shown below:
Compounding frequency Annual interest rate
CD1 Quarterly 8.00%
CD2 Continuously 7.95%
Which CD has the highest effective annual rate (EAR) and how much interest will it earn?
Highest EAR Interest earned
A. CD1 $82,432
B. CD2 $82,746
C. CD2 $83,287

Solution: B
Quarterly: EAR= 1.024 ‐ 1= 1.082432 ‐ 1 = 0.082432 = 8.2432%
Interest = $1,000,000×8.2432% = $82,432
Continuous: EAR = e0.0795x1 = 1.082746 = 8.2746%
Interest = $1,000,000 x 8.2746% = $82,746
Therefore, the CD paying 7.95% compounded continuously offers the highest effective annual
rate.

R25‐2 掌握几种收益率的计算：rBD，HPY，EAY，rMM，并且知道相互之间的转化
¾ t
1). PV = FV * (1‐ rBD * )
360
¾ t
2). FV = PV * (1+ rMM * )
360
t
¾ BEY 2* 365 FV ‐ PV + D1
4).1+ HRY = (1+ ) HPR =
2 PV
¾ rBD
5). rMM =
t
1‐ * rBD
360
t t
¾ 6). FV = (1+ EAR) 365 * PV 1+ HRY = (1+ EAR) 365
t t
7). 单利时用复利时用
¾ 360 365
¾ 注：对于同一笔投资来说，rBD＜ rMM ＜EAY<Rc

15‐2 binomial model
Q28‐3 Assume that a stock’s price over the next two periods is as shown below.
Time = 0 Time = 1 Time = 2
S0 = 100 Su = 110 Suu= 121
Sd = 92 Sud,du= 101.20
Sdd= 84.64
The initial value of the stock is $100. The probability of an up move in any given period
is 40% and the probability of a down move in any given period is 60%. Using the
82
binomial model, the probability that the stock’s price will be $101.20 at the end of two
periods is closest to:
A. 16%.
B. 24%.
C. 48%.

Solution: C
Across two periods, there are four possibilities: an up move followed by an up move ($121.00
end value), an up move followed by a down move ($101.20 end value), a down move followed by
an up move ($101.20 end value), and a down move followed by a down move ($84.64 end value).
The probability of an up move followed by a down move is 0.40 times 0.60 equals 0.24.
The probability of a down move followed by an up move is 0.60 times 0.40 also equals 0.24. Both
of these sequences result in an end value of $101.20. Therefore, the probability of an end value
of $101.20 is 48%.

16‐2 Descriptive Statistics and Inferential Statistics
Q29‐3 An analyst gathered the price‐earnings ratios (P/E) for the firms in the S&P 500 and then
ranked the firms from highest to lowest P/E. She then assigned the number 1 to the
group with the lowest P/E ratios, the number 2 to the group with the second lowest P/E
ratios, and so on. The measurement scale used by the analyst is best described as:
A. ratio.
B. ordinal.
C. interval.

Solution: B
The analyst is using an ordinal scale which involves sorting data into categories based on some
characteristic, such as the firms’ P/E ratios.

Descriptive Statistics and Inferential Statistics 掌握理解：
R26‐2 Ratio, ordinal, interval, nominal 各自的意义是什么
¾ Nominal scales: weakest level of measurement, categorize data but do not rank them,
only has mode.
¾ Ordinal scales: stronger level of measurement, sort data into categories that are
ordered with respect to some characteristics. Has mode and median.
¾ Interval scales: provide not only ranking but also assurance that the differences
between scale values are equal, no absolute zero, can add and deduct.
¾ Ratio scales: the strongest level of measurement. Have absolute zero; can do all kinds of
calculations.
¾ Notes: 一般 CFA 协会会给出具体场景，让考生判断属于哪种类型

17‐2 Chebyshev’s Inequality
Q30‐3 Using Chebyshev’s inequality, what is the minimum proportion of observations from a
population of 500 that must lie within two standard deviations of the mean, regardless
83
of the shape of the distribution?
A. 71%.
B. 75%.
C. 89%.

Solution: B
Chebyshev’s inequality holds for any distribution, regardless of shape, and states that the
minimum proportion of observations located within k standard deviations of the mean is equal
to 1 ‐ 1/ k2. In this case, k=2 and l ‐ 1/4=0.75 or 75%.

R27‐2 Chebyshev’s Inequality 掌握计算及理解：
1
¾ P( x ‐ μ ≤ kσ ) ≥ 1 −
k 2 （对任意一组观测值，个体落于均值周围 k 个标准差之内的
1
概率不小于 1 − 任意 k＞1）
k2
¾ This relationship applies regardless of the shape of the distribution.

18‐2 Safety First Ratio
Q31‐3 On 1 January 2004, the value of an investor's portfolio is $89,000. The investor plans to
donate $6,000 to charity organization and pay $2,000 to his insurance account on 31
December 2004, but meanwhile he does not want the year‐end portfolio value to be
below $89,000. If the expected return on the existing portfolio is 12% with a variance of
0.0125, the safety‐first ratio that would be used to evaluate the portfolio based on Roy's
criterion is closest to:
A. 0.269
B. 0.365
C. 0.471

Solution: A
Roy's safety‐first criterion states that the optimal portfolio minimizes the probability that the
return of the portfolio falls below some minimum acceptable level. This minimum acceptable
level is called the "threshold" level. Symbolically, Roy's safety‐first criterion can be stated as:
Maximize the SFR where SFR = [E(Rp) ‐ RL] / σ
Where: Rp = portfolio return; RL = threshold level return
RL=8000/89000=8.99%, SFR = (12%‐8.99%)/(0.0125 1/2) =0.0301/0.1118=0.269

Q32‐3 If the risk‐free rate is equal to zero and the mean is less than the standard deviation,
compared with Sharp ratio, the coefficient of variation is?
A. Greater.
B. Same.
C. Less.

Solution: A
84
Sharpe ratio = expected return (mean) – risk‐free rate/standard deviation = mean/standard

deviation; CV = standard deviation/expected return. The mean is less than the standard deviation,
so compared with Sharp ratio, the coefficient of variation is GREATER.

R28‐2 SFR 掌握计算及理解：
¾ [E(Rp) ‐ RL] /σ the bigger, the better
¾ For P(Rp<RL)min, the optimal portfolio minimizes the probability that the return of
portfolio falls belw some minimum acceptable level, simply, minimize P(Rp<RL).
R29‐2 区分于 Sharpe ratio
¾ SFRatio= ⎡⎣ E(R p )-R L ⎤⎦ / σ p
¾ Sharpe ratio= ⎡ R P − RF ⎤ / sP
⎣ ⎦
¾ Sharpe ratio will be a special case of SFR if rL = rF
¾ Sharpe ratio 只能用于 Rank，没有实在含义；当小于零时，可能会得到错误的结论。

19‐2 The desirable properties of an estimator
Q33‐3 When an analyst is unsure of the underlying population distribution, which of the
following is least likely to increase the reliability of parameter estimates?
A. Increase in the sample size
B. Use of point estimates rather than confidence intervals
C. Use of the t‐distribution rather than the normal distribution to establish confidence
intervals

Solution: B
Point estimates are not as reliable as confidence interval estimates. A conservative approach to
confidence intervals relies on the t‐distribution rather than the normal distribution, and use of
the t‐distribution will increase the reliability of the confidence interval. Increasing the sample
size increases the reliability of the confidence interval. (mock83‐31)

Q34‐3 If the accuracy of a sample enhances when the size is becoming larger, which of the
characteristic does it represent?
A. Unbiasedness.
B. Consistency.
C. Effectiveness.

Solution: B
A consistent estimator is one for which the accuracy of the parameter estimate increases as the
sample size increases. Unbiasedness represents that the variance of its sampling distribution is
smaller than all the other unbiased estimators of the parameter you are trying to estimate. An
unbiased estimator is also efficient if the variance of its sampling distribution is smaller than all
the other unbiased estimators of the parameter you are trying to estimate.
85

R30‐2 Concept of sampling and estimation
¾ Methods of sampling: simple random sampling, stratified random sampling.
¾ Sampling error: sampling error of mean=sample mean‐population mean.
R31‐2 The desirable properties of an estimator：
¾ Unbiasedness: expected value of the estimator is equal to the parameter that are trying
to estimate
¾ Efficiency: for all unbiased estimators, if the sampling dispersion is smaller than any
other unbiased estimators, then this unbiased estimator is called efficient.
¾ Consistency: the accuracy of the parameter estimate increases as the sample size
increases. (the standard deviation of the parameter estimate decreases as the sample
size increases)
¾ As the sample size increases, the standard error of the sample mean falls.
R32‐2 Point estimation: the statistic, computed from sample information, which is used to
estimate the population parameter
R33‐2 Interval estimation:
¾ Level of significance （alpha）
¾ Degree of Confidence （1－alpha）
¾ Confidence Interval = [ Point Estimate +/‐ (reliability factor) ×Standard error]
R34‐2 Biases in sampling
¾ Data‐mining bias: refers to results where the statistical significance of the pattern is
overestimated because the results were found through data mining. To detect this bias,
out‐of‐sample test and economic signifcance testing.
¾ Sample selection bias: some data is systematically excluded from the analysis, usually
because of the lack of availability.
¾ Survivorship bias: usually derives from sample selection for only the existing portfolio
are included
¾ Look‐ahead bias: occurs when a study tests a relationship using sample data that was
not a available on the test date.
¾ Time‐period bias: time period over which the data is gathered is either too short or too
long. If the time period is too short, research results may reflect phenomena specific to
that time period, or perhaps even data mining.

20‐2 Bayes’ Formula
Q35‐3 As from the record of CFA Institute and GARP, the passthrough rate of CFA level I exam is
40%, and the passthrough rate of FRM exam is 50%. And as an investigation led by the
two institutes, among the people who has passed the FRM, the passthrough rate of CFA
level 1 exams is 60%. So what is the passthough rate of FRM members who has also
passed the CFA level 1 exam before?
A. 48%
B. 60%
C. 75%

86
Solution: C
P(CFA I and FRM)= P(CFA I|FRM) × P(FRM) = 60% × 50% = 30%
P(CFA I and FRM ) 30%

P ( FRM CFA I ) = = = 75%
P (CFA I ) 40%
R35‐2 Bayes’ Formula 掌握计算：

¾ Updated probability = (probability of new information for given event / unconditional
probability of new information) prior prob. of event, posterior probability（后验概率）
P( A1 ) P( B A1 )
¾ P ( A1 B) =
P( A1 ) P ( B A1 ) + P( A2 ) P( B A2 )
¾ Updated probability: By Bayes’s formula, we can update a given set of prior
probabilities for a given event in response to the arrival of new information.
P(O I)
P(I O )= × P(I)
P(O)
¾ 如果有必要，在考试中需要画出二叉树，或者是概率图形帮助解题

快速诊断仪机器说有病机器说没病

如果人真有病 0.8 0.2
如果人真没病 0.1 0.9

现一个人诊断为有病，问其真有病的概率？

21‐2 Type I and Type II Errors
Q36‐3 Which of the following statements about hypothesis testing is most accurate?
A. A type II error is to reject the null when it is actually true.
B. The significance level equals one minus the probability of a Type I error.
C. A two‐tailed test with a significance level of 5% has z‐critical values of ±1.96.

Solution: C
Type I error is the rejection of the null hypothesis when it’s actually true, while Type II error is
the failure to reject the null hypothesis when it’s actually false.Significance level (α) is the
probability of making a Type I error. Power of a test is the probability of correctly rejecting the
null hypothesis when it is false

Q37‐3 All else equal, is specifying a smaller significance level in a hypothesis test likely to
increase the probability of a:
Type I error? Type II error?
A No No
B No Yes
C Yes No

87
Solution: B
Decrease the significance level can increase type II error and decrease type I error.

Q38‐3 Which of the following decisions by an analyst would most accurately describe a Type II
error?
A. An analyst rejects a true null hypothesis.
B. An analyst rejects a false null hypothesis.
C. An analyst does not reject a false null hypothesis.

Correct answer: C
define and interpret a test statistic, a Type I and a Type II error, and a significance level, and
explain how significance levels are used in hypothesis testing. Failing to reject a false null
hypothesis results in making a Type II error.

R36‐2 Type I and Type II error
¾ Type I error: 拒真，reject the null hypothesis when it’s actually true
¾ Type II error: 取伪，fail to reject the null hypothesis when it’s actually false
¾ Significance level (α): the probability of making a Type I error
Significance level =P(Type I error)=P(H0×|H0√)
¾ Power of a test: the probability of correctly rejecting the null hypothesis when it is false
Power of a test = 1−P(Type II error)= P(H1√|H1√)
P(Type II error)=P(H1×|H1√)
¾ 要掌握 decision rule：包括 critical value 和 p value

22‐2 Hypothesis Testing
Q39‐3 When an investigator wants to test whether a particular parameter is larger than a
specific alue, the null and alternative hypothesis are best defined as:
A. H0: θ = θ0 versus Ha: θ ≠ θ0
B. H0: θ ≤ θ0 versus Ha: θ > θ0
C. H0: θ ≥ θ0 versus Ha: θ < θ0

Solution: B
A positive “hoped for” condition means that we will only reject the null (and accept the
alternative) if the evidence indicates that the population parameter is greater than θ0. Thus, H0:
θ ≤ θ0 versus Ha: θ > θ0 is the correct statement of the null and alternative hypotheses.

Q40‐3 William Adams wants to test whether the mean monthly returns over the last five years
are the same for two stocks. If he assumes that the returns distributions are normal and
have equal variances, the type of test and test statistic are best described as:
A. Paired comparisons test, t‐statistic.
B. Paired comparisons test, F‐statistic.
C. Difference in mean test, t‐statistic.

Solution: A

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Q41‐3 Independent samples drawn from normally distributed populations exhibit the following
characteristics:
Sample Size Sample mean Sample standard deviation
A 25 200 45
B 18 185 60
Assuming that the variances of the underlying populations are equal, the pooled
estimate of the sample variance is 2,678.05. The t‐test statistic appropriate to test the
hypothesis that the two population means are equal is closest to: (mock84‐29)
A. A. 0.29.
B. B. 0.94.
C. C. 1.90.

Solution: B
The t statistic for the given information (normal populations, variances assumed equal) is
calculated as:
t= (X 1 )
- X 2 - (m1 - m 2 )

æ s 2p s 2p ö 0.5
ç + ÷
ç ÷
è n1 n2 ø
Where
(n1 - 1) s12 + (n2 - 1) s12

s 2p = in this case we have:
n1 + n2 - 2
(25 - 1)452 + (18 - 1)602

s 2p = = 2678.04878
25 + 18 - 2
t= (200 - 185) - (0) = 0.9377

0.5
æ 2678.04878 2678.04878 ö
ç
ç + ÷÷
è 25 18 ø

Q42‐3 An analyst collects the following data related to paired observations for Sample A and
Sample B. Assume that both samples are drawn from normally distributed populations
and that the population variances are not known(mock83‐28).
Paired Observation Sample A Value Sample B Value
1 25 18
2 12 9
3 ‐5 ‐8
4 6 3
5 ‐8 1
The t‐statistic to test the hypothesis that the mean difference is equal to zero is closest
to:
A. 0.23.
B. 0.27.
C. 0.52.
89

Solution: C
First, calculate the mean difference:
1
d=
n
å di
Then, calculate the sample variance and the standard error of the mean difference:
2
(d - d)
sd 2
=å i
n -1
sd
sd =
n
then, calculate the t‐statistic: t = d - m d 0 sd
In this case, the mean difference is 1.4. The sample variance is 36.8. The standard error of the
mean difference is 2.712932. The t‐statistic is 0.51605.

R37‐2 Hypothesis testing:
Sample statistics − Hypothesized value
Test Statistic =
¾ stanard error of the sample statistic
¾ Test Statistic follows Normal, T, Chi Square or F distributions
¾ Test Statistic has formula. Calculate it with the sample data.
¾ This is the general formula but only for Z and T distribution
R38‐2 Student’s t‐distribution: Degrees of freedom (df)=n‐1
¾ Symmetrical
¾ Less peaked than a normal distribution (“fatter tails”)
¾ As the degrees of freedom gets larger, the shape of t‐distribution approaches
standard normal distribution
R39‐2 T‐test 和 Z‐test 的不同应用：
When sampling form a: Test Statistic
Small sample (n<30) Large sample (n>=30)
Normal distribution with know variance z‐Statistic z‐Statistic
Normal distribution with unknow variance t‐Statistic t‐Statistic/z
Nonnormal distribution with know variance not available z‐Statistic
Nonnormal distribution with unknow variance

not available t‐Statistic/z

90

Test type Assumptions Test‐statistic Critical value
H0
Normally distributed population,
x − μ0
known population variance μ=0 Z = N(0,1)
σ/ n
Normally distributed population,
x − μ0
unknown population variance μ=0 t = t(n‐1)
s/ n
Independent populations,
Mean unknown population variances μ1−μ2=0 t t(n1 + n2 ‐ 2)
hypothesis assumed equal
testing Independent populations,
unknown population variances μ1−μ2=0 t t
not assumed equal
Samples not independent,
μd=0 t = d t(n‐1)
paired comparisons test sd
for example, two returns of For example, the same population after and before
stocks in the market, the return an event, or comparison with the two different
of gas and that of oil styles, which are affected by the same macro factors.
(n − 1) s 2
Normally distributed population σ²= σ 0
2
χ2 = χ 2 (n − 1)
Variance σ 2
0
hypothesis
testing Two independent normally s12 F (n1 − 1, n2
σ1²=σ2² F = 2
distributed populations s 2

23‐2 Correlation and covariance
Q43‐3 A well‐diversified investor holds equal investments in the shares of Meyer, Inc., Johnson,
Inc., and Fairfax Enterprises. The three companies operate in the same industry and will
benefit equally from a favorable decision in a pending court case. The investor concludes
that the current stock prices for Meyer and Johnson each reflect a 15% probability that
the decision will be favorable to the industry, while the current stock price for Fairfax
reflects a 70% probability that the decision will be favorable. The most appropriate
strategy for the investor is to:
A. sell Fairfax shares and use the proceeds to purchase additional shares in Meyer and
Johnson.
B. sell both Meyer and Johnson shares and use the proceeds to purchase additional shares in
Fairfax.
C. reallocate the investment in the industry to 15% in Meyer, 15% in Johnson, and 70% in
Fairfax.

Solution: A
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The current stock prices for Meyer and Johnson each reflect a 15% probability, while Fairfax
reflects 70%. Compared with Fairfax (overvalued), the current stock prices for Meyer and
Johnson are undervalued.

Q44‐3 Which of the following statements best describes the relationship between correlation
and covariance? The correlation between two random variables is their covariance
standardized by the product of the variables:
A. variances.
B. standard deviations.
C. coefficient of variation.

Solution: B
The correlation between two random variables is equal to the covariance between the variables
divided by the product of the variables’ standard deviations.

Q45‐3 The joint probability of returns, for securities A and B, are as follows:
Joint Probability Function of Security A and Security B Returns. (Entries are joint
probabilities)
Return on security B =30% Return on security B20%
Return on security A= 25% 0.60 0
Return on security A= 20% 0 0.40
The covariance of the returns between securities A and B is closest to:
A. 3%.
B. 12%.
C. 24%.

Correct answer: B
Expected return on security A= 0.6 x 25% + 0.4 x 20% = 15% + 8% = 23%
Expected return on security B= 0.6 x 30% + 0.4 x 20% = 18% + 8% = 26%
Cov (RA, RB) = 0.6 [(25% ‐ 23%)(30% ‐ 26%)] + 0.4 [(20% ‐ 23%)(20% ‐ 26%)]
= 0.6 (2% x 4%) + 0.4 (‐3% x ‐6%)= 0. 12%.

Q46‐3 An analyst gathered information about three economic variables, He noted that
whenever variable A increased by one unit, variable B increased by 0.5 units but
variable C decreased by 0.5 units. The correlation between variables A and B and the
correlation between variables A and C respectively, are closest to:
Correlation between variables A and B Correlation between variables A and C
A 0.5 ‐1.0
B 0.5 ‐0.5
C 1.0 ‐1.0

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A. Answer A
B. Answer B
C. Answer C

Correct answer: C
The relationship between variables A and B is perfect positive correlation (1.0) and the
relationship between variables A and C is perfect negative correlation (‐1.0).

R40‐2 Covariance:
¾ Covariance measures how one random variable moves with another random variable
¾ The covariance of RA with itself is equal to the variance of RA
¾ Covariance ranges from negative infinity to positive infinity
¾ COV(X,Y) = E[(X-E(X))(Y-E(Y))]
¾ COV(X, X) = E[(X - E(X))(X - E(X))] = σ 2 (X)
¾ Cov(RA ,RB )= ∑∑ P(RA,i ,RB, j )(RA,i - ERA )(RB, j - ERB )

i j
R41‐2 Correlation:
¾ Correlation measures the linear relationship between two random variables
¾ ρ=COV(A,B) / (σAσB)
¾ Correlation has no units, ranges from –1 to +1, standardization of covariance
¾ If ρ=0, this indicates?
R42‐2 理解: c介于[‐1, 1]; d在 portfolio 中，负相关的产品进行组合可以分散风险
¾ If ρx, y =1, the two random variables have perfect positive linear correlation. This means
one random variable will move in proportion in response to the movement of another
random variable.
¾ If ρx, y =‐1, the two random variables have perfect negative linear correlation. This
means one random variable will move in proportion but in opposite direction to the
movement of another random variable.
¾ Ifρx, y =0, the two random variables have no linear correlation. This means movement of
one random variable cannot be used to predict the movement of another random
variable.

24‐2 Technical Analysis Assumption
Q47‐3 Why is technical analysis especially useful in the analysis of commodities and
currencies?
A. Valuation models cannot be used to determine fundamental intrinsic value for these
securities.
B. Government regulators are more likely to intervene in these markets.
C. These types of securities display clearer trends than equities and bonds do.

Solutions: A
Commodities and currencies do not have underlying financial statements or an income stream;
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thus, fundamental analysis is useless in determining theoretical values for them or whether they
are over‐ or undervalued.

25‐2 Charts
Q48‐3 In analyzing a price chart, high or increasing volume most likely indicates which of the
following?
A. Predicts a reversal in the price trend.
B. Predicts that a trendless period will follow.
C. Confirms a rising or declining trend in prices.

Solutions: C
Rising volume shows conviction by many market participants, which is likely to lead to a
continuation of the trend.

Q49‐3 A downtrend line is constructed by drawing a line connecting:
A. the lows of the price chart.
B. the highs of the price chart.
C. the highest high to the lowest low of the price chart.

Solutions: B
A downtrend line is constructed by drawing a line connecting the highs of the price chart.

26‐2 Chart Patterns
Q50‐3 In an inverted head and shoulders pattern, if the neckline is at €100, the shoulders at
€90, and the head at €75. The price target is closest to which of the following?
A. €50.
B. €110.
C. €125.

Solutions: C
Target = Neckline + (Neckline ‐ Head): €100 + (€100 ‐ €75) = €125

27‐2 Technical Indicators
Q51‐3 Bollinger Bands are constructed by plotting:
A. a MACD line and a signal line.
B. a moving‐average line with an uptrend line above and downtrend line below.
C. a moving‐average line with upper and lower lines that are at a set number of standard
deviations apart.

Solutions: C
Bollinger Bands consist of a moving average and a higher line representing the moving average
plus a set number of standard deviations from average price (for the same number of periods as
used to calculate the moving average) and a lower line that is a moving average minus the same
number of standard deviations.
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Q52‐3 A TRIN with a value of less than 1.0 indicates:
A. the market is in balance.
B. there is more volume in rising shares.
C. there is more volume in declining shares.

Solutions: B
A value below 1.0 is a bullish sign; it means more volume is in rising shares than in declining ones.
The TRIN is calculated as: (Advancing issues/Declining issues)/ (Volume of advancing
issues/Volume of declining issues).

28‐2 Cycles & Waves
Q53‐3 According to the U.S. presidential cycle theory, the DJIA has the best performance during
which year?
A. The presidential election year itself.
B. The first year following a presidential election.
C. The third year following a presidential election.

Solutions: C
A possible reason for the superior performance in the third year is that the U.S. presidential
election occurs, together with a number of other elections, in a four‐year cycle, so the politicians
desiring to be reelected inject money into the economy in the third year to improve their
chances of winning the following year.

Q54‐3 All of the following are names of Elliott cycles except:
A. presidential.
B. supercycle.
C. grand supercycle.

Solutions: A
This is the term for a separate cycle theory.

Q55‐3 A technical analyst has detected a price chart pattern with three segments. The left
segment shows a decline followed by a reversal to the starting price level. The middle
segment shows a more pronounced decline than in the first segment and again a
reversal to near the starting price level. The third segment is roughly a mirror image of
the first segment. This chart pattern is most accurately described as: (mock84‐32)
A. a triple bottom.
B. a head and shoulders.
C. an inverse head and shoulders.

Solutions:C
An inverse head and shoulders pattern consists of a left segment that shows a decline followed by a
reversal to the starting price level, a middle segment that shows a more pronounced decline than in the
95
first segment and again a reversal to near the starting price level, and a third segment that is roughly a
mirror image of the first segment.

R43‐2 技术分析概述
¾ Technical analysis relies on Price and Volume data.
¾ Technical analysis is the study of collective market sentiment, as expressed in buying
and selling of assets.
¾ The market price equates supply and demand at any instant. Price and volume reflect
the collective behavior of buyers and sellers.
¾ Market price reflects both rational and irrational investor behavior. This assumption
implies that the efficient markets hypothesis does not hold.
R44‐2 技术分析三大假设
¾ Supply and demand determine prices;
¾ Changes in supply and demand cause changes in prices;
¾ Prices can be projected with charts and other technical tools.
R45‐2 技术分析的作用
¾ Behavior is reflected in trends and patterns that tend to repeat and can be indentified
and used for forecasting prices.
R46‐2 技术分析的优劣势
¾ Actual price and volume data are observable and objective. Data is not subject to
assumptions or restatements. 优势
¾ In illiquid markets price and volume data might not truly reflect supply and demand.
劣势
¾ 由于缺乏可靠的估值模型以决定内在价值，技术分析特别适用于商品、外汇等资
产的分析。
R47‐2 掌握理解各类 technical analysis charts：
¾ Line Charts: Show closing prices for each period as a continuous line.
¾ Bar charts: Add the high and low prices for each trading period. Each period is displayed
as a vertical line, with the closing price indicated as a point or dash on the right side of
the line.
¾ Candlestick Charts: Display a box bounded by the opening and closing price. Box clear
表示股票涨了。Box filled 表示股票跌了。
¾ Distinction among line charts, bar charts, and candlestick charts：line chart 只包含收盘
价与连接收盘价的直线，bar chart 包含收盘价、开盘价、最高价、最低价，candlestick
chart 不仅包括 4 个价格，本身的形状颜色还代表了一段时间的涨跌大局。
¾ Charts of Price Data：方向相同时，每变化一个 box size 做一个记号，方向相反变化
超过 reversal point 就换一列做相反记号，注意横轴不代表时间，反映价格变化了
多少次，剔除了 Noise。
¾ Relative strength analysis: compare the performance of a stock with a benchmark,
usually an index.
¾ 注意 chart 的时间区间，可以是日、周，也可以是月、年。
¾ 注意 Volume 与 Trend 的关系：放量预示趋势确认，缩量预示趋势逆转。
R48‐2 学会分析使用 trend, support and resistance lines, and change in polarity
96
¾ Uptrend: Prices are consistently reaching higher highs and retracing to higher lows.
With connecting the lows of the price chart. The Longer price below the trendline, the
more meaningful the breadkdown.the forces of demand are greater than forces of
supply.
¾ Downtrend: Prices are consistently declining to lower lows and retracing to lower highs.
¾ 记忆诀窍: uptrend 是低点越来越高，downtrend 是高点越来越低。
¾ Trendline: Can help to indentify whether a trend is continuing or reversing.
¾ Change in polarity：突破 resistance level 后，resistance level 极性变化为 support level。
也就是我们平时说的阻力位一旦突破后就会成为支撑位。
R49‐2 Reversal patterns（反转图形，改变原趋势）
¾ Head and shoulders pattern is the most widely recognized reversal pattern
¾ Volume is an important indicator. A clear trend should exist before the formation of the
pattern. Shoulders should be symmetrical.
¾ For uptrend: head‐and‐shoulder, double top, triple top. For HAS, Left shoulder:上升斜
率大，量大，形成倒 V 型；Head：上升到更高位，但量下降，又下降到肩的开始
上升位（Neckline），且最低位突破了趋势线；Right shoulder: 与左肩对称，但是量
更低。
¾ 难点：Head and shoulders pattern Price target ＝ neckline ‐ (head‐neckline).Reversal
head and shoulders pattern price target = neckline (neckline – head)
¾ Triple tops and bottoms: three peaks or troughs at roughly the same price level.
R50‐2 Contunation patterns（盘整图形，突破后保持原趋势）
¾ Ascending triangle（上面为水平线，下降得越来越小，最后突破向上）；Decending
triangle（下面是水平线，上升得越来越小，最后突破向下）；symmetrical triangle
（bullish 和 bearish 寻找 consensus，突破后方向与突破前一致）
¾ Rectangle: 上下水平线，分别为支撑线和阻力线
¾ Flags and Pennants are similar to rectangles and triangles in shape, but they are not
horizontal.（旗形和楔形一般出现在短期，突破后趋势不变）
R51‐2 Price‐based indicators
¾ 移动平均线：20, 60, 120 trading days
¾ Golden cross: a short‐term MA line crosses from underneath a long‐term MA; Dead
cross: a short‐term MA line crosses from above a long‐term MA.
¾ Bollinger bands：移动平均线加减几个标准差，短期突破无意义；长期突破，在上
面则为超买指标。
R52‐2 Momentum oscillators:
¾ to detect out of ordinary. 1) 可以用技术分析的方法，如趋势、支持和阻力线；2）
分析与价格的 Convergence and divergence。如果价格到高位，但是趋势振荡指标相
反，early sign of weakness. 有三个应用：1）确定 strength of trend; 2) 如果达到历
史的高低点，表明要反转；3）for non‐trending, 可用于短期交易决策。
¾ Rate of change: M=(V‐Vx)100, 如果与趋势同向且穿过零，则为买卖信号；
¾ Relative Strength Index：RSI=＝100‐100/(1+RS), RS=价格上升总和除以下降总和。一
般为在 30‐70 之间，过多则为 overbought。过大，则波动率大。
¾ Stochastic Oscillator, KD 线：％K＝100(C‐L14)/(H14‐L14), %D 为％K 的最近三天移动
平均。When %D moves from below the %K line to above it, a bullish short‐term trading
97
signal.
¾ MACD: MACD 为 12 and 26 差异的指数移动平均，Signal line 为 MACD 的移动平均（9
days）.应用：1）交叉说明趋势结束；2）做 MACD 的趋势线。
R53‐2 Sentiment indicators
¾ Put/Call ratio, contrarian
¾ CBOE Volatility Index: 市场下降，波动率高。Use VIX with trend, pattern, or oscillator,
contrarian
¾ Margin debt: 如果处于低位，则 Upturn is a sign of bullish.
¾ Short interest ratio=Short interest/Average daily trading volume
R54‐2 Flow‐of‐funds indicators
¾ Arms Index=平均下降量（下降总量除以下降家数）/平均上升量，>1, 则说明更多
的下降量。如果持续下降，现有更大的下降，则 bullish.
¾ Margin debt：如果下降，则说明在卖股票，继续下跌。
¾ Mutual fund cash position. Contrarian.
¾ New equity issuance & Secondary offerings: uptrend may be to turn down
R55‐2 Cycle
¾ Kondratieff cycle: long 54‐year economic cycle; 18‐year cycle：常用于房地产
¾ Decennial pattern：0 最好，5 最差
¾ Presidential cycle：第三年最好
R56‐2 Elliot Wave Theory
¾ Impluse wave & corrective wave: 5 moving up in a bull market and three moving down
in a bear market
¾ Fibonacci sequence: ratio of the size of subsequent waves was a Fibonacci ratio (0.50,
0.6667, 0.6, 0.625, 0.6154, 2, 1.5, 1.6667, 1.6, 1.625), 1.618 golden ratio

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3‐Economics
1‐3 Demand and supple function
Q1‐3 A college student’s monthly demand for pizza is given by the equation:
QDpizza=11‐0.70Ppizza+0.009I‐0.20Pcola
Where QDpizzais the number of pizzas ordered per month
Ppizza is the price of a pizza
I is her monthly food budget
Pcola is the price of cola per bottle
The student’s current monthly food budget is $500, the price of a pizza is $5, and the
price of a bottle of cola is $1.25/bottle. If the student’s monthly food budget were to
increase to $700, the slope of her demand curve for pizza would be closest to:
A. ‐2.42.
B. ‐1.43.
C. ‐0.70.

Solution: B.
Initial Price Quantity Relationship:
D
QPizza = 11 − 0.70 Ppizza + 0.009 × $500 − 0.20 × 1.25 = 15.25 − 0.70 PPizza

Resulting Demand Curve:
PPizza = 21.79 − 1.43QPizza

D

Price Quantity Relationship at New Income Level
D
QPizza = 11 − 0.70 PPizza + 0.009 × $700 − 0.20 × 1.25 = 17.05 − 0.70 PPizza
Resulting Demand Curve:
PPizza = 24.36 − 1.43QPizza

D

The slope of her demand curve for pizza will still be —1.43 even with the higher income effect
will result in a parallel shift of the initial demand curve to the right.
注：需求曲线是指需求反函数, demand curve is the graph of the inverse demand function.

Q2‐3 Which of the following least likely describes an unstable market equilibrium ?
A. Excess supply will tend to drive prices down.
B. The supply curve is less steeply sloped than the demand curve.
C. Prices that differ from equilibrium values tend to move further away from equilibrium.

Solution: A
Unstable market equilibria result when a downward sloping supply curve is less steeply sloped
than the demand curve, so that excess supply tends to drive prices up and excess demand tends
to drive prices down (further away from the equilibrium price)

Q3‐3 Two‐dimensional demand and supply curves are drawn under which of the following
99
assumptions? (原版书 R13‐3)
A. Own price is held constant.
B. All variables but quantity are held constant.
C. All variables but own price and quantity are held constant.

Solution：C
In order to draw demand and supply curves, own price and own quantity must be allowed to
vary. However, all other variables are held constant to focus on the relation of own price with
quantity.

Q4‐3 Movement along the demand curve for good Xoccurs due to a change in: (原版书 R13‐6)
A. income.
B. the price of good X.
C. the price of a substitute for good X.

Solution：B
The demand curve shows quantity demanded as a function of own price only.

Q5‐3 The following information relates to Questions 1‐2(原版书 R13‐8)
A producer's supply function is given by the equation
Q=‐55+26Ps+1.3Pa
where Q is the quantity of steel supplied by the market, Ps is the per unit price of steel, and Pa is
the per unit price of aluminum.

Q6‐3 1. If the unit price of aluminum is 10, the slope of the supply curve is closest to:
A. 0.04.
B. 1.30.
C. 26.00.

Solution：A
The slope coefficient of Q. in the inverse supply function is 0.04.
Start with the supply equation : Q=‐55+26Ps+1.3Pa
Insert Pa=10; =‐55+26Ps+1.3Pa(10)
=‐42+26 Ps
Solve for Ps : Ps=1.6+0.04Q (the inverse supply function)

Q7‐3 2. Assume the supply side of the market consists of exactly five identical sellers. If the
unit price of aluminum is 20, which equation is closest to the expression for the market
inverse supply function?
A. Ps ==9.6+0.04Qss
B. Ps = 1.1 + 0.008Qss
C. Qss = ‐145 + 130PS

Solution：B.
100
Start with the supply equation : Q=‐55+26Ps+1.3Pa
To aggregate for five suppliers , multiply the individual producer’s supply function by 5:
Q =5(‐55+26Ps+1.3Pa)
=‐275+130 Ps+6.5 Pa
Now insert the unit price of aluminum at 20:
Q=‐275+130 Ps+6.5(20)
=‐145+130Ps
Invert the equation to get the market inverse supply function :
Ps=1.1+0.008Q

Q8‐3 Which of the following statements about market equilibrium is most accurate? (原版书
R13‐10)
A. The difference between quantity demanded and quantity supplied is zero.
B. The demand curve is negatively sloped and the supply curve is positively sloped.
C. For any given pair of market demand and supply curves, only one equilibrium point can
exist.

Solution：A
At market equilibrium the quantity demanded just equals quantity supplied, and thus, the
difference between the two is zero.

Q9‐3 A wireless phone manufacturer introduced a next‐generation phone that received a high
level of positive publicity. Despite running several high‐speed production assembly lines,
the manufacturer is still falling short in meeting demand for the phone nine months
after introduction. Which of the following statements is the most plausible explanation
for the demand/supply imbalance? (原版书 R13‐15)
A. The phone price is low relative to the equilibrium price.
B. Competitors introduced next‐generation phones at a similar price.
C. Consumer incomes grew faster than the manufacturer anticipated.

Solution：A
The situation described is one of excess demand because, in order for markets to clear at the
given level of quantity supplied, the company would need to raise prices.

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需求与供给基本概念
R1‐3 Demand and supple function
¾ Inverse demand function: PD= a ‐bQD ——需求曲线
¾ Inverse supply function: PS =a+bQS ——供给曲线
In order to draw demand and supply curves, own price and own quantity must
be allowed to vary. However, all other variables are held constant to focus on
the relation of own price with quantity.
¾ Law of Demand and supply
demand decreases as the price increases
supply increases as the price increases
¾ Aggregating demand and supply curves:
Add the firms that comprise market supply together to get the market supply
function.
Add the many individual demand curves to get the market demand function
R2‐3 Stable and unstable equilibria
¾ Stable equilibrium:供给曲线从上向下穿过（从上压住）需求曲线
¾ Unstable equilibrium:供给曲线从下向上穿过需求曲线

2‐3 Auction
Q10‐3 An auction in which the auctioneer starts at a high price and then lowers the price in
increments until there is a willing buyer is best called a:
A. Dutch auction.
B. Vickery auction.
C. private‐value auction.

Solution: A.
The basic Dutch auction is a descending‐price auction.

Q11‐3 Which statement is most likely to be true in a single‐price U.S. Treasury bill auction?
A. Only some non‐competitive bids would be filled.
B. Bidders at the highest winning yield may only get a portion of their order filled.
C. All bidders at a yield higher than the winning bid would get their entire order filled.

Solution: B.
Non‐competitive bids and bidders at lower yields will get their orders filled first. Securities may
then not be available to fill demand entirely at the highest winning yield.

Q12‐3 An auction in which the auctioneer starts at a high price and then lowers the price in
increments until there is a willing buyer is best called a: (原版书 R13‐12)
A. Dutch auction.
B. Vickery auction.
C. private‐value auction.

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Solution：A
The basic Dutch auction is a descending‐price auction.

Q13‐3 Which statement is most likely to be true in a single‐price U.S. Treasury bill auction? (原
版书 R13‐13)
A. Only some non‐competitive bids would be filled.
B. Bidders at the highest winning yield may only get a portion of their order filled.
C. All bidders at a yield higher than the winning bid would get their entire order filled.

Solution：B
Non‐competitive bids and bidders at lower yields will get their orders filled first. Securities may
then not be available to fill demand entirely at the highest winning yield.

Q14‐3 The winner's curse in common value auctions is best described as the winning bidder
paying: (原版书 R13‐14)
A. more than the value of the asset.
B. a price not equal to one's own bid.
C. more than intended prior to bidding.

Solution：A
The winning bidder in such auctions may be overly optimistic about the underlying value of the
item won.

Q15‐3 Noncompetitive bid
拍卖的基本概念
R3‐3 Common value auction VS Private value auction
a) common value auction:拍卖商品对每一个 bidder 都具有相同的价值
b) Private value auction：拍卖商品对每一个 bidder 都具有不同的潜在价值
R4‐3 Common type of auctions
a) ascending price auction (English auction):拍卖人先以一个保留价格起拍，出价最高的
人获得这件商品
¾ Winner’s curse: bid more than the ultimate value of the asset for common goods.
b) sealed bid auction：每一个 bidder 将出价记录在一张纸上，并密封在信封中，which
is unknown to other bidders
¾ the optimal bid for the bidder with the highest reservation price
¾ reservation price：密封拍卖中存在保留价格，若所有出价都低于这个保留价格，那
么商品将不属于任何 bidder
c) second price sealed bid auction (Vickrey auction): Vickrey 拍卖类似于密封拍卖，但却
有一个关键性差异：商品由出价最高的投标者获得，但却只需按第二高的出价支
付
d) descending price auction (Dutch auction)：拍卖人先以一个较高价格起拍，然后逐步
降低价格，直到某个投标人愿意接受这个价格为止
R5‐3 Noncompetitive bid
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¾ U.S. Treasury securities, a single price auction is held but bidders may also submit
Noncompetitive bid
¾ bidders will accept the amount of Treasuries indicated at the price determined by the
auction, rather than specifying a maximum price in their bids
i. 例 U.S. Treasury securities, a single price auction is held but bidders may also
submit Noncompetitive bid
ii. bidders will accept the amount of Treasuries indicated at the price determined
by the auction, rather than specifying a maximum price in their bids
iii. US Treasury offers 90 billions to be auctioned with both competitive and
non‐competitive. 价格为 0.1790 的总量为 97，满足 Non‐competitive 15billions,
满足 0.1790 competitive 3 billions, 小于等于 0.1780 的全部满足，所有的成交
价格都为 0.1790（贴现率），即价格为 99.9095
Discount Bid Price Competitive Cumulative Non-competitive Total
Rate per $100 Bids Competitive Bids($ billions) Cumulative
Bid(%) ($ billions) Bids Bids
($ billions) ($ billions)
0.1731 99.91250 10 10 15 25
0.1741 99.91200 15 25 15 40
0.1751 99.91150 20 45 15 60
0.1760 99.91100 12 57 15 72
0.1770 99.91050 10 67 15 82
0.1780 99.91000 5 72 15 87
0.1790 99.90950 10 82 15 97

3‐3 Consumer Surplus
Q16‐3 Venkat Reddy is very fond of mango fruits. If mangoes cost 10 rupees each, Reddy
spends his budget on fruits that the values more highly than mangoes. However, at 4
rupees each Reddy buys 20 mangoes for devouring over a one‐week period. The total
consumer surplus in rupees for Venkat would be closest to:
A. 13.
B. 26.
C. 60.

Solution: C
The consumer surplus is the value of the good minus the price paid for it (10‐4) = 6, summed
over the quantity bought. The total consumer surplus is the consumer surplus on each mango
that Reddy buys and is added together. It is the area of the right triangle = (base x height) / 2,
with base equal to 20 mangoes a week and the height equal to 6, the consumer surplus on each
mango. Thus the total consumer surplus = (20 x 6) / 2 = 60

Q17‐3 All else equal, if the elasticity of demand and the elasticity of supply both increase,
which of the following is most likely?
A. Consumer surplus will increase and producer surplus will increase.
B. Consumer surplus will decrease and producer surplus will increase.
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C. Consumer surplus will decrease and producer surplus will decrease.

Solution: C
If both the elasticity of demand and elasticity of supply increase, both the demand curve and the
supply curve will become more horizontal. The space between the curves to the left of the
equilibrium quantity will become smaller and both consumer and producer surplus will
decrease.

Q18‐3 Consumer surplus is best described as being:
A. always less than or equal to zero.
B. always greater than or equal to zero.
C. at times positive and at other times negative

Solution: B
Consumer surplus is the value (or marginal benefit) of a good minus the price paid for it,
summed over the quantity bought. As no consumer will (willingly) pay a price greater than the
marginal value or benefit, consumer surplus is always positive. Abd of firce us used to coerce the
consumer to buy a product, then the marginal benefit must be adjusted also so as to include the
benefit of avoiding the punishment for not buying the product.

Q19‐3 Assume a market demand function is given by the equation Qd = 50 — 0.75P where Qd
is the quantity demanded and Pis the price. If P equals 10, the value of the consumer
surplus is closest to: (原版书 R13‐20)
A. 67
B. 1205
C. 1667

Solution：B.
We find consumer surplus as the area of the triangle formed by the y(price) axis, the inverse
demand curve, and a line segment from the y axis to the inverse demand function at P = 10.
Put the price into the demand equation : Qd=50‐0.75(10)
Qd=43.5(this is the base of the triangle
Invert the demand function by solving for P: ‐0.75P= Qd‐50
P=‐1.33 Qd+66.67
Note the price intercept is 66.67. The height of the triangle is 66.67 ‐10 = 56.67. The consumer
surplus is the area of the triangle above the price of 10 and below the demand curve, with base
equal to the quantity of 42.5: 1/2 Base X Height = (1/2) (42.5) (66.7 ‐ 10) = 1,205.

Q20‐3 Which of the following best describes producer surplus? (原版书 R13‐21)
A. Revenue minus variable costs.
B. Revenue minus variable plus fixed costs.
C. The area above the supply curve and beneath the demand curve and to the left of the
equilibrium point.

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Solution：A
Producer surplus is the difference between the total revenue that sellers receive from selling a
given amount of a good and the total variable cost of producing that amount.

Q21‐3 Assume a market supply function is given by the equation Q = —7 + 0.6P where Q is the
quantity supplied and P is the price. If P equals 15, the value of the producer surplus is
closest to: (原版书 R13‐22)
A. 33
B. 41.0
C. 67.5

Solution：A
With a linear supply curve, producer surplus is equal to the area of a triangle with base equal to
the market clearing price minus the price intercept, height equal to the market clearing quantity,
and bounded by the supply curve as the hypotenuse. Given a (market clearing) price of 15,
quantity is 2:
Q= ‐7 +0.6(15) =2
Next find the inverse supply function : P=(1/0.6)7+(1/0.6)Q
P=11.67+1.67Q
Note that the price intercept is 11.7 and the quantity intercept is ‐7.0.
Thus, producer surplus is 1/2 Base X Height = (1/2) (2) (15 ‐ 11.7) = 3.3.
R6‐3 Efficient allocation
¾ The efficiencient quantity of a good is achieved: marginal benefits = marginal cost
( the intersect of demand and supply curve).
¾ The allocative efficiency is attained when marginal benefits equates marginal cost.
¾ At this equilibrium price and quantity, the sum of the consumer and producer surplus
is at a maximum.
R7‐3 Surplus 的理解
¾ Consumer surplus: the difference between the total value to consumers of the units
of a good that they buy and the total amount they must pay for those units
¾ Producer surplus: the sum of difference between the price received for each unit of
good produced and the opportunity cost of each unit for the total units produced.
R8‐3 Obstacles to the efficient allocation of productive resources: Price ceilings and price
floors; Taxes, subsidies and quotas; Monopoly; External costs External benefits.
R9‐3 Price ceiling
¾ the upper limit on the price which a seller can charge. When placed below the
equilibrium price, it makes seller provide less products, and dead weight loss is
produced.
¾ In the long run, price ceilings lead to the following:(1) wait a long line to purchase（春
运火车票） , (2) suppliers engage in discrimination, (3) take bribes to do
so(rent‐seeking), (4) suppliers reduce the quality of the goods.
R10‐3 Price floor
¾ the minimum price that a buyer has to pay for a good. When placed above the
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equilibrium price, it produce dead weigh loss.
¾ In the long run, price ceilings lead to the following: (1) overproduction(价格高，生产
更多，卖不出去), (2) consumers will buy less if the price floor is above the
equilibrium price. （工人的最低工资导致失业）

4‐3 Tax
Q22‐3 The tax division between buyers and sellers with respect to products with perfectly
elastic and perfectly inelastic demand, respectively, are:
Perfectly elastic demand Perfectly inelastic demand
A. Buyers pay the entire tax Buyers pay the entire tax
B. Buyers pay the entire tax Sellers pay the entire tax
C. Sellers pay the entire tax Buyers pay the entire tax

Solution: C
In the extreme cases of products with perfectly elastic and perfectly inelastic demand, the sellers
and buyers, respectively, pay the entire tax.

Q23‐3 Compared to a producer, the consumer is most likely to pay the largest part of a tax
increase if the elasticity of demand and elasticity of supply, respectively, are more:
Elasticity of Demand Elasticity of Supply
A. Elastic Elastic
B. Elastic Inelastic
C. Inelastic Elastic

Solution: C
The buyer pays the largest portion of a tax when demand is more inelastic and supply is more
elastic.

Q24‐3 The demand for oil is more inelastic in the short‐run than the supply of oil, but it is not
perfectly inelastic. Based only on this factor, if the government imposes a $5.00 per
barrel tax on oil producers:
A. The incidence of the tax will fall most heavily on oil producers, because the tax is imposed
directly on them.
B. The incidence of the tax will fall entirely on oil consumers, because producers will pass the
tax through to consumers by increasing the price of oil by the amount of the tax.
C. The incidence of the tax will be split between oil producers and oil consumers, with most of
the tax being paid by oil consumers.

Solution: C
The more elastic, the more ability to respond to the change in price, the lower the tax incidence.

Q25‐3 For markets with perfectly elastic supply and perfectly inelastic supply, respectively, the
introduction of a tax will most likely result in:
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Market with perfectly elastic supply Market with perfectly inelastic supply
A. a price increase, and the seller bears the tax a price increase, and the buyer bears the tax
B. a price increase, and supply remains the same. no change in price, and the seller bears the tax.
C. a price increase, and the buyer bears the tax. no change in price, and the seller bears the tax.

Solution: C
Because in markets with perfectly elastic supply, price increases as a result of tax and the seller
passes on the tax burden to buyers. In markets with perfectly inelastic supply, sellers maintain
the same supply and price but absorb the tax burden themselves.

Q26‐3 In principle and in practice, rent ceilings are most likely to:
A. be fair.
B. be efficient.
C. prevent the housing market from operating in the social interest.

Soluction: C
In principle and in practice rent ceilings are inefficient and unfair. They prevent the housing
market from operating in the social interest.

Q27‐3 A per‐unit tax on items sold that is paid by the seller will most likely result in the: (原版
书 R13‐16)
A. supply curve shifting vertically upward.
B. demand curve shifting vertically upward.
C. demand curve shifting vertically downward.

Solution：A
The lowest acceptable price to the supplier at any given quantity must now increase because
part of the price is paid as a per‐unit tax. Thus, the supply curve shifts upward.

Q28‐3 If an excise tax is paid by the buyer instead of the seller, which of the following
statements is most likely to be true? The price: (原版书 R13‐18)
A. paid will be higher than if the seller had paid the tax.
B. received will be lower than if the seller had paid the tax.
C. received will be the same as if the seller had paid the tax.

Solution：C
The trade price should be the same whether the tax is imposed on the buyer or on the selle

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R11‐3 Tax 的理解:

¾ The actual tax incidence is independent of whether the government imposes the tax
(statutory incidence) on consumers or suppliers.
¾ If demand is less elastic than supply, consumers will bear a higher burden.(弹性弱的
一方承担更多税收)
¾ If supply is less elastic than demand, suppliers will bear a higher burden.
¾ 弹性越小，DWL 越小

5‐3 Subsidies and quotas
Q29‐3 Which of the following provides the best description of the effect of subsidies on the
prices of goods and the relationship between marginal cost and marginal benefit?
Effect on prices Relationship between marginal cost and marginal benefit?
A. Price falls Marginal benefit exceeds marginal cost
B. Price increases Marginal cost exceeds marginal benefit
C. Price falls Marginal cost exceeds marginal benefit

Solution: C
Upon introduction of a subsidy, the equilibrium level of supply increases and the price falls. In
the new equilibrium, marginal cost (on the supply curve) exceeds marginal benefit (on the
demand curve) and a deadweight loss arises due to overproduction.

P P
S
S-subsidy S
MB Quota
O
Deadweight loss Deadweight loss
O’
MC Quota O
D D
Q
Subsidies Quotas Q

补贴，限额对供给，需求和市场均衡的影响：
R12‐3 Subsidies：供给曲线下降 subsidy 个单位→市场均衡从 O 移动到 O’，均衡价格下降，
均衡产量上升→形成一块 deadweight loss（如图箭头指向的三角形）
R13‐3 Quotas：供给曲线，需求曲线和市场均衡都没有变化→quotas 使市场处于非均衡状
态，供给量小于需求量，形成供需缺口→形成一块 deadweight loss（如图箭头指向
的三角形）

6‐3 Elasticity
Q30‐3 If the number of ice cream bars demanded increases from 19 to 21 when the price
decreases from $1.50 to $0.50, the price elasticity of demand is:
A. ‐5.
B. ‐0.2.
C. ‐0.1
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Solution: C.
If the number of ice cream bars demanded changes from 19 to 21 when the price changes from
$1.50 to $0.50, the percentage change in quantity is (21‐19) / [(21 + 19)/ 2]=10%, and the
percentage change in price is (0.50‐1.50) / [(1.50+0.50) /2]= ‐100%. Thus, price elasticity = 10%
/‐100%=‐0

Q31‐3 For most products, the long‐run price elasticity of demand is:
A. less than the short‐run price elasticity of demand.
B. greater than the short‐run price elasticity of demand.
C. more likely to increase than is the short‐run price elasticity of demand.

Solution: B
Generally, when the price of a product increases, consumers reduce consumption by a larger
amount in the long run than in the short run; this relationship between elasticity and time is
referred to as the second law of demand.

Q32‐3 For a particular company's product, the percent change in quantity demanded is smaller
than the percent change in price that caused the change in quantity demanded. If the
company increased the price of that product, total revenue from sales of that product
would most likely:
A. increase more in the short run than in the long run.
B. increase more in the long run than in the short run.
C. decrease more in the short run than in the long run.

Solution: A
The price elasticity of demand for the product is inelastic (absolute value of elasticity coefficient
is less than one). An increase in price will increase total revenue in the short run. The longer the
time that has elapsed since a price change, the more elastic is demand. In the long run
consumers will reduce their consumption by a larger amount than in the short run.

Q33‐3 For a particular product produced by a firm, the quantity at which demand is unit elastic is
most likely the quantity that maximizes:
A. total profit from the product but not total revenue from the product.
B. total revenue from the product but not total profit from the product.
C. both total profit from the product and total revenue from the product.

Solution: B
A firm maximizes its revenue at the price (or quantity) where demand is unit elastic. This price or
quantity is not the one that maximizes profit unless output can be increased at zero cost (no
marginal costs).

Q34‐3 Susan Jahlberg, CFA recognizes that the expanding economy of China is increasing
prosperity and the demand for many types of goods and services. To estimate the
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demand for a particular item, which of the following elasticities of demand would be the
best choice for Jahlberg to calculate?
A. The price elasticity.
B. The income elasticity.
C. The cross‐elasticity.

Solutions: B.
The income elasticity of demand measures the effect of income changes on demand and is the
appropriate measure in this case. The price elasticity of demand measures the effect of price
changes on demand. The cross‐elasticity of demand measures the effect of price changes in
substitutes and complementary products on demand.

Q35‐3 When the price of a cup of coffee is a constant Kenya Shillings (KES) 70 per cup, 10 cups
of coffee are sold each hour at the Habari Café. However, when the price of tea falls
from KES 70 per cup to KES 50 per cup, the quantity of coffee sold falls to 5 cups per
hour. Assuming no other influences, the cross elasticity of demand for coffee with
respect to the price of tea is closest to:
A. 0.57.
B. 1.75.
C. 2.00.

Solutions: C. The formula for the cross elasticity of demand is as follows:
Cross elasticity of demand = Percentage change in quantity demanded / Percentage change in
price of a substitute or complement. Therefore the cross elasticity of demand for coffee with
respect to the price of tea is: Percentage change in quantity demanded = (5 ‐ 10) / (10 + 5)/2)
×100 = ‐5 / 7.5 x 100 = ‐66.67.0%.Percentage change in price of a substitute = (50 ‐ 70) / ((50 + 70)
/ 2) = ‐20 / 60 = ‐33.33.0%. Cross elasticity of demand = ‐66.67% / ‐33.33% = 2.00

Q36‐3 The market demand function for four‐year private universities is given by the equation
(原版书 R13‐25)
Qprd = 84 – 3.1 Ppr +0.8I +0.9Ppu
Where Qprd is the number of applicants to private universities per year in thousands , Ppr
is the average price of private universities (in thousands of USD), I is the household
monthly income (in thousands of USD), and Ppu is the average price of public
(government‐supported ) . Assume that Ppr is equal to 38, I is equal to 100, and Ppu is
equal to 18 .
The cross‐price elasticity of demand for private universities with respect to the price of
public universities is closest to:
A. 0.3.
B. 3.1.
C. 3.9.

Solution：A
From the demand function:
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Solve for Qprd:
ΔQprd/ΔPpu=0.9(the coefficient in front of Ppu)
Qprd = 84‐3.1 Ppr+0.8I+0.9 Ppu
=84‐3.1(38)+0.8(100)+0.9(18)
=62.4
At Ppr = 38 ,and Ppu=18, the cross‐price elasticity of demand
=(ΔQprd/ΔPpu)( Ppu/ Qprd)=(0.9)(18 / 62.4)=0.3

Q37‐3 If the cross‐price elasticity between two goods is negative, the two goods are classified
as: (原版书 R13‐26)
A. normal.
B. substitutes.
C. complements.

Solution：C
With complements, consumption goes up or down together. With a negative cross‐price
elasticity, as the price of one good goes up, the demand for both falls.

Q38‐3 Demand for a good is most likely to be more elastic when:
A. the good is a necessity.
B. a lesser proportion of income is spent on the good.
C. the adjustment to a price change takes a longer time.

Solution：C
The longer the time that has elapsed since a price change, the more elastic demand is. For
example, if gas prices rise, consumers cannot quickly change their mode of transportation but
will likely do so in the longer run.

Elasticity 掌握概念及公式：
R14‐3 需求点弹性、交叉弹性和收入弹性的计算，分母用平均值。
percent change in quantity demanded %ΔQ
price elasticity of demand= =
percent change in price %ΔP
percent change in quantity demanded
cross elasticity of demand=
percent change in price of substitute or complement
percent change in quantity demanded

income elasticity of demand=
percent change in income
R15‐3 Inelasticity demand & elasticity demand 商品的定价策略，怎样才能使受益最大化

R16‐3 Different kinds of goods:
¾ Normal Goods: positive income elasticity, demand rises with income. (> 0)
Luxuries: high positive elasticity, demand rises strongly with income. (>1)
Necessity goods: normal but low elasticity
¾ Inferior Goods: negative income elasticity, demand falls with income (<0)
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R17‐3 商品的价格与它的互补品的需求量正向，商品的价格与它的替代品的需求量成反向
R18‐3 Factors influencing the elasticity of demand:
¾ Availability of substitutes↑, higher
¾ Relative amount of spent on the good ↑,higher
¾ Time period since price change ↑,higher
R19‐3 Factors influencing the elasticity of supply:
¾ Availability of substituting inputs↑, higher.
¾ Time period since price change, long‐term>short‐term>momentary（供电弹性大，水
果小）
R20‐3 Price elasticity along a linear demand curve
¾ Point in a higher price range has greater price elasticity of demand than point in the
lower price range.
¾ Revenue is maximized at the point that has unitary elasticity (elasticity=‐1)
7‐3 Utility theory of consumers
Q39‐3 Partial information on three baskets (1, 2, and 3) containing goods A and B is given in the
table below. The marginal rate of substitution of B for A, (MRSBA), at basket 2 is also
provided.（mock85‐34）
Basket Units of A Unit of B MRSBA
1 30
2 50 35 4.0
3 40 40
A consumer claims that he is indifferent between baskets 2 and 3 and his indifference
curves are strictly convex. If he is also indifferent between baskets 1 and 3, the number
of units of A in basket 1 is most likely.
A. equal to 60.
B. less than 60.
C. greater than 60.

Soluction: C
Describe consumer choice theory and utility theory.
Describe the use of indifference curves, opportunity sets, and budget constraints in
decision‐making.
As he is indifferent between all three baskets, all three must fall on the same indifference curve.
The MRSBA at basket 2 is 4, meaning that the slope of the indifference curve at that point is ‐4,
hence ΔA/ΔB = ‐4 = (A ‐ 50) / (30 ‐ 35): Solve for A = 70: greater than 60.

Q40‐3 Which of the following ranking systems best describes consumer preferences within a
utility function?（原版书 R14‐2）
A. Util.
B. Ordinal.
C. Cardinal.

Solution:B.
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Utility functions only allow ordinal rankings of consumer preferences.

Q41‐3 If a consumer's marginal rate of substitution of good Xfor good Y (MRSxy) is equal to 2,
then the:（原版书 R14‐4）
A. consumer is willing to give up 2 units of Xfor 1 unit of Y
B. slope of a line tangent to the indifference curve at that point is 2.
C. slope of a line tangent to the indifference curve at that point is —2

Solution: C.
The marginal rate of substitution is equal to the negative of the slope of the tangent to the
indifference curve at that point, or ‐2.

Q42‐3 Which of the following statements best explains why indifference curves are generally
convex as viewed from the origin?
A. The assumption of non‐satiation results in convex indifference curves.
B. The marginal rate of substitution of one good for another remains constant along an
indifference curve.
C. The marginal utility gained from one additional unit of a good versus another diminishes the
more one has of the first good.

Solution: C
The slope of the indifference curve at any point gives the marginal rate of substitution of one
good for another. The curve is convex because the marginal value of one good versus another
decreases the more one has of the first good.
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消费者行为理论
R21‐3 Utility theory（消费者偏好）
¾ A utility function（ordinal utility）: U=U(Q,QB,...,QN)
¾ Assumption: for bundle A, B and C, “>” stand for prefer
complete preference: U(A)>U(B), U(B)>U(A), U(A)=U(B) (indifference)
transitive preference: U(A)>U(B), U(B)>U(C)=>U(A)>U(C)
non‐satiation: U(A+1)>U(A), more is better
R22‐3 Indifference curve 特征
¾ 较高无差异曲线的效用高于较低无差异曲线
¾ 同一消费者无差异曲线不向交
¾ 无差异曲线向右下倾斜
¾ 无差异曲线凸向原点，是凸图形(convex)
R23‐3 边际替代率(MRS)
¾ MRSXY =‐△Y/ △X(商品 X 对商品 Y 的替代）例如： MRSXY＝3，X 对 Y 的替代率为 3，
即增加（＋1）X，放弃（‐3）Y，效用水平不变。
¾ If two consumers (A and B) have different MRS, they can both benefit from voluntary
trade until MRSAXY=MRSBXY
R24‐3 边际替代率递减规律：在维持效用水平不变的前提下，随着一种商品的消费数量连续
增加，消费者为得到每一单位的这种商品所需要放弃的另一种商品的消费数量是递减
的。（随着 X 越来越大，放弃的 Y 数量越来越小，斜率绝对值越来越小）
R25‐3 Budget constraint (预算约束线）
Consumption option are determined by income & price；PXQX+PYQY<=I
R26‐3 Consumer equilibrium (最优化选择)
¾ Utility is maximized, subject to the budget constraint
¾ Tangency between budget constraint & the highest attainable indifference curve
¾ At Tangency, MRSXY（边际替代率，消费者意愿）= Price ratio（相对价格，市场意愿）
Good Y
I/PX为横坐标截距

I/PY为纵坐标截距
I/PY
Most preferred affordable combination PX/PY为预算线斜率
5 ΔY MU P
MRS XY
=-
ΔX
= X
= X
MU Y P Y
Good X
6 I/P
X

8‐3 Subsitution effect and income effect
Q43‐3 In the case of a normal good with a decrease in own price, which of the following
statements is most likely true?（原版书 R14‐6）
A. Both the substitution and income effects lead to an increase in the quantity purchased.
B. The substitution effect leads to an increase in the quantity purchased, while the income
effect has no impact.
C. The substitution effect leads to an increase in the quantity purchased, while the income
effect leads to a decrease.
115
Solution: A
In the case of normal goods, the income and substitution effects are reinforcing, leading to an
increase in the amount purchased after a drop in price.

Q44‐3 The diagram illustrates a consumer’s allocation of her budget between items X and Y.
With an initial budget (BC1) she consumes Qa units of item Y. When the price of Y drops,
she consumes Qc units of item Y. Lines BC2 and BC3 are parallel to one
another.(MOCK84‐34)
Quantity of X
c
a
b BC1
BC1 BC3
Qa Qc Qb Quantity of Y

The income effect arising from this change in the price of Y is best described as the
distance between:
A. Qb and Qa.
B. Qc and Qb.
C. Qc and Qa.

Solution: B
When the price of Y falls, the budget constraint shifts outward from BC1 to BC2, indicating an
increase in the consumption of Y. Points a and b reflect the change in consumption of Y due
solely to a decrease in price because BC3 reduces her income by a sufficient amount to return her
to her original indifference curve. Qc – Qb is the income effect (which is negative here) because
this is an inferior good.

Q45‐3 In the case of a normal good with a decrease in own price, which of the following
statements is most likely true?
A. Both the substitution and income effects lead to an increase in the quantity purchased.
B. The substitution effect leads to an increase in the quantity purchased, while the income
effect has no impact.
C. The substitution effect leads to an increase in the quantity purchased, while the income
effect leads to a decrease.

Solution: A
In the case of normal goods, the income and substitution effects are reinforcing, leading to an
increase in the amount purchased after a drop in price.
116

R27‐3 Substitution effect：商品 X 价格减低时，商品 X 相对于其他商品相对价格减,Consumer
equilibrium 在无差异曲线上移动，带来对商品 X 需求量的增加
R28‐3 Income effect：商品 X 价格减低时，消费者实际购买力变化，real income 提高， budget
constraint 曲线移动带来对商品 X 需求量的变化。
R29‐3 When decrease in the price of Good X:
¾ The substitution effect is positive, and the income effect is also positive—consumption
of Good X will increase.
¾ The substitution effect is positive, and the income effect is negative but smaller than
the substitution effect—consumption of Good X will increase.
¾ The substitution effect is positive, and the income effect is negative and larger than the
substitution effect—consumption of Good X will decrease, Giffen goods

9‐3 Giffen and Veblen goods
Q46‐3 Which of the following statements best illustrates the difference between a Giffen good
and a Veblen good? （原版书 R14‐8）
A. The Giffen good alone is an inferior good.
B. The substitution effect for each is in opposite directions.
C. The Veblen good alone has a positively sloped demand curve.

Solution: A
Veblen goods are not inferior goods, whereas Giffen goods are. An increase in income for
consumers of a Veblen good leads to an increase in the quantity purchased at each price. The
opposite is true for a Giffen good.

Q47‐3 Which of the following statements best illustrates the difference between a Giffen good
and a Veblen good?
A. The Giffen good alone is an inferior good.
B. The substitution effect for each is in opposite directions.
C. The Veblen good alone has a positively sloped demand curve.

Solution: A
Veblen goods are not inferior goods, whereas Giffen goods are. An increase in income for
consumers of a Veblen good leads to an increase in the quantity purchased at each price. The
opposite is true for a Giffen good.

Q48‐3 Two‐Part Tariff Pricing
Nicole Johnson's monthly demand for visits to her health club is given by the following equation:
Qd = 20‐4P, where Qd is visits per month and P is euros per visit. The health club's marginal cost
is fixed at €2 per visit.
1) Determine Johnson's demand curve for health club visits per month.
2) Calculate how many visits Johnson would make per month if the club charged a price per
visit equal to its marginal cost.
117
3) Calculate Johnson's consumer surplus at the price determined in Question 2
4) Calculate how much the club could charge Johnson each month for a membership fee.
1) Solution to 1: Qd= 20 ‐ 4P, so when P= 0 , Qd = 20. Inverting, P= 5 ‐ 0.25Q, so when Q =
0, P=5
5 Johnson’s consumer surplus
Johnson’s demand
curve
2
12 20

2) Solution to 2: Qd = 20 – 42 = 12. Johnson would make 12 visits per month at a price of
€2 per visit.
3) Solution to 3: Johnson's consumer surplus can be measured as the area under her
demand curve and above the price she pays, for a total of 12 visits: CS = (1/2) 123 = 18.
Johnson would enjoy €18 per month consumer surplus.
4) Solution to 4: The club could extract all of Johnson's consumer surplus by charging her
a monthly membership fee of €18 plus a per‐visit price of €2. This is called a two‐part
tariff because it assesses one price per unit of the item purchased plus a per‐month fee
(sometimes called an "entry fee") equal to the buyer's consumer surplus evaluated at
the per‐unit price.

R30‐3 Giffen goods(吉芬商品):
¾ Income effect （inferior goods） > Substitution effect
¾ demand curve has positive slope
R31‐3 Veblen goods(韦伯伦商品, Conspicuous goods): Price is used by the consumer to signal
the status in the society
¾ have a positively sloped demand curve (eg: Gucci bag)
¾ But when price increases, the slope may be negative.
R32‐3 two important distinctions between Giffen goods and Veblen goods.
¾ First, Giffen goods are inferior goods (negative income effect), while Veblen goods
certainly are not.
¾ Second, the existence of Giffen goods is theoretically supported by the rules of
consumer choice, while the existence of Veblen goods is not.

10‐3 Economic profit
Q49‐3 Chace’s House Industry has compiled the following information in order to determine its
economic profit for the year:

118
Total revenue $460,000
Value of buildings and machinery
‐ At the beginning of the year $320,000
‐ At the end of the year $270,000
Cost of raw materials $80,000
Wages paid during the year $ 30,000
Normal profit for the year $ 50,000
What is the economic rent of Choice Malts Breweries closest to?
A. $110,000.
B. $250,000.
C. $230,000.

Solution: B
机会成本包括: 显性成本和隐性成本, 确切的说, 固定资产的经济性贬值也是一种隐性成本,
也应扣除.
Opportunity costs= 80,000 + 30,000 + 50,000 = 160,000
Economic depreciation= 320,000 ‐ 270,000 = 50,000
Economic profit= Total revenue ‐ Opportunity costs – Economic depreciation=460,000 ‐ 160,000
‐ 50,000 =250,000

Q50‐3 Four years ago, a company purchased a $500,000 machine with an estimated useful life
of 10 years. For accounting purposes, the machine is being depreciated in the amount of
$50,000 annually. The machine is used to manufacture a particular product and has no
alternative use or scrap value. The annual revenue generated from operating the
machine is $650,000 and the annual cost of the factors of production, other than
depreciation, employed to generate that revenue is $600,000. Should the company
continue to operate the machine?
A. Yes.
B. No, because operating costs are equal to operating revenues.
C. No, because the opportunity cost of operating the machine is zero.

Solution: A
The company should continue to operate the machine. The opportunity cost of operating the
machine is zero. The machine generates net economic profit of $50,000.

5) Which of the following is least likely to be classified as an explicit opportunity cost?
A. Employee payroll.
B. Economic depreciation.
C. Salary paid to the owner.

Solution:B.
Economic depreciation is classified as an implicit opportunity cost. The salary was paid to the
owner not forgone and thus is an explicit cost.
119

Q51‐3 Normal profit is best described as:
A. zero economic profit.
B. total revenue minus all explicit costs.
C. the sum of accounting profit plus economic profit.

Solution: A.
Normal profit is the level of accounting profit such that implicit opportunity costs are just
covered; thus, it is equal to a level of accounting profit such that economic profit is zero.

R33‐3 Economic Profit 的理解
¾ Opportunity cost: Opportunity cost is the return that a firm’s resources could have
earned elsewhere in its next most valuable use, which includes:
¾ Explicit costs are measurable cash flows for operating expenses (wages, rent, material
costs).
¾ Implicit costs measure the opportunity cost of using a firm's assets (wages or rental,
which are not claimed by the owner of the business).
⎧explicit costs
⎪
Opportunity cost ⎨ ⎧implied rental rate
⎪implied costs ⎨normal profit
⎩ ⎩
R34‐3 The differences between economic profit and accounting profit：
¾ Economic profit includes both explicit and implicit cost components of the firm, while
accounting profit ignores implicit costs such as the opportunity cost of equity capital.
¾ Accounting profits are generally higher than economic profits.
R35‐3 When the firm’s revenues are just equal to its costs (explicit and implicit, including the
normal rate of return) economic profits will be zero

11‐3 TR AR & MR
Q52‐3 An agricultural firm operating in a perfectly competitive market supplies wheat to
manufacturers of consumer food products and animal feeds. If the firm were able to
expand its production and unit sales by 10%, the most likely result would be:
A. a 10% increase in total revenue.
B. a 10% increase in average revenue.
C. an increase in total revenue of less than 10%.

Solution: A.
In a perfectly competitive market, an increase in supply by a single firm will not affect price.
Therefore, an increase in units sold by the firm will be matched proportionately by an increase in
revenue.

Q53‐3 The marginal revenue per unit sold for a firm doing business under conditions of perfect
competition will most likely he:
120
A. equal to average revenue.
B. less than average revenue.
C. greater than average revenue.

Solution: A.
Under perfect competition, a firm is a price taker at any quantity supplied to the market, and AR
= MR = Price.

REVENUE: (OUTPUT‐‐‐‐‐REVENUE)
R36‐3 Total revenue= Price. output
Marginal revenue = change in total revenue / change in output
Average revenue = total revenue / output
R37‐3 Perfect competition
P
D = P = MR=AR（price taker）
DWL=0, 市场实现最优配置
Q

12‐3 Short‐run & Long‐run Decision Time Frames
Q54‐3 Regarding a company’s production function, both labor costs and capital costs are best
described as:
A. fixed in the long run.
B. variable in the long run.
C. variable in the short run.

Solution: B
In the short run, a company can vary the quantity of labor but the quantity of capital is fixed. In
the long run, a firm can vary both the quantity of labor and the quantity of capital.

Q55‐3 Which of the following is generally not considered a long‐run resource?
A. Labor
B. Buildings
C. Technology

Solution: A
Economists generally treat raw materials and labors as variable costs. Plant size, capital
equipment and technology are regarded as long‐run resources because they cannot be adjusted
in the short run.

121
R38‐3 Short‐run & Long‐run Decision Time Frames 的理解

¾ Short run: a time period for which quantities of some resources are fixed, which is a
constraint on a firm’s ability to increase production. （labor and raw materials are
variable while plant size, capital equipment, and technology are constant）
¾ Long run: a time period for which a firm can adjust its input quantities, production
methods, and plant size. (所有因素都可变)
R39‐3 Short‐run & Long‐run Decision Time Frames 的理解
¾ Labor and raw materials are variable in the short run.
¾ Plant size, capital equipment, technology are constant in the short run.

13‐3 Marginal Cost
Q56‐3 Consider the following data for a firm operating in perfect competition.
Quantity Total Revenue Total Cost
21 $210 $138

22 $220 $145
23 $230 $154
24 $240 $165
The firm’s profit‐maximizing output (in units) is most likely:
A. 21.
B. 23.
C. in excess of 24.

Solution: B
Under perfect competition, economic profits are maximized where marginal revenue equals
marginal cost; in this case where marginal cost crosses $10 per unit. Profits are maximized at 23
units of production.

Q57‐3 If adding one additional unit of labor results in a positive but declining marginal product
of labor, then total product most likely is:
A. constant.
B. decreasing.
C. increasing at a decreasing rate.

Solution: C
As long as marginal product is positive, total product is increasing. If the marginal product
declines as additional units of labor are added, the rate of increase in total product is declining,
i.e., increasing at a decreasing rate.

Q58‐3 If marginal cost per unit is greater than average total cost per unit, increasing output will
most likely cause:
A. marginal cost to decrease.
B. average fixed cost to increase.
C. average variable cost to increase.
122

Soluction:C .
If marginal cost is greater than average total cost, then increasing output will cause marginal,
average variable, and average total costs to increase. Average fixed cost will continue to decrease
as output increases.

Q59‐3 Which of the following best describes the elasticity of demand in a perfectly competitive
market?
A. The firm elasticity is zero and the market elasticity is infinite.
B. The firm elasticity is infinite and the market elasticity is zero.
C. The firm elasticity is infinite and the market elasticity is some finite number.

Solution: C
Infinite elasticity reflects perfect elasticity of demand. This characterizes the elasticity of demand
for the products of a firm operating in a perfectly competitive market. If the firm increases prices,
customers will go to another firm. However, the market demand is not perfectly elastic as it
depends on substitutability with other products. Market elasticity will be greater than zero but
less than infinite.

Q60‐3 Which of the following is the best reason for price discrimination?
A. Differences in applicable tariffs.
B. Differences in consumers' willingness to pay.
C. Differences in production and/or transportation costs.

Solution: B
Price discrimination is charging different prices for a single good or service because of differences
in buyers' willingness to pay and not because of differences in production costs.

Q61‐3 In the short run, an increase in output at low levels of production will most likely cause:
A. an increase in the marginal cost due to the rising total fixed cost.
B. an increase in the marginal cost due to the law of diminishing returns.
C. a decrease in the marginal cost due to economies from greater specialization.

Solution: C
The marginal cost decreases at low levels of output due to economies from greater specialization.
However, at higher levels of production, it eventually increases because of the law of diminishing
returns.

Q62‐3 A profit maximum is least likely to occur when: (原版书 R15‐14)
A. average total cost is minimized.
B. marginal revenue equals marginal cost.
C. the difference between total revenue and total cost is maximized.

Solution: A.
123
The quantity at which average total cost is minimized does not necessarily correspond to a profit
maximum.

Q63‐3 Under conditions of perfect competition, in the long run firms will most likely earn: (原
版书 R15‐17)
A. normal profits.
B. positive economic profits.
C. negative economic profits.

Solution: A.
Competition should drive prices down to long‐run marginal cost, resulting in only normal profits
being earned.

Q64‐3 The following equations have been developed for a company:
Demand curve P = 150 – 5 × Q
2
Total revenue curve TR = 150 × Q – 5 × Q
Marginal revenue curve MR = 150 – 10 × Q
3 2
Total cost curve TC = Q – 10 × Q + 73 × Q + 120
2
Average cost curve AC = Q – 10 × Q + 73 + 120/Q
2
Marginal cost curve MC = 3 × Q – 20 × Q + 73
P: price per unit Q: cost per unit
The profit maximizing output for this firm (in units) is closest to: （mock84‐39）
A. 7.
B. 8.
C. 11.

Solution: A.
The profit‐maximizing output will arise when MR = MC.
MR = 150 – 10 × Q = MC = 3 × Q2 – 20 × Q + 73.
On reduction, this becomes: 3 × Q2 – 10 × Q – 77 = 0.
Only with Q = 7 will this equation be satisfied: 3 × 72 – 10 × 7 – 77 = 0

Q65‐3 A local laundry and dry cleaner collects the following data on its workforce productivity.
Workers always work in teams of two, and the laundry earns $3.00 of revenue for each
shirt laundered.
Quantity of Labor (L) Total Product (TP)
(Workers) (Shirts Laundered per Hour)
0 0
2 20
4 36
6 50
8 62
The marginal revenue product ($ per worker) for hiring the fifth and sixth workers is
124
closest to: （mock83‐34）
A. 14.
B. 21.
C. 42.

Solution: B.
The marginal product (MP) is the amount of additional output resulting from using one more
unit of input: ΔTP/ΔL, where ΔTP is the change in total product and ΔL is the change in total labor.
The marginal revenue product (MRP) is the marginal product of an input times the price of the
product: MP × Price = ΔTP/ΔL × Price.
In this problem, the marginal product of hiring the 5th and 6th workers (ΔL = 2) is 14 shirts per
hour/2 workers = 7 shirts per hour/worker. With each shirt resulting in $3 of revenue, the MRP is
7 shirts per hour/worker × $3/shirt = $21 per worker.

掌握边际利润递减规律、边际成本递增规律：
R40‐3 The law of diminishing return: at some point, as one more resource is added to the
production process, holding the quantity of other inputs constant, the output continues
to increase, but at a decreasing rate.
R41‐3 Marginal product of capital: increase in output from using one additional unit of capital,
holding the quantity of labor constant.
TP曲线最高点的横坐标与MP曲线和横轴的
交点横坐标相同
TP 曲线拐点与 MP
曲线最高点横坐标
MP曲线与AP相交于AP最高点

R42‐3 TP:toal product，随投入增高，而增高，到达一定高度，减少。
¾ MP: Marginal product, 先增加后减少
¾ AP: Average product.
125
Cos Cost
T ATC=AFC+AVC
TV $6 MC
ATC
$3 AVC
X
TF
$1
X AFC
0 10 20 30

¾ TC: total cost. TVC:total viarable cost . TFC:total Fixed cost. MC: marginal cost. ATC:
average total cost. AVC: average viarable cost. AFC: average fixed cost .
¾ MC intersects AVC and ATC at their minimum points.
¾ Verticle distance between ATC and AVC is AC.
R43‐3 Shutdown point & Breakeven point
¾ Shutdown point:
If AR < AVC in the short run, the firm should shut down. This is its short‐run
shutdown point.
If AR ＞ AVC in the short run, the firm should continue to operate, even if it has
losses.
In the long run the firm should shut down if AR < ATC. This is the long‐run
shutdown point.
¾ Breakeven point
If AR = ATC, TR = TC (economic cost ), this is the firm's breakeven point.
If AR ≥ATC, firm stay in the market in both the short and long run
If AR ≥ AVC, but AR < ATC, the firm stay in market in the short run but will exit the
market in the long run
If AR < AVC, the firm shut down in the short run and exit the market in the long
run
¾ 对于短期，固定总成本不变，一根生产曲线，代表一种生产规模。
Economy of Diseconomy of
Cost
Constant returns
to scale LACT
Q* Q
¾ In the long run, everything is viarable and the long run cost curves are known as
planning curves.

14‐3 Long‐run industry supply
Q66‐3 A firm engages in the development and extraction of oil and gas, the supply of which is
126
price inelastic. The most likely equilibrium response in the long run to an increase in the
demand for petroleum is that oil prices: (原版书 R15‐18)
A. increase, and extraction costs per barrel fall.
B. increase, and extraction costs per barrel rise.
C. remain constant, and extraction costs per barrel remain constant.

Solution: B.
The development and extraction of scarce oil and gas is an increasing‐cost industry. A positive
shift in demand will cause firms to increase supply, but at higher costs. The higher costs
associated with increasing supply will cause prices to rise

Q67‐3 A firm develops and markets consumer electronic devices in a perfectly competitive,
decreasing‐cost industry. The firm's products have grown in popularity. The most likely
equilibrium response in the long run to rising demand for such devices is for selling
prices to: (原版书 R15‐19)
A. fall and per‐unit production costs to decrease.
B. rise and per‐unit production costs to decrease.
C. remain constant and per‐unit production costs to remain constant.

Solution: A.
A positive shift in demand will cause firms to increase supply, but at decreasing costs. The
decreasing cost per unit will be passed on to consumers and cause prices to fall in the long run.

R44‐3 Long‐Run Industry Supply Curves
¾ 成本递增行业：行业产量↑成本↑，产品价格与供给量成同方向变动
¾ 成本递减行业：行业产量↑成本↓，产品价格与供给量成反方向变动
¾ 成本不变行业：行业产量↑成本保持不变，以不变的均衡价格提供产量
Price
(a) Increasing‐cost industry
(b) Decreasing‐cost industry
(c)Constant‐cost industry
Quantity

Q68‐3 Cost minization and profit maximization
Q69‐3 A firm experiencing an increase in the marginal product of labor employed would most
likely: (原版书 R15‐22)
127
A. allow an increased number of workers to specialize and become more adept at their
individual functions.
B. find that an increase in workers cannot be efficiently matched by other inputs that are fixed
such as property, plant, and equipment.
C. find that the supply of skilled workers is limited, and additional workers lack essential skills
and aptitudes possessed by the current workforce.

Solution: A.
Adding new workers in numbers sufficient for them to specialize in their roles and functions
should increase marginal product of labor.

Q70‐3 For a manufacturing company to achieve the most efficient combination of labor and
capital, and therefore minimize total costs for a desired level of output, it will most likely
attempt to equalize the: (原版书 R15‐23)
A. average product of labor to the average product of capital.
B. marginal product per unit of labor to the marginal product per unit of capital.
C. marginal product obtained per dollar spent on labor to the marginal product per dollar
spent on capital.

Solution: C.
Costs are minimized when substitution of labor for capital (or the reverse) does not result in any
cost savings, which is the case when the marginal product per dollarspent is equalized across
inputs.

R45‐3 Profit‐maximizing Utilization of an Input
¾ For a firm with N productive inputs, cost minimization requires
MP 1
= MP 2
=" = MP N
P 1 P 2 P N
¾ Based on the condition for the profit‐maximizing utilization of each factor, MRPf = Pf,
for profit maximization, a firm must employ inputs in quantities
MRP = MP × MR
MRP MRP MRP

1
= 2
=" N
=1
P 1 P 2 P N

15‐3 Perfect competition
Q71‐3 In perfectly competitive industries, what is the most likely long‐run effect of a
permanent decrease in demand?
A. Price decreases.
B. Firms incur economic losses.
C. The number of firms decreases.

Solution: C
128
A permanent decrease in demand in a perfectly competitive industry will in the short‐run cause
the demand curve to shift to the left, causing prices to fall. However, in the long‐run, firms will
leave the industry due to economic losses. As firms leave the industry, supply decreases (i.e., the
supply curve shifts left‐ward) thus increasing prices back to the equilibrium where economic
profit is zero.

Q72‐3 In an industry comprised of three companies, which are small‐scale manufacturers of an
easily replicable product unprotected by brand recognition or patents, the most
representative model of company behavior is:
A. oligopoly.
B. perfect competition.
C. monopolistic competition.

Solution: B.
The credible threat of entry holds down prices and multiple incumbents are offering
undifferentiated products.

Q73‐3 The marginal revenue product of labor is most likely the additional:
A. product generated by adding one more unit of labor.
B. revenue generated by adding one more unit of labor.
C. product generated by each laborer when technology improves.

Solution: B .
The marginal revenue product of labor is the additional revenue generated by adding one more
unit of labor.

Q74‐3 The following equations have been developed for a company:
Demand curve P = 150 – 5 × Q
Total revenue curve TR = 150 × Q – 5 × Q2
Marginal revenue curve MR = 150 – 10 × Q
Total cost curve TC = Q3 – 10 × Q2 + 73 × Q + 120
Average cost curve AC = Q2 – 10 × Q + 73 + 120/Q
Marginal cost curve MC = 3 × Q2 – 20 × Q + 73
P: price per unit Q: cost per unit
The profit maximizing output for this firm (in units) is closest to: （mock84‐39）
A. 7.
B. 8.
C. 11.

Solution: A.
The profit‐maximizing output will arise when MR = MC.
MR = 150 – 10 × Q = MC = 3 × Q2 – 20 × Q + 73.
On reduction, this becomes: 3 × Q2 – 10 × Q – 77 = 0.
129
Only with Q = 7 will this equation be satisfied: 3 × 72 – 10 × 7 – 77 = 0.
Units Marginal revenue Marginal cost TR TC Net Profit
7 150 – 10 × 7 = 80 2 805 484 321
3 × 7 – 20 × 7 + 73 = 80
8 150 – 10 × 8 = 70 2 880 576 304

3 × 8 – 20 × 8 + 73 = 105
11 150 – 10 × 11 = 40 2 1045 1045 0

3 × 11 – 20 × 11 + 73 = 216

掌握几种市场（perfect competition, monopolistic competition, oligopoly and monopoly）的特
点和达到均衡时的条件：
R46‐3 For perfect competition(also price taker market):
¾ All the firms in the market produce identical products.
¾ There is a large number of independent firms.
¾ Each seller is small relative to the size of the total market.
¾ There is no barrier to entry or exit.
¾ 短期内：MR=MC，可能有 economic profit 或者 economic loss；在有 economic loss
时，当 AVC<P<ATC 时，可以继续生产，P<AVC 时，要关停.（shut down point）
¾ Individual firm's demand schedule is perfectly elastic (horizontal).
¾ 长期内：无经济利润或损失（因为无进出壁垒）只有 normal return，均衡条件是
P=MR=MC=ATC。
R47‐3 Permenant increase in demand:
¾ External economies of scale: input prices fall because of the greater demand P1<P0
¾ External economies of scale: input prices rise because of the greater demand P1>P0
¾ 短期供给曲线用 SMC 曲线上大于等于 AVC 曲线最低点的部分表示，即 SMC 上大于
等于 shutdown point 的部分来表示

16‐3 monopoly
Q75‐3 Collusion is less likely in a market when: (原版书 R16‐11)
A. the product is homogeneous.
B. companies have similar market shares.
C. the cost structures of companies are similar.

Solution: B .
When companies have similar market shares, competitive forces tend to outweigh the benefits
of collusion.

Q76‐3 A government entity that regulates an authorized monopoly will most likely base
regulated prices on: (原版书 R16‐14)
A. marginal cost.
B. long‐run average cost.
C. first‐degree price discrimination.

130
Solution: B.
This allows the investors to receive a normal return for the risk they are taking in the market.

Q77‐3 Upsilon Natural Gas, Inc. is a monopoly enjoying very high barriers to entry. Its marginal
cost is $40 and its average cost is $70. A recent market study has determined the price
elasticity of demand is 1.5. The company will most likely set its price at: (原版书 R16‐4)
A. $ 40.
B. $ 70.
C. $120.

Solution：C.
Profits are maximized when MR = MC . For a monopoly, MR=P(1‐1/Ep). Setting this equal to MC
and solving for P:
$40= P(1‐1/1.5)=P0.333
P=$120

Q78‐3 Compared with perfect competition, a natural monopoly will most likely be associated
with a decrease in:
A. Deadweight loss.
B. Producer surplus.
C. Consumer surplus.

Solution: C
The consumer surplus under a monopoly will be less than if the same market were perfectly
competitive. And producer surplus can be increased by price discrimination.

Q79‐3 When rent‐seeking equilibrium is reached, a monopoly's economic profit will most likely
be:
A. zero.
B. positive.
C. negative.

Solution: A.
With competitive rent seeking, a monopoly uses all its economic profit to maintain its monopoly.
The firm's rent‐seeking costs add to total fixed costs and to average total costs (ATC). The ATC
curve shifts upward until, at the profit‐maximizing price, the monopolistic firm breaks even.

Q80‐3 A monopoly's equilibrium level of output is least likely to occur where:
A. demand is elastic.
B. demand is inelastic.
C. marginal revenue equals marginal cost.
Solution: B
A monopoly will never choose to operate where demand is inelastic because marginal revenue is
negative in the inelastic portion of the demand curve.
131
R48‐3 For monopoly:
¾ Single seller, high barriers( legal barriers and natural barriers)
Price
MC
F ATC
P*
ATC*
G
E
D
MR
O Q* Quantity

¾ Monopolists are price searchers (face downwards sloping demand curves) and have
imperfect information about demand, so they must experiment with different prices
(search) to find the profit maximizing price/quantity with always be in the elastic range
of the demand curve for the firm's product.
¾ 短期和长期的均衡条件都是 MR=MC（利润最大化的条件）,相比于完全竞争市场，
垄断市场的产量较少，价格较高，并且有 dead weight loss.
1
¾ MR = P × (1 − )
εP
¾ Price discrimination reduces this inefficiency by increasing output toward the quantity
where marginal benefit equals marginal cost, and the dead weight loss is smaller. An
extreme case of price discrimination is perfect price discrimination. If it were possible
for the monopolist to charge each consumer the maximum they are willing to pay for
each unit, where would be no dead weight loss, since a monopolist would produce the
same quantity as under perfect competition. With perfect price discrimination the
consumer surplus would all be captured by the monopolist.
¾ For price discrimination to work the seller must:
Downward sloping demand curve
At least two identifiable groups of customers with different price elasticities of
demand for the product
Prevent the customers paying the lower price from reselling the product to the
customers paying the higher price
¾ Government regulation:
①Average cost pricing is the more common form of regulation at the point where
ATC=D. This will
9 Increase output and decrease price.
9 Increase social welfare (allocative efficiency).
9 Ensure the monopolist a normal profit since price=ATC.
② Marginal cost pricing forces the monopolist to reduce price to the point where
MC=D. this will: Increase output and reduce price. However, the price may be lower
than ATC, resulting subsidy by government.
132

17‐3 monopolistic competition
Q81‐3 Under monopolistic competition, a firm that introduces a new and differentiated
product is least likely to:
A. increase its price.
B. make an economic profit.
C. face a demand that is more elastic.

Solution: C
A firm in a monopolistic competition that introduces a new and differentiated product is able to
better differentiate its products, and thus demand would be less elastic as close substitutes
would be less readily available. Thus the firm would be able to increase price and enjoy
economic profit in the short run.

R49‐3 monopolistic competition
¾ The following market and product features define monopolistic competition:(1) There
are a large number of independent sellers. (2) Each seller produces a differentiated
product. (3) Firms compete on product quality, price and marketing. (4) Firms are free
to enter and exit. (5) Firms in monopolistic competition face downward‐sloping
demand curves and the curves are highly elastic because competing products are
perceived by consumers as close substitutes
Short-run output decision for a firm Long-run output decision for a firm
Price Price
MC
MC
P*
ATC
ATC
ATC* D ATC*,P*
MR D
MR
Quantity Quantity
Q Q
短期内：MR=MC，可以 economic profit 或者 economic loss；

长期内：无经济利润或损失（因为无进出壁垒），均衡条件是 MC=MR & P=ATC，但不
是在 ATC 的最低点

18‐3 Oligopoly market
Q82‐3 Over time, the market share of the dominant company in an oligopolistic market will
most likely: (原版书 R16‐13)
A. increase.
B. decrease.
C. remain the same.
133

Solution: B
The dominant company's market share tends to decrease as profits attract entry by other
companies.

Q83‐3 Oligopolistic pricing strategy most likely results in a demand curve that is: (原版书
R16‐10)
A. kinked.
B. vertical.
C. horizontal.

Solution: A
The oligopolist faces two different demand structures, one for price increases and another for
price decreases. Competitors will lower prices to match a price reduction, but will not match a
price increase. The result is a kinked demand curve.

Q84‐3 Aquarius, Inc. is the dominant company and the price leader in its market. One of the
other companies in the market attempts to gain market share by undercutting the price
set by Aquarius. The market share of Aquarius will most likely: (原版书 R16‐7)
A. increase.
B. decrease.
C. stay the same

Solution: A
As prices decrease, smaller companies will leave the market rather than sell below cost. The
market share of Aquarius, the price leader, will increase.
Q85‐3 ★SigmaSoft and ThetaTech are the dominant makers of computer system software. The
market has two components: a large mass‐market component in which demand is price
sensitive, and a smaller performance‐oriented component in which demand is much less
price sensitive. SigmaSoft's product is considered to be technically superior. Each
company can choose one of two strategies:
¾ Open architecture (Open): Mass market focus allowing other software venders to
develop products for its platform.
¾ Proprietary (Prop): Allow only its own software applications to run on its platform.
Depending upon the strategy each company selects, their profits would
ThetaTech - Prop ThetaTech - Open
SigmaSoft-Prop ( S 400, T 600) (S 650,T 700)
SigmaSoft-Open (S 800, T 300) (S 600, T 400)

The Nash equilibrium for these companies is: (原版书 R16‐8)
A. proprietary for SigmaSoft and proprietary for ThetaTech.
B. open architecture for SigmaSoft and proprietary for ThetaTech.
134
C. proprietary for SigmaSoft and open architecture for ThetaTech.

Solution: C
In the Nash model, each company considers the other's reaction in selecting its strategy. In
equilibrium, neither company has an incentive to change its strategy. ThetaTech is better off with
open architecture regardless of what SigmaSoft decides. Given this choice, SigmaSoft is better off
with a proprietary platform. Neither company will change its decision unilaterally.

Q86‐3 The natures of competitive environment to which the game of prisoners’ Dilemma
applies and the solution offered by Nash equilibrium, respectively, are:
nature of competitive environment solution from Nash equilibrium
A. Oligopoly Both prisoners deny
B. Oligopoly Both prisoners confess
C. Monopolistic competition Both prisoners deny

Solution: B
The game of Prisoners’ Dilemma applies to oligopoly and the solution from Nash equilibrium is
that both prisoners would confess to the crime.

Q87‐3 All else being equal, will the joint profit of an oligopolistic industry most likely be
maximized if the:
barriers to entry in the industry are demand for the industry's products is stable?
low?
A. No No
B. No Yes
C. Yes No

Solution: B
Joint profits in an oligopolistic industry are maximized when collusion is effective. The lower the
number of firms in the industry (higher barriers to entry), the more effective collusion will be.
Successful collusion is more likely when demand is stable because most firms will have similar
expectations for the future of the industry.

R50‐3 For oligopoly:
¾ Oligopoly is a form of market competition characterized by (1) small number of sellers
(2) interdependence among competitors (3) large economies of scale (4) significant
barriers to entry (5) either similar or differentiated products
¾ Four traditional oligopoly models (1) The kinked demand curve model of oligopoly is
based (2)Cournot duopoly model (3)Nash equilibrium model (4 Stackelberg dominant
firm model
R51‐3 The kinked demand curve model of oligopoly
¾ Assumption: each firm believes that if it raises its price, others will not follow, but if it
cuts its price, other firms will cut theirs
135
¾ Between range A and B, the optimum Q is constant, cann’t determine price
Price MC 1
More elastic
MC
Kink MC 2
PK
MR A
1
B Less elastic
MR 2
Quantity
Q
K
Max profit

R52‐3 Cournot model
¾ only two firms competing (eg:a duopoly 双寡模型)
¾ both have identical and constant marginal costs of production
¾ each firm knows the quantity supplied by the other firm in the previous period and
assumes that is what it will supply in the next period(两个厂商都准确地了解市场需
求曲线)
¾ construct a demand curve and marginal revenue curve for its own production (共同面
临的市场需求曲线是线性的)
¾ 市场成本为零
R53‐3 Dominant firm model
¾ a single firm has a significantly large market share：greater scale & lower cost structure
¾ market price is essentially determined by the dominant firm
¾ the other competitive firms take this market price as given.
¾ The order of decision: 1→2→ 3→4
Price
MCCF
MCDF
3
1 Market demand
4 2 MRDF
Quantity
QCF QDF

R54‐3 Game theory: Nash equilibrium: best payoff under which no best options for either.
B honors B cheats
A honors A 10% B 10% A ‐15% B 20%

A cheats A 20% B ‐15% A 0 B 0

19‐3 Market Concentration（计算、根据已知值分析）
Q88‐3 An analyst gathered the following market share data for an industry comprised of six
firms:
136
Firm Market Share
A 30%
B 20%
C 15%
D 15%
E 10%
F 10%
So, the industry’s four‐firm concentration ratio and Herfindahl‐Hirschman index are closest to:
Four‐firm concentration ratio HHI
A. 50% 1750
B. 90% 1750
C. 80% 1950

Solution: C
The four‐firm concentration ratio=30%+20%+15%+15%=80%
The Herfindahl‐Hirschman index=302+202+152+152+102+102=1950

Q89‐3 Which of the following four‐firm concentration ratios most likely would indicate an
oligopolistic market structure?
A. 25%
B. 55%
C. 75%
Solution: C
A four‐firm concentration ratio that exceeds 60% is regarded as indicative of an oligopoly.

Q90‐3 One disadvantage of the Herfindahl‐Hirschmann Index is that the index: (原版书
R16‐17)
A. is difficult to compute.
B. fails to reflect low barriers to entry.
C. fails to reflect the effect of mergers in the industry.

B is correct. The Herfindahl‐klirschmann Index does not reflect low barriers to entry that may
restrict the market power of companies currently in the market.

Market Concentration 计算：
R55‐3 The N‐Firm Concentration Ratio is the percentage of the value of sales accounted for by
the firms in an industry.
R56‐3 The Herfindahl‐Hirschman Index (HHI) is the square of the percentage market share of
each firm summed over the largest 50 firms (or summed over all the firms if there are
¾ In a competitive market, HHI<1000
¾ In a moderately competitive market, 1000<HHI<1800
¾ In an uncompetitive market, HHI>1800
137
1000 1800 10000
Competitive Moderately Uncompetitive Monopoly

market competitive market market market
R57‐3 Limitation of measures
¾ First, limitation of the N‐firm concentration ratio is that it may be relatively
insensitive to mergers of two firms with large market shares. This problem is
reduced by using Herfindahl‐Hirschman Index (HHI).
¾ Second, both of our simple concentration measures is that barriers to entry are not
considered in either case. Even a firm with high market share may not have much
pricing power if barriers to entry are low and there is potential competition
R58‐3 Economic rent & opportunity cost
¾ The opportunity cost of an employee is what he could make in his next
highest‐paying alternative employment.
¾ The different between a factor of production's earnings and opportunity cost is
called economic rent.

¾ Economic rent:对于 fixed supple 的经济租（例如：土地，黄金 & 石油），拿到的
所有 revenue 都是经济租,故要素价格越高经济租越高

20‐3 GDP 的基本概念
Q91‐3 Which of the following is least likely to result in an increase in potential GDP?
A. An advance in technology.
B. An increase in the money wage rate.
C. An increase in the quantity of capital.

Solution: B
Potential GDP will not change in response to an increase in the money wage rate.

Q92‐3 Assuming the economy is operating at full employment, what is the most likely
long‐run effect of an increase in government spending on the price level and real GDP?
A. The price level and real GDP will both increase.
B. The price level will increase, but there will be no change in real GDP.
C. The price level will not change, but there will be an increase in real GDP.

138
Solution: B .
If an economy is operating at full employment, the long‐run effect of an increase in government
spending is to increase the price level while real GDP will be unchanged at the full employment
level.

Q93‐3 The component least likely to be included in a measurement of gross domestic product
(GDP) is:(原版书 R17‐2)
A. the value of owner occupied rent.
B. the annual salary of a local police officer.
C. environmental damage caused by production.

Solution: C .
By‐products of production processes that have no explicit market value are not included in GDP.

Q94‐3 Suppose a painting is produced and sold in 2010 for £5,000. The expenses involved in
producing the painting amounted to £2,000. According to the sum‐of‐value‐added
method of calculating GDP, the value added by the final step of creating the painting was:
(原版书 R17‐5)
A. £2,000.
B. £3,000.
C. £5,000.

Solution: B .
This is the value added by the artist: £5,000 — £2,000 = £3,000.

Q95‐3 From the beginning to the ending years of a decade, the annual value of final goods and
services for country Xincreased from €100 billion to €300 billion. Over that time period,
the GDP deflator increased from 111 to 200. Over the decade, real GDP for country
Xincreased by approximately: (原版书 R17‐8)
A. 50%.
B. 67%.
C. 200%.

Solution: B .
Real GDP in the first year was €100 billion/1.11 = €90, and in the last year it was €300 billion/2.00
= €150. Thus, (€150 — €90)/€90 = 0.67 or 67%.

Q96‐3 The numerator of the GDP price deflator reflects: (原版书 R17‐10)
A. the value of base year output at current prices.
B. the value of current year output at current prices.
C. the value of current year output at base year prices.

Solution: B .
139
Value of current year output at current year prices

GDP deflator= × 100
Value of current year output at based year prices

Q97‐3 Consider the following data for 2010 for a hypothetical country: (原版书 R17‐11)
Account name Amount ($ trillions)
Consumption 15.0
Statistical discrepancy 0.5
Capital consumption allowance 1.5
Government spending 3.8
Imports 1.7
Gross private domestic investment 4.0
Exports 1.5

Based only on the data given, the gross domestic product and national income are respectively
closest to:
A. 21.1 and 20.6.
B. 22.6 and 20.6.
C. 22.8 and 20.8.

Solution: B .
GDP = Consumption + Gross private domestic investment + Government Spending + Exports —
Imports = 15 + 4 + 3.8 + 1.5 — 1.7 = 22.6. National income = GDP — CCA — Statistical
discrepancy = 22.6 — 1.5 — 0.5 = 20.6.
R59‐3 Nominal and Real GDP and GDP deflator
N
nominal GDPt = ∑ Pi,t Qi,t
i=1
N
= ∑ (price of good i in year t ) × (quantity of good i produced in year t )
i=1
N
real GDPt = ∑ Pi,t-5Qi,t
i=1
N
= ∑ (price of good i in year t − 5) × (quantity of good i produced in year t )
i=1
N
∑P Q i,t i,t
GDP deflator for year t = i=1
N
× 100
∑P
i=1
i,t-5 Qi,t
nominal GDP in year t

= ×100
value of year t output at year t − 5 prices
R60‐3 GDP 的计算
¾ expenditure approach：GDP = C + I + G + (X ‐ M)
¾ income approach：GDP = national income + capital consumption allowance
+ statistical discrepancy
140
21‐3 国民收入核算
Q98‐3 In a simple economy with no foreign sector, the following equations apply
Consumption function C = 2,500 + 0.80 × (Y – T)
Investment function I = 500 + 0.30 × Y – 25 × r
Government spending G = 1,000
Tax function T = –250 + 0.30 × Y
Y: Aggregate income r: Real interest rate
If the real interest rate is 3% and government spending increases to 2,000, the increase in
aggregate income will be closest to: (MOCK83‐39)
A. 1,000.
B. 1,163.
C. 7,143.

Solution: C .
With no foreign sector, the GDP identity is Y = C + I + G.
With substitution from the equations above,
Y = 2,500 + 0.80 × (Y – T) + 500 + 0.30 × Y – 25 × r + 1,000
= 2,500 + 0.80 × (Y +250 – 0.30 × Y) + 500 + 0.30 × Y – 25 × r + 1,000.
Y = 4,200 + 0.86 × Y – 25 × r.
Y = 30,000 – 178.6 × r.
At 3%, Y = 30,000 – 178.6 × 3 = 29,464.
Alternatively, Y – 0.86Y = 4,200 – 25 × r
0.14Y = 4,200 – 256 × r.

If government spending increased by 1,000 to 2,000, then Y = 5,200 + 0.86 × Y – 25 × r.
Y = 37,142 – 178.6 × r, which at 3% would be Y = 37,142 – 178.6 × 3 = 36,607.
Representing an increase of 36,607 – 29,464 = 7,143.
Alternatively, at 5,200, Y – 0.86Y = 5,200 – 25 × r or 0.14 Y = 5,200 – 25 × r.
Or more simply, ∆G ÷ (1 – c) = 1,000/(1 – 0.86) = 7,143.

Q99‐3 In calculating personal income for a given year, which of the following would not be
subtracted from national income? (原版书 R17‐12)
A. Indirect business taxes.
B. Undistributed corporate profits.
C. Unincorporated business net income.
Solution: C.
Unincorporated business net income is also known as proprietor's income and is included in
personal income.

141
R61‐3 National income, personal income, and personal disposable income
¾ National income is the sum of the income received by all factors of production that go
into the creation of final output.
¾ national income = compensation of employees (wages and benefits)
+corporate and government enterprise profits before taxes
+interest income
+unincorporated business net income (business owners' incomes)
+rent
+indirect business taxes ‐ subsidies (taxes and subsidies that are
included in final prices)
¾ Personal income= national income ‐ indirect business tax ‐ corporate business tax ‐
undistributed corporate profit
¾ Personal disposable income= personal income ‐ personal taxes

22‐3 Saving and investment
Q100‐3 Because of a sharp decline in real estate values, the household sector has increased the
fraction of disposable income that it saves. If output and investment spending remain
unchanged, which of the following is most(原版书 R17‐14)
A. A decrease in the government deficit.
B. A decrease in net exports and increased capital inflow.
C. An increase in net exports and increased capital outflow.

Solution: C
The fundamental relationship among saving, investment, the fiscal balance, and the trade
balance is S = I + (G — T) + (X —M). Given the levels of output and investment spending, an
increase in saving (reduction in consumption) must be offset by either an increase in the fiscal
deficit or an increase in net exports. Increasing the fiscal deficit is not one of the choices, so an
increase in net exports and corresponding increase in net capita] outflows (increased lending to
foreigners and/or increased purchases of assets from foreigners) is the correct response.

Q101‐3 Equality between aggregate expenditure and aggregate output implies that the
government's fiscal deficit must equal: (原版书 R17‐13)
A. Private saving — Investment — Net exports.
B. Private saving — Investment + Net exports.
C. Investment — Private saving + Net exports.

Solution: C.
The fundamental relationship among saving, investment, the fiscal balance, and the trade
balance is S = I + (G — T) + (X — M). This form of the relationship shows that private saving must
fund investment expenditures, the government fiscal balance, and net exports (= net capital
outflows). Rearranging gives G — T = (S — I) — (X — M). The government's fiscal deficit ( G — T)
must be equal to the private sector's saving/investment balance (S — I) minus net exports.

142
R62‐3 储蓄,投资,财政平衡与贸易平衡之间的关系
¾ 总收入：C + I + G + (X ‐ M) →① 总支出：C+S+T →②
¾ ① = ② → S‐ I = (G ‐ T) + (X ‐ M)
¾ (G ‐ T)：财政平衡 (X ‐ M)：贸易平衡
¾ 储蓄大于投资说明出现政府赤字或者贸易赤字

23‐3 IS & LM curve.
An increase in the price level would shift the: (原版书 R17‐18)
A. IS curve.
B. LM curve.
C. aggregate demand curve.

Solution: B .
The LM curve represents combinations of income and the interest rate at which the demand for
real money balances equals the supply. For a given nominal money supply, an increase in the
price level implies a decrease in the real money supply. To decrease the demand for real money
balances, either the interest must increase or income must decrease. Therefore, at each level of
the interest rate, income (= expenditure) must decrease—a leftward shift of the LM curve.

Q102‐3 An increase in the nominal money supply would shift the: (原版书 R17‐17)
A. IS curve and the LM curve.
B. IS curve and the aggregate demand curve.
C. LM curve and the aggregate demand curve.

Solution: C .
The LM curve represents combinations of income and the interest rate at which the demand for
real money balances equals the supply. For a given price level, an increase in the nominal money
supply is also an increase in the real money supply. To increase the demand for real money
balances, either the interest must decline or income must increase. Therefore, at each level of
the interest rate, income (= expenditure) must increase—a rightward shift of the LM curve. Since
the IS curve is downward sloping (higher income requires a lower interest rate), a rightward shift
in the LM curve means that the IS and LM curves will intersect at a higher level of aggregate
expenditure/income. This implies a higher level of aggregate expenditure at each price level—a
rightward shift of the Aggregate Demand curve.

Q103‐3 An increase in government spending would shift the：(原版书 R17‐16)
A. IS curve and the LM curve.
B. IS curve and the aggregate demand curve.
C. LM curve and the aggregate demand curve.

Solution: B .
The IS curve represents combinations of income and the real interest rate at which planned
expenditure equals income. Equivalently, it represents combinations such that
143
S(Y) = I( r) + (G– T) + (X – M)
where S( Y) indicates that planned saving is a (increasing) function of income and l(r) indicates
that planned investment is a (decreasing) function of the real interest rate. To maintain this
relationship, an increase in government spending (G) requires an increase in saving at any given
level of the interest rate (r). This implies an increase in income ( Y) at each interest rate level—a
rightward shift of the IS curve.
Unless the LM curve is vertical, the IS and LM curves will intersect at a higher level of aggregate
expenditure/income. Since the LM curve embodies a constant price level, this implies an increase
in aggregate expenditure at each price level—a rightward shift of the Aggregate Demand curve.

Q104‐3 Which curve represents combinations of income and the real interest rate at which
planned expenditure equals income? (原版书 R17‐15)
A. The IS curve.
B. The LM curve.
C. The aggregate demand curve.

A is correct. The IS curve represents combinations of income and the real interest rate at which
planned expenditure equals income.

IS and LM curves
R63‐3 IS curves
Real The ISCurve
Real LM curve
interest lower M/P
interest
rate
rate (r) LM Curve
x
C LM curve
x higher M/P
B x
A
Real aggregate Income Real GDP (y)

¾
If income and expenditure are to remain in equilibrium, there must be an inverse
relationship between the real interest rate and income. In economics, this relationship
is called the IS curve, because investment (I) and savings (S) are the primary variables
that adjust to maintain the balance between expenditure and income.
R64‐3 LM curves
¾ In equilibrium, there is a positive relationship between real income and the real
interest rate for a given level of the real money supply

24‐3 Aggregate Demand
Q105‐3 In regard to the aggregate demand curve and an increase in one of its associated factors,
which of the following relationships is least accurate? (MOCK84‐36)

144
Increase in factor Shifts the AD curve Reason

A Stock prices Rightward Lower investment
B Consumer confidence Rightward Higher consumption
C Exchange rate Leftward Lower exports and higher
imports
Exchange rate is foreign currency per unit of domestic currency

Solution: A.
If stock prices rise, the aggregate demand curve will shift to the right (increase in AD) because of
higher consumption (wealth effect), not lower investments.

Q106‐3 The least likely cause of a decrease in aggregate demand is: (原版书 R17‐23)
A. higher taxes.
B. a weak domestic currency.
C. a fall in capacity utilization.

Solution: B .
A weak domestic currency will result in an increase in aggregate demand at each price level—a
rightward shift in the AD curve. A weaker currency will cause a country's exports to be cheaper in
global markets. Conversely, imports will be more expensive for domestic buyers. Hence, the net
exports component of aggregate demand will increase.

Q107‐3 As the price level declines along the aggregate demand curve, the interest rate is most
likely to: (原版书 R17‐19)
A. decline.
B. increase.
C. remain unchanged.

Solution:A .
A decrease in the price level increases the real money supply and shifts the LM curve to the right.
Since the IS curve is downward sloping, the IS and LM curves will intersect at a higher level of
income and a lower interest rate.

Q108‐3 All else equal, aggregate demand is most likely to decrease in response to a decrease in:
A. Interest rates.
B. Federal tax revenues.
C. Expected corporate profits.

Solution: C
Aggregate demand is expected to decrease if corporate profits decrease because firms will have
less money to spend on investment in capital equipment.

145
Aggregate Demand
R65‐3 AD 曲线说明 Real GDP 与物价水平之间呈反向关系
¾ 原因：更高的物价水平降低了实际财富，提高了实际利率并使国内生产的产品相
比于国外产品更贵，所有这些因素使得国内产出下降
R66‐3 Movement & shift
¾ a change in the price level is represented as a movement along the AD curve
¾ an increase in aggregate demand is shown by a shift to the right, indicating that the
quantity of goods and services demanded is greater at any given price level.
R67‐3 The factors that affect aggregate demand:
¾ Increase in consumers' wealth: households' wealth ↑→proportion of income
saved↓& spending↑→C↑
¾ Consumer expectations of future income: 消费者预期未来收入增加从而会增加当
前消费
¾ Business expectations: When businesses are more optimistic about future sales, they
tend to increase their investment in plant, equipment, and inventory, which increases
aggregate demand (I ↑).
¾ High capacity utilization：资本效用提高从而 PPE 投资增加
¾ Expansionary monetary policy ： (a)rate of growth of the money supply↑→puts
downward pressure on interest rates→PPE 投资↑; (b) rate↓→credit↑→分期付款消
费↑
¾ Expansionary fiscal policy：taxes increases↓→disposable income and consumption，
government spending↑→AD directly ↑(C increases for tax cut, G increases for
spending increase
¾ Exchange rates：A decrease in the relative value of a country's currency will increase
exports and decrease imports. Both of these effects tend to increase domestic
aggregate demand (net X increases).
¾ Global economic growth: GDP growth in foreign economies tends to increase the
quantity of imports (domestic exports) foreigners demand. By increasing domestic
export demand, this will increase aggregate demand (net X increases

25‐3 Aggregate Supply Curve
Q109‐3 Following a sharp increase in the price of energy, the overall price level is most likely to
rise in the short run: (原版书 R17‐28)
A. and remain elevated indefinitely unless the central bank tightens.
B. but be unchanged in the long run unless the money supply is increased.
C. and continue to rise until all prices have increased by the same proportion.

B is correct.
An increase in energy prices will shift the short‐run aggregate supply curve (SRAS) to the left,
reducing output and increasing prices. If there is no change in the aggregate demand curve, in
particular if the central bank does not expand the money supply, slack in the economy will put
downward pressure on input prices, shifting the SRAS back to its original position. In the long run,
the price level will be unchanged.
146

Q110‐3 If wages were automatically adjusted for changes in the price level, the short‐run
aggregate supply curve would most likely be: (原版书 R17‐22)
A. flatter.
B. steeper.
C. unchanged.

B is correct.
The slope of the short‐run aggregate supply curve reflects the extent to which wages and other
input costs adjust to the overall price level. Automatic adjustment of wages would mitigate the
impact of price changes on profitability. Hence, firms would not adjust output as much in
response to changing output prices—the SRAS curve would be steeper.

Q111‐3 Which of the following best describes the aggregate supply curve in the short run (e.g., 1
to 2 years)? The short‐run aggregate supply curve is: (原版书 R17‐21)
A. flat because output is more flexible than prices in the short run.
B. vertical because wages and other input prices fully adjust to the price level.
C. upward sloping because input prices do not fully adjust to the price level in the short run.

C is correct.
Due to long‐term contracts and other rigidities, wages and other input costs do not fully adjust to
changes in the price level in the short run. Given input prices, firms respond to output price
changes by expanding or contracting output to maximize profit. Hence, the SRAS is upward
sloping.

Q112‐3 The most likely outcome when both aggregate supply and aggregate demand increase is:
(原版书 R17‐26)
A. a rise in inflation.
B. higher employment.
C. an increase in nominal GDP.

B is correct.
Higher aggregate demand (AD) and higher aggregate supply (AS) raise real GDP and lower
unemployment, meaning employment levels increase.

Aggregate Supply Curve
R68‐3 Three aggregate supply curves with different time frames
¾ (1) the very short‐run aggregate supply (VSRAS) curve
¾ (2) the short‐run aggregate supply (SRAS) curve
¾ (3) the long‐run aggregate supply (LRAS) curve
R69‐3 Factors can cause the SRAS curve to shift to the right:
¾ (1) Labor productivity
¾ (2)Input prices
147
¾ (3)Expectations of future output prices
¾ (4)Taxes and government subsidies(5)Exchange rates
R70‐3 Factors that will shift the LRAS curve are
¾ (1) Increase in the supply and quality of labor
¾ (2) Increase in the supply of natural resources
¾ (3) Increase in the stock of physical capital
¾ (4) Technology
R71‐3 Stagflation
¾ Stagflation：both high unemployment and increasing inflation
¾ Stagflation is generally associated with a sharp decrease in aggregate supply.即 supply
shock 导致 AS 突然大幅下降从而使得 GDP 下降，物价上升，例如 1973 年的石油
危机
¾ An investor anticipating stagflation should:
Decrease investment in fixed income securities in anticipation of higher inflation
and nominal interest rates.
Decrease investment in equities as revenue and profit margins will decrease.
Increase investment related to commodities in anticipation of higher commodity
prices.

26‐3 Production function
Q113‐3 An economic forecasting firm has estimated the following equation from historical data
based on the neoclassical growth model:
Potential output growth = 1.5 + 0.72 X Growth of labor + 0.28 X Growth of capital
The intercept (1.5) in this equation is best interpreted as: (原版书 R17‐33)
A. the long‐run sustainable growth rate.
B. the growth rate of total factor productivity.
C. above trend historical growth that is unlikely to be sustained.

B is correct.
The estimated equation is the standard Solow growth accounting equation. The intercept is the
growth rate of total factor productivity.

Q114‐3 In the neoclassical or Solow growth model, an increase in total factor productivity
reflects an increase in: (原版书 R17‐32)
A. returns to scale.
B. output for given inputs.
C. the sustainable growth rate.

B is correct.
Total factor productivity (TFP) is a scale factor primarily reflecting technology. An increase in TFP
means that output increases for any level of factor inputs.

Q115‐3 The sustainable growth rate is best estimated as: (原版书 R17‐31)
148
A. the weighted average of capital and labor growth rates.
B. growth in the labor force plus growth of labor productivity.
C. growth in total factor productivity plus growth in the capital‐to‐labor ratio.

B is correct.
Output growth is equal to the growth rate of the labor force plus the growth rate of labor
productivity, i.e. output per worker. Unlike total factor productivity, output per worker is
observable, so this is the most practical way to approach estimation of sustainable growth.

Production function
R72‐3 Five important sources of economic growth(1) Labor supply (2)Human capital(3)Physical
capital stock (4)Technology (5)Natural resources
R73‐3 Production function
¾ Y = A ×f (L, K)其中：A 代表技术，L 代表劳动力，K 代表资本
¾ Y/L=A ×f (K/L) →人均增长
¾ growth in potential GDP = growth in technology + WL(growth in labor) + WC (growth in
capital), WL and W C are labor's and capital's percentage share of national income.
¾ WL＞WC 说明国民收入中 labour 的贡献更大
¾ growth in per‐capita potential GDP =growth in technology + WC (growth in the
capital‐to‐labor ratio

27‐3 Business cycle
Q116‐3 Based on typical labor utilization patterns across the business cycle, productivity (output
per hours worked) is most likely to be highest(原版书 R18‐5)
A. at the peak of a boom.
B. into a maturing expansion.
C. at the bottom of a recession.

C is correct.
At the end of a recession, firms will run "lean production" to generate maximum output with the
fewest number of workers.

Q117‐3 In a recession, companies are most likely to adjust their stock of physical capital by: (原
版书 R18‐6)
A. selling it at fire sale prices.
B. not maintaining equipment.
C. quickly canceling construction activity.

B is correct.
Physical capital adjustments to downturns come through aging of equipment plus lack of
maintenance.

Q118‐3 Business cycle analysis most commonly describes economic activity that is conducted
149
through: (原版书 R18‐1)
A. state enterprises.
B. agricultural co‐ops.
C. private corporations.

C is correct.
Business cycles relate to fluctuations in national economic activity generated mainly through
business enterprises.

Q119‐3 If relative to prior values of their respective indicators the inventory—sales ratio has
risen, unit labor cost is stable, and real personal income has decreased, it is most likely
that a peak in the business cycle: (原版书 R18‐25)
A. has occurred.
B. is just about to occur.
C. will occur sometime into the future.

A is correct.
Both inventory—sales and unit labor costs are lagging indicators that decline somewhat after a
peak. Real personal income is a coincident indicator that by its decline shows a slowdown in
business activity.

Q120‐3 The inventory/sales ratio is most likely to be rising: (原版书 R18‐7)
A. as a contraction unfolds.
B. partially into a recovery.
C. near the top of an economic cycle.

C is correct. Near the top of a cycle, sales begin to slow before production is cut, leading to an
increase in inventories relative to sales.
Business cycle
R74‐3 Business cycles have four phases: trough\expansion\ peak\contraction
¾ Tow consecutive quarters of growth in real GDP as the beginning of an expansion and
two declining as the beginning of a contraction
¾ Only applies to the economies that cosist of business, not the state‐control and
argicultural society
R75‐3 Inventory‐sales ratio
¾ 经济扩张接近波峰时，sales 增加放缓，unsold 存货累积，从而 inventory‐sales ratio
高于正常水平
¾ 存货增加无论是计划还是非计划都计入 GDP
¾ 如果只看到 GDP 增加而没看到 inventory‐sales ratio 增加，会错误认为 GDP 依然强劲
而不是开始衰退, lagging indicator

28‐3 解释经济周期的理论
Q121‐3 The Austrian economic school attributes the primary cause of the business cycle to: (原
150
版书 R18‐8)
A. misguided government intervention.
B. the creative destruction of technological progress.
C. sticky price and wage expectations that exaggerate trends.

A is correct.
Austrian economists see monetary policy mistakes as leading to booms and busts.

R76‐3 Theories of the business cycle
¾ Neoclassical theory:强调技术进步会同时影响 AD 与 AS, economy has strong tendency
toward 充分就业均衡，该学派的结论是经济周期是长期均衡的暂时偏离
¾ Keynesian cycle theory：投资的变动是由 fluctuation in business confidence (animal
spirits)，这是 AD 变化的主要原因
¾ New Keynesian cycle theory：工资是根据 past rational expectation 确定，所以
unexpected and currently expected fluctuation in AD 将使得经济周期出现。
¾ New classical cycle theory（RBC）：rational expectation of price level 是由 potential GDP
and expected AD 决定。Only unexpected fluctuation in AD 将使得经济周期出现。
¾ 奥地利学派:Believe cycles are caused by government intervention in the economy
¾ Monetarist cycle theory: fluctuations in both investment and consumption
expenditure, driven by fluctuations in the growth rate of the quantity of money, are
the main source of fluctuations in AD，将使得经济周期出现。
29‐3 unempolyment
Q122‐3 The discouraged worker category is defined to include people who:
A. are overqualified for their job.
B. could look for a job but choose not to.
C. currently look for work without finding it

Solution: B

Q123‐3 The unemployment rate is considered a lagging indicator because:
A. new job types must be defined to count their workers.
B. multi‐worker households change jobs at a slower pace.
C. businesses are slow to hire and fire due to related costs.

Solution: C

Q124‐3 12. The factor for which it is most difficult to estimate its effect on the unemployment
rate is:
A. technological progress.
B. the use of temporary workers.
C. the nature of underemployment.

Solution: A
151
R77-3 Definiton
¾ Employed: number of people with a job. This figure normally does not include
people working in the informal sector (e.g., unlicensed cab drivers, illegal workers,
etc.).
¾ Labor force: number of people who either have a job or are actively looking for a
job. This number excludes retirees, children, stay‐at‐home parents, fulltime
students, and other categories of people who are neither employed nor actively
seeking employment.
¾ Unemployed: people who are actively seeking employment but are currently without a
job. Some special subcategories include:
Long‐term unemployed: people who have been out of work for a long time
(more than 3‐4 months in many countries) but are still looking for a job.
Frictionally unemployed: people who are not working at the time of filling
out the statistical survey because they just left one job and are about to
start another job. That is, the frictionally unemployed have a job waiting for
them and are not 100 percent unemployed—it is just that they have not
started the new job yet.
¾ Unemployment rate: ratio of unemployed to labor force.
number of unemployed
unemployment rate = × 100
labor force
¾ Activity (or participation) ratio: ratio of labor force to total population of working age
(i.e., those between 16 and 64 years of age).
labor force
labor force participation rate= × 100
Working − age population
¾ Underemployed: person who has a job but has the qualifications to work a
significantly higher‐paying job. For example, a lawyer who is out of work and
takes a job in a bookstore could call herself underemployed. This lawyer would
count as employed for the computation of the unemployment rate (she does have
a job, even if it may not be her highest paying job). Although the unemployment
rate statistic is criticized for not taking the issue of underemployment into
account, it may be difficult to classify whether a person is truly
underemployed—for example, the lawyer may find legal work too stressful and
prefers working at the bookstore. However, data for part‐time working is
sometimes a good proxy.
¾ Discouraged worker: person who has stopped looking for a job. Perhaps because of
a weak economy, the discouraged worker has given up seeking employment.
Discouraged workers are statistically outside the labor force (similar to children
and retirees), which means they are not counted in theofficial unemployment
rate. During bad recessions, the unemployment rate may actually decrease
because many discouraged workers stop seeking work, such as stay‐at‐home
mothers who ideally would prefer to work. It is important to observe the
participation rate together with the unemployment rate to understand if
unemployment is decreasing because of an improved economy or because of an
152
increase in discouraged workers. Discouraged workers and underemployed people
may be considered examples of "hidden unemployment."
¾ Voluntarily unemployed: person voluntarily outside the labor force, such as a
jobless worker refusing an available vacancy for which the wage is lower than their
threshold or those who retired early.

30‐3 inflation
Q125‐3 Which of the following can lead to demand‐pull inflation?
A. An increase in exports.
B. A decrease in government expenditures.
C. An increase in the prices of raw materials.

A is correct.
An increase in exports reflects an increase in aggregate demand that causes inflation.

Q126‐3 An analyst gathered the following year‐end price level data for an economy:
Year End Price Level
2000 174.0
2004 190.3
2005 196.8
The economy's annual inflation rate for 2005 and the compounded annual inflation rate for the
2000‐2005 period are closest to:
2005 Inflation 2000‐2005 Inflation
A 3.42% 2.49%
B 3.42% 2.62%
C 6.50% 2.49%

Solution: A
Inflation for 2005 = (196.8/190.3) — 1 = 1.0342 — 1 = 3.42% or (196.8 — 190.3)/190.3 = 3.42%.
The compound annual inflation for 2000‐2005 is found using a financial calculator. Inputs are PV
= ‐174.0, FV= 196.8, N = 5, PMT = 0, and compute I/ Y = 2.49%.

Q127‐3 The least likely consequence of a period of hyperinflation is the: (原版书 R18‐16)
A. reduced velocity of money.
B. increased supply of money.
C. possibility of social unrest.

A is correct.
In hyperinflation, consumers accelerate their spending to beat price increases and money
circulates more rapidly.

Q128‐3 The term that describes when inflation declines but nonetheless remains at a positive
153
level is: (原版书 R18‐14)
A. deflation.
B. stagflation.
C. disinflation.

C is correct.
Disinflation is known as a reduction of inflation from a higher to lower, but still above zero, level.

Q129‐3 The category of persons who would most likely be harmed by an increase in the rate of
inflation is: (原版书 R18‐13)
A. homeowners with fixed 30‐year mortgages.
B. retirees relying on a fixed annuity payment.
C. workers employed under contracts with escalator clauses.

B is correct.
With inflation, a fixed amount of money buys fewer goods and services, thus reducing
purchasing power.

Q130‐3 An economic peak is most closely associated with: (原版书 R18‐4)
A. accelerating inflation.
B. stable unemployment.
C. declining capital spending.

A is correct.
Inflation is rising at peaks.

Q131‐3 Demand‐pull inflation is least likely a result of the increase of
A. Export
B. money wage rate
C. quantity of money

Solution: B
Demand pull inflation result from an increase in the money supply, increased government
spending, or any other cause that increases aggregate demand.

The following information Exhibit 1 relates to two folloing questions
Date November 2010 December 2010
Goods Quantity Price Quantity Price
Sugar 70kg €0.90/kg 120kg €1.00/kg
Cotton 60kg €0.60/kg 50kg €0.80/kg

Q132‐3 For the December consumption basket in Exhibit 1, the value of the Paasche index is
closest to: (原版书 R18‐18)
154
A. 116.
B. 148.
C. 160.

A is correct.
The Paasche index uses the current product mix of consumption combined with the variation of
prices. So for December, its value is:
(120 X 1 + 50 X 0.8)/ (120 X 0.9 + 50 x 0.6) =‐ (160/138) X 100= 115.9

Q133‐3 Assuming the base period for 2010 consumption is November and the initial price index
is set at 100, then the inflation rate after calculating the December price index as a
Laspeyres index is closest to: (原版书 R18‐17)
A. 19.2%.
B. 36.4%.
C. 61.6%.

A is correct.
The Laspeyres index is calculated with these inputs: I.‐
¾ November consumption bundle: 70 X 0.9 + 60 X 0.6 = 99
¾ December consumption bundle: 70 X 1 + 60 X 0.8 = 118 IN.
¾ December price index: (118/99) X 100 = 119.19
¾ Inflation rate: (119.19/100) — 1 = 0.1919 = 19.19%

Inflation
R78‐3 Inflation rate
¾ Inflation rate = [(Current CPI ‐ year‐ago CPI) / year ‐ ago CPI] 100
¾ CPI = (cost of basket at current prices / cost of basket at base period prices) 100
¾ Core inflation:价格指数计算中剔除了食品与能源，因此更好的反映价格变化趋势
R79‐3 Laspeyres index
¾ uses a constant basket of goods and services ,most countries calculate consumer price
inflation this way
¾ Three factors cause a Laspeyres index of consumer prices to be biased upward as a
measure of the cost of living: new goods, quality changes, commodity substitution
R80‐3 Paasche index
¾ A Paasche index uses the current consumption weights, prices from the base period,
and prices in the current period.
R81‐3 Fisher index.
¾ A Fisher index the geometric mean of a Laspeyres index and a Paasche index
¾ IndexFisher=(IP*IL)1/2
¾ can solve the subsititution bias.
R82‐3 Hedonic pricing
¾ can be used to adjust a price index for product quality.
R83‐3 Inflation
155
¾ Demand‐pull inflation: (1) increase in the quantity of money, (2) Increase in
government purchases. (3)Increase in exports.
¾ Cost‐push inflation: (1)increase in money wage rates. (2) increase in the money prices
of raw materials
¾ non‐accelerating inflation rate of unemployment (NAIRU), also called the natural rate
of unemployment

31‐3 Indicators
Q134‐3 Which of the following statements is the best description of the characteristics of
economic indicators? (原版书 R18‐23)
A. Leading indicators are important because they track the entire economy.
B. Lagging indicators in measuring past conditions do not require revisions.
C. A combination of leading and coincident indicators can offer effective forecasts.

C is correct.
Although no single indicator is definitive, a mix of them—which can be affected by various
economic determinants—can offer the strongest signal of performance.

Q135‐3 The characteristic of national consumer price indexes which is most typically shared
across major economies worldwide is:
A. the geographic areas covered in their surveys.
B. the weights they place on covered goods and services.
C. their use in the determination of macroeconomic policy

C is correct.
Central banks typically use consumer price indexes to monitor inflation and evaluate their
monetary policies.

Q136‐3 When the spread between 10‐year U.S. Treasury yields and the federal funds rate
narrows and at the same time the prime rate stays unchanged, this mix of indicators
most likely forecasts future economic: (原版书 R18‐24)
A. growth.
B. decline.
C. stability.

B is correct.
The narrowing spread of this leading indicator foretells a drop in short‐term rates and a fall in
economic activity. The prime rate is a lagging indicator and typically moves after the economy
turns.

Q137‐3 Of the following statements regarding the Producer Price Index (PPI), which is the least
likely? The PPI: (原版书 R18‐20)
A. can influence the future CPI.
156
B. category weights can vary more widely than analogous CPI terms.
C. is used more frequently than CPI as a benchmark for adjusting labor contract payments.

C is correct.
The CPI is typically used for this purpose, while the PPI is more closely connected to business
contracts.

R84‐3 先行，同步与滞后经济指标
Leading Reason
S&P 500 Stock Index Because stock prices anticipate economic turning points,
both up and down, their movements offer a useful early
signal on economic cycles.
Money supply, real M2 Because money supply growth measures the tightness or
looseness of monetary policy, increases in money beyond
inflation indicate easy monetary conditions and a positive
economic response, whereas declines in real M2 indicate
monetary restraint and a negative economic response.
Interest rate spread between Because long‐term yields express market expectations
10‐year treasury yields and about the direction of short‐term interest rates, and rates
overnight borrowing rates ultimately follow the economic cycle up and down, a
(federal funds rate) wider spread, by anticipating short rate increases, also
anticipates an economic upswing. Conversely, a narrower
spread, by anticipating short rate decreases, also
anticipates an economic downturn.
Index of Consumer Expectations, Because the consumer is about two‐thirds of the U.S.
University of Michigan economy and will spend more or less freely according to
his or her expectations, this gauge offers early insight into
future consumer spending and consequently directions in
the whole economy.

Coincident Reason
Employees on non‐agricultural Once recession or recovery is clear, businesses adjust their
payrolls fulltime payrolls.
Aggregate real personal income By measuring the income flow from non‐corporate profits
(less transfer payments) and wages, this measure captures the current state of the
economy.
Industrial Production Index Measures industrial output, thus capturing the behavior of
the most volatile part of the economy. The service sector
tends to be more stable.
Manufacturing and trade sales In the same way as aggregate personal income and the
industrial production index, this aggregate offers a
measure of the current state of business activity.
157
Lagging Reason
Average Duration of Because businesses wait until downturns look genuine to
Unemployment lay off, and wait until recoveries look secure to rehire, this
measure is important because it lags the cycle on both the
way down and the way up.
Inventory—sales ratio Because inventories accumulate as sales initially decline
and then, once a business adjusts its ordering, become

depleted as sales pick up, this ratio tends to lag the cycle.

32‐3 Money supply and money demand
Q138‐3 The proposition that the real interest rate is relatively stable is most closely associated
with: (原版书 R19‐7)
A. the Fisher effect.
B. money neutrality.
C. the quantity theory of money.

A is correct.

Q139‐3 The Fisher effect is based on the idea that the real interest rate is relatively stable.
Changes in the nominal interest rate result from changes in expected inflation.

Which is the most accurate statement regarding the demand for money?
A. Precautionary money demand is directly related to GDP.
B. Transactions money demand is inversely related to returns on bonds.
C. Speculative demand is inversely related to the perceived risk of other assets.

A is correct.
Precautionary money demand is directly related to GDP. Precautionary money balances are held
to provide a buffer against unforeseen events that might require money. Precautionary balances
tend to rise with the volume and value of transactions in the economy, and therefore rise with
GDP.

R85‐3 Money has three basic functions:
¾ Medium of exchange ‐facilitates transactions (liquidity). (2)Unit of account‐ used to
quote prices. (2) Store of value‐ transfer purchasing power to future
R86‐3 Money Creation:
1
¾ Potential deposit expansion multiplier = （r: the required reserve ratio）
r
¾ Fed definition: based on spendiabiliyt. M1 includes all currency not held at banks,
travelers’ checks, and checking account deposits of individuals and firms (but not
government checking accounts); M2 includes all the components of M1, plus time
deposits, savings deposits, and money market mutual and fund balances.
R87‐3 货币数量论
158
¾ Money supply × Velocity= GDP = Price × Real output Monetarists believed that money
supply should be increased only at the growth rate of real output to stabilize price
level.
R88‐3 货币需求：
¾ Transaction demand：与 real GDP 正相关
¾ Precautionary demand 与 real GDP 正相关
¾ Speculative demand It is inversely related to returns available in the market（(risk
higher, higher cash 即与风险正相关)
R89‐3 Fisher effect
¾ R Nom = R Real + E [ I ] +RP

33‐3 Central bank
Q140‐3 Which role is a central bank least likely to assume? (原版书 R19‐11)
A. Lender of last resort.
B. Sole supervisor of banks.
C. Supplier of the currency.

B is correct.
The supervision of banks is not a role that all central banks assume. When it is a central bank's
role, responsibility may be shared with one or more entities.

Q141‐3 In theory, setting the policy rate equal to the neutral interest rate should promote: (原版
书 R19‐18)
A. stable inflation.
B. balanced budgets.
C. greater employment.

A is correct.
The neutral rate of interest is that rate of interest that neither stimulates nor slows down the
underlying economy. The neutral rate should be consistent with stable long‐run inflation.

Q142‐3 Which action is a central bank least likely to take if it wants to encourage businesses and
households to borrow for investment and consumption purposes? (原版书 R19‐14)
A. Sell long‐dated government securities.
B. Purchase long‐dated government treasuries.
C. Purchase mortgage bonds or other securities.

A is correct.
Such action would tend to constrict the money supply and increase interest rates, all else equal.

Q143‐3 Which of the following is a limitation on the ability of central banks to stimulate growth
in periods of deflation? (原版书 R19‐21)
159
A. Ricardian equivalence.
B. The interaction of monetary and fiscal policy.
C. The fact that interest rates have a minimum value (0%).

C is correct.
Deflation poses a challenge to conventional monetary policy because once the central bank has
cut nominal interest rates to zero to stimulate the economy, they cannot cut them further.

Q144‐3 A central bank that decides the desired levels of interest rates and inflation and the
horizon over which the inflation objective is to be achieved is most accurately described
as being: (原版书 R19‐15)
A. target independent and operationally independent.
B. target independent but not operationally independent.
C. operationally independent but not target independent.

A is correct.
The central bank described is target independent because it set its own targets (e.g., the target
inflation rate) and operationally independent because it decides how to achieve its targets (e.g.,
the time horizon).

中央银行的作用，政策目标，与政策工具
R90‐3 Role of central bank:
¾ Sole supplier of currency (发行货币)
¾ Banker to the government and other banks （最终贷款）
¾ Lender of last resort
¾ Supervise banks (监管)
¾ Holder of gold and foreign exchange reserves
¾ Conductor of monetary policy
R91‐3 Central banks manage money supply in order to
¾ Maintain price stability
¾ Promote full employment
¾ Maximum sustainable long‐term growth of the economy
¾ Moderate long‐term interest rate
R92‐3 Three Policy Tools of the central bank
¾ required reserve ratio ：most powerful tool
¾ open market operations： is most frequently used tool
¾ discount rate ：央行处于被动地位
R93‐3 Central bank should be:
¾ Independence:
operational independence: allowed to independently determine the policy rate
target independence: central bank definec how inflation is computed, sets the
target infaltion level, and determines the time horizon to achieve
ECB has both, while most central banks have only operational independence.
160
¾ Credible: too much debt leads to incredible; self‐fulling prophecies
¾ Transparent

34‐3 Monetary policy
Q145‐3 A country that maintains a target exchange rate is most likely to have which outcome
when its inflation rate rises above the level of the inflation rate in the target country?
(原版书 R19‐16)
A. An increase in short‐term interest rates.
B. An increase in the domestic money supply.
C. An increase in its foreign currency reserves.

A is correct.
Interest rates are expected to rise to protect the exchange rate target.

Q146‐3 The least likely limitation to the effectiveness of monetary policy is that central banks
cannot: (原版书 R19‐22)
A. accurately determine the neutral rate of interest.
B. regulate the willingness of financial institutions to lend.
C. control amounts that economic agents deposit into banks.

A is correct.
The inability to determine exactly the neutral rate of interest does not necessarily limit the
power of monetary policy.

Q147‐3 The primary monetary policy goal of most major central banks is best characterized as:
A. containing inflation.
B. stimulating economic growth.
C. maintaining low interest rates.

Solution: A
Most major central banks’ primary monetary policy goal is to contain inflation.
货币政策传导机制
R94‐3 Money Supply 在长期和短期对经济的影响：
¾ In the short run, decrease (increase) in the equilibrium interest rate from increase
(decrease) in the money supply will increase (decrease) aggregate demand, which will
increase (decrease) real GDP and the price level.
R95‐3 In the long run, money supply growth has no effect on real GDP and, as the quantity
theory of money suggests, increases in the money supply, when the economy is
operating at potential (full‐employment) GDP, will lead to a proportional increase in
prices
R96‐3 Monetary policy’s transmission mechanism:
¾ 了解 FFR 的变化如何影响整个经济：Purchase securities 　Reserve↑ → FFR↓ →
Rate↓ → Domestic currency depreciate↓ → Net exports(NX)↑ → More investment↑
161
→ Purchase of goods (consume)↑ → Aggregate demand↑ → Price, real GDP↑
R97‐3 The transmission mechanism for a decrease in interbank lending rates affects four
things simultaneously:
¾ Market rates decrease due to banks adjusting their lending rates for the short and long
term.
¾ Asset prices increase because lower discount rates are used for computing present
values.
¾ Firms and individuals raise their expectations for economic growth and profitability.
They may also expect the central bank to follow up with further interest rate
decreases.
¾ The domestic currency depreciates due to an outflow of foreign money as real interest
rates decline
R98‐3 Neutral rate of interest：the rate that neither spurs on nor slows down the underlying
economy
¾ Neutral rate=Trend growth + Inflation target
¾ Policy rate> Neutral rate: contractionary
¾ Policy rate< Neutral rate: expansionary
R99‐3 Limitation of money policy
¾ 如果公众相信央行通过降低 MS 以试图降低通胀是成功的，就会预期未来通胀率将
会下降，那么长期利率将会下降；
¾ 但是，尽管央行想通过提高短期利率来降低经济活力，如果公众认为会造成经济
衰退，公众都会去购买长期国债，将使得长期债券的价格上升，长期利率下降，
货币政策失效；
¾ 流动性陷阱：如果央行试图通过增加货币供给降低利率来治理通货紧缩，但是，
公众会完全吸收新增的货币供给，对利率水平根本没有影响。特别是，在通货紧
缩的前提下，利率水平已经达到零。
¾ 结论是，对于央行的扩张政策，公众和金融机构完全吸收其流动性，则货币政策
失效。

35‐3 Fiscal policy
Q148‐3 Which statement regarding fiscal policy is most accurate? (原版书 R19‐26)
A. To raise business capital spending, personal income taxes should be reduced.
B. Cyclically adjusted budget deficits are appropriate indicators of fiscal policy.
C. An increase in the budget surplus is associated with expansionary fiscal policy.

B is correct.
Cyclically adjusted budget deficits are appropriate indicators of fiscal policy. These are defined as
the deficit that would exist if the economy was at full employment (or full potential output).

Q149‐3 The least likely explanation for why fiscal policy cannot stabilize aggregate demand
completely is that: (原版书 R19‐27)
A. private sector behavior changes over time.
B. policy changes are implemented very quickly.
162
C. fiscal policy focuses more on inflation than on unemployment.

B is correct.
Fiscal policy is subject to recognition, action, and impact lags.

财政政策工具
R100‐3 Fiscal Policy Tools: Spending Tools, Revenue Tools & Desirable attributes of tax policy
R101‐3 Spending Tools:
¾ Transfer payments: redistribute wealth, taxing some and making payments to others,
transfer payments are not included in GDP computations.
¾ Current spending:government purchases of goods and services on an ongoing and
routine basis.
¾ Capital spending: government spending on infrastructure such as roads, schools,
bridges, and hospitals
R102‐3 Revenue Tools
¾ Direct taxes are levied on income or wealth. These include income taxes, taxes on
income for national insurance, wealth taxes, estate taxes, corporate taxes, capital gains
taxes, and Social Security taxes
¾ Indirect taxes are levied on goods and services. These include sales taxes, value‐added
taxes (VATs), and excise taxes.
R103‐3 Advantages of fiscal policy tools
¾ Social policies such as discouraging tobacco use can be implemented very quickly via
indirect taxes
¾ Quick implementation of indirect taxes also means that government revenues can be
increased without significant additional costs
R104‐3 Disadvantages of fiscal policy tools
¾ Direct taxes and transfer payments take time to implement, delaying the impact of fiscal
policy
¾ Capital spending also takes a long time to implement. The economy may have recovered
by the time its impact is felt.
36-3 Effect of fiscal policy
Q150‐3 ★★In an economy, consumption is 70% of pre‐tax income and the average tax rate is
25% of total income. If planned government expenditures are expected to increase by
$1.25 billion, the increase in total incomes and spending, in billions, is closest to:
A. $1.3.
B. $2.6.
C. $4.2.

Correct answer: C
Explain the implementation of fiscal policy and the difficulties of implementation.

163
The fiscal multiplier is 1/[1‐c(1‐T)]
where
c marginal propensity to consume = consumption ÷ disposable income
T the tax rate
Assuming pre‐tax income of $100
Disposable income $100×(1‐0.25)=$75
Marginal propensity to consume $70÷$75=0.933
The fiscal multiplier 1÷[1‐0.933×(1‐0.25)]=3.33
With government expenditure of $1.25 Billion, total incomes and spending will rise by $1.25
Billion×3.33=$4.2 Billion
Notes: MPC is based on disposable income.
财政政策实施
R105‐3 Fiscal multiplier: Fiscal multiplier = 1 ,MPC: 边际消费倾向
1 − MPC(1-t)
R106‐3 The balance budget multiplier, K ΔY 1− b
= =
ΔT 1 − b(1 − t )
B
R107‐3 Debt ratio: Aggregate debt to GDP
¾ If the real interest rate on the government's debt is higher than the real growth rate of
the economy, then the debt ratio will increase over time
¾ debt ratio 衡量的是政府的赤字规模
R108‐3 Discretionary fiscal policy：refers to government spending and taxing decisions designed
to stabilize the economy.
¾ Crowding‐out effect: Deficit→increase real interest→decrease Private investment.
¾ Limitation: (1) Recognition lag (The forecast may be wrong), (2) Action lag, (3) Impact lag
R109‐3 Interaction of monetary and fiscal policies
Monetary Fiscal Interest rate output Private Public
policy policy spending spending
Tight Tight higher lower lower lower
Easy Easy lower higher higher higher
Tight Easy higher higher lower higher
Easy Tight lower varies higher lower

37‐3 比较优势
Q151‐3 In the Ricardian trade model, a country captures more of the gains from trade if: (原版
书 R20‐8)
A. it produces all products while its trade partner specializes in one good.
B. the terms of trade are closer to its autarkic prices than to its partner's autarkic prices.
C. the terms of trade are closer to its partner's autarkic prices than to its autarkic prices.

164
C is correct.
A country gains if trade increases the price of its exports relative to its imports as compared to its
autarkic prices, i.e. the final terms of trade are more favorable than its autarkic prices. If the
relative price of exports and imports remains the same after trade opens, then the country will
consume the same basket of goods before and after trade opens, and it gains nothing from the
ability to trade. In that case, its trade partner will capture all of the gains. Of course, the opposite
is true if the roles are reversed. More generally, a country captures more of the gains from trade
the more the final terms of trade differ from its autarkic prices.

Q152‐3 According to the Heckscher‐Ohlin model, when trade opens: (原版书 R19‐10)
A. the scarce factor gains relative to the abundant factor in each country.
B. the abundant factor gains relative to the scarce factor in each country.
C. income is redistributed between countries but not within each country.

B is correct.
As a country opens up to trade, it has a favorable impact on the abundant factor, and a negative
impact on the scarce factor. This is because trade causes the output mix to change and therefore
changes the relative demand for the factors of production. Increased output of the export
product increases demand for the factor that is used intensively in its production, while reduced
output of the import product decreases demand for the factor used intensively in its production.
Because the export (import) product uses the abundant (scarce) factor intensively, the abundant
factor gains relative to the scarce factor in each country.

Q153‐3 Which of the following statements best describes the costs of international trade? (原版
书 R19‐2)
A. Countries without an absolute advantage in producing a good cannot benefit significantly
from international trade.
B. Resources may need to he allocated into or out of an industry and less‐efficient companies
may be forced to exit an industry, which in turn may lead to higher unemployment.
C. Loss of manufacturing jobs in developed countries as a result of import competition means
that developed countries benefit far less than developing countries from trade

B is correct.
Resources may need to be reallocated into or out of an industry, depending on whether that
industry is an exporting sector or an import‐competing sector of that economy. As a result of this
adjustment process, less‐efficient companies may be forced to exit the industry, which in turn
may lead to higher unemployment and the need for retraining in order for displaced workers to
find jobs in expanding industries.

Q154‐3 Suppose Mexico exports vegetables to Brazil and imports flashlights used for mining
from Brazil. The output per worker per day in each country is as follows: (原版书 R19‐5)
165
Flashlights Vegetables
Mexico 20 60
Brazil 40 80
Which country has a comparative advantage in the production of vegetables and what is the
most relevant opportunity cost?
A. Brazil: 2 vegetables per flashlight.
B. Mexico: 1.5 vegetables per flashlight.
C. Mexico: 1/3 flashlight per vegetable.

C is correct.
While Brazil has an absolute advantage in the production of both flashlights and vegetables,
Mexico has a comparative advantage in the production of vegetables. The opportunity cost of
vegetables in Mexico is 1/3 per flashlight, while the opportunity cost of vegetables in Brazil is 1/2
per flashlight.

Q155‐3 In the Ricardian trade model, comparative advantage is determined by: (原版书 R19‐7)
A. technology.
B. the capital‐to‐labor ratio.
C. the level of labor productivity.

A is correct.
In the Ricardian model, comparative advantage is determined by technology differences
between countries. Technology determines output per worker in each industry in each country.
Differences in technology between countries cause output per worker in each industry to differ
between countries. These ratios determine the pattern of comparative advantage.

Q156‐3 Consider two countries, A and B. Country A is a closed country with a relative abundance
of labor and holds a comparative advantage in the production of textiles. Country B has
a relative abundance of capital. When the textile trade is opened between the two
countries, Country A will most likely experience a favorable impact on: （MOCK84‐42）
A. labor.
B. capital.
C. both capital and labor.

A is correct.
As a country opens up to trade, the benefit accrues to the abundant factor, which is labor in
Country A.

比较优势
R110‐3 Absolute advantage & Comparative advantage
¾ Absolute advantage refers to the lower absolute cost to produce a product.
¾ Comparative advantage refers to the lower opportunity cost to produce a product
¾ The law of comparative advantage holds that trading partners can be made better off if
166
they specialize in the production of goods for which they are the low‐opportunity cost
producer and trade for those goods for which they are the high‐opportunity cost
producer.
R111‐3 产生比较优势的原因
¾ Ricardian model: comparative advantage and pattern of trade are determined by
differences in technology between countries.（技术差异）
¾ Heckscher‐Ohlin model: comparative advantage and pattern of trade are determined by
differences in factor (factor & labor) endowments between countries. （生产要素禀赋
区别）

38‐3 Trade barrier
Q157‐3 Assuming its trading partner does not retaliate, which of the following conditions must
hold in order for a large country to increase its national welfare by imposing a tariff?
（MOCK83‐42）
A. It must have a comparative advantage in the production of the imported good.
B. The deadweight loss must be smaller than the benefit of its improving terms of trade.
C. It must auction the import licenses for a fee to offset the decline in the consumer surplus.

B is correct.
The large country is able to cause the foreign exporter to reduce price in order to retain market
share. In the large country, domestic producers gain from higher volume and the government
gains from collecting the tariff. The sum of these two gains must exceed the deadweight loss to
domestic consumers to achieve a national welfare gain. The change in terms of trade causes
income redistribution from the foreign exporter to the domestic producer

Q158‐3 Four countries operate within a customs union. One country proposes moving to a
common market structure. What additional level of economic integration between the
countries would most likely arise if this change took place? They would:（MOCK84‐43）
A. establish common trade barriers against non‐members.
B. begin to allow free movement of the factors of production.
C. establish common economic institutions and coordination of economic policies

B is correct.
A common market structure incorporates all aspects of the customs union and extends it by
allowing free movement of factors of production among members.

Q159‐3 A large country can: (原版书 R19‐13)
A. benefit by imposing a tariff.
B. benefit with an export subsidy.
C. not benefit from any trade restriction.

A is correct.
167
By definition, a large country is big enough to affect the world price of its imports and exports. A
large country can benefit by imposing a tariff if its terms of trade improve by enough to outweigh
the welfare loss arising from inefficient allocation of resources.

Q160‐3 Which of the following trade restrictions is likely to result in the greatest welfare loss for
the importing country? (原版书 R19‐12)
A. A tariff.
B. An import quota.
C. A voluntary export restraint.

C is correct. With a voluntary export restraint, the price increase induced by restricting the
quantity of imports (= quota rent for equivalent quota = tariff revenue for equivalent tariff)
accrues to foreign exporters and/or the foreign government.

贸易壁垒
R112‐3 Trade restrictions
¾ prevent free flow of goods and services among countries
¾ reasons of trade barriers:Protecting infant industry, National security, Protecting
domestic jobs, Protecting domestic industries
R113‐3 In trade analysis, small country（can not affect the world price）;large country: （ can
affect the world price）;
¾ Trade barriers 对于 small country 一定有福利损失（资源分配无效）
¾ Trade barriers 对于 large country 可能有福利增加（定价权控制的利益大于资源分配
无效的损失
R114‐3 Types of trade restrictions: tariffs, quotas, export subsidy voluntary export
restraint,minimum domestic content
¾ Domestic (importing) country, import quotas, tariffs, and VERs 的效应:
Reduce imports.
Increase price.
Decrease consumer surplus.
Increase domestic quantity supplied.
Increase producer surplus.
R115‐3 Capital restriction
¾ Place control on foreigners’ ability to own domestic assets and/or control on domestic
residents’ ability to own foreign assets
¾ Capital restriction: limit openness of financial market
¾ Trade restriction: limit openness of goods market

39‐3 BOP
Q161‐3 A country with a persistent trade surplus is being pressured to let its currency appreciate.
Which of the following best describes the adjustment that must occur if currency
appreciation is to be effective in reducing the trade surplus? （原版书 R21‐21）
A. Domestic investment must decline relative to saving.
168
B. Foreigners must increase investment relative to saving.
C. Global capital flows must shift toward the domestic market.

C is correct.
The trade surplus cannot decline unless the capital account deficit also declines. Regardless of
the mix of assets bought and sold, foreigners must buy more assets from (or sell fewer assets to)
domestic issuers/investors.

Q162‐3 A country having a current account deficit most likely will still be able to consume more
output than it produces by: （MOCK83‐43）
A. increasing its net foreign liabilities.
B. restricting foreign direct investment.
C. adjusting interest rates to stimulate higher domestic savings.

A is correct. A current account deficit must be offset by a capital account surplus. Only by
borrowing money from foreigners can a country have a current account deficit and consume
more output than it produces (原版书 p. 475). An increase in net foreign liabilities is the result of
borrowing from foreigners.

Q163‐3 A country with a trade deficit will most likely: （原版书 R21‐19）
A. have an offsetting capital account surplus.
B. save enough to fund its investment spending.
C. buy assets from foreigners to fund the imbalance.

A is correct.
A trade deficit must be exactly matched by an offsetting capital account surplus to fund the
deficit. A capital account surplus reflects borrowing from foreigners (an increase in domestic
liabilities) and/or selling assets to foreigners (a decrease in domestic assets). A capital account
surplus is often referred to as a "capital inflow" because the net effect is foreign investment in
the domestic economy.

Q164‐3 During the most recent quarter, a steel company in South Korea had the following
transactions: (原版书 R19‐18)
¾ Bought iron ore from Australia for AUD50 million.
¾ Sold finished steel to the United States for USD65
¾ Borrowed AUD50 million from a bank in Sydney.
¾ Received a USD10 million dividend from U.S. subsidiary.
¾ Paid KRW550 million to a Korean shipping company.
Which of the following would be reflected in South Korea's current account balance for the
quarter?
A. The loan.
B. The shipping.
C. The dividend.

169
C is correct.
The current account includes income received on foreign investments. The Korean company
effectively "exported" the use of its capital during the quarter to its U.S. subsidiary, and the
dividend represents payment for those services.

Q165‐3 The sale of mineral rights would be captured in which of the following balance of
payments components? (原版书 R19‐16)
A. Capital account.
B. Current account.
C. Financial account.

A is correct.
The capital account measures capital transfers and sale and purchase of non‐produced,
non‐financial assets such as mineral rights and intangible assets

国际收支平衡表
R116‐3 Balance of Payments Components
¾ The BOP equation is:
current account + capital account + financial account = 0
The current account measures the exchange of merchandise goods, services,
investment income, and unilateral transfers (gifts to and from other nations). The
current account balance equals the sum of exports minus imports, net interest
income, and net transfer.
The capital account consists capital transfer（债务豁免，移民） and net sales of
non‐produced\non‐financial assets（版权，自然资源的买卖）.
The financial account measure net capital flows based on sales and purchases of
domestic and foreign financial assets. (financial assets aboard 在国外金融资产
and foreign‐owned financial assets 国外拥有的在国内的金融资产)
R117‐3 X‐M≡private saving + government saving ‐ investment
¾ Low private saving and/or high investment ‐> current account deficit ‐>net capital
imports（美国国内消耗多就要从国外进口，从国外吸收资本）
¾ Government deficit‐> current account deficit
¾ Current account deficit(长期)‐>rise the risk premium in the deficit country

40‐3 汇率
Q166‐3 Over the past month, the Swiss Franc (CHF) has depreciated 12% against pound sterling
(GBP). How much has the pound sterling appreciated against the Swiss Franc? （原版书
R21‐7）
A. 12%.
B. Less than 12%.
C. More than 12%.

C is correct.
170
The appreciation of sterling against the Swiss franc is simply the inverse of the 12% depreciation
of the Swiss franc against Sterling:
[1/ (1 ‐ 0.12)] ‐ 1 = (1/0.88) ‐ 1 =‐ 0.1364, or 13.64%

Q167‐3 A BRL/MXN spot rate is listed by a dealer at 0.1378. The 6‐month forward rate is 0.14193.
The 6‐month forward points are closest to: （原版书 R21‐11）
A. —41.3.
B. +41.3.
C. +299.7.

B is correct.
The number of forward points equals the forward rate minus the spot rate, or 0.14193 — 0.1378
= 0.00413, multiplied by 10,000: 10,000 X 0.00413 = 41.3 points. By convention, forward points
are scaled so that ±1 forward point corresponds to a change of ±1 in the last decimal place of the
spot exchange rate.

Q168‐3 A three‐month forward exchange rate in CAD/USD is listed by a dealer at 1.0123. The
dealer also quotes 3‐month forward points as a percentage at 6.8%. The CAD/USD spot
rate is closest to: （原版书 R21‐12）
A. 0.9478.
B. 1.0550.
C. 1.0862.

A is correct.
Given the forward rate and forward points as a percentage, the unknown in the calculation is the
spot rate. The calculation is as follows:
Spot rate X (1 + Forward points as a percentage) = Forward rate
Spot rate X (1 + 0.068) = 1.0123
Spot = 1.0123/1.068 = 0.9478

Q169‐3 The JPY/AUD spot exchange rate is 82.42, the jIN interest rate is 0.15%, and the AUD
interest rate is ..1.95%. If the interest rates are quoted on the basis of a 360‐day year, the
90‐day forward points in11T/AUD would be doses/ to: （原版书 R21‐15）
A. —377.0.
B. —97.7.
C. 98.9.

B is correct.
The forward exchange rate is given by
171
⎛ ⎛ 90 ⎞ ⎞
⎜ 1 + .0015 ⎜ ⎟⎟
⎛ 1 + iJPYτ ⎞ ⎝ 360 ⎠ ⎟
FJPY AUD = S JPY AUD ⎜ ⎟ = 84.42 ⎜
⎝ 1 + iAUDτ ⎠ ⎜ ⎛ 90 ⎞ ⎟
⎜ 1 + .0495 ⎜ 360 ⎟ ⎟
⎝ ⎝ ⎠⎠
= 82.42 × .98815 = 81.443
The forward points are 100 X (F— S) =100 X (81.443 — 82.42) =100 X (‐0.977) =—97.7. Note that
because the spot exchange rate is quoted with two decimal places, the forward points are scaled
by 100.

Q170‐3 A large industrialized country has recently devalued its currency in an attempt to correct
a persistent trade deficit. Which of the following domestic industries is most likely to
benefit from the devaluation? （原版书 R21‐20）
A. Luxury cars.
B. Branded prescription drugs.
C. Restaurants and live entertainment venues.

A is correct.
A devaluation of the domestic currency means domestic producers are cutting the price faced by
their foreign customers. The impact on their unit sales and their revenue depends on the
elasticity of demand. Expensive luxury goods exhibit high price elasticity. Hence, luxury car
producers are likely to experience a sharp increase in sales and revenue due to the devaluation.

Q171‐3 Which of the following counterparties is most likely to be considered a sell‐side
foreign‐exchange market participant? （原版书 R21‐4）
A. A large corporation that borrows in foreign currencies.
B. A sovereign wealth fund that influences cross‐border capital flows.
C. A multinational bank that trades foreign exchange with its diverse client base.

C is correct.
The sell side generally consists of large banks that sell foreign exchange and related instruments
to buy‐side clients. These banks act as market makers, quoting exchange rates at which they will
buy (the bid price) or sell (the offer price) the base currency.

Q172‐3 An exchange rate between two currencies has increased to 1.4500. If the base currency
has appreciated by 8% against the price currency, the initial exchange rate between the
two currencies was closest to: （原版书 R21‐8）
A. 1.3340.
B. 1.3426.
C. 1.5660.

B is correct.
The percentage appreciation of the base currency can be calculated by dividing the appreciated
exchange rate by the initial exchange rate. In this case, the unknown is the initial exchange rate.
172
The initial exchange is the value of X that satisfies the formula:
1.4500/X = 1.08
Solving for X leads to 1.45/1.08 = 1.3426.

Q173‐3 A dealer provides the following quotes: （原版书 R21‐10）
Ratio Spot rate
CNY/HKD 0.8422
CNY/ZAR 0.9149
CNY/SEK 1.0218
Another dealer is quoting the ZAR/SEK cross‐rate at 1.1210. The arbitrage profit that can be
earned is closest to:
A. ZAR 3671 per million SEK traded.
B. SEK 4200 per million ZAR traded.
C. ZAR 4200 per million SEK traded.

C is correct.
The ZAR/SEK cross‐rate from the original dealer is (1.0218/0.9149) =‐‐ 1.1168, which is lower than
the quote from the second dealer. To earn an arbitrage profit, a currency trader would buy SEK
(sell ZAR) from the original dealer and sell SEK (buy ZAR) to the second dealer. On 1 million SEK
the profit would be
SEK 1,000,000 x (1.1210 — 1.1168) = ZAR 4200

Q174‐3 A forward premium indicates: （原版书 R21‐14）
A. an expected increase in demand for the base currency.
B. the interest rate is higher in the base currency than in the price currency.
C. the interest rate is higher in the price currency than in the base currency.

C is correct.
To eliminate arbitrage opportunities, the spot exchange rate (S), the forward exchange rate (F),
the interest rate in the base currency (ib), and the interest rate in the price currency (if,) must
satisfy:
F ⎛ 1 + ip ⎞
=⎜ ⎟
S ⎝ 1 + ib ⎠
According to this formula, the base currency will trade at forward premium (F > S) if, and only if,
the interest rate in the price currency is higher than the interest rate in the base currency (ip > ib).

Q175‐3 In early 2011, the British pound (GBP) to New Zealand dollar (NZD) spot exchange rate
was 2.0979. The UBOR interest rates, quoted on a 360‐day year basis, were 1.6025% for
the British pound and 3.2875% for the New Zealand dollar. The 180‐day forward points
(scaled up by four decimal places) in GBP/NZD would be closest to:（mock85‐44）
A. ‐343.
B. ‐173.
173
C. 176.
B is Correct. Covered interest arbitrage will ensure identical terminal values by investing the
same initial amounts at the respective country’s domestic interest rates:
GBP investment £2.0979 (1 ‐ 0.01602 5×180 / 360) = £2.1147
NZD investment NZ$1×(1 + 0.032875×180 / 360) = NZ$1.0164
The forward rate is determined by equating these two terminal amounts.
GBP / NZD Forward Rate = £2.1147 / NZ$1.0164 = £2.0806 / NZ$
Forward points = (Forward -Spot)×10,000 = (2.0806 -2.0979)×10,000 = -173.0

Q176‐3 The current spot rate for the USD/EUR is 0.7500. The forward rate for the
EUR/Australian dollar (AUD) is 1.4300, which represents a 400 point forward premium to
the spot rate (scaled up by four decimal places). The USD/AUD spot rate is closest to:
（mock84‐44）
A. 1.0296.
B. 1.0425.
C. 1.1154.
Step 1 Find the spot rate for the EUR/AUD
Spot = Forward rate – Points Spot=1.4300− 400/10,000=1.3900
Step 2: Calculate cross‐rate
USD USD EUR USD
= * =0.75001.3900=1.0425
AUD EUR AUD AUD

汇率
R118‐3 名义与实际汇率
¾ FX real = FX nominal ×(price in Europe/price in U.S.)
¾ FX real(d/f) = FX nominal (d/f) CPIf/CPId
R119‐3 FX Appreciation and Depreciation
1.7799CHF/USD to 1.8100CHF/USD USD appreciated therefore CHF depreciated
R120‐3 Spot rates & Forward rates
¾ Spot rates：exchange rates for immediate delivery of the currency
¾ Forward rates ：exchange rates for currency transactions that will occur in the future.
（例如，现在约定一个月后以多少人民币买 1 美元）
R121‐3 The spread on a forward foreign currency quotation
¾ Consider a 6‐month (180 days) forward exchange rate quote from a U.S. currency dealer
of GBP:USD = 1.6384 / 1.6407.
Percentage spread = (1.6407 – 1.6384) / 1.6407 = 0.14%
¾ Spreads increase with greater exchange rate volatility, the term of the forward contract,
and decrease when trading volume is higher.
¾ Forward currency spreads are typically greater than spot currency spreads
R122‐3 Forward discount or premium
⎛ forward prmium ⎞ ⎛ F-S ⎞ ⎛ 360 ⎞

⎜ ⎟=⎜ ⎟×⎜ ⎟
⎝ or discount ⎠ ⎝ S ⎠ ⎝ t ⎠
174

41‐3 FX regime
Q177‐3 In practice, both a fixed parity regime and a target zone regime allow the exchange rate
to float within a band around the parity level. The most likely rationale for the band is
that the band allows the monetary authority to: （原版书 R21‐17）
A. be less active in the currency market.
B. earn a spread on its currency transactions.
C. exercise more discretion in monetary policy.

C is correct.
Fixed exchange rates impose severe limitations on the exercise of independent monetary policy.
With a rigidly fixed exchange rate, domestic interest rates, monetary aggregates (e.g., money
supply), and credit conditions are dictated by the requirement to buy/sell the currency at the
rigid parity. Even a narrow band around the parity level allows the monetary authority to
exercise some discretionary control over these conditions. In general, the wider the band, the
more independent control the monetary authority can exercise.

Q178‐3 In the classification of currency regimes, a currency board system (CBS) most likely
differs from a fixed‐rate parity system in that: （mock83‐44）
A. a CBS has a discretionary target level of foreign exchange reserves.
B. a CBS can peg to a basket of currencies but a fixed‐rate system cannot.
C. the monetary authority within a CBS does not act as a traditional lender of last resort.

C is correct.
In a CBS, the monetary authority has an obligation to maintain 100% foreign currency reserves
against the monetary base. It thus cannot lend to troubled financial institutions. As long as the
country under a fixed‐parity regime maintains its exchange peg, the central bank can serve as a
lender of last resort.

R123‐3 Exchange rate regimes
¾ Countries That Do Not Have Their Own Currency
A country can use the currency of another country (formal dollarization) not
create money/currency.
A country can be a member of a monetary union in which several countries use a
common currency (eg:Euro)
¾ Countries That Have Their Own Currency
A currency board arrangement is an explicit commitment to exchange domestic
currency for a specified foreign currency at a fixed exchange rate（ notable
example of such an arrangement is Hong Kong）
conventional fixed peg arrangement a country pegs its currency within margins
of ±1 percent versus another currency or a basket that includes the currencies of
its major trading or financial partners
9 Target zone : the permitted fluctuations in currency value relative to another
175
currency or basket of currencies are wider (e.g., +/‐2 %)
Crawling peg: the exchange rate is adjusted periodically, typically to adjust for
higher inflation
9 passive crawling peg : a series of exchange rate adjustments over time is
announced and implemented
9 active crawling peg: can influence inflation expectations, adding some
predictability to domestic inflation
Managed floating exchange rates: the monetary authority attempts to influence
the exchange rate in response to specific indicators such as the balance of
payments, inflation rates, or employment without any specific target exchange
rate or predetermined exchange rate path
Independently floating: the exchange rate is market‐determined, and foreign
exchange market intervention is used only to slow the rate of change and reduce
short‐term fluctuations, not to keep exchange rates at a certain target level

42‐3 Elasticity approach
Q179‐3 A large industrialized country has recently devalued its currency in an attempt to correct
a persistent trade deficit. Which of the following domestic industries is most likely to
benefit from the devaluation? (原版书 R21‐20)
A. Luxury cars.
B. Branded prescription drugs.
C. Restaurants and live entertainment venues.
Solution: A
Q180‐3 A country that wishes to narrow its trade deficit devalues its currency. If domestic
demand for imports is perfectly price‐inelastic, whether devaluing the currency will
result in a narrower trade deficit is least likely to depend on:
A. the size of the currency devaluation.
B. the country's ratio of imports to exports.
C. price elasticity of demand for the country's exports.
Solution: A

R124‐3 弹性轮
Imports exports
ω M
=
imports + exports ω X
=
imports + exports
ε M
: elasticities ( as positive numbers ) of demand for imports
ε X
: elasticities ( as positive numbers ) of demand for emports
¾ Given Marshall‐Lerner condition : ω ε + ω (ε
X X M M
− 1) > 0
176
¾ When import expenditures=export revenues 即 ω =ω
X M

Marshall‐Lerner condition 简写为 ε X
+ε M > 1

¾ In general, elasticity of demand is greater for goods with close substitutes, goods
that represent a high proportion of consumer spending, and luxury goods in
general. Goods that are necessities, have few or no good substitutes, or represent a
small proportion of overall expenditures tend to have less elastic demand.
¾ Thus, currency depreciation will have a greater effect on the balance of trade when
import or export goods are primarily luxury goods, goods with close substitutes,
and goods that represent a large proportion of overall spending.
R125‐3 The J‐Curve 贬值效应的时滞
¾ import and export contracts delivery and payment in the future , import and export
quantities may be relatively insensitive to currency depreciation in the short run means
currency depreciation may worsen a trade deficit in the short run
¾ 出口供给（主要原因）和进口需求作出相应调整后，贸易余额开始改善
¾ 调整过程用曲线描述呈 J 形
¾ Marshall‐Lerner condition 成立情况下，贬值对贸易余额的时滞效应——J‐Curve
Effect
¾ Shortcoming :ignores capital flows
Balance of trade
0
Trade restrictions
Before
Before
currency
currency
depreciates
Time

R126‐3 Absorption approach
¾ BT = Y – E, 其中 Y = domestic production of goods and services or national incom, E =
domestic absorption of goods and services, which is total expenditure，BT = balance of
trade
¾ 国民收入>总吸收：国际收支顺差，货币升值; 国民收入<总吸收：国际收支逆差，
货币贬值

177

4‐Financial Statement Analysis
1‐4 Accruals and other adjustments in preparing financial statements
Q1‐4 ★Assume U.S. GAAP applies unless otherwise noted. Walker Company received a letter
on November 31, 2001 indicating that Johnson, Inc. would purchase a specialty machine
priced at $4,000,000. On February 13, 2002, a binding contract was executed for the
machine’s construction. Materials costing $2,000,000 were ordered in December 2001,
arrived with an invoice in August 2002, and were used in the manufacturing process in
the first quarter of 2003. After a labor dispute, Walker finally completed manufacture
and delivered the machine in December 2004. Johnson received the first invoice in 2005
and paid the $4,000,000 purchase price in 2005. Walker Company uses the accrual
method of accounting. Walker should record the materials used to construct the
machine as expenses in the year:
A. 2005.
B. 2004.
C. 2003.

Solution: B
Under the accrual concept, income is recognized when the earning activities are substantially
completed, risk of ownership has transferred from buyer to seller, and payment is realizable and
collectible. Under the matching principle, expenses incurred that directly relate to the sold item
are expensed in the same period as the revenue is recognized.

Q2‐4 Assume U.S. GAAP applies unless otherwise noted. Bishop Ltd. received an advanced
payment of $10,000 on December 1, for rent on a property for December and January.
On receipt they correctly recorded it as cash and unearned revenue. If at December 31,
their year‐end, they failed to make an adjusting entry related to this payment, ignoring
taxes, what would the effect on the financial statements for the year be?
A. Assets are overstated by $5,000 and Liabilities are overstated by $5,000.
B. Liabilities are overstated by $5,000 and Net income is overstated by $5,000.
C. Liabilities are overstated by $5,000 and Owners’ equity is understated by $5,000.

Solution: C
The Company should have made an adjusting entry to reduce the unearned revenue account (a
liability) by $5,000 and increase Revenue (and hence net income and retained earnings) by
$5,000. As the company failed to make the adjusting entry the liabilities are overstated and
owners’ equity is understated.

Q3‐4 ★ Which of the following statements about cash received prior to the recognition of
revenue in the financial statements is most accurate? The cash is recorded as:（原版书
Reading23）
A. deferred revenue, an asset.
B. accrued revenue, a liability.
178
C. deferred revenue, a liability.

Solution：C.
Cash received prior to revenue recognition increases cash and deferred or unearned revenue.
This is a liability until the company provides the promised goods or services.

Q4‐4 ★When, at the end of an accounting period, a revenue has been recognized in the
financial statements but no billing has occurred and no cash has been received, the
accrual is to: （原版书 Reading23）
A. unbilled (accrued) revenue, an asset.
B. deferred revenue, an asset.
C. unbilled (accrued) revenue, a liability.

Solution：A.
When cash is to be received after revenue has been recognized but no billing has actually
occurred, an unbilled (accrued) revenue is recorded. Such accruals would usually occur when an
accounting period ends prior to a company billing its customer. This type of accrual can be
contrasted with a simple credit sale, which is reflected as an increase in revenue and an increase
in accounts receivable. No accrual is necessary.

Q5‐4 ★When, at the end of an accounting period, cash has been paid with respect to an
expense incurred but not yet recognized in the financial statements, the business should
then record: （原版书 Reading23）
A. an accrued expense, an asset.
B. a prepaid expense, an asset.
C. an accrued expense, a liability.

Solution：B.
Payment of expenses in advance is called a prepaid expense, which is classified as an asset.

Q6‐4 ★ When, at the end of an accounting period, cash has not been paid with respect to an
expense that has been incurred, the business should then record: （原版书 Reading23）
A. an accrued expense, an asset.
B. a prepaid expense, an asset.
C. an accrued expense, a liability.
Solution：C.
When an expense is incurred and no cash has been paid, expenses are increased and a liability
("accrued expense") is established for the same amount.
掌握以下几种权责发生制（Accrual Basis）：
权责发生制是以权利和责任的发生来决定收入和费用归属期的一项原则。
R1‐4 收入应与为取得该收入所发生的费用、成本相匹配，以正确计算在该会计期间、该
会计所获得的净损益。
R2‐4 ★除了基本概念以外还需要掌握几个名词
179
¾ unearned revenue (liability): The firm receives cash before it provides a good or service to
customers，等到货物 delivery 之后，B/S 表中 liability 会减少一部分，cash 增加一部分
¾ unbilled revenue (asset): If the revenue is earned, and it is just that the billing dept has not
raised the bill, then you should take up the revenue under accrued receivables and for most
purposes, they should be the same as accounts receivables.（未开票前，称为 unbilled；开
票后，从 unbilled 转为 A/R）
¾ prepaid expenses(asset): The firm pays cash ahead of time for unanticipated expense.
¾ accrued expenses(liability): An expense that is incurred, but not yet paid for, during a given
accounting period.
2‐4 Audits of Financial Statements 的理解
Q7‐4 ★Assume U.S. GAAP applies unless otherwise noted. Which of the following statements
best describes the level of accuracy provided by a standard audit report?
A. There is reasonable assurance that the financial statements contain no errors.
B. There is full assurance that the financial statements are free of material errors.
C. There is reasonable assurance that the financial statements are fairly presented.

Solution: C
Audits provide reasonable assurance that the financial statements are fairly presented, meaning
that there is a high degree of probability that they are free of material error, fraud or illegal acts.

Q8‐4 What type of audit opinion is preferred when analyzing financial statements?
A. Qualified.
B. Adverse.
C. Unqualified.

Solution: C
An unqualified opinion is a “clean” opinion and indicates that the financial statements present
the company’s performance and financial position fairly.

Q9‐4 ★Information about management and director compensation would least likely be
found in the:（原版书 Reading22）
A. auditor's report.
B. proxy statement.
C. notes to the financial statements.

Solution：A.
Information about management and director compensation is not found in the auditor's report.
Disclosure of management compensation is required in the proxy statement, and some aspects
of management compensation are disclosed in the notes to the financial statements.

180
R3‐4 Audits of Financial Statements 掌握概念及理解：

¾ 概念：Audit is an independent review of an entity’s financial statement.
¾ 理解： Audits provide reasonable assurance that the financial statements are fairly
presented, meaning that there is a high degree of probability that they are free of material
error, fraud or illegal acts.
¾ Audit report 有三种类型分别是 qualified opinion, unqualified opinion, adverse opinion.
¾ ★An unqualified audit opinion conveys that the financial statement report a “true and fair
view” or are “fairly presented” in accordance with applicable accounting standards.
¾ ★The auditors must also express an opinion on the company’s internal control systems
according to Sarbanes‐Oxley Act.

3‐4 Other Information Sources of Financial Statements 的理解
Q10‐4 Assume U.S. GAAP applies unless otherwise noted. When an issue is going to be put to a
vote, by shareholders, at an annual general meeting the company prepares a (n):
A. annual report.
B. proxy statement.
C. management statement of responsibility.

Solution: B
Proxy statements are prepared and distributed to shareholders on matters that are to be put to a
vote at shareholder meetings.

Q11‐4 ★Assume U.S. GAAP applies unless otherwise noted. An analyst would find information
about significant uncertainties affecting a company's liquidity, capital resources and
results of operations in the:
A. Notes to the financial statements.
B. Balance sheet and income statement.
C. Management discussion and analysis.

Solution: C
Management must highlight any favorable and unfavorable trends and identify significant events
and uncertainties that affect the company’s liquidity, capital resources and results of operations
in the MD&A.

Q12‐4 Accounting methods, estimates, and assumptions used in preparing financial statements
are found
A. in footnotes.
B. in the auditor’s report
C. the proxy statement

Solution: A
The footnotes disclose choices in accounting methods, estimates, and assumptions.

181
Q13‐4 ★Information about material events and uncertainties would best be found in
A. footnotes.
B. the proxy statement.
C. management’s discussion and analysis

Solution: C.
This is a component of management’s discussion and analysis.
.
Q14‐4 ★ Which of the following is least likely to appear in a company's proxy
statement?(MOCK‐57)
A. Compensation arrangements for management and directors
B. Significant events and contingencies that may affect future operations
C. Potential conflicts of interest between management, directors, and shareholders

Solution: B
Significant events, conditions, trends, and contingencies that may affect future operations are
contained in Management's Discussion and Analysis/ compensation agreements for directors
and management and their potential conflicts of interest are required in the proxy statement.

Q15‐4 ★ Information about a company's objectives, strategies, and significant risks would
most likely be found in the: （原版书 Reading22）
A. auditor's report.
B. management commentary.
C. notes to the financial statements.

Solution：B.
These are components of management commentary.
Other Information Sources of Financial Statements 掌握概念：
R4‐4 ★Financial footnotes
¾ includes information about account methods and assumptions; related‐party transactions;
commitments and contingencies
¾ footnote 是被审计过的
R5‐4 Supplementary schedule: provides explanatory information, such as operating income
or sales by region or business segment;
R6‐4 MD&A (Management Discussion & Analysis):
¾ Management must highlight any favorable or unfavorable trends, and
¾ Identify significant events and uncertainties that affect the company’s liquidity, capital
resources, and results of operations;
¾ Such as, to provides information about the effects of inflation, changing prices
R7‐4 ★Proxy statement: provides useful information regarding
¾ Management and director compensation;
¾ Company stock performance;
¾ Any potential conflicts of interest between management, shareholders and board;
182
¾ Relevant current information on their websites and press release and as part of conference
calls.
R8‐4 Annual filing (10‐K) & quarterly report (10‐Q): generally present the 4 key financial
statements and footnotes but are not audited.
R9‐4 8‐K: reported to SEC, which includes material corporate events on a more current basis,
such as M&A

4‐4 关于 Financial Statement 指标、准备和呈报的一些要求
Q16‐4 ★Which of the following statements is most accurate with respect to financial reporting
requirements? （2012mock85）
A. Regulatory authorities are typically private sector, self‐regulated organizations.
B. Standard‐setting bodies have authority because they are recognized by regulatory agencies.
C. The requirement to prepare financial reports in accordance with specified accounting
standards is the responsibility of standard‐setting bodies.

Correct answer: B
Without the recognition of the standards by the regulatory authorities, such as the U.S.
Securities and Exchange Commission, the private sector standard‐setting bodies, such as U.S.
FASB, would have no authority.

Q17‐4 Which of the following is least likely to be a general feature underlying the preparation
of financial statements within the IFRS Conceptual Framework? （2012‐mock83）
A. Matching
B. Materiality
C. Accrual basis

Solution：A

Solution: A. The IFRS Conceptual Framework specifies a number of general features underlying
the preparation of financial statements, including materiality and accrual basis. Matching is not
one of those general features; it is a general principle of expense recognition.

Q18‐4 Under the IASB Conceptual Framework, one of the qualitative characteristics of useful
financial information is that different knowledgeable users would agree that the
information is a faithful representation of the economic events that it is intended to
represent. This characteristic is best described as:
A. verifiability.
B. comparability.
C. understandability.

Solution：A

Under the International Accounting Standards Board’s Conceptual Framework, verifiability is the
183
qualitative characteristic that means that different knowledgeable and independent users would
agree that the information presented faithfully represents the economic events that it is
intended to represent.

Q19‐4 Which of the following statements best describes the role of the International
Organization of Securities Commissions (IOSCO)? The IOSCO: （2012mock84）
A. is responsible for regulating financial markets of member nations.
B. is the oversight body to which the International Accounting Standards Board (IASB) reports.
C. assists in attaining the goal of cross‐border cooperation in combating violations of securities
laws.

Solution：C
Solution: C. The IOSCO is not a regulator of financial markets. To ensure consistent application of
international financial standards, it is important to have uniform regulation and enforcement
across national boundaries. IOSCO assists in attaining this goal of uniform regulation as well as
cross‐border cooperation in combating violations of securities and derivatives laws.

Q20‐4 U.S. generally accepted accounting principles are currently developed by which entity?
（原版书 Reading24）
A. The Securities and Exchange Commission.
B. The Financial Accounting Standards Board.
C. The Public Company Accounting Oversight Board.

Solution：B.
The FASB is responsible for the Accounting Standards CodificationTM, the single source of
nongovernmental authoritative U.S. generally accepted accounting principles.

Q21‐4 A core objective of the International Organization of Securities Commissions is to: （原
版书 Reading24）
A. eliminate systematic risk.
B. protect users of financial statements.
C. ensure that markets are fair, efficient, and transparent.

Solution：C.
A core objective of IOSCO is to ensure that markets are fair, efficient, and transparent. The other
core objectives are to reduce, not eliminate, systematic risk and to protect investors, not all users
of financial statements.

Q22‐4 Which of the following is not a constraint on the financial statements according to the
Conceptual Framework (2010)? （原版书 Reading24）
A. Understandability.
B. Benefit. versus cost.
C. Balancing of qualitative characteristics.

184
Solution：A.
Understandability is an enhancing qualitative characteristic of financial information—not a
constraint.

Q23‐4 Valuing assets at the amount of cash or equivalents paid or the fair value of the
consideration given to acquire them at the time of acquisition most closely describes
which measurement of financial statement elements? （原版书 Reading24）
A. Current cost.
B. Historical cost.
C. Realizable value.
Solution：B.
Historical cost is the consideration paid to acquire an asset.

Q24‐4 The valuation technique under which assets are recorded at the amount that would be
received in an orderly disposal is: （原版书 Reading24）
A. current cost.
B. present value.
C. realizable value.
Solution：C.
The amount that would be received in an orderly disposal is realizable value.

Financial Statement 指标:
R1‐4 美国准则与国际准则
¾ Standard‐setting bodies: make the rules, such as FASB——U.S. GAAP; IASB——IFRS
¾ Regulatory authorities: enforce the rules, such as SEC——美国；FSA——英国
R2‐4 Qualitative characteristics of financial statement, U.S.GAAP 更重视 relevance 和
reliabilityfaithful presentation（two fundamental characteristics）
R3‐4 Four characteristics enhance relevance and faithful presentation
¾ Understandability
¾ Relevance: materiality and timeliness
¾ Reliability: faithful representational, substance over form, prudence, completeness
neutrality, timeliness
¾ verification
¾ Comparability
R4‐4 Constraints on financial statement
¾ Relevant vs. Timely
¾ Cost vs. benefits
¾ Non‐quantifiable
R5‐4 coherent of financial reporting framework (underlying logic)
¾ Transparency
¾ Comprehensiveness
¾ Consistency
185
R6‐4 Standard‐setting approach
¾ Principles‐based: require the prepares of financial reports and auditors to exercise
considerable judgment in financial reporting — IFRS
¾ Rules‐based: establishes specific rules for each element or transaction — U.S. GAAP
¾ U.S. GAAP 将慢慢转变为 Objectives Oriented（结合以上两者）
5‐4 Financial Statement Elements 的理解
Q25‐4 Assume U.S. GAAP applies unless otherwise noted. Which of the following is least likely
to be classified as a financial statement element?
A. Revenue
B. Liability
C. Net income

Solution: C
Net income is not an element of the financial statements, but the net result of revenues less
expenses. The elements are: assets, liabilities, owners’ equity, revenue and expenses.

Q26‐4 ★Which of the following principle requires faithful representation of the effects of
transactions in accordance with the standards without material errors?
A. Fair presentation
B. Materiality
C. Consistency

Solution: B
Materiality means that the financial statements should be free of misstatements or omissions
that could influence the decisions of users of financial statements.

Q27‐4 ★Which of the following is not a requirement to recognize revenues under US GAAP?
A. Price is determinable
B. Goods have been delivered to clients
C. Cost can be estimated reliably

Solution: A
Price is determinable, this principal is made by SEC.

Q28‐4 ★Which of the following is the collection of all business transactions in an accounting
system sorted by date?
A. General ledger
B. General Journal
C. Trial balance

Solution: B
General Journal is sorted by date. General ledger is sorted by account.

186
Q29‐4 ★Under US GAAP, a company which is planning to change one of its accounting policies
has to adjust the financial statements most likely in a manner:
A. Retrospective
B. Prospective
C. Cumulative

Solution: A
Change accounting policies need to Retrospect. (To LIFO, no need to adjust retrospectively)

Financial Statement Elements 掌握 U.S. GAAP 和 IFRS 的区别：
R10‐4 US GAPP: Assets，Liabilities，Equity or Net Assets，Investments by owners，Distributions
to owners，Comprehensive income，Revenues，Expenses，Gains，Losses
R11‐4 IFRS: Assets、Liabilities、Equity or Net Assets、Revenues，Expenses

6‐4 Steps in the Financial Statement Analysis Framework
Q30‐4 Assume U.S. GAAP applies unless otherwise noted. Making any necessary adjustments
to the financial statements to facilitate comparison with respect to accounting choices is
done in which step of the financial statement analysis framework?
A. Process data
B. Collect data
C. Develop and communicate conclusions

Solution: A
Making any adjustments is part of the processing data step. Commonly used data bases (part of
the collection phase) do not make adjustments for differences in accounting choices.

Q31‐4 Ratios are an input into which step in the financial analysis framework?
A. Process data.
B. Collect input data.
C. Analyze/interpret the processed data.
Solution: C.
Ratios are an output of the process data step but are an input into the analyze/interpret data
step.

Q1‐4 ★Ratios are an input into which step in We financial statement analysis framework?
A. Process data.
B. Collect input data.
C. Analyze/interpret the processed data.
Solution：C.
Ratios are an output of the process data step but are an input into the analyze/interpret data
step.

187
R12‐4 Steps in the Financial Statement Analysis Framework — 6 个步骤

¾ State the objective and context
¾ Gather data：所有财务报表信息的搜集
¾ Process the data：将财务报表搜集的信息做处理，如计算 ratio
¾ Analyze and interpret the data：将分析出来的各种 ratio 进行分析
¾ Report the conclusions or recommendations
¾ Update the analysis

7‐4 Accounting System
Q32‐4 Assume U.S. GAAP applies unless otherwise noted. An entry made to record an accrual,
such as bad debt expense, that is not yet reflected in the accounting system is best
described as a (n):
A. Ledger entry.
B. Adjusting entry.
C. Trial balance entry.

Solution: B
Adjusting entries are a type of journal entries typically made at the end of the accounting period
to record items such as accruals that are not yet reflected in the accounting system.

Q33‐4 Which of the following is the collection of all business transactions in an accounting
system sorted by date?
A. General ledger
B. General Journal
C. Trial balance

Solution: B
General Journal is sorted by date. General ledger is sorted by account.

Q34‐4 ★The collection of all business transactions sorted by account in an accounting system
is referred to as:（原版书 Reading23）
A. a trial balance.
B. a general ledger.
C. a general journal.

Solution：B.
The general ledger is the collection of all business transactions sorted by account in an
accounting system. The general journal is the collection of all business activities sorted by date.
R13‐4 ★报表制作几个步骤
¾ General Journal: list of entries sorted by date (order)
¾ General ledger: sorted by account
¾ Initial trial balance/Adjusted trial balance: balance
¾ Financial statements
188

8‐4 Revenue Recognition
Q35‐4 Under IFRS, income includes increases in economic benefits from.
A. increases in owners' equity related to owners' contributions.
B. increases in liabilities not related to owners' contributions.
C. enhancements of assets not related to owners' contributions.

Solution: C.
Under IFRS, income includes increases in economic benefits from increases in assets,
enhancement of assets, and decreases in liabilities.

Q36‐4 ★If the outcome of a long‐term contract can be measured reliably, the preferred
accounting method under both IFRS and U.S. GAAP is:
A. the installment method.
B. the completed contract method.
C. the percentage‐of‐completion method.

Solution: C
The preferred method is the percentage‐of‐campletion method. The completed contract method
should be used only when the outcome cannot be measured reliably.

Q37‐4 ★★A company uses the percentage‐of‐completion method to recognize revenue from
its long‐term construction contracts and estimates percent completion based on
expenditures incurred as a percentage of total estimated expenditures. A three‐year
contract for €10 million was undertaken with a 30% gross profit anticipated. The project
is now at the end of its second year, and the following end‐of‐year information is
available:
Year 1 Year 2
Costs incurred during year €3,117,500 €2,582,500
Estimated total costs €7,250,000 €7,600,000
The gross profit (in €) recognized in year 2 is closest to:

A. 617,500.
B. 880,000.
C. 960,000.

Solution: A
Percentage of Completed Costs Incurred /Total Costs Anticipated × 100%
Gross Profit %Complete × Future Anticipated Profit – Profit Already Recognized
Year 1 Year2
Percent Completed 3,117,500 / 7,250,000 = 43.0% 5,700,000 / 7,600,000 = 75.0%
Gross Profit 43.0% × (10,000,000–7,250,000) 75.0% × (10,000,000 –7,600,000)
= 1,182,500 – 1,182,500 = 617,500
189

Q38‐4 ★During 2010, Company A sold a piece of land with a cost of $6 million to Company B
for $10 million. Company B made a $2 million down payment with the remaining
balance to be paid over the next 5 years. It has been determined that there is significant
doubt about the ability and commitment of the buyer to complete all payments.
Company A would most likely report a profit in 2010 of:
A. $4 million using the accrual method.
B. $0.8 million using the installment method.
C. $2 million using the cost recovery method.

Solution: B
Under the installment method, the portion of the total profit that is recognized in each period is
determined by the percentage of the total sales price for which the seller has received cash. For
Company A 2/10 x 4 = $0.8 million. Note, cost recovery method could be used in this case, but
the reported profit would be $0.

Q39‐4 ★The following information is from a company’s investment portfolio:
Investment Classification Held‐to‐maturity
Market value, 31 Dec 2009 $ 17,000
Cost/Amortized cost 31 Dec 2009 22,000
Market value, 31 Dec 2010 10,000
Cost/Amortized cost 31 Dec 2010 20,000
If the investment is reclassified as Available‐for‐sale as of 31 December 2010, the balance sheet
carrying value of the company’s investment portfolio would most likely:
A. remain the same.
B. decrease by $10,000.
C. decrease by $12,000.

Solution: B
Held‐for‐trading and available‐for‐sale securities are carried at market value, whereas held‐to‐
maturity securities are carried at amortized cost. If the investment is reclassified as available‐
for‐sale in 2010, the carrying amount should be adjusted to its market value, which is $10,000.
Compared with the amortized cost of $20,000, it’s a decrease of $10,000.

Q40‐4 Assume U.S. GAAP applies unless otherwise noted.Differences between accrued revenue
and expenses and cash flows result in the creation of assets and liabilities. Would each
of the following revenue events result in the creation of an asset or a liability when the
event originally occurs?
Revenue is recognized before the cash is Cash is received before the revenue is
received. recognized.
A. Asset Asset
B. Asset Liability
C. Liability Asset
190

Solution: B
Revenue recognition before the cash is received will result in the creation of an accounts
receivable, an asset, whereas when the cash is received before the revenue is recognized a
liability, unearned revenue, is created.

Q41‐4 ★A real estate firm sold an industrial building to an automobile manufacturer. The price
of the building was 12 million dollars with a cost of 8 million dollars. The purchaser
made a down payment of 1 million dollars without any further payment. Recently, as the
economy contracted, the purchaser met some financial difficulties. The firm can no
longer assure the reception and timing of the remaining amount. If the company
decided to use installment method, at the end of the first year, the profit recognized is
closest to:
A. 0.
B. 333,333.
C. 500,000.

Solution: B
Under installment method, the profit recognized equal to 1,000,000(12‐8) / 12=333

Q42‐4 Assume U.S. GAAP applies unless otherwise noted.At the beginning of 2008, Florida
Road Construction entered into a contract to build a road for the government
Construction will take four years. The following information as of 31 December 2008 is
available for the contract:
Total revenue according to contract $10,000,000
Total expected cost $8,000,000
Cost incurred during 2008 $1,200,000
Under the completed contract method, how much revenue will be reported in 2008?
A. None.
B. $300,000.
C. $1,500,000.

Solution: A
Under the completed contract method, no revenue would be reported until the project is
completed. B is incorrect. This is the profit under the percentage‐of‐completion method. C is
incorrect. This is the revenue under the percentage‐of‐completion method.

Q43‐4 Under IFRS, if the cost of a long‐term contract cannot be estimated reliably, which of the
following methods is preferred to recognize revenue?
A. Recognize revenue up to the extent of cost incurred.
B. Recognize revenue after the completeness of the contract.
C. Recognize revenue as proportionate to cost incurred.

191
Solution: A
The completed‐contract method is used when the outcome of a project cannot be reliably
measured or the project is short‐term.

Q44‐4 An example of an expense classification by function is:
A. tax expense.
B. interest expense.
C. cost of goods sold

Solution: C.
Cost of goods sold is a classification by function. The other two expenses represent classifications
by nature.

Q45‐4 According to International Financial Reporting Standards, which of the following
conditions should be satisfied in order to report revenue on the income statement?
（2012‐mock83）
A. Payment has been received.
B. Costs can be reliably measured.
C. Goods have been delivered to the customer.

Solution：B
The IFRS conditions that should be met include that the costs incurred can be reliably measured,
and it is likely that the economic benefits will flow to the entity, not the actual receipt of any
payment, and that the significant risks and rewards of ownership have been transferred, which is
normally when the goods have been delivered, but not always.

Q46‐4 A company entered into a three‐year construction project with a total contract price of
$10.6 million and an expected total cost of $8.8 million. The following table provides
cash flow information relating to the contract: （2012‐mock83）

All figures in millions Year 1 Year 2 Year 3
Costs incurred and paid $1.2 $6.0 $1.6
Amounts billed and payments received $2.4 $5.6 $2.6

If the company uses the percentage‐of‐completion method, the amount of revenue recognized
(in millions) in Year 2 is closest to:

A. $3.5.
B. $5.6.
C. $7.2.

Solution：C
The revenue reported is equal to the percentage of the contract that is completed in that period,
where percentage completion is based on costs.
192
In Year 2: (6.0 ÷ 8.8) × 10.6 = 7.2.

Q47‐4 ★ An example of an expense classification by function is:（原版书 Reading25）
A. tax expense.
C. cost of goods sold.

Solution：C.
by nature.

Q48‐4 ★If the outcome of a long‐term contract can be measured reliably, the preferred
accounting method under both 1FRS and U.S. GAAP is: （原版书 Reading25）
A. the cost recovery method.
B. the completed contract method.
C. the percentage‐of‐completion method.

Solution：C.
The preferred method is the percentage‐of‐completion method. The completed contract method
should be used under U.S. GAAP only when the outcome cannot be measured reliably. A method
similar to, but not referred to as, the cost recovery method is used under IFRS when the outcome
cannot be measured reliably.

Q49‐4 ★At the beginning of 2009, Florida Road Construction entered into a contract to build a
road for the government. Construction will take four years. The following information as
of 31 December 2009 is available for the contract:
Total revenue according to contract 10,000,000
Total expected cost $ 8,000,000
Cost incurred during 2009 $ 1,200,000
Assume that the company estimates percentage complete based on costs incurred as a
percentage of total estimated costs. Under the completed contract method, how much revenue
will be reported in 2009?（原版书 Reading25）
A. None.
B. $300,000.
C. $1,500,000.

Solution：A.
Under the completed contract method, no revenue would be reported until the project is
completed.

Q50‐4 ★During 2009, Argo Company sold 10 acres of prime commercial zoned land to a
builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay
the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002
for $2,000,000. Using the installment method, how much profit will Argo report for 2009?
193
A. $600,000.
B. $1,000,000.
C. $3,000,000.

Solution：A.
The installment method apportions the cash receipt between cost recovered and profit using the
ratio of profit to sales value (i.e., $3,000,000 = $5,000,000 = 60 percent). Argo will, therefore,
recognize $600,000 in profit for 2009 ($1,000,000 cash received X 60 percent).

Q51‐4 ★Using the same information as in Question 8, how much profit will Argo report for
2009 using the cost recovery method? （原版书 Reading25）
A. None.
B. $600,000.
C. $1,000,000.

Solution：A.
Under the cost recovery method, the company would not recognize any profit until the cash
amounts paid by the buyer exceeded Argo's cost of $2,000,000.

Q52‐4 ★Apex Consignment sells items over the internet for individuals on a consignment basis.
Apex receives the items from the owner, lists them for sale on the internet, and receives
a 25 percent commission for any items sold. Apex collects the full amount from the
buyer and pays the net amount after commission to the owner. Unsold items are
returned to the owner after 90 days. During 2009, Apex had the following information:
¾ Total sales price of items sold during 2009 on consignment was €2,000,000.
¾ Total commissions retained by Apex during 2009 for these items was €500,000.
How much revenue should Apex report on its 2009 income statement?（原版书 Reading25）
A. €500,000.
B. €2,000,000.
C. €1,500,000.

Solution：A.
Apex is not the owner of the goods and should only report its net commission as revenue.

Revenue Recognition 掌握概念及理解：
R14‐4 Revenue Recognition criteria
¾ completion of the earnings process & assurance of payment. For example, Receiving cash
before revenue recognition‐‐unearned revenue
¾ Expenses are recognized when incurred.
¾ Under IFRS: risk and reward is transferred, no continuing control or management over the
goods sold, revenue can be readily measured, probable inflow of economic benefits, cost
can be realiably measured (for service, the stage of completion can be measured)
194
¾ Under GAAP: evidence of arrangement between the buyer and seller, product being
delivered or service has been rendered, price is determined or determinable, reasonably
sure of collecting money.
R15‐4 ★Revenue Recognition 理解：
¾ Under U.S. GAAP
1) 对于 long‐term contract，可以选用 POC 和 CC——此处定为考点，请重点掌握. Percentage
of completion: 在工程的收入与支出确定时使用。通过已产生支出与总支出的比例来确
定收入总额。Completed‐contract:当工程的结果不确定时使用。收入，支出和利润均在
工程完工后确认。
2) 对于 short term contract，可以选用一手交钱，一手交货；installment sales 或者是 cost
recovery
3) 熟记：POC 和 CC 的区别: 重要指标，A 是 POC 比较大；L 是 POC 比较小；NI 的波动是
CC 比较大；但是 total CF 一样大
¾ Under IFRS
1) 对于 long term contract，只有 POC
2) 那么如果遇到长期合同，与美国准则下 CC 不同，在国际准则下选用收入的确认不超过
成本，最后才确认毛利
3) 其它与美国准则一样
R16‐4 ★installment method 和 cost recovery method 如何区分（under US. GAAP）
Under US. GAAP, Installment method and Cost recovery method are used
¾ Installment method: when collectibility cann’t be reasonably estimated, profit is recognized
as cash is collected.
¾ Cost recovery method: when is highly uncertain, profit is recognized only when cash
collected exceeds cost incurred.
¾ 假如：ABC firm considered the initial investment by the buyer was not substantial enough to
warrant full recognition of the gain.
¾ If the recovery of cost is assured if default.也就是说就算是 default，公司也能确认 cost 是
可以 recovery 的。所以题目中有这样的描述就是 installment sales；
¾ 如果没有这样的描述，那么就是 cost recovery。Cost recovery 较谨慎。
¾ 例：Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise
noted. On June 15, 2007, a short term agreement was entered into sell the property and
automatic equipment of ABC firm for USD 100,000. As the result of this sale, the subsidiary
will no longer offer sales of title insurance or real estate closing servicing. ABC firm
considered the initial investment by the buyer was not substantial enough to warrant full
recognition of the gain. However, the recovery of the cost of the property is reasonably
assured if the buyer defaults. Which of the revenue recognition method will be the most
appropriate? 答：用 installment sales method
R17‐4 ★Installment 在 IFRS 下如何进行利润确认
¾ the discounted present value: is recognized at the time of sale
¾ the difference between the installment payments and the discounted present value: is
recognized as interest over time
¾ If the outcome of the project cannot be reliably estimated:revenue recognition is similar to
the cost recovery method.
195

9‐4 Accounting Equation
Q53‐4 Assume U.S. GAAP applies unless otherwise noted. An analyst gathered the following
information from a company’s accounting records:
Assets, December 31, 2007 $5,250,000
Liabilities, December 31, 2007 $2,200,000
Contributed capital, December 31, 2007 $1,400,000
Retained earnings, January 1, 2007 $800,000
Dividends declared during 2007 $200,000
The analyst’s estimate of net income for 2007 would be closest to:
A. $650,000.
B. $850,000.
C. $1,050,000.

Solution: C
Owner’s equity = $5,250,000 ‐ $2,200,000 = $3,050,000.
Owners equity = contributed capital + ending retained earnings.
Ending retained earnings = 3,050,000 ‐ 1,400,000 = 1,650,000.
Ending retained earnings = beginning retained earnings + net income ‐ dividends.
1,650,000 = 800,000 + NI ‐ 200,000; so Net income = $1,050,000.

Q54‐4 ★Assume U.S. GAAP applies unless otherwise noted. HVG, LLC paid $12,000 of cash to a
real estate company upon signing a lease on 31 December 2005. The payment
represents a $4,000 security deposit and $4,000 of rent for each of January 2006 and
February 2006. Assuming that the correct accounting is to reflect both January and
February rent as prepaid, the most likely effect on HVG’s accounting equation in
December 2005 is
A. No net change in assets.
B. A decrease in assets of $8,000.
C. A decrease in assets of $12,000.
Solution: A
The payment of January rent represents prepaid rent (an asset), which will be adjusted at the
end of January to record rent expense. Cash (an asset) decreases by $12,000. Deposits (an asset)
increase by $4,000. Prepaid rent (an asset) increases by $8,000. There is no net change in assets.

Q55‐4 ★At the beginning of the year, a company had total shareholders' equity consisting of
￥50,000 in retained earnings, contributed capital at the start was ￥200,000.
During the year, the following events occurred: ￥
1.Net income reported . 42,000
2.Dividend paid 7,000
3.Realized loss on available‐for‐sale investments 3,000
4.Foreign currency translation gain on foreign subsidiaries 8,000
5.Repurchase of company stock, to be held as Treasury stock 6,000
196
The total shareholders' equity at the end of the year is closest to:(MOCK79‐47)
A. ￥268,000
B. ￥284,000
C. ￥287,000

Solution:C
List and explain the components of owners' equity.
Shareholders' Equity (￥)
Start‐of‐year share capital 200,000
Less treasury stock (6,000)
Beginning retained earnings 50,000
Plus net income 42,000
Less dividends paid (7,000)
Ending retained earnings 85,000 85,000
Accumulated other comprehensive income Foreign $8,000
currency translation adjustment gain
End‐of‐year shareholders' equity 287,000
The realized loss on the available‐for‐sale investments is already accounted for in net
income.

Q56‐4 ★At the start of the year, a company's capital contributed by owners and retained
earnings accounts had balances of $10,000 and $6,000, respectively. During the year, the
following events took place:
Net income earned $4,000
Interest paid on debt $500
Repayment of long‐term debt $1,000
Proceeds from shares issued $1,000
Dividends paid $600
The end‐of‐year owners' equity is closest to:(MOCK79‐58)
A. $19,400
B. $19,900
C. $20,400

Solution: C
Start‐of‐year capital contributed by owners $10,000
Additional shares issued 1,000
Initial retained earnings 6,000
Net income 4,000
Dividends paid (600)
Increase in retained earnings 3,400 3,400
Ending owners' equity $20,400
197

Q57‐4 ★ Which of the following elements represents an economic resource? （原版书
Reading23）
A. Asset.
B. Liability.
C. Owners' equity.

Solution：A.
An asset is an economic resource of an entity that will either be converted into cash or
consumed.

Q58‐4 ★An analyst has collected the following information regarding a company in advance of
its year‐end earnings announcement (in millions): （原版书 Reading23）
Estimated net income $ 200
Beginning retained earnings $1,400
Estimated distributions to owners $ 100
The analyst's estimate of ending retained earnings (in millions) should be closest to:（2012 原版
书后重点题）
A. $1,300.
B. $1,500.
C. $1,700.

Solution：B.
Beginning retained earnings $1,400
+ Net income 200
－Distributions to owners (100)
= Ending retained earnings $1,500

Q59‐4 ★A group of individuals formed a new company with an investment of $500,000. The
most likely effect of this transaction on the company's accounting equation at the time
of the formation is an increase in cash and: （原版书 Reading23）
A. an increase in revenue.
B. an increase in liabilities.
C. an increase in contributed capital.

Solution：C.
This is a contribution of capital by the owners. Assets would increase by $500,000 and
contributed capital would increase by $500,000, maintaining the balance of the accounting
equation.

Q60‐4 ★ An example of an expense classification by function is:（原版书 Reading25）
A. tax expense.
C. cost of goods sold.
198

Solution：C.
by nature.

R18‐4 Accounting Equation 掌握公式：
¾ Assets = Liabilities + Owners’ equity
¾ Assets = Liabilities + Contributed Capital + Ending retained Earnings
¾ Assets= Liabilities + Contributed Capital + Beginning Retained Earnings + Revenue –
Expenses – Dividends
¾ Owners equity = contributed capital + ending retained earnings.

10‐4 Income Statement 相关其它特殊交易的处理，如 Barter Transactions
Q61‐4 ★Assume IFRS applies unless otherwise noted. Revenue from barter transactions
should be measured based on the fair value of revenue from:
A. Similar barter transactions with related parties.
B. Similar barter transactions with unrelated parties.
C. Similar non‐barter transactions with unrelated parties.

Solution: C
Under IFRS, revenue for barter transactions should be measured based on the fair value of
revenue from similar non‐barter transactions with unrelated parties. Under U.S. GAAP, revenue
for barter transactions can be recognized at fair value only if a company has historically received
cash payments for such services and can thus use this historical experience as a basis for
determining fair value.

Q62‐4 Apex Consignment sells items over the internet for individuals on a consignment basis.
Apex receives the items from the owner, lists them for sale on the internet, and receives
a 25 percent commission for any items sold. Apex collects the full amount from the
buyer and pays the net amount after commission to the owner. Unsold items are
returned to the owner after 90 days. During 2006, Apex had the following information:
¾ Total sales price of items sold during 2006 on consignment was €2,000,000.
¾ Total commissions retained by Apex during 2006 for these items was €500,000.
How much revenue should Apex report on its 2006 income statement?
A. €500,000.
B. €.2,000,000
C. €1,500,000.

Solution: A.
Apex is not the owner of the goods and should only report its net commission as revenue. C is
the amount paid to the owners. B is the total amount collected on behalf of the owners.

199
Income Statement 相关其它特殊交易的会计处理：
R19‐4 ★Barter Transactions
¾ Under IFRS, 收入确认 fair value of revenue from similar non‐barter transactions with
unrelated parties.
¾ Under U.S. GAAP, 收入确认为 fair value only if a company has historically received cash
payments for such services and can thus use this historical experience as a basis for
determining fair value.
R20‐4 Round Trip：barter transactions 的一种形式，比如 A 公司有一项服务卖给 B 公司，
立刻又从 B 公司购入了等额的产品，此时 A 公司的收入等于费用，这样的交易不影
响 NI，也不影响 CF
R21‐4 ★Gross Revenue and Net Revenue
¾ Gross revenue: 公司分开记录收入和支出。
¾ Net revenue: 公司只记录收入和支出的差额。
¾ 确认为 gross revenue 是有条件的：the company is the primary obligor under the contract,
bears risk, can choose the supplier, and has reasonable latitude to establish price；
¾ 如果不满足以上条件，确认为 net revenue，比如代售，代销确认的就是 net

11‐4 Income Statement 的线下项目
Q63‐4 ★Assume IFRS (international financial reporting standard) applies unless otherwise
noted.A loss from the destruction of property in a fire would most likely be classified as
A. Continuing operations.
B. An extraordinary item.
C. Discontinued operations.

Solution: A
A fire may be infrequent, but it would still be part of continuing operations. IFRS does not permit
classification of an item as extraordinary. Discontinued operations relate to a decision to dispose
of an operating division.

Q64‐4 ★Assume U.S. GAAP applies unless otherwise noted.During 2007 Nagano Incorporated,
a manufacturing company reported the following items on their income statement:
Loss on disposal of fixed assets $60,000
Interest expense $73,400
The correct classification of each of these items on the income statement would be as a(n):
Loss on disposal of fixed assets Interest expense
A. Non‐operating item operating item
B. operating item nonoperating item
C. operating item operating item

Solution: B
The loss on the disposal of fixed assets is an unusual or infrequent item, but it is still part of
normal operating activities. The interest expense is the result of financing activities and would be
classified as a nonoperating expense by nonfinancial service companies.
200

Q65‐4 Which of the following is least likely considered a nonoperating transaction from the
perspective of a manufacturing firm?
A. Dividends received from available‐for‐sale securities.
B. Interest expense on subordinated debentures.
C. Accruing bad debt expense for goods sold on credit.

Solution: C.
Bad debt expense is an operating expense. The other choices are nonoperating items from the
perspective of a manufacturing firm.

Q66‐4 ■Under IFRS, a loss from the destruction of property in a fire would most likely be
classified as:
A. continuing operations.
B. an extraordinary item.
C. discontinued operations.

Solution: A.
A fire may be infrequent, but it would still be part of continuing operations. IFRS does not permit
classification of an item as extraordinary. Discontinued operations relate to a decision to dispose
of an operating division.

Q67‐4 A company suffered a substantial loss when its production facility was destroyed in an
earthquake against which it was not insured. Geological scientists were surprised by the
earthquake as there was no evidence that one had ever occurred in that area in the past.
Which of the following statements is most accurate? The company should report the
loss on its income statement: （2012‐mock83）
A. net of taxes if it reports under U.S. GAAP.
B. as an extraordinary item if it reports under IFRS.
C. as an unusual item if it reports under U.S. GAAP.

Solution：A
To qualify as an extraordinary item, an item must be both unusual in nature and infrequent in
occurrence: The description of the earthquake meets these criteria. Extraordinary items are only
allowed under U.S. GAAP and are reported on the income statement net of tax.

Income Statement 的线下项目
R22‐4 FASB 要求，在一份基本的 Income Statement 中，为了得到 Net Income，必须包含
net income from continuing operations 和 non‐recurring items.
R23‐4 ★Non‐operating income:
¾ For non‐financial service company：在 equity or debt securities issued 的投资，any
dividend, interest (including amortization discount or premium) or profits from sales 都视为
non‐operating income；
201
¾ For financial service firms, interest income and expense are likely components of operating
activities.
R24‐4 ★Non‐recurring items 分为三种
¾ 分别叫做：Unusual or infrequent items, Extraordinary items, Discontinued operations.
¾ Unusual or infrequent items 指 Transactions or events that are either unusual in nature or
infrequent in occurrence but not both. 唯有它列示于 net income from continuing
operations 之上.包括：(1) gains or losses from the sale of assets or part of a business. (2)
impariments, write‐offs, write‐downs and restructuring costs.
¾ Extraordinary items 指性质高度异常的重大损益项目，该项目因企业日常业务活动以外
的交易或事项产生，并预期不会再度发生，包含了灾难带来的损失，对于国外没收，
及提前赎回债券的损失（美国准则有这项，但是国际准则没有这一项）
R25‐4 ★Discontinued Operations：the business line in disposal of or intended to dispose
generate the income (earnings or loss net of tax); during the phase period (since
measurement date to disposal date), should recognize the loss but not the gain.
R26‐4 ★Accounting changes 包括 changes in accounting principles, changes in accounting
estimates。
¾ changes in accounting principles 需要追溯调整，即 retroprospective，放在 R/E beginning
（在美国准则下这一条已经不再显示了，现在来自于这里的变动全部直接调整期初留存
收益）。
¾ changes in accounting estimates 一般是由于有了新的信息所导致的估计调整。不需要追
溯调整，只考虑以后，即 prospective。
¾ error adjustment is recorded in Prior Period Adjustment

12‐4 Basic EPS 和 Diluted EPS 计算
Q68‐4 ★Assume U.S. GARP applies unless otherwise noted. An analyst gathered the following
information about a company:
Shares of common stock $1,000,000
Net income for the year $1,500,000
Par value of convertible bonds with a 4% coupon rate $10,000,000
Par value of cumulative preferred stock with a 7% dividend rate $2,000,000
Tax rate 30%
The bonds were issued at par and can be converted into 300,000 common shares. All securities
were outstanding for the entire year. Diluted earnings per share for the company are closest to:
A. $1.05
B. $1.26
C. $1.36

Solution: B
Preferred stock dividends of $140,000 (0.07* 2,000,000) should be deducted from net income to
derive amount available for common shareholders: $1,360,000 = (1,500,000 ‐ 140,000).
Basic EPS = $1,360,000/1,000,000 or $1.36 per share.
Diluted EPS would consider the convertible bonds if they were dilutive. Interest on the bonds
would be $400,000 and the after‐tax add back to net income would be $400,000 (0.7) or
202
$280,000. Diluted EPS would be $1,640,000/1,300,000 shares assuming conversion = $1.26 per
share.

Q69‐4 ★An analyst collected data about a company as follows:
Net income $1,000,000.00
Debt outstanding with a coupon rate of 4% $5,000,000.00
Preferred stocks with dividend rate of 4% $1,000,000.00
Tax rate 35%
Average weighted number of shares issued 500,000
The preferred stock can be converted to 10,000 common stocks, while the debt is not convertible.
The diluted earnings per share is closest to:
A. 1.92
B. 1.96
C. 2.01

Solution: A
If the convertible preferred shares were converted to common stocks, there would be no
preferred dividends paid. Thus, we should add back the convertible preferred dividends that had
previously been subtracted from net income in the numerator.
Basic EPS = (net income – dividend from preferred stocks) / average weighted number of shares
issued = (1.000.000 – 1.000.0000.04) / 500.000= 1.92
Diluted EPS = (net income – dividend from preferred stocks+ dividend from preferred stocks) /
(average weighted number of shares issued + shares from conversion of preferred stocks) =
(1.000.000 – 1.000.0000.04 + 1.000.0000.04) / (500.000+10.000) = 1.96
1.96 > 1.92, diluted EPS is 1.92.

Q70‐4 Cell Services (CSI) had 1,000,000 average shares outstanding during all of 2007. During
2007, CSI also had 10,000 options outstanding with exercise priccs of $10 each. The
avcragc stock pricc of CST during 2007 was $15. For purposes of computing diluted
earnings per share, how many shares would he used in the denominator?
A. 1,000,000.
B. 1,003,333.
C. 1,010,000.

Solution:B .
With stock options, the treasury stock method must be used. Under that method, the company
would receive $100,000 (10,000 × $10) and would repurchase 6,667 shares ($100,000/$15). The
shares for the denominator would be:
Shares outstanding 1,000,000
Options exercised 10,000
Treasury shares purchased (6,667)
Denominator 1,003,333

203
Q71‐4 ★★What is least likely to cause a distortion in the true free cash flow of a company
assuming that a large stock buyback has taken place to offset the dilutions from options
exercised?（2012 原版书后重点题 Reading32）
A. Stock bought back on the open market.
B. Classifying the cash expended to buy back stock as a financing activity.
C. Classifying the tax benefit of option exercises as an operating cash flow.

Solution：A.
Most stock buy backs occur in the open market and do not result in any distortion of cash flow.

Q72‐4 ★★Which of the following is the least important reason why an analyst should review
the cash flow statement, the stockholders' equity statement, and the notes to the
financial statements for information regarding stock options? To determine:（2012 原版
书后重点题）
A. the volume of options exercised in the period.
B. the extent to which cash flows are affected by the tax benefit on stock options.
C. whether the company follows APB No. 25 or SFAS 123(R) to account for stock options.

Solution：C.
Since 2005, U.S. GAAP require all companies to follow SFAS 123(R) which requires options to be
expensed.
R27‐4 EPS 掌握计算：
1) 公式：
net income - preferred dividednds
basic EPS =
weighted average number of common shares outstanding
2) 步骤：firstly, Calculate basic EPS; then，to identify dilutive securities; in the end, to
calculate diluted EPS
3) 关键
¾ ★考试中经常出现的是 weighted average number of common shares outstanding，要记得
stock dividend 和 stock split 要追溯处理，stock new issue 和 repurchase 只要时间加权
¾ Dilutive EPS 的计算，就是 convertible bond，convertible preferred stock 和 stock option，
warrant 是否会让 basic EPS 稀释。对于各自可稀释性债券份子，分母需要考虑什么，一
定要记熟
¾ ★如果公司有 option 或者 warrant 的情况下，计算的 Diluted EPS 用的是 treasury stock
method，如果在考试中遇到这个称法不要觉得陌生，其实不影响计算的过程。事实上，
treasury stock method 的意思是假设公司使用收入的期权实行费用来回购股票，抵消一
部分稀释。当期权执行价格低于股票市场平均价格，该期权是反稀释的。
¾ ★注意，在计算可转债带来的稀释时，不要忽略税盾。
¾ Treasury stock 投票权问题：Treasury stock has no voting rights and does not receive
dividends.
13‐4 Comprehensive Income
Q73‐4 Assume U.S. GARP applies unless otherwise noted. For financial assets classified as
available for sale, how are unrealized gains and losses reflected in shareholders’ equity?
204
A. They are not recognized.
B. They flow through retained earnings.
C. As a separate line item (other comprehensive income).

Solution: C
For financial assets classified as available for sales, unrealized gains and losses are not recorded
on the income statement but do appear on the balance sheet. Shareholders’ equity is adjusted
through a separate line item for valuation gains and losses termed “other comprehensive
income.

Q74‐4 ★Which of the following transactions affects owners' equity but does not affect net
income?
A. Foreign currency translation gain.
B. Repaying the face amount on a bond issued at par.
C. Dividends received from available‐for‐sale securities.

Solution: A
A foreign currency translation gain is not included in net income but the gain increases owners'
equity. Dividends received are reported in the income statement. The repayment of principal
does not affect owners' equity.

Q75‐4 ★A company is not required to disclose its other comprehensive income in a separate
line from reserves under its own accounting standards. An analyst is planning to make
an adjustment of its financial statements to make them more comparative with those
prepared under IFRS. He collected the following information from the footnotes (in
thousand euros):
Net income 500
Unrealized gain on trading securities 20
Loss on translation of foreign currency 30
Gain on derivatives for hedge 40
Dividend declared 30
The total comprehensive income of the company is closest to:
A. 540
B. 510
C. 500

Solution: A
Comprehensive income is equal to net income plus other comprehensive income.
Comprehensive income includes foreign currency translation adjustment, unrealized gains or
losses on derivatives contracts accounted for as hedges, unrealized holding gains and losses on
available‐for‐sale securities, and minimum pension liability adjustments.
Both unrealized gain on trading securities and loss on translations of foreign currency are
reflected in income statement.
205
The total comprehensive income is equal to 500 + 40 = 540.

Q76‐4 Selected information for a company and the common size data for its industry are
provided below.
Company(￡) Common Size Industry Data (% of sales)
EBIT 76,000 28,0

Pretax profit 66,400 19.6
Net income 44,488 13.1
Sales 400,000 100.0
Total assets 524,488 131.0
Total equity 296,488 74.0

ROE 14.5% 17.7%
The main driver of the company's inferior ROE compared to that of the industry is most likely the
result of its lower:(MOCK79‐49)
A. EBIT margin
B. tax burden ratio
C. Interest burden ratio

Solution: A
Calculation Company Industry
EBIT Margin EBIT/Sales 76,000/400,000=0.19 28.0/100=0.28
Tax Burden ratio Net Inc/EBT 44,488/66,400=0.67 13.1/19.6=0.67
Interest Burden ratio EBT/EBIT 66,400/76,000=0.87 19.6/28.0=0.70
The company has a higher interest burden ratio bur a lower EBIT margin than the industry,
and the same tax burden ratio; the lower EBIT margin relative to the industry is the cause
of the company's poor relative performance
EBI: Pretax profit (earnings before tax) Net Inc: Net Income

Q2‐4 ★ The following information is available from a company’s accounting records:
（2012mock85）
€millions
Revenues for the year 12,500
Total expenses for the year 10,000
Gains from available‐for‐sale securities 1,475
Loss on foreign currency translation adjustments on a foreign subsidiary 325
Dividends paid 500
The company’s total comprehensive income (in millions) is closest to:
A. €1,150.
B. €3,150.
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C. €3,650.

Correct answer: C
Total comprehensive income = Net income + other comprehensive income
Net Income = revenues ‐ expenses
Other comprehensive income includes gains or losses on available‐for‐sale securities and
translations adjustments on foreign subsidiaries.
(Revenues ‐ expenses) + gain on AFS ‐loss on FX translation
(12,500 ‐ 10,000) + 1,475 ‐325 = 3,650.
Comprehensive Income 的基本了解
R28‐4 全面综合收益 Comprehensive Income：the change in equity (net asset) of a business
enterprise during a period from transactions and other events and circumstances from
non‐owner sources，单列在 NI 后面的，不放在 I/S 中。
R29‐4 ★CI=NI + other comprehensive income（在股东权益变动表中也包含这些项目, IFRS
下没有 CI，但有 OCI）
R30‐4 ★Other comprehensive Income
¾ Foreign currency translation adjustment
¾ Unrealized G/L on derivatives contracts accounted for as hedges
¾ Unrealized G/L on available for sale securities
¾ Changes in the funded status of a company’s defined benefit post‐retirement plans
R31‐4 Accumulated other comprehensive income aggregates past and current OCI 并显示在
B/S 中的 equity 中（IFRS 没有明确规定在 B/S 中列出 Accumulated other comprehensive
income 的数额）

14‐4 Understanding balance sheet
Q77‐4 Resources controlled by a company as a result of past events are:
A. equity.
B. assets.
C. Liabilities.

Solution: B.
Assets are resources controlled by a company as a result of past events.

Q78‐4 ★The carrying value of inventories reflects:
A. their original cost.
B. their current value.
C. the lower of original cost or net realizable value.

Solution: C Inventories are carried at historical cost, unless the current replacement cost of the
inventory is less.

Q79‐4 ■Under IFRS, the minority interest in consolidated subsidiaries is presented on the
balance sheet:
207
A. as a long‐term liability.
B. separately, but as a part of shareholders' equity.
C. as a mezzanine item between liabilities and shareholders' equity.

Solution: B .
IFRS requires that minority interest in consolidated subsidiaries be classified as shareholders'
equity.

15‐4 Accounting Treatment to Marketable Securities
Q80‐4 ★Which of the following is the least appropriate accounting treatment for marketable
securities under IAS No. 39?
Category Measurement Method Realized Gains &Losses Reported In
A. Trading Fair Value Income Statement
B. Available for sale Fair Value Equity
C. Held to Maturity Amortized Cost Income Statement

Solution: B
All categories have realized gains or losses treated in the same way; they are reported on the
income statement. It is the unrealized gains and losses that are included in other comprehensive
income (in equity) for available‐for‐sale securities carried at market value.

Q81‐4 ★Assume U.S. GAAP applies unless otherwise noted. A company issued bonds in 2006
that mature in 2016. The measurement basis used for the bonds on the 2008 balance
sheet will be:
A. Market value.
B. Historical cost.
C. Amortized cost.

Solution: C
Bonds payable issued by a company are financial liabilities measured at amortized cost.

Q82‐4 Assume a company has the following portfolio of marketable securities which was
acquired at the end of 2009:
Category Original Cost in € Fair Market Value in €
as at the Year End, 2009 as at the Year End, 2010
Held for trading 12,000,000 12,500,000
Available for sale 17,000,000 16,000,000
If the company reports under IFRS instead of U.S. GAAP, its net income will most likely be:
A. the same.
B. €500,000 lower.
C. €500,000 higher.

Solution: A
Whether securities are classified as held for trading or available for sale, they are measured at
208
their fair value on the balance sheet, but all gains/losses on held for trading securities are
reported on income statements. The unrealized gains/losses on available for sale securities are
reported in equity. This treatment is the same for both IFRS and U.S. GAAP reporting.

Q83‐4 ★★Which of the following statements is most accurate regarding cash flow statements
prepared under IFRS and U.S. GAAP?
A. Under U.S. GAAP, bank overdrafts should be classified as a financing cash flow.
B. Under IFRS, interest paid can be reported either as an operating or an investing cash flow.
C. Both the direct and indirect formats of cash flow statements are allowed under IFRS and
U.S. GAAP, but indirect is encouraged under IFRS only.

Solution: A
Under U.S. GAAP, bank overdrafts are not considered part of cash and cash equivalents and are
classified as financing cash flows.

Q84‐4 The initial measurement of goodwill is most likely affected by:（原版书 Reading26）
A. an acquisition's purchase price.
B. the acquired company's book value.
C. the fair value of the acquirer's assets and liabilities.

Solution: C.
Impairment write‐clowns reduce equity in the denominator of the debt‐to‐equity ratio but do
not affect debt, so the debt‐to‐equity ratio is expected to increase. Impairment write‐downs
reduce total assets but do not affect revenue. Thus, total asset turnover is expected to increase.

Q85‐4 For financial assets classified as available for sale, how are unrealized gains and losses
reflected in shareholders' equity? （原版书 Reading26）
A. They are not recognized.
B. They flow through retained earnings.
C. They are a component of accumulated other comprehensive income.

Solution：C.
For financial assets classified as available for sale, unrealized gains and losses are not recorded on
the income statement and instead are part of other comprehensive income. Accumulated other
comprehensive income is a component Of shareholders' equity.

Q86‐4 The non‐controlling (minority) interest in consolidated subsidiaries is presented on the
balance sheet: （原版书 Reading26）
A. as a long‐term liability.
B. separately, but as a part of shareholders' equity.
C. as a mezzanine item between liabilities and shareholders' equity.

Solution：B.
The non‐controlling interest in consolidated subsidiaries is shown separately as part of
209
shareholders' equity.

Q87‐4 ★★When comparing financial statements prepared under IFRS with those prepared
under U.S. generally accepted accounting principles, analysts may need to make
adjustments related to:（2012 原版书后重点题 Reading35）
A. realized losses.
B. unrealized gains and losses for trading securities.
C. unrealized gains and losses for available‐for‐sale securities.

Solution：C.
IFRS makes a distinction between unrealized gains and losses on available‐for‐sale debt securities
that arise due to exchange rate movements and requires these changes in value to be recognized
in the income statement., whereas U.S. GAAP does not make this distinction.

Q88‐4 ★★Oil Exploration LLC paid $45,000 in printing, legal fees, commissions, and other costs
associated with its recent bond issue. It is most likely to record these costs on its
financial statements as:
A. an asset under U.S. GAAP and reduction of the carrying value of the debt under IFRS.
B. a liability under U.S. GAAP and reduction of the carrying value of the debt under IFRS.
C. a cash outflow from investing activities under both U.S. GAAP and IFRS.

Solution: A.
Under U.S. GAAP, expenses incurred when issuing bonds are generally recorded as an asset and
amortized to the related expense (legal, etc.) over the life of the bonds. Under IFRS, they are
included in the measurement of the liability. The related cash flows are financing activities.

金融资产和负债的计量
R32‐4 ★判断证券所属的种类，Held‐to‐maturity、Trading securities 还是 Available‐to‐sale，
并了解这三种证券不同的 accounting treatment（考试常考）：
Category Measurement Unrealized/Realized Gains or Losses
Held‐to‐maturity Amortized cost Unrealized: not reported
Realized: reported in income statement
Trading securities Fair value Unrealized: reported in income
statement and B/S
Available‐to‐sale Fair value Unrealized: reported in equity and B/S
★Dividend and interest income and realized gains and losses are recognized in the income
statement for all three classifications of securities.

210
R33‐4 金融资产和负债的计量（需要了解）：
Measured at fair value Measured at cost or
amortized cost
Financial assets: Financial assets:
A. TS(stocks and bonds) A. Loans and
B. AFS(stocks and bonds) receivable
C. Derivatives whether stand‐alone or embedded in B. HTM(bonds)
non‐derivative instruments
D. Non‐derivative instruments with fair value
exposures hedged by derivative(A)
Financial liabilities: Financial liabilities:
A. Derivatives All other liabilities(such
B. Financial liabilities held for trading as bonds payables, notes
C. Non‐derivative instruments with fair value payable)

exposures hedged by derivative(L)

16‐4 掌握 bad debt 的计算：
Q3‐4 ★★Based on the following information about a company, the bad debt expense (in
millions) for 2011 is closest to: （2012‐mock85）
￡millions 2011 2010
Accounts receivables，gross 6,620 4,840
Allowance for doubtful accounts 92 56
Write‐offs during the year 84 42
A. £36.
B. £84.
C. £120.

Correct answer: C
The allowance for doubtful accounts increases by the bad debt expense recognized for the year
and decreases by the amounts written off during the year.
Beginning balance allowance 56
Plus bad debt expense ?
Less write‐offs (84)
Ending balance allowance 92
Therefore Bad debt expense =120

R34‐4 掌握 bad debt 的计算：
Beginning balance allowance
+ Bad expenses
— write‐offs
= Ending balance allowance
Bad debt 会增加 allowance for debtful accounts（contra‐assets accounts）
Bad debt 注销会减少 gross receivable and allowance account
211

17‐4 理解各种 activity 的 classification
Q89‐4 Assume U.S. GAAP applies unless otherwise noted. The sale of a building for cash would
be classified as what type of activity on the cash flow statement?
A. Operating.
B. Investing.
C. Financing.

Solution: B
Purchases and sales of long‐term assets are considered investing activities. Note: Absent
information to the contrary, it is assumed that the sale of a building involves cash. If, for example,
the transaction had involved the exchange of a building for common stock or the exchange of a
building for a long‐term note payable, it would have been considered a significant non‐cash
activity.

Q90‐4 Which of the following is an example of a financing activity on the cash flow statement
under U.S. GAAP?
A. Payment of dividends.
B. Receipt of dividends.
C. Payment of interest.

Solution: A
Answers B and C are items that are included in operating cash flows. Note: International
accounting standards allow companies to include receipt of interest and dividends as either
operating or investing cash flows, and international accounting standards allow companies to
include payment of interest and dividends as either operating or financing cash flows

Q91‐4 When a company buys shares of its own stock to be held in treasury, it records a
reduction in:（原版书 Reading27）
A. both assets and liabilities.
B. both assets and shareholders' equity.
C. assets and an increase in shareholders' equity.

Solution：B.
Share repurchases reduce the company's cash (an asset). Shareholders' equity is reduced
because there are fewer shares outstanding and treasury stock is an offset to owners' equity.

Q92‐4 ★ ★ An analyst has gathered the following information about a company:
（2012‐mock85）
212
Cdn $ millions
Cash flow from operating activities 105.9
Cash flow from investing activities (11.8)
Cash flow from financing activities 46.5
Net change in cash for the year 140.6
Interest paid(included in CFO) 22.4
Taxes pa id(tax rate of 30％) 18.0
Total debt，end of year 512.8
The cash flow debt coverage ratio for the year is closest to:
A. 20.6%.
B. 23.7%.
C. 27.4%.

Correct answer: A
Cash flow debt coverage ratio = CFO ÷ Total debt.
105.9÷512.8 = 20.6%

Other cash flow ratios
Performance ratios Coverage ratio
CFO/ Revenue CFO / Total debt
CFO/ Average total assets CFO / Cash paid for long‐ term assets
CFO / Average total equity CFO / Cash long – term debt repayment
CFO/ Operating income CFO/ dividend paid
(CFO – Preferred dividends) / CFO / Cash outflows from investing and financing
Weighted average number of activities
common shares
(CFO + interest paid + taxes paid)/ Interest paid

Q4‐4 ★★A company recorded the following events in 2010: （2012‐mock85）
$’000s
Purchase of securities for trading purposes 240
Proceeds from the sale of trading securities 300
Proceeds from issuance of bonds 500
Purchase of 30% of shares of an affiliated company 275
On the 2010 statement of cash flows, the company’s cash flow from investing activities (in
‘000s) is closest to:
A. ‐$275.
B. ‐$215.
C. $285.

Correct answer: A
213
Only the cash flows for the purchase of the shares in an affiliated company are cash from
investing activities; therefore the net amount is ‐ $275,000. Cash flows from trading securities
are operating activities.

理解各种 Activities 的区分：
R35‐4 三种 activities
¾ Operating activities 和每天的运营相关的现金流的流进流出
¾ Investing activities 和由于投资引起的购买或出售相关
¾ Financing activities 包含长期借钱，还钱，发新股，回购，分红（不包括付息）, 但是对
于金融公司，这些都属于 operating activities.
R36‐4 ★特别注意公司的主营业务和投资产品的主要性质
¾ 如果是银行，存款和贷款就是 Operating activities，因为本身就是银行的主营业务
¾ 如果投资的产品持有期很短，高流动性，或者本身就是以交易为目的，就不考虑在
Investing activities 当中

18‐4 CFO 直接法和间接法的理解
Q93‐4 ★Assume U.S. GAAP applies unless otherwise noted. An analyst gathered the following
information from a company’s 2005 financial statements ($ millions):
Balances as of year ended 31 December 2004 2005
Retained earnings 120 145
Accounts receivable 38 43
Inventory 45 48
Accounts payable 36 29
The company declared and paid cash dividends of $10 million in 2005 and recorded depreciation
expense in the amount of $25 million for 2005. The company’s 2005 cash flow from operations
($ millions) was closest to
A. 25.
B. 35.
C. 45.

Solution: C
Net income (NI) for 2005 can be computed as the change in retained earnings, $25, plus the
dividends paid in 2005, $10. NI can also be calculated from the formula: beginning retained
earnings + NI — dividends paid = ending retained earnings. Depreciation of $25 would be added
back to net income while the increases in accounts receivable, $5, and in inventory, $3, would be
subtracted from net income because they are uses of cash. The decrease in accounts payable is
also a use of cash and, therefore, a subtraction from net income. Thus, cash flow from operations
for 2005 is $25 + $10 + $25 — $5 — $3 — $7 = $45 ($ millions).

Q94‐4 ★If a nonfinancial company securitizes its accounts receivables for less than their book
value, the most likely effect on the financial statements is to increase:
A. net income.
B. cash from operations.
214
C. cash from financing activities.

Solution: B
The securitization of accounts receivables for less than book value would result in a loss on the
income statement, but an increase in the cash from operations, reflecting the proceeds received.

Q95‐4 ★A conversion of a face value $1,000,000 convertible bond for $1,000,000 of common
stock would most likely be:
A. reported as a $1,000,0011 financing cash outflow and inflow.
B. reported as supplementary information to the cash flow statement.
C. reported as a $1,000,000 financing cash outflow and a $1,000,000 investing cash inflow.

Solution: B.
Noncash transactions, if significant, are reported as supplementary information, not in the
investing or financing sections of the cash flow statement.

Q96‐4 ★Assume U.S. GAAP applies unless otherwise noted. In 2008, a company reported net
income of $200 million and cash flow from operations of $120 million. All else equal, the
most likely explanation for the difference between net income and cash flow from
operations in 2008 is that the company:

A. Tightened credit policies and increased collection efforts during the year.
B. Sold a long‐term investment for an amount equal to book value at the end of the year.
C. Increased raw materials inventory in anticipation of increased sales at the end of the year.
Solution: C
NI=$200 million and CFO=$120, so NI>CFO, and CFO=NI + dep./amor. ‐ gain + loss ‐ changes in
current assets + changes in current liabilities.
Tightened credit policies and increased collection efforts will increase CFO; and to sell a
long‐term investment for an amount equal to book value at the end of the year is an investment
activity, so increased raw materials inventory in anticipation of increased sales at the end of the
year will lead to CFO decreased, and less than NI.

Q97‐4 Assume U.S. GAAP applies unless otherwise noted. An analyst gathered the following
information about three equipment sales that a company made at the end of the year:
Original Cost Accumulated Depredation at Date of Sale Sale Proceeds
1 $200,000 $150,000 $70,000
2 $200,000 $200,000 $30,000
3 $300,000 $250,000 $40,000
All else equal for that year, the company’s cash flow from operations will most likely be:
A. $40,000 less than net income.
B. $10,000 less than net income.
C. $40,000 more than net income.

215
Solution: A
Equipment sale 1 results in a gain of $20,000, sale 2 results in a gain of $30,000, and sale 3
results in a loss of $10,000. The net gain is $40,000. The amount that would be deducted from
net income to determine CFO is equal to the net gain of $40,000.

Q98‐4 Assume U.S. GAAP applies unless otherwise noted. The following information is from a
company’s 2007 financial statements ($ millions):
Balances as of the year ended 31 December 2007 2006
Inventory 48 45
The company declared and paid cash dividends of $5 million in 2007 and recorded depreciation
expense of $25 million for 2007. The company’s 2007 cash flow from operations ($ millions) was
closest to:
A. 25.
B. 30.
C. 35.

Solution: C
The change in retained earnings is $20 and dividends are paid from retained earnings. 2007 net
income would equal the change in retained earnings plus any dividends paid during 2007.
Depreciation expense would be added to net income and the changes in balance sheet accounts
would also be considered to determine cash flow from operations.
$20 + 5 (dividends) + 25 (depreciation) ‐ 5 (increase in receivables) ‐ 3 (increase in inventory) ‐ 7
(decrease in payables) = $35 million.

Q99‐4 ★ Interest paid is classified as an operating cash flow under:（原版书 reading27）
A. U.S. GAAP but may be classified as either operating or investing cash flows under IFRS.
B. IFRS but may be classified as either operating or investing cash flows under U.S. GAAP.
C. U.S. GAAP but may be classified as either operating or financing cash flows under IFRS.

Solution：C.
Interest expense is always classified as an operating cash flow under U.S. GAAP but may be
classified as either an operating or financing cash flow under IFRS.

Q100‐4 ★An analyst gathered the following information from a company's 2010 financial
statements (in $ millions): （原版书 reading27）

216
Year Ended 31 December 2009 2010

Net sales 245.8 254.6
Cost of goods sold 168.3 175.9
Accounts receivable 73.2 68.3
Inventory 39.0 47.8
Accounts payable 20.3 22.9

Based only on the information above, the company's 2010 statement of cash flows in the direct
format would include amounts (in $ millions) for cash received from customers and cash paid to
suppliers, respectively, that are closest to:
cash received from customers cash paid to suppliers
A. 249.7 169.7
B. 259.5 174.5
C. 259.5 182.1

Solution：C.
Cash received from customers = Sales + Decrease in accounts receivable = 254.6 + 4.9 = 259.5.
Cash paid to suppliers = Cost of goods sold + Increase in inventory — Increase in accounts
payable = 175.9 +8.8 — 2.6 = 182.1.

Q101‐4 ★An analyst gathered the following information from a company's 2010 financial
statements (in $ millions):
Balances as of Year Ended 31 December 2009 2010
Inventory 45 48

In 2010, the company declared and paid cash dividends of $10 million and recorded depreciation
expense in the amount of $25 million. The company considers dividends paid a financing activity.
The company's 2010 cash flow from operations (in $ millions) was closest to: （原版书
reading27）
A. 25.
B. 45.
C. 75.

Solution：B. All dollar amounts are in millions. Net income (NI) for 2010 is $35. This amount is the
increase in retained earnings, $25, plus the dividends paid, $10. Depreciation of $25 is added
back to net income, and the increases in accounts receivable, $5, and in inventory, $3, are
subtracted from net income because they are uses of cash. The decrease in accounts payable is
also a use of cash and, therefore, a subtraction from net income. Thus, cash flow from operations
is $25 + $10 + $25 — $5 — $3 — $7 = $45.

217
Q102‐4 The following items are from a company’s cash flow statement. （2012mock84）

Classification of cash flow Description Amount (£000s)
Operating activities Cash received from customers 55,000
Investing activities Interest and dividends received 10,000
Financing activities Net repayment of revolving credit loan 12,000

Which of the following standards and formats did the company most likely use in the preparation
of its financial statements?

A. IFRS, direct format
B. IFRS, indirect format
C. Either IFRS or U.S. GAAP, direct format

Solution：A
The direct method of cash flow statement presentation shows the specific cash inflows and
outflows that result in reported cash flow from operating activities (cash from customers, cash to
suppliers, etc.). Companies using IFRS can decide to report interest and dividend receipts as
either an investing or operating activity, whereas under U.S. GAAP, they must report such income
as an operating activity. The listed operating and investment activities indicate that the company
reports under IFRS, using the direct method.

Q103‐4 ★★Which of the following is least likely to be a reason a company would securitize its
accounts receivable? To increase:
A. net income.
B. operating cash flows.
C. financing cash flows.

Solution: C.
The securitization of accounts receivable results in an increase in operating cash flows (as
receivables decrease), and they are frequently sold at a gain, which increases net income.
Financing cash flows are not affected.

CFO 掌握概念及公式：
R37‐4 CFO 计算方式：直接法和间接法，熟练掌握 2 种方法 (公式)
R38‐4 CFO 理解：firstly, 考题中会出现计算是无疑的；secondly，考题中会考核考生对 CFO
和 NI 之间关系的掌握；lastly，CFO 和 working capital 之间的关系，有时也会成为
考核点
R39‐4 ★CFO 补充公式：
¾ FAopening + purchasing – depreciation – disposal = FAending（可以计算 CFO 间接法中的 dep；
也可以计算 CFI 中的 purchase）
¾ Gain or Loss = Proceeds received – Disposal（可以计算 CFO 间接法中的 G/L；也可以计算
CFI 中的 proceed received）
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¾ Opening R/E + NI – div. declared = Ending R/E（严谨地说，我们计算的 Div 应该是 Div.
declared，但是一般题目中只需要计算 Div. paid，所以公式可以简化为 Opening R/E + NI –
Div= Ending R/E）
¾ Div. paid =‐ Div. declared + change in div. payables
R40‐4 ★Notes payable 被视为 CFF
R41‐4 How to determine CFO
Additions Subtractions
Dep. of tangible assets Bond amortized premium
Amor. of intangible assets Gain on sale of assets
Depletion of natural resources Gain on retirement of debt
Bond amortized discount Changes in current assets
Loss on sale or write down of assets
Loss on retirement of debt
Changes in current liabilities

19‐4 CFI 和 CFF 的理解
Q104‐4 Assume U.S. GAAP applies unless otherwise noted. At the end of the year, a company
sold equipment for $40,000 cash. The company paid $100,000 for the equipment
several years ago and had accumulated depreciation of $60,000 for the equipment at
the time of sale. All else equal, the equipment sale will result in the company's cash flow
from:
A. investing activities decreasing by $10,000.
B. investing activities increasing by $40,000.
C. operating activities being $40,000 more than net income.

Solution: B
The increase in inventory (working capital investment) would reduce CFO relative to net income.

Q105‐4 Assume U.S. GAAP applies unless otherwise noted. Jaderong Plinkett Stores reported net
income of $25 million, which equals the company’s comprehensive income. The
company has no outstanding debt. Using the following information from the
comparative balance sheets (in millions), what should the company report in the
financing section of the statement of cash flows?
Balances sheet item 12/31/2005 12/31/2006 change
Common stock $100 $102 $2
Additional paid‐in capital common stock $100 $140 $40
Retained earnings $100 $115 $15
Total stockholders’ equity $100 $357 $57

A. Issuance of common stock $42 million; dividends paid of $10 million.
B. Issuance of common stock $38 million; dividends paid of $10 million.
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C. Issuance of common stock $42 million; dividends paid of $40 million.

Solution: A
The increase of $42 million in common stock and additional paid‐in capital indicates that the
company issued stocks during the year. The increase in retained earnings of $15 million indicates
that the company paid $10 million in cash dividends during the year, determined as beginning
retained earnings of $100 million plus net income of $25 million, minus ending retained earnings
of $115, which equals $10 million in cash dividends.

CFI 和 CFF 掌握理解及公式：
R42‐4 理解：CFI consist of the inflows and outflows of cash resulting from the acquisition or
disposal of long‐term assets and certain investments.
¾ 计算方式：proceeds received – purchasing；也就是 sales – purchasing
¾ ★CFI=‐ (BV1+depreciation‐BV0)+gain‐loss
R43‐4 理解：CFF consist of the inflows and outflows of borrowing, repayment, new issue,
repurchase, div paid

20‐4 FCFE 和 FCFF 的理解
Q106‐4 Which of the following is an appropriate method of computing flee cash flow to the
firm?
A. Add operating cash flows plus capital expenditures and deduct after‐tax interest payments.
B. Add operating cash flows plus after‐tax interest payments and deduct capital expenditures.
C. Deduct both after‐tax interest payments and capital expenditures from operating cash
flows.
Solution: B.
Free cash flow to the firm can be computed as operating cash flows plus after‐tax interest
expense less capital expenditures.

annual information ($ millions) about a company that pays no dividends and has no
debt:
Net income 45.8
Depreciation 18.2
Loss on sale of equipment 1.6
Decrease in accounts receivable 4.2
Increase in inventories 5.4
Increase in accounts payable 4.5
Capital expenditures 7.3
Proceeds from sale of stock 8.5
The company's annual free cash flow to equity ($ millions) is closest to:
A. 53.1.
B. 58.4.
C. 61.6.
220

Solution: C
CFO = net income + depreciation + loss on sale of equipment + decrease in accounts receivable ‐
increase in inventories + increase in accounts payable. (The loss on sale of equipment is added
back when calculating CFO.)
It would have been deducted in the calculation of net income but the loss is not the cash impact
of the transaction (the proceeds received, if any, would be the cash effect) and cash flows
related to equipment transactions are investing activities, not operating activities.)
CFO = 45.8 + 18.2 + 1.6 + 4.2 – 5.4 + 4.5 = $68.9 million; so FCFE = $68.9 ‐ $7.3 = $61.6 million.
Q108‐4 ★An analyst is planning to make a valuation on a privately held company by using a FCF
Model. In order to determine the free cash flow to all capital suppliers, he collected the
following data (in million):
Operating cash flow 500
Interest paid 30
Investment in working capital 80
Investment in fixed asset 60
Tax rate 30%
The free cash flow the analyst is planning to determine is closest to:
A. 440.
B. 381.
C. 461.
Solution: C
Free cash flow = CFO + interest paid (1 ‐ tax rate) – investment in working capital – investment in
fixed asset = 500 + 300.7– 60 = 461

Q109‐4 ★Which of the following is an appropriate method of computing free cash flow to the
firm?（原版书 Reading27）
A. Add operating cash flows to capital expenditures and deduct after‐tax interest payments.
B. Add operating cash flows to after‐tax interest payments and deduct capital expenditures.
C. Deduct both after‐tax interest payments and capital expenditures from operating cash
flows.
Solution：B.
Free cash flow to the firm can be computed as operating cash flows plus after‐tax interest
expense less capital expenditures.

R44‐4 ★FCFE&FCFF 掌握概念及公式：
1) 公式：FCFF = NI + NCC + [ Int (1 ‐ tax rate) ] – FCInv – WCInv
2) 公式：FCFE = CFO – FCInv + Net borrowing
3) 计算公司价值的时候，用 FCFF，并且折现率使用 WACC(二级内容）
4) 计算股东价值的时候，用 FCFE，并且折现率用 re
∞ ∞
FCFFt
Firm value = ∑ Equity value = ∑ FCFEt
(1 + WACC ) t =1 (1 + r )
t t
t =1
221
FCFF1 FCFF0 (1 + g )
Firm value = =
WACC − g WACC − g
FCFE1 FCFE0 (1 + g )
Equity value = =
r−g r−g

21‐4 CF Statement 中其它知识点理解
Q110‐4 ★Interest expense may be classified as an operating cash flow
A. Under U.S. GAAP, but may be classified as either operating or investing cash flows under
IFRS.
B. Under IFRS, but may be classified as either operating or investing cash flows under U.S.
GAAP
C. Under U.S. GAAP, but may be classified as either operating or financing cash flows under
IFRS.

Solution: C
Interest expense is always classified as an operating cash flow under U.S. GAAP but may be
classified as either an operating or financing cash flow under IFRS.

CF Statement 中其它知识点理解：
R45‐4 Comparison of classification between IFRS and GAAP
¾ Interest received: Classified as CFO under U.S. GAAP; CFO or CFI under IFRS.
¾ Interest paid: Classified as CFO under U.S. GAAP; CFO or CFF under IFRS.
¾ Dividend received: Classified as CFO under U.S. GAAP; CFO or CFI under IFRS.
¾ Dividend paid: Classified as CFF under U.S. GAAP; CFO or CFF under IFRS.
¾ Overdraft: IFRS: cash equivalent; GAAP: CFF
R46‐4 Comparison of presentation between IFRS and GAAP
¾ Direct method is encouraged under both
¾ US. GAAP: a direct method must also disclose indirect method. IFRS: not required
¾ US. GAAP: tax and interest can be reported in CF/S or in the footnotes. IFRS: should be
disclosed separately in the CF/S under direct and indirect method.
R47‐4 Non‐cash transactions are not reported in CF statement, but is required to be closed,
either in a separate note or a supplementary schedule to the cash flow statement.（比如
可转债由债转成股）

22‐4 Financial Analysis Techniques
Q111‐4 ★An analyst has calculated a ratio using as the numerator the sum of operating cash
flow, interest, and taxes, and as the denominator the amount of interest. What is this
ratio, what does it measure, and what does it indicate?
A. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest
obligations and indicating a company's solvency.
B. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow
222
used for taxes, and indicating a company's efficiency in tax management.
C. This ratio is an operating profitability ratio, measuring the operating rash flow generated
arrounting for taxes and interest and indicating a company's liquidity.

Solution:A.
This is the interest coverage ratio using operating cash flow rather than earnings before interest,
tax, depreciation, and amortization (EBITDA).

Q112‐4 In order to assess a company's ability to fulfill its long‐term obligations, an analyst would
most likely examine:
A. activity ratios.
B. liquidity ratios.
C. solvency ratios.

Solution: C.
Solvency ratios are used to evaluate the ability of a company to meet its long‐term obligations

Q113‐4 ■Marcus Lee is examining the solvency of Apex Manufacturing and has collected the
following data (in millions of euros):
2005 2004 2003
Total debt €2,000 €1,900 €1,750

Total equity €4,000 €4,500 €5,000

Which of the following would be the most appropriate conclusion for Lee?
A. The company is becoming increasingly less solvent, as evidenced by the increase in its
debt‐to‐equity ratio from 0.35 to 0.50 from 2003 to 2005.
B. The company is becoming less liquid, as evidenced by the increase in its debt‐to‐equity ratio
from 0.35 to 030 from 2003 to 2005.
C. The company is becoming increasingly more liquid, as evidenced by the increase in its
debt‐to‐equity ratio from 0.35 to 0.50 from 2003 to 2005.

Solution: A.
The company is becoming increasingly less solvent, as evidenced by its debt‐to‐equity ratio
increasing from 0.35 to 0.50 from 2003 to 2005. B is incorrect because it incorrectly interprets
the debt‐to‐equity ratio as a measure of liquidity. C is incorrect because it incorrectly interprets
the direction of the trend and misinterprets the ratio as an indicator of liquidity.
Debt to equity:
2005: 2,000/4,000 = 0.5000
2004: 1,900/4,500 = 0.4222
2003: 1,750/5,000 = 0.3500

A decomposition of ROE for Integra SA is as follows:
223
2005 2004
ROE. 18.90% 18.90%
Tax burden 0.70 0.75
Interest burden 0.90 0.90
EBIT margin 10.00% 10.00%
Asset turnover 1.50 1.40
Leverage 2.00 2.00

Q114‐4 ★Which of the following choices best describes reasonable conclusions an analyst
might make based on this ROE decomposition?
A. Profitability and the liquidity position both improved in 2005.
B. The higher average tax rate in 2005 offset the improvement in profitability, leaving ROE
unchanged.
C. The higher average tax rate in 2005 offset the improvement in efficiency, leaving ROE
unchanged.

Solution: C.
The increase in the average tax rate in 2005, as indicated by the decrease in the value of the tax
burden (the tax burden equals one minus the average tax rate), offset the improvement in
efficiency indicated by higher asset turnover); as a result, ROE remained unchanged at 18.90
percent. Statement A is not correct because the EBIT margin, measuring profitability, was
unchanged in 2005; furthermore, no information is given on liquidity. Statement B is not correct
because profitability was unchanged in 2005.

Q115‐4 In general, a creditor would consider a decrease in which of the following ratios to be
positive news?
A. Interest coverage (times interest earned).
B. Debt to total assets.
C. Return on assets.

Solution: B
In general, a creditor would consider a decriewie in debt to total assets as positive news. A
higher level of debt in a company's capital structure increases the risk of default and will result in
higher borrowing costs for the company to compensate lenders for assuming greater credit risk.

Financial Analysis Techniques
Common‐size statement 了解 income statement 和 balance sheet 的 common‐size statement
构建方法的不同.
R48‐4 ★Liqudity ratio (measure liquidity，这些比率越高，公司的短期偿债能力越好):
current assets
¾ Current ratio =
current liabilities
cash + marketable securities + receivables
¾ Quick ratio =
current liabilities
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cash + marketable securities

¾ Cash ratio =
current liabilities
R49‐4★Solvency ratio (measure leverage，这些比率越高，公司风险越大)
¾ Long − term debt ratio = total long - term debt
total equity
¾ total debt
Debt ratio =
total equity
¾ total debt
Total debt ratio =
total equity
¾ total assets
Financial leverage =
total equity
EBIT
¾ Interest coverage =
interest payments
R50‐4 ★Activity ratio (measure asset utilization 这些比率最好与行业平均标准接近)
annual sales
¾ Rceivable turnover =
average receivables
¾ 365 收回账款的平均时间
Days of sales outstanding =
receivables turnover
COGS
¾ Inventory turnover =
average inventory
365
¾ Days of inventory on hand = 存货循环的平均时间
inventory turnover
purchases
¾ Payable turnover =
average
revenue
¾ Total asset turnover =
average total assets
revenue
¾ Fixed assets turnover = net fixed assets 需要减去累计折旧
average net fixed assets
revenue
¾ Working capital turnover =
average working capital
⎛ days sales ⎞ ⎛ days of inventory ⎞ ⎛ number of days ⎞

¾ Cash convertion cycle = ⎜⎜ ⎟⎟ + ⎜⎜ ⎟⎟ − ⎜⎜ ⎟⎟
⎝ outstanding ⎠ ⎝ on hand ⎠ ⎝ of paybales ⎠
R51‐4 ★Profitability ratios
net income
¾ Net profit margin =
revenue
gross profit
¾ Gross profit margin =
revenue
225
EBIT
¾ Operating profit margin =
revenue
net income
¾ Return on assets =
total assets
¾ Return on equity =
net income
average equity
net income - preferred dividends
¾ Return on common equity =
average common equity
R52‐4 ★DuPont system of analysis 杜邦分因素分析析是十分重要的，3 因素和 5 因素都要
掌握，尤其是 5 因素分析。
net income sales assets

¾ Return on equity = × ×
sales assets equity
¾ Return on equity = profit margin × asset turnover × financial leverage 3 因素
分析
net income EBT EBIT revenue asset

¾ Return on equity = × × × ×
EBT EBIT revenue assets equity
⎛ tax ⎞⎛ interst ⎞⎛ EBIT ⎞⎛ asset ⎞⎛ financial ⎞

¾ Return on equity = ⎜⎜ ⎟⎟⎜⎜ ⎟⎟⎜⎜ ⎟⎟⎜⎜ ⎟⎟⎜⎜ ⎟⎟ 5 因素
⎝ burden ⎠⎝ burden ⎠⎝ margin ⎠⎝ turover ⎠⎝ leverage ⎠
分析
¾ 杜邦分析的内容有可能和权益里的内容一起考，
通过 ROEretention rate, 来计算 g，
进而使用 DDM 进行估值。

23‐4 Inventory 的理解
Q116‐4 ★A company incurs the followings costs related to its inventory during the year:
Cost ¥ millions
Purchase price 100,000
Trade discounts 5,000
Import duties 20,000
Shipping of raw materials to manufacturing facility 10,000
Manufacturing conversion costs 50,000
Abnormal costs as a result of waste material 8,000
Storage cost prior to shipping to customers 2,000
The amount charged to inventory cost (in millions) is closest to:
A. ¥175,000.
B. ¥177,000.
C. ¥185,000.

Solution: A
The costs to include in inventories are all costs of purchase, costs of conversion, and other
costs incurred in bringing the inventories to their present location and condition.
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Cost ¥ millions
Purchase price 100,000
Less Trade discounts (5,000)
Import duties 20,000
Shipping of raw materials to manufacturing facility 10,000
Manufacturing conversion costs 50,000
Total inventory costs 175,000

Q117‐4 ★The following information (in millions) on a company is available:
Cost of goods sold $ 500
Increase in total assets 250
Increase in total liabilities 200
Change in inventory (30)
Change in accounts payable (25)
The amount of cash (in millions) that the company paid to its suppliers is closest to:
A. $445.
B. $495.
C. $505.

Solution: B
Cost of goods sold $500
Less: Decrease in inventory (30)
Equals purchases from suppliers $470
Plus: Decrease in accounts payable 25
Cash paid to suppliers $495

Q118‐4 ★A U.S. pulp brokerage firm which prepares its financial statements according to U.S.
GAAP and uses a periodic inventory system had the following transactions during the
year:
Activity Beginning inventory Tons $ per Ton
Date (000s)
February Purchase 5 650

May Sale 2 700
August Purchase 3 680
November Sale 4 750
The cost of sales (in ‘000s) is closest to:
A. $3,850 using FIFO.
B. $4,080 using LIFO.
C. $5,890 using weighted average.

Solution: B
FIFO cost of sales is $3,850 as per the table.
227

Q119‐4 ★A review of a company’s inventory records for the year indicates that the following
costs were incurred:
Fixed production overhead: $500,000
Direct material and direct labor: 300,000
Storage costs incurred during production: 25,000
Abnormal waste costs: 30,000
If the company operated at full capacity during the year, the total capitalized inventory cost
is closest to:
A. $800,000.
B. $825,000.
C. $855,000.

Solution: B
The total capitalized costs include fixed production costs, the direct conversion costs of material
and labor, storage costs required as part of production but not abnormal waste costs. $500,000
+ 300,000 + 25,000 = $825,000

Q120‐4 In a period of rising prices, when compared with a company that uses weighted average
cost for inventory, a company using FIFO will most likely report higher values for its:
A. return on sales.
B. inventory turnover.
C. debt‐to‐equity ratio.

Solution: A
in periods of rising prices FIFO results in a higher inventory value and a lower cost of goods sold
and therefore a higher net income. The higher net income increases return on sales. The higher
reported net income also increases retained earnings, and therefore results in a lower debt‐to‐
equity ratio. The combination of higher inventory and lower cost of goods sold decreases
inventory turnover (COGS/inventory).

Q121‐4 ★Assume U.S. GAAP applies unless otherwise noted.Sipex Corporation uses the LIFO
inventory method, but most of the other companies in Sipex industry use FIFO. Which
of the following best describes one of the adjustments that would be made to Sipex's
financial statements to compare that company with other companies in the industry? To
adjust Sipex's ending inventory to the FIFO method, the amount reported for Sipex's
ending inventory should be:
A. increased by the ending balance in Sipex's LIFO reserve.
B. decreased by the ending balance in Sipex's LIFO reserve.
C. increased by the change in Sipex's LIFO reserve for that period.

Solution: A
Adding the ending balance in the LIFO reserve to the LIFO inventory would equal the ending
228
balance for inventory on FIFO basis.

Q122‐4 ★Assume U.S. GAAP applies unless otherwise noted. Sauerbraten Corp. reported 2007
sales ($ in millions) of $2,157 and cost of goods sold of $1,827. Inventories at year‐end
2007 and 2006, respectively, were $553 and $562. The company uses the LIFO method
for inventory valuation and discloses that if the FIFO inventory valuation method had
been used, inventories would have been $63.3 million and $56.8 million higher in 2007
and 2006, respectively. Compared to the inventory turnover ratio reported, if
Sauerbraten had exclusively used the FIFO method its inventory turnover ratio would
have been closest to
A. 2.96.
B. 3.28.
C. 3.49.

Solution: A
Inventory turnover is cost of goods sold divided by average inventory. As reported, this was
$1,827 / $557.5 = 3.28. Under FIFO, cost of goods sold would have been $1,820.5 and inventory
would have been $616.3 and $618.8 (average $617.6). Adjusted inventory turnover would thus
be 2.96.

Q123‐4 Assume U.S. GAAP applies unless otherwise noted. Camden Company’s appliance
inventory transactions in 2004 were as follows:
¾ Beginning inventory of 40 appliances at $600 each.
¾ Purchased 80 appliances on April 15 at $625 each.
¾ Purchased 100 appliances on August 7 at $650 each.
¾ Sold 160 appliances on October 8.
¾ Purchased 120 appliances on December 31 at $675 each.
Using the average cost method, what is Camden’s cost of goods sold for the year ended
December 31, 2004?
A. $101,091
B. $103,530
C. $100,000

Solution: B
Under the average cost method, goods available for sale (inventory plus purchases) are valued at
their weighted average cost per unit. Camden’s goods available for sale cost an average of (40
$600) + (80 $625) + (100 $650) + (120 $675) / 340 = $647.06 each. Cost of goods sold for
2001 was (160 $647.06 =) $103,530.

Q124‐4 An investor collected a company’s inventory data as follows:
2009 2008
COGS 1200 1430
LIFO Reserve 800 820
229
If the company used FIFO method to recognize, what would the cost of goods sold be?
A. 1220
B. 1200
C. 1180
D.
Solution: A
COGS(FIFO) = COGS(LIFO) – (ending LIFO reserve – beginning LIFO reserve) = 1200 – (800‐820) =
1220

Q125‐4 The carrying value of inventories reflects:（原版书 Reading29）
A. their historical cost.
B. their current value.
C. the lower of historical cost or net realizable value.

Solution：C.
Under IFRS, inventories are carried at historical cost, unless net realizable value of the inventory
is less. Under U.S. GAAP, inventories are carried at the lower of cost or market.

Q126‐4 ★Carrying inventory at a value above its historical cost would most likely be permitted if:
（原版书 Reading 29）
A. the inventory was held by a producer of agricultural products.
B. financial statements were prepared using U.S. GAAP.
C. the change resulted from a reversal of a previous write‐down.

Solution：A.
IFRS allow the inventories of producers and dealers of agricultural and forest products,
agricultural produce after harvest, and minerals and mineral products to be carried at net
realisable value even if above historical cost. (U.S. GAAP treatment is similar.)

Q127‐4 ★Compared to using the weighted average cost method to account for inventory,
during a period in which prices are generally rising, the current ratio of a company using
the FIFO method would most likely be: （原版书 Reading 29）
A. lower.
B. higher.
C. dependent upon the interaction with accounts payable.

Solution：B.
In a rising price environment, inventory balances will be higher for the company using the FIFO
method. Accounts payable are based on amounts due to suppliers, not the amounts accrued
based on inventory accounting.

Q128‐4 ★Zimt AG wrote down the value of its inventory in 2007 and reversed the write‐down in
2008. Compared to the ratios that would have been calculated if the write‐down had
never occurred, Zinn's reported 2007:（原版书 Reading 29）
230
A. current ratio was too high.
B. gross margin was too high.
C. inventory turnover was too high.

Solution：C.
The write‐down reduced the value of inventory and increased cost of sales in 2007. The higher
numerator and lower denominator mean that the inventory turnover ratio as reported was too
high. Gross margin , and the current ratio were both too low.

Q129‐4 Zimt AG wrote down the value of its inventory in 2007 and reversed the write‐down in
2008. Compared to the results the company would have reported if the write‐down had
never occurred, repotted 2008: （原版书 Reading 29）
A. profit was overstated.
B. cash flow from operations was overstated.
C. year‐end inventory balance was overstated.

Solution：A.
The reversal of the write‐down shifted cost of sales from 2008 to 2007. The 2007 cost of sales
was higher because of the write‐down, and the 2008 cost of sales was lower because of the
reversal of the write‐down. As a result, the reported 2008 profits were overstated. Inventory
balance in 2008 is the same because the write‐down and reversal cancel each other out. Cash
flow from operations is not affected by the non‐cash write‐down, but the higher profit in 2008
likely resulted in higher taxes and thus lower cash flow from operations.

Q130‐4 Carey Company adheres to U.S. GAAP, whereas Jonathan Company adheres to IFRS. It is
least likely that: （原版书 Reading 29）
A. Carey has reversed an inventory write‐down.
B. Jonathan has reversed an inventory write‐down.
C. Jonathan and Carey both use the FIFO inventory accounting method.

Solution：A.
U.S. GAAP do not permit inventory write‐downs to be reversed.

Q131‐4 ★★An analyst can most accurately identify a LIFO liquidation by observing a(n):
（2012‐mock85）
A. increase in gross margin.
B. decrease in the LIFO reserve.
C. change in inventory out of line with change in sales.

Correct answer: B
The most appropriate way to identify a LIFO liquidation is by reviewing the inventory footnotes
for a decrease in the LIFO reserve. Although LIFO liquidation may result in an increase in gross
margin or changes in inventory out of line with changes in sales, there are other factors could
explain those changes.
231

The following information is available about a manufacturing company: （2012mock84）
$ million
Cost of ending inventory computed using FIFO 4.3
Net realizable value 4.1
Current replacement cost 3.8

Q132‐4 If the company is using International Financial Reporting Standards (IFRS), instead of U.S.
GAAP, its cost of goods sold ($ millions) is most likely:
A. the same.
B. 0.3 lower.
C. 0.3 higher.
Solution：A
Under IFRS, the inventory would be written down to its net realizable value ($4.1 million),
whereas under U.S. GAAP, market is defined as current replacement cost and hence would be
written down to its current replacement cost ($3.8 million). The smaller write down under IFRS
will reduce the amount charged to the cost of goods sold, as compared with U.S. GAAP, and
result in a lower cost of goods sold of $0.3 million.

Inventory 掌握公式及两种方法的比较：
Cost capitalization and expense
R53‐4 ★Capitalized cost (product cost) include:
9 Purchase cost.
9 Conversion cost.
9 Allocation of fixed production overhead based on normal capacity levels.
9 Other costs necessary to bring the inventory to its present location and condition.
R54‐4 ★Expensed cost (period cost)
9 Unallocated portion of fixed production overhead
9 Abnormal waste of materials, labor, or overhead.
9 Storage costs ( unless required as part of the production process).
9 Selling cost.
R55‐4 ★两种方法的转换是经常考到的考点公式：
9 EI=BI + P – COGS
9 NVF = INVL + LIFO reserve
9 COGSF = COGSL – △LIFO reserve
9 △NI = △LIFO reserve (1‐t)
9 R/E = LIFO reserve (1‐t)
R56‐4 ★了解在两种不同的会计准则下存货的计价方式：
¾ U.S. GAAP:
1) Lower of cost or market
2) NRV‐normal profit margin < market (replacement cost) < NRV
3) no write‐up allowed under U.S.GAAP and no reversal after devaluation
¾ IFRS:
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1) Lower of cost or NRV
2) NRV = sales price‐selling cost
3) inventory can be written up but only limited to the loss recognized previously
Reporting inventory above the historical cost is only permitted under IFRS and U.S. GAAP in
certain industries such as agricultural and forest products, mineral ores, and precious metals.

R57‐4 ★LIFO 下，COGS 高，存货少，inventory turnover ratio 大，利润小，现金流大。在
价格上升的情况下，只有 COGS 和 CF 和价格上升反方向，其余全是正方向（利润小，
税少）, current ratio 小（inventory 小），debt to equity ratio 大。
R58‐4 ★LIFO liquidation, the inventory value under FIFO is lower, and COGS under LIFO is
lower；LIFO liquidation 是财务舞弊的一种方式，通过使用老旧存货降低 COGS，达
到操作 net income 的手段。LIFO liquidation 的重要特征是 LIFO reserve 下降。
R59‐4 ★LIFO 真实反映了 COGS，FIFO 真实反映了存货的价值，所以 LIFO 对利润表更合适，
FIFO 对资产负债表更合适。
R60‐4 只有存货计价方法会影响现金流，其它方法都不会影响总体现金流，因为存货记账
方法会影响税收。
R61‐4 LIFO 真实反映了 COGS（I/S reflect economic value），FIFO 真实反映了存货的价值 (B/S
reflect economic value), regardless of the direction of change in price..
R62‐4 IFRS 不允许用 LIFO 的方法；LIFO 方法是美国特有的，而且专有“LIFO conformity rule”
允许美国公司在财务报表上也用 LIFO 计算
R63‐4 ★Under IFRS and US GAAP, the forest and ore, reflect in Fair value.
R64‐4 Inventory adjustment：
9 Under IFRS：the firm must demonstrate that the change will provide reliable and more
relevant information.
9 Under U.S. GAAP：the firm must explain why the change in cost flow method is preferable
9 An exception to retrospective application：when a firm changes to LIFO from FIFO，no
adjustments are made to the prior periods. With prospective application, the carrying value
of inventory under the old method simply becomes the first layer of inventory under LIFO in
the period of the change.

24‐4 Depreciation 的理解
Q133‐4 Assume U.S. GAAP applies unless otherwise noted. All else equal, the net profit margin
for a company will be highest if, for new depreciable assets, that company uses:
A. Low salvage value estimates and long average lives.
B. High salvage value estimates and long average lives.
C. High salvage value estimates and short average lives.

Solution: B
A high salvage value estimate reduces the depreciable base and thus depreciation expense; long
average lives reduce the annual depreciation expense for any given depreciable base. The
combination of the two would result in the lowest depreciation expense, which leads to the
highest net income and profit margins.

233
Q134‐4 ★ Assume U.S. GAAP applies unless otherwise noted. Which of the following
adjustments to the assumed useful life and assumed salvage value of a company’s assets
would most likely decrease the company’s total asset turnover ratio?
Assumed useful life Assumed salvage value
A. Longer Lower
B. Longer Higher
C. Shorter Lower

Solution: B
A longer useful life and higher salvage value are consistent with lower depreciation expense,
which results in a higher net asset value. Asset turnover (Sales/Total assets) would decrease
because sales would be constant while assets would be higher due to smaller depreciation
charges.

Q135‐4 ■Assume U.S. GAAP applies unless otherwise noted. An analyst gathered the following
information ($ millions) about four companies operating in the same industry:
Company Annual Depreciation Expense Accumulated Depreciation
1 10.8 58.9
2 18.9 78.6
3 27.8 80.3
4 33.6 128.8
Although the companies have different levels of sales and assets, they are all experiencing sales
growth at about the same rate and use the same type of equipment in the manufacturing
process. All four companies also use the same depreciation method. Based only on the
information above, which company is least likely to require major capital expenditures in the
near future?

A. Company 1
B. Company 2
C. Company 3

Solution: C
Average life of F/A= Accumulated depreciation/ annual depreciation expense, choose the least,
which is least likely to require major capital expenditure in the near future.

Q136‐4 ★A US‐based company wrote down its inventories last year because it thought that the
target market was shrinking and the resale price was declining sharply. This year, it
estimated that emerging markets would have more demand than expected and cause
the market value to rise over the original cost. Which of the following measures can the
company take to respond the changing market conditions?
A. Reversing the writing‐down to the initial cost.
B. Revaluing the inventories up to the market value.
C. No action can be taken.
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Solution: C
Based on US GAAP, if the current cost exceeds the original cost, it’s not permitted for reversal of
inventory writing‐down.

Q5‐4 ★Which combination of depreciation methods and useful lives is most conservative in
the year a depreciable asset is acquired?（2012 原版书后重点题）
A. Straight‐line depreciation with a short useful life.
B. Declining balance depreciation with a long useful life.
C. Declining balance depreciation with a short useful life.

Solution：C.
This would result in the highest amount of depreciation in the first year and hence the lowest
amount of net income relative to the other choices.

Q6‐4 ★★An analyst in the finance department of BOOLDO S.A., a French corporation, is
computing the amortisation of a customer list, an intangible asset, for the fiscal year
ended 31 December 2009. She gathers the following information about the asset:

Acquisition cost €2,300,000
Acquisition date 1 January 2008
Expected residual value at time of acquisition €500,000

The customer list is expected to result in extra sales for three years after acquisition. The present
value of these expected extra sales exceeds the cost of the list.

If the analyst uses the straight‐line method, the amount of accumulated amortisation related to
the customer list as of 31 December 2009 is closest to:（2012 原版书后 Reading30）
A. €600,000.
B. €1,200,000.
C. €1 ,533,333.

Solution：B.
Using the straight‐line method, accumulated amortisation amounts to
Accumulated amortisation = [(2,300.000 — 500,000) years] x 2 years
= 1,200,000.

Q7‐4 ★★A financial analyst at BETTO S.A. is analyzing the result of the sale of a vehicle for
85,000 Argentine pesos (ARP) on 31 December 2009. The analyst compiles the following
information about the vehicle:

Acquisition cost of the vehicle ARP 100,000
Acquisition date 1 January 2007
Estimated residual value at acquisition date ARP 10,000
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Expected useful life 9 years
Depreciation method Straight‐line

The result of the sale of the vehicle is most likely:（2012 原版书后 Reading30）
A. a loss of ARP 15,000.
B. a gain of ARP 15,000.
C. a gain of ARP 18,333.

Solution：B.
The result on the sale of the vehicle equals
Gain or loss on the sale = Sale proceeds – Carrying amount
=Sale proceeds – (Acquisition cost – Accumulated depreciation)
= 85,000 – [100,000 – 1((100,000 – 10,000)/9 years) X 3 years]
= 15,000.

R65‐4 Depreciation 掌握计算及灵活运用：
¾ Most firms use the ST depreciation method for financial reporting purposes. It results that
most assets generate more benefits in the early years of their economic life and fewer
benefits in the later years. 所以直线法折旧，随时间增加，ROA 是不断增加的
¾ Acelerated depreciation method is more appropriate for matching the expenses to
revenues.

25‐4 Impairment 的理解
Q137‐4 ★Assume U.S. GAAP applies unless otherwise noted. An analyst determined the
following information concerning Franklin, Inc.’s stamping machine:
Acquired January 1, 1998
Cost $22 million
Depreciation straight line method
Estimated useful life 12 years
Salvage value $4 million
As of December 31, 2004, the stamping machine is expected to generate $1,500,000 per year for
five more years and will then be sold for $1,000,000. The stamping machine is:
A. impaired because its carrying value exceeds expected future cash flows.
B. impaired because expected salvage value has declined.
C. Not impaired because annual expected revenue exceeds annual depreciation.
Solution: A
The carrying value of the stamping machine is its cost less accumulated depreciation.
Depreciation taken through 2004 was (($22,000,000 ‐ $4,000,000) / 12 7 =) $10,500,000 so
carrying value is ($22,000,000 ‐ $10,500,000 =) $11,500,000. Because the $11,500,000 carrying
value is more than expected future cash flows of ((5 $1,500,000) + $1,000,000 =) $8,500,000,
the stamping machine is impaired.
Q138‐4 ★A Canadian printing company which prepares its financial statements according to
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IFRS has experienced a decline in the demand for its products. The following information
relates to the company’s printing equipment as of 31 December 2010.
C$
Carrying value of equipment (net book value) 500,000
Undiscounted expected future cash flows 550,000
Present value of expected future cash flows 450,000
Fair Value 480,000
Costs to sell 50,000
Value in use 440,000
The impairment loss (in C$) is closest to:
A. 0.
B. 60,000.
C. 70,000.

Correct answer：B
Under IFRS, an asset is considered to be impaired when its carrying amount exceeds
its recoverable amount (the higher of fair value less cost to sell or value in use).
Fair value less costs to sell: 480,000 – 50,000 = 430,000
Value in use = 440,000
Recoverable amount (higher value) = 440,000
Impairment loss under IFRS = Carrying value – recoverable amount = 500,000 – 440,000 = 60,000

Q139‐4 ■Assume U.S. GAAP applies unless otherwise noted. All else equal, will a company's
implementation of the accounting standard (SFAS 143) related to asset retirement
obligations incurred because of environmental damage most likely increase or decrease
that company's:
return on assets net income
A. Increase Increase
B. Increase Decrease
C. Decrease Decrease

Solution: C
Implementation of SFAS 143 requires that companies record an asset and related liability for
costs involved in the remedy of environmental damage. The increase in assets will decrease
return on assets and the increase in depreciation and accretion expense will reduce net income.

Q140‐4 ★★An analyst is studying the impairment of the manufacturing equipment of WLP
Corp.a U.K.‐based corporation that follows IFRS. He gathers the following information
about the equipment:

Fair value £16,800,000
Costs to sell £800,000
Value in use £14,500,000
237
Net carrying amount £19,100,000

The amount of the impairment loss on WLP Corp.'s income statement related to its
manufacturing equipment is closest to:（2012 原版书后 Reading30）
A. £2,300,000.
B. £3,100,000.
C. £1,600,000.

Solution：B.
The impairment loss equals £3,100,000.
Impairment = max(Recoverable amount; Value in use) – Net carrying amount
= max(16,800,000 – 800,000; 14,500,000) – 19,100,000 = –3,100,000.

R66‐4 ★Impairment under US GAAP
¾ Recoverability 的度量标准：carrying value> undiscounted cash flow
¾ Loss measurement: carrying value‐ fair market value/discounted cash flow
¾ Cann’t reverse the recognized loss
R67‐4 ★Impairment under IFRS
¾ Carrying value> max [Fair Value‐ selling cost, PV(value in use)]
¾ Can reverse the loss, the revaluation will be recognized in equity. Revaluing the asset's value
upward is even permitted under IFRS.
R68‐4 ★Impairment effect
¾ PP&E cost (asset) decrease & NI decrease (due to impairment expenses)
¾ But NI of next year will higher caused by lower PP&E level
¾ mpairment 对 ratio 的影响：在确认减值的当期，ROA，ROE 较小。在以后的几期，ROA,
ROE 变大（decreased depreciation)。
¾ The impact of Valuing asset upward to financial ratios: low leverage (high asset),high
ROA/ROE in the period of revaluation and low ROA/ROE in subsequent periods.
R69‐4 Held for sale (same under US GAAP and IFRS)
¾ Stop depreciation and impairement test
¾ If carrying value> Fair Value –selling cost, impairement
¾ Can reverse the loss

26‐4 关于 Capitalized 和 Expensed 的理解
Q141‐4 ★★Assume U.S. GAAP applies unless otherwise noted.Two companies are identical
except for their accounting treatment of R&D costs. One company expenses all such
costs immediately, while the other capitalizes a portion of the costs. Compared with the
company that capitalizes costs, the company that expenses immediately will most likely:

A. Earn a lower return on assets.
B. Have lower financial leverage.
C. Report lower cash flow from operations in the statement of cash flows.

238
Solution: C
Companies that capitalize R&D costs report those expenditures in CFI; companies that expense
R&D costs report those expenditures in CFO.

Q142‐4 ★During 2009, the following events occurred at a company. The company:
purchased a customer list for $100,000, which is expected to provide equal annual benefits
1.
for the next 4 years.
recorded $200,000 of goodwill in the acquisition of a competitor. It is estimated that the
2. acquisition would provide substantial benefits for the company for at least the next 10
years.
Repeatedly received favorable mention in the media for its response to a local natural
disaster, in which it donated $300,000 in products and services to the community. The CEO
3.
of the company was heard to say that the publicity enhanced the firm's reputation
substantially and would likely be worth at lease $100,000 annually over the next 5 years.

Based on these events, the amortization expense that the company should report in 2010 is
closet to:
A. $25,000
B. $45,000
C. $125,000

Solution: A
The customer list is the only identifiable intangible asset and it should be amortized on a
straight‐line basis over its expected future life: $100,000/4=25,000 per year. Goodwill is an
generated intangible that is not recorded on the balance sheet and is therefore not amortized,

Q143‐4 ★★On 1 January, a company, which prepares its financial statements according to IFRS,
arranged financing for the construction of a new plant. The company: （2012‐mock85）
• borrowed NZ$5,000,000 at an interest rate of 8%,
• issued NZ$5,000,000 of preferred shares with a cumulative dividend rate of 6%, and
• during the first year of construction the company was able to temporarily invest
NZ$2,000,000 of the loan proceeds for the first six months and earned 7% on that amount.
The amount of financing costs to be capitalized (NZ$) to the cost of the plant in the first year
is closest to:
A. 330,000.
B. 400,000.
C. 630,000.

Correct answer A
239
The interest costs can be capitalized.
Under IFRS any amounts earned by temporarily investing the funds are deducted from the
capitalized amount．
The costs related to the preferred shares cannot be capitalized.

Capitalized costs
Interest costs 0.08×5,000,000=400,000
Less interest income 0.07×2,000,000×0.5=(70,000)
Total capitalized costs 330,000

Q144‐4 ★★If a company chooses to capitalize an expenditure related to capital assets instead
of expensing it, ignoring taxes, the company will most likely report: （2012‐mock85）
A. a lower cash flow per share in that period.
B. a higher earnings per share in future periods.
C. the same free cash flow to the firm in that period.

Correct answer: C
Example Capitalizing delivery cost as opposed to expensing it.

FCFF CFO + interest ×(1‐t)—capital expenditures

Capital expenditures If capitalized，the amount capitalized increases capital
expenditures and is recorded as a cash outflow from
investing activities．
CFO The CFO will be higher by amount capitalized, i.e., the
amount not expensed.

Since capital expenditures and CFO increase by the same amount, FCFF is unchanged.

Q145‐4 ★ A company recently purchased a warehouse property and related equipment
(shelving, forklifts, etc.) for €50 million, which were valued by an appraiser as follows:
Land €10 million, building €35 million, and equipment €5 million. The company incurred
the following additional costs in getting the warehouse ready to use: （2012‐mock83）
• €2.0 million for repairs to the building’s roof and windows
• €0.5 million to modify the interior layout to meet their needs (moving walls and doors,
inserting and removing partitions, etc.)
• €0.1 million on an orientation and training session for employees to familiarize them
with the facility
The cost to be capitalized to the building account (in millions) for accounting purposes is
closest to:
A. €37.0.
B. €37.5.
C. €38.5.
240

Solution：B
The capitalized cost of the building would include the other costs that are directly attributable to
the building and are involved in extending its life or getting it ready to use:

Initial cost €35.00
Repairs to roof and windows 2.00
Modifications to interiors 0.50
Total cost €37.5 million

Q146‐4 The following data are available for a company and its industry: （2012mock84）

Company
Common‐Size Balance Sheet
As at 31 December 2010
Assets (%)
Cash & Short‐Term Investments 43.2
Accounts Receivable 9.4
Inventory 0.6
Total Current Assets 53.2
Net Property, Plant, and Equipment 3.9
Goodwill 40.0
Other Long‐Term Assets 2.9
Total Assets 100.0

Liabilities and Shareholders’ Equity
Short‐Term Debt 1.6
Accrued Liabilities and Accounts Payable 17.8
Total Current Liabilities 19.4
Long‐Term Debt 20.1
Other Long‐Term Liabilities 6.5
Total Liabilities 46.0
Total Stockholders’ Equity 54.0
Total Liabilities & Shareholders’ Equity 100.0

Data for comparison Industry
Current ratio 3.0
Debt‐to‐equity 50.0%
Long‐term debt‐to‐equity 40.0%

Which of the following statements about the company is most appropriate? The company:

A. operates in the manufacturing industry.
241
B. has made significant acquisitions in the past.
C. has higher financial leverage than the industry.

Solution：B
Goodwill makes up 40% of total assets; therefore, the company has made significant acquisitions
at some point because goodwill is only recognized during acquisitions. Leverage is below the
industry average for both the debt‐to‐equity ratio of 40% [(20.1 + 1.6) ÷ 54] versus the industry
average of 50% and long‐term debt‐to‐equity ratio of 37% [20.1 ÷ 54] versus the industry average
of 40%. The low PP&E and inventory levels also indicate the company is not likely a
manufacturer.

Q147‐4 ★JOOVI Inc. has recently purchased and installed a new machine for its manufacturing
plant. The company incurred the following costs:

Purchase price $12,980
Freight and insurance $1,200
Installation $700
Testing $100
Maintenance staff training costs $500

The total cost of the machine to be shown on JOOVI's balance sheet is closest to:（2012 原版书
后 Reading30）
A. $14,180.
B. $14,980.
C. $15,480.

Solution：B.
Only costs necessary for the machine to be ready to use can be capitalised. Therefore, Total
capitalised costs = 12,980 + 1,200 + 700 + 100 = $14,980.

Q148‐4 ★★BAURU, S.A., a Brazilian corporation, borrows capital from a local bank to finance
the construction of its manufacturing plant. The loan has the following conditions:

Borrowing date 1 January 2009
Amount borrowed 500 million Brazilian real (BRL)
Annual interest rate 14 percent
Term of the loan 3 years
Payment method Annual payment of interest only. Principal amortisation is due at the
end of the loan term.

The construction of the plant takes two years, during which time BAURU earned BRL 10 million
by temporarily investing the loan proceeds. Which of the following is the amount of interest
related to the plant construction (in BRL million) that can be capitalised in BAURU's balance
sheet?（2012 原版书后 Reading30）
242
A. 130.
B. 140.
C. 210.

Solution：A.
Borrowing costs can be capitalised under IFRS until the tangible asset is ready for use. Also,
under IFRS, income earned on temporarily investing the borrowed monies decreases the amount
of borrowing costs eligible for capitalisation. Therefore, Total capitalised interest = (500 million X
14% X 2 years) — 10 million = 130 million.

Q149‐4 ★★MARU S.A. de CAT., a Mexican corporation that follows IFRS, has elected to use the
revaluation model for its property, plant, and equipment. One of MARU's machines was
purchased for 2,500,000 Mexican pesos (MXN) at the beginning of the fiscal year ended
31 March 2010. As of 31 March 2010, the machine has a fair value of MXN 3,000,000.
Should MARU show a profit for the revaluation of the machine?（2012 原版书后
Reading30）
A. Yes.
B. No, because this revaluation is recorded directly in equity.
C. No, because value increases resulting from revaluation can never be recognised as a profit.

Solution：B. In this case, the value increase brought about by the revaluation should be recorded
directly in equity. The reason is that under IFRS, an increase in value brought about by a
revaluation can only be recognised as a profit to the extent that it reverses a revaluation
decrease of the same asset previously recognised in the income statement.

R70‐4 Capitalized 和 Expensed 的理解：
¾ 资本化：准备用于长时间生产的设备、厂房的建造和购买费用。（耕牛）
¾ 费用化：准备在短时间内出售的资产的费用。（肉牛）
¾ Product costs should be capitalized in the inventories account; Period costs should be
expensed in the period occurred
R71‐4 利息的资本化和费用化：
¾ Capitalized expenditures are classified as CFI. Expensed expenditures are classified as CFO；
The asset you capitalized today will be expensed in the future.
¾ Under IFRS：income earned by temporarily investing borrowed funds reduces the interest
that is eligible for capitalization.
¾ under U.S. GAAP：no such reduction of capitalized interest
R72‐4 ★资本化和费用化对财务报表的影响
¾ Net income: 费用化的 NI 当期较低，以后较高；资本化的 NI 当期高，以后稍低，利润
表随时间波动小。
¾ Shareholder's equity 与 Net Income 的变化趋势相同。
¾ Cash flow: 费用化的现金流支出归入 CFO，因而费用化的 CFO 低；资本化的现金流归入
CFI，所以资本化 CFI 低。
¾ Financial ratios: ROA/ROE 与 NI 同向变化，费用化当期 ROA/ROE 比较低，以后比较高，
243
资本化当期 ROA/ROE 高，以后比较低，资本化 ROA/ROE 比较平稳。

¾ Interest coverage ratio (EBIT/ interest expense): 资本化前期 Interest coverage ratio 比较
大，因为 interest expense 小，后期比较小，因为 EBIT 小；费用化前期 Interest coverage
ratio 比较小，因为 interest expense 比较大，后期比较大，因为 EBIT 后期比较大。
R73‐4 如果问哪一种财务处理较保守、激进，相对应，应该是资本化（激进）还是费用化
（保守）
R74‐4 ★Tangible asset：折旧就是一种将资产资本化的方式
¾ Tangible asset not used in the operations of the firm should be classified as investment
assets.
¾ Land 不必折旧
¾ Land improvement 需折旧
¾ Lease Improvement 需折旧
¾ Long‐lived assets held for sale: tested for impairement immediately, no longer depreciate;
NRV>carrying value, imparied and can be reversed up to the total loss
R75‐4 ★component depreciation
¾ IFRS requires to depreciate the components of an asset seperately.
¾ GAAP allows but is seldom used
R76‐4 ★Intangible asset：amotize 摊销
¾ Finite‐lived intangible assets are amortized over their useful lives.
¾ 一般的讲，企业本身开发的无形资产的费用应该费用化。例外：R&D，software.
¾ GAAP, R&D 的费用要费用化；IFRS, research 的费用应该费用化 development 的费用应该
资本化。
¾ Sofeware: GAAP 要求在技术可行性确立完成之前的费用费用化（研发费用），之后的费
用资本化（光盘费用）。
¾ Infinite‐lived intangible asset values are not amortized but are tested for impairment at least
annually.
¾ Goodwill 不折旧，不摊销，只做 annual impairment test（还要掌握 goodwill 的定义）
¾ Gas and oil reserve 是资源，需要 Depletion
R77‐4 Upward revaluation
¾ ★upward revaluation of assets 在 IFRS 下是允许的，但在 U.S. GAAP 下是不允许的，除非
是 forest and oil if reasonable active price exists.
¾ ★reversal of impairment is permitted under IFRS for inventory (回转到原来的值), not
permitted under U.S. GAAP unless for held for sale 的资产
R78‐4 ★For the producers and dealers of commodity‐like products, such as agricultural and
forest products, mineral ores, and precious metals:
¾ Inventory is reported at net realized value and the unrealized gains and losses from
changing market prices are recognized in the income statement.
¾ If an active market exists for the commodity, the quoted market price is used to value the
inventory. Otherwise, recent transactions are used.

27‐4 关于 investment property
Q150‐4 ★★A company, which prepares its financial statements according to IFRS, owns several
investment properties on which it earns income. It values the properties using the fair
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value model based on prevailing rental markets. A summary of the properties’ valuations
is as follows: （2012‐mock85）
•Original cost (acquired in 2009) €50 million
•Fair value valuation as at 31 December 2009 €50.5 million
Which of the following best describes the impact of the revaluation on the 2011 financial
statements?
A. €6.5 million charge to net income.
B. €6.5 million charge to revaluation surplus.
C. €4.5 million charge to revaluation surplus and €2.0 million charge to net income.

Correct answer: A
For investment properties, when using the fair value model of revaluing assets, all increases and
decreases affect the net income. Here, it is 54.5 — 48.0 = 6.5.

28‐4 ★★If a company uses We fair value model to value investment property, changes in the
fair value of the asset arc least to affect:
A. net income.
B. net operating income.
C. other comprehensive income.

Solution: C.
When a company uses the fair value model to value investment property, changes in the fair
value of the property are reported in the income statement—not in other comprehensive
income.

29‐4 ★★A company is most likely to:（2012 原版书后 Reading30）
A. use a fair value model for some investment property and a cost model for other investment
property.
B. change from the fair value model when transactions on comparable properties become less
frequent.
C. change from the fair value model when the company transfers investment property to
property, plant, and equipment.

Solution：C.
A company will change from the fair value model to either the cost model or revaluation model
when the company transfers investment property to property, plant, and equipment.

R79‐4 Investment property（新增考点；注意 IFRS 和 GAAP 下的区别）
IFRS：includes assets that generate rental income or capital appreciation.
either be reported at amortized cost (just like PP&E) or fair value（Under the fair value model,
any change in fair value is recognized in the income statement）.
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U.S. GAAP：does not have a specific definition of investment property. Under IFRS
注意：（原版书 volume3‐478）investment property 的转换
Transfer From Transfer To Financial Statement Treatment
Owner‐occupied Investment property Treat as revaluation: recognize
gain through I/S only if it reverses previou
recognized loss
Inventory Investment property Recognize gain or loss if
fair value is different from carrying amount
Investment property Owner‐occupied or Fair value of asset at date of transfer will be

inventory cost under new classification

30‐4 关于 Debt Security 的理解
Q151‐4 A company issues €1 million of bonds at face value. When the bonds are issued, the
company will record a:
A. cash inflow from investing activities.
B. cash inflow from financing activities.
C. cash inflow from operating activities

Solution:B.
The company receives €1 million in cash from investors at the time the bonds are issued, which is
recorded as a financing activity.

Q152‐4 ★Fairmont Golf issued fixed rate debt when interest rates were 6 percent. Rates have
since risen to 7 percent. Using only the carrying amount (based on historical cost)
reported on the balance sheet to analyze the company's financial position would most
likely cause an analyst to:
A. overestimate Fairmont's economic liabilities.
B. underestimate Fairmont's economic liabilities.
C. underestimate Fairmont's interest coverage ratio.

Solution: A.
When interest rates rise, bonds decline in value. Thus, the carrying amount of the bonds being
carried on the balance sheet is higher than the market value. The company could repurchase the
bonds for less than the carrying amount, so the economic liabilities are overestimated. Because
the bonds are issued at a fixed rate, there is no effect on interest coverage.

Q153‐4 ★★Assume U.S. GAAP applies unless otherwise noted. Madison Inc. is planning a bond
issue. They are considering issuing either a straight coupon bond or a coupon bond with
warrants attached. The proceeds from either Issue would be the same. What will be the
effect on their interest expense and balance sheet liability if they issue the bonds with
warrants as compared to the straight bonds? For the bonds with warrants the:

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interest expense will be balance sheet liability will be
A. lower Lower
B. lower Higher
C. higher Lower

Solution: A
The portion of the proceeds attributable to the warrants would be classified as equity, thus the
portion classified as a liability would be smaller (lower). The lower balance sheet value would
lead to a lower interest expense when it is calculated. The interest expense is based on the
liability at the beginning of the period. Not the coupon Davment.

Q154‐4 ★On 1 January 2010 the market rate of interest on a company's bonds is 5 percent and
it issues a bond with the following characteristics: (MOCK 79‐65)
Face value €50 million
Coupon rate, paid annually 4%
Maturity date December 31,2019 (10 years)
Issue price 92.28
If the company uses IFRS, its interest expense (in millions) in 2010 is closest to:
A. €1.846
B. €2.307
C. €2.500

Solution: B
IFRS recommends the effective interest method for the amortization of bond
discounts/premiums. The bond is issued for 0.9228x50 million= 46.140.
Interest expense=46.140x5%=2.307million

Debt Security 的理解：
R80‐4 ★报表记录：对于 discount bond，premium bond 的报表记录，特别掌握如何用实
际利率法计算 int. exp（用 mkt. rate at issuance date）
¾ Step 1：计算 bond 的 PV
¾ Step 2：计算 bond 第一期真正的 int. exp；then 计算第一期结束的 carrying value
¾ Step 3：根据第一期结束的 carrying value，计算 bond 第二期真正的 int. exp
¾ 如此推导下去
R81‐4 ★amortization 对 CFO 间接法的影响 (premium 是减去，discount 是加上)
¾ For premium bonds, the total portion of coupon is treated as CFO. For analytical purpose,
CFO have to be increase by the amount of amortization, while CFF has to be increased by the
same amount. The same adjustment can be applied to discount bond CF adjustment.
R82‐4 ★Disclose in footnotes as bond: The nature of liabilities；Maturity dates；Stated and
effective interest rates；Call provisions and conversion privileges；Restrictions imposed by
creditors；Assets pledged as security；The amount of debt maturing in each of the next
five years
R83‐4 Bond redemption. When bond is redeemed, a gain or loss is recognized by subtracting
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the redemption price from the book value of the bond liability, which is reported in the
income statement. In the CF statement, it is treated as CFF.
R84‐4 ★注意 conventional bond 与 bond with warrants，convertible bond 的比较：U.S. GAAP：
bond with warrants 分拆为 liability 和 equity 两部分确认计量；但是 conventional bond
不需要拆分；IFRS：concertiable bond 和 bond with warrants 都需要拆.
R85‐4 For analytical purpose, if the stock price is significantly higher than the conversion price,
the convertible bond should be treated as equity, in contrast, if the stock price is vastly
lower than the conversion price, convertible bond should be treated as liability.
Par bonds Premium bonds Discount bonds
Market rate=coupon rate Market rate<coupon rate Market rate>coupon rate
Cash paid=CR.*Par Interest expense = cash paid Interest expense = cash paid
‐ amortization of premium + amortization of discount
Interest expense is constant Interest decreases over time Interest increases over time
CFO 低估；CFF 高估 CFO 高估；CFF 低估

31‐4 Lease for lessor and lessee
Q155‐4 ★Assume U.S. GAAP applies unless otherwise noted. At the beginning of the year, a
lessee company enters into a new lease agreement that is correctly classified as a
finance lease, with the following terms:
Annual lease payments due at the end of the year $100,000
Lease term 5 years
Appropriate discount rate 12%
Depreciation method straight‐line basis
Estimated salvage value $0
With respect to the effect of the lease on the company’s financial statements in the first
year of the lease, which of the following is most accurate? The reduction in the company’s:
A. Pretax income is $72,096.
B. Cash flow from financing is $56,742.
C. Cash flow from operations is $72,096.

Solution: B
The present value of the lease is $360,477.62. (n = 5, I = 12%, PMT = $100,000) 12% of the
original PV is $43,257.31 and represents the interest component of the payment in the first year.
The difference between the annual payment and the interest is the amortization of the lease
obligation included in cash flow from financing. $100,000 – 43,257.31 = $56,742.69. Depreciation
is $360,477.62 / 5 or $72,095.52 so the total reduction in pretax income would be interest plus
depreciation or $115,352.83. Cash flow from operations would be reduced by the amount of the
interest only because the depreciation would be added back to determine cash flow from
operations.

Q156‐4 ★Assume U.S. GAAP applies unless otherwise noted. On 1 January a company entered
into a capital lease resulting in an obligation of $10,000 being recorded on the balance
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sheet. The lessor’s implicit interest rate was 12%. At the end to the first year of the lease,
the cash flow from financing activities section of the lessee’s statement of cash flows
showed a use of cash of $1,300 applicable to the lease. The cash the company paid the
lessor in the first year of the lease was closest to:
A. $1,200
B. $1,300
C. $2,500

Solution: C
1,300+10,00012%. The cash flow from financing section of the statement of cash flows contains
the amortization of the capital lease obligation. The cash flow from operations contains the
interest expense associated with the capital lease the total of the amortization add interest
expense in the lease payment.

Q157‐4 ★Assume U.S. GAAP applies unless otherwise noted. On January 1, 2008, InTec
Products Inc. entered into a lease agreement to lease a piece of machinery as the lessor.
The annual lease payments are $50,000, due December 31, the lease term is for 5 years,
the machine has an estimated useful life of 6 years, and Peoria currently records the
machine on its balance sheet at its cost of $160,000. The incremental rate of the lease is
8% and they are reasonably assured of the collection of the lease payments. Which of
the following best describes the classification and effect of the lease on Peoria's income
statement for 2008?

A. Direct financing lease. Gross profit of $39,635 plus interest income of $15,971.
B. Direct financing lease. Interest income of $15,971.
C. Sales type lease. Gross profit of $39,635 plus interest income of $15,971.

Solution: C
先判断对于出租人是什么类型的lease: the lease period covers more than 75% of its useful life
(5/6), and Peoria currently records the machine on its balance sheet at its cost of $160,000.所以
是一个capital lease；之后因为InTec Products Inc.是一个manufacturer，而且cost可以确认，
被视为出租人方capital lease中的sales‐type：PV of the lease payments ($199,635) (PMT =
$50,000, N=5, i=8%). 之后确认the gross profit: PV of series of lease payment‐ cost of goods
sold (cost of goods sold=租赁资产的帐面价值‐残值现值, 题目中没有提到残值, 就不用考虑
了) (199,635 ‐ 160,000 = 39,635，如果残值高估，则成本低估，经营利润高估)。所以Interest
income on the net investment in the lease: 0.08 x 199,635 = 15,971.

Q158‐4 ★Compared with a capital lease, which impact will an operating lease have on a
company’s financial statements?
A. Interest coverage ratio will deteriorate.
B. Leverage ratio will improve.
C. Profitability will deteriorate in the first years.

Solution: B
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Compared with capital lease, operating lease will result in higher operating expense and lower
net income, thus, profitability will decrease in the first year.

Q159‐4 ★Under U.S. GAAP, a lessor's reported revenues at lease inception will be highest if the
lease is classified as a(n):
A. sales‐type lease.
B. operating lease.
C. direct financing lease.

Solution: A.
sales‐type lease treats the lease as a sale of the asset, and revenue is recorded at the time of sale
equal to the present value of future lease payments. Under a direct financing lease, only interest
income is reported as earned. Under an operating lease, revenue from rent is reported when
collected.

Q160‐4 ★A company has announced that it is going to distribute a group of long‐lived assets to
its owners in a spin‐off. The most appropriate way to account for the assets until the
distribution occurs is to classify them as:
A. held for sale with no depreciation taken.
B. held for use until disposal with no depreciation taken.
C. held for use disposal with depreciation continuing to be taken.
Solution: C.
Long‐lived assets that will be disposed of other than by sale (such as a spin‐off, an exchange for
other assets, or abandonment) are classified as held for use until disposal and continue to be
depreciated until that time.
Q161‐4 Which of the following is most likely a reason that a lessor can offer attractive lease
terms and lower cost financing to a lessee? Because the: （2012‐mock83）
A. lessor retains the tax benefits of ownership.
B. lessor avoids reporting the liability on its balance sheet.
C. lessee is better able to resell the asset at the end of the lease.
Solution：A
The lessor often retains the tax benefits of ownership of the leased asset, which allows the lessor
to pass those savings along to the lessee in the form of lower financing costs or other attractive
terms.

Q162‐4 Which of the following will most likely increase a company’s operating cash flow? An
increase in: （2012mock84）
A. days sales payable (DSP).
B. gains on the sale of long‐term assets.
C. use of operating leases versus financing leases.
Solution：A
An increase in the days sales payable would indicate the company is stretching out its payables,
which would increase the cash from operations.
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关于承租人和出租人的 Lease：
R86‐4 承租人（常考）
¾ Operating lease vs. Capital lease (capital lease also can be called as finance lease)
R87‐4 ★Under IFRS, capital lease when transfer the risk and return of title, applying to both
lessee and lessor.
¾ To lessee, No specific condition and focus on substance of transaction, if transfer, capital
lease to lessee and lessor.
¾ To lessor, If PV of lease payment larger than Fair Value, sales‐type.
R88‐4 ★Capital lease 的条件 under US GAAP with specific conditions：
1. The title to the leased asset is transferred to the lessee at the end of the lease period.
2. A bargain purchase option exists: to permit the lessee to purchase the leased asset for a
price that is significantly lower than the fair market value of the asset on the exercisable
date.
3. The lease period is at least 75% of the asset’s economic life.
4. The present value of the lease payments is equal to or greater than 90% of the fair value of
the leased asset. The discount rate used is the lower of the lessee’s incremental borrowing
rate or the interest rate implicit in the lease (the discount rate that the lesser used to
determine the lease payment.)
R89‐4 ★两种 lease 的方式对于报表呈现各项和 ratio 的影响（凡是 capital 的处理，都会引
起 A 和 L 的增加, CFO 被高估，在 capital lease 中 Dep., Int.也会同时增加，所以 NI
低；但是 dep.不会大于 lease payment，所以相对 operating lease，EBIT 高。 Remember,
all the financial ratios deteriorate with financial lease, except EBIT and CFO)
R90‐4 在 Capital lease 中，增加的 Liability 部分包含 ST 和 LT，其中 ST 是利息—即为 CFO；
LT 是本金—即为 CFF
R91‐4 ★Capital lease 的计算：和 bond 的计算相似
¾ 先将 MLP 折现，然后 A 和 L 都会增加 PV of MLP
¾ Dep.：按照在 A 上确认的 PV of MLP，用直线折旧法
¾ Int.：每期的都用 carrying valuer，carrying value=carrying value（上期）‐ principal repaid
（考试会考第二年或第三年的利息）
R92‐4 ★出租人：只要能区分 direct financing & sales type under US GAAP
¾ 判断是什么类型的 lease：对于出租人，lease 也分为两类—operating lease 和 capital lease。
¾ 对于 lessor，判断 capital lease 的判断条件：
¾ Firstly, 满足对于 lessee 是 capital lease；Secondly，collectability of the MLPs is reasonably
predictable and there are no significant uncertainties regarding the amount of
unreimbursable costs yet to be incurred by the lessor under the provisions of the lease
agreement
¾ Lessor 的 capital lease 又分为两种：sales‐type (PV> Fair Value of leased asset) 和
direct‐financing
¾ 记账区别：sales‐type 在期初会确认一笔毛利 gross profit= PV of MLP – (Cost of assets – PV
of salvage)；但是 direct‐financing 不确认毛利，而是把 PV of MLP 当做一笔借款借给承租
人，将来收利息
¾ 期初现金流区别：sales‐type 在期初没有现金流；而 direct‐financing 没有现金流
¾ 期中现金流区别：sales‐type 和 direct‐financing 有 CFO inflow，都是 int. revenue
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R93‐4 ★Disclose in footnotes as lease: 特别是 lease payment that are due in each of the next

five years and after five‐year aggregate (can be); but interest rate is not always disclosed
R94‐4 Take‐or‐pay commitment&sale of receivable with recourse
¾ Take or pay commitment: the liability should be increased by amount of the commitment.
¾ Sale of receivable with recourse : should be treated as borrowing collateralized by
receivable. To specific, add receivables back and treat the proceeds of the sale as debt. CFO
of the amount of the proceeds of sale should be treated as CFF.
¾ Thus, leverage ratio are higher with off‐balance sheet items without adjustment.

32‐4 Deferred Tax
Q163‐4 ★Using the straight‐line method of depreciation for reporting purposes and accelerated
depreciation for tax purposes would most likely result in a:
A. valuation allowance.
B. deferred tax asset.
C. temporary difference.

Solution: C.
Because the differences between tax and financial accounting will correct over time, the
resulting deferred tax liability, for which the expense was charged to the income statement but
the tax authority has not yet been paid, will be a temporary difference. A valuation allowance
would only arise if there was doubt over the company's ability to earn sufficient income in the
future to require paying the tax

Q164‐4 Deferred tax liabilities should be treated as equity when:
A. they are not expected to reverse.
B. the timing of tax payments is uncertain.
C. the amount of tax payments is uncertain.

Solution: A.
If the liability will not reverse, there will be no required tax payment in thc Future and thc
"liability" should be treated as equity

Q165‐4 ★When accounting standards require recognition of an expense that is not permitted
under tax laws, the result is a:
A. deferred tax liability.
B. temporary difference.
C. permanent difference.
Solution: C.
Accounting items that are not deductible for tax purposes will not be reversed and thus result in
permanent differences.

Q166‐4 ★Assume U.S. GAAP applies unless otherwise noted.A company reports net income of
$800,000 for the year. The table below indicates selected items which were included in
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net income and their associated tax status.
Included in determining Tax Status
net Income
Depreciation Expense $70,000 $90,000 allowed for tax purposes
Dividend Income $120,000 Dividends not taxable
Fine related to $100,000 Not deductible for tax purposes
environmental damage
R&D Expenditures $50,000 $20,000 allowed for tax purposes
The company’s tax rate is 35 percent. The company’s current income taxes payable (in $) is
closest to:
A. 206,500.
B. 276,500.
C. 360,500.

Solution: B
Net income $800,000
Add back book depreciation 70,000
Deduct tax allowed depreciation (90,000)
Deduct Dividend income (120,000)
Add back Fine 100,000
Add back book R&D 50,000
Deduct tax allowed R&D (20,000)
Taxable income 790,000
Current taxes payable 35% x $790,000=276,500

Q167‐4 ★Assume U.S. GAAP applies unless otherwise noted. Which of the following best
describes taxes payable?
A. Total liability for current and future taxes
B. Expense based on current period pre‐tax income
C. Tax return liability resulting from current period taxable income

Solution: C
Taxes payable is the current liability resulting from the current period taxable income based on
taxable income.

Q168‐4 Assume U.S. GAAP applies unless otherwise noted.Deltax Corp., a highly profitable
company, purchased a new asset on 1 January 2002 for $1,000,000. The following
information applies to the asset:
• For financial statements purposes, straight‐line depreciation over 10 years with no
salvage value
• For tax purposes, three‐year MACRS depreciation class with first year MACRS factor =
0.333
• Tax rate = 40%
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The effect of the asset purchase on Deltax’s deferred tax liability for 2002 is closest to a:
A. $233,000 decrease.
B. $93,200 decrease.
C. $93,200 increase.

Solution: C
The timing difference results in an increase in deferred tax liability:
($333,000‐$100,000)0.40= $93,200

Q169‐4 ★★A company has recently revalued one of its depreciable properties and estimated
that its remaining useful life would be another 20 years. The applicable tax rate for all
years is 30% and the revaluation of the property is not recognized for tax purposes.
Details related to this asset are provided in the table below, with all £‐values in millions.

Accounting Purposes Tax Purposes
Original values and estimates, start of 2007
2007 Acquisition cost £8,000 £8,000
Depreciation, straight‐line 20 years 8 years
Accumulated depreciation end of 2009 £1,200 £3,000
Net balance end of 2009 £6,800 £5,000

Re‐estimated values and estimates, start of 2010
Revaluation balance start of 2010 £10,000 Not applicable

New estimated life 20 years
The deferred tax liability (in millions) as at the end of 2010 is closest to:
A. £690.
B. £960.
C. £1,650.

Solution: A
Accounting Purposes Tax Purposes
Revaluation surplus (10,000 – 6,800) =3,200 no revaluation allowed
Depreciation, straight‐line 20 years 5 years remaining
2009 start of year balance after
10,000 5,000
revaluation
Depreciation 2009 500 1,000
Net balance end of 2009 9,500 4,000
Less revaluation surplus (3,200)
Carrying value for purposes of
deferred taxes 6,300 4,000
Deferred tax liability = 0.30 x (6,300 – 4,000) = 690
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Q170‐4 ★★Assume U.S. GAAP applies unless otherwise noted. Fred Company has a deferred
tax liability balance of $1,200,000 at the end of 2005. Tax rates increased from 30
percent to 40 percent in 2005. Fred Company should increase its tax liability account and
also increase its:
A. 2005 income tax expense by $120,000.
B. 2005 income tax expense by $400,000
C. Income taxes payable by $400,000.

Solution: B
The change in Fred’s rates causes its deferred tax liability account to increase (((40 – 30) / 30)
$1,200,000 =) $400,000. The corresponding increase is to current income tax expense.

Q171‐4 ★The following information is available about a company:
(all figures in $ thousands) 2010 2009
Deferred tax assets 200 160
Deferred tax liabilities (450) (360)
Net deferred tax liabilities (250) (200)

Earning before taxes 4,000 3,800
Income taxes at the statutory rate 1,200 1,140
Income tax payable (Current income tax expense) 1,000 900
The company's 2010 income tax expense (in thousands) is closest to:(MOCK79‐51)
A. $1,000
B. $1,050
C. $1,250

Solution: B
Income tax expense reported on the income statement=income tax payable+ net changes in the
deferred tax assets and deferred tax liabilities. The change in the net deferred tax liability is a $50
increase (indicating that the income tax expense is $50 in excess of the income tax payable (or
current income tax expense)) and representing an increase in the expense.
Therefore, the income tax expense= $1,000+50=. $1,050

Q172‐4 ★★★A company purchased equipment in 2009 for £25,000; the year‐end values for
accounting purposes and tax purposes are as follows: （2012‐mock85）
2010 2009
Carrying amount for accounting £20,000 £22,500
purposes
Tax base for tax purposes £16,000 £20,000
Tax rate 25% 30%
Which of the following statements best describes the effect of the change in the tax rate on the
company’s 2010 financial statements? The deferred tax liability:
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A. increased by £250.
B. decreased by £200.
C. decreased by £800.

Correct answer: B
Evaluate the impact of tax rate changes on a company’s financial statements and ratios.
Deferred tax liability=taxable temporary difference×tax rate
In 2010 if the rates had not changed, and deferred tax liability 0.30×4,000= £1200
would be:
But with the lower tax rate, the deferred tax liability will be: 0.25×4,000= £1000
Effect of the change in rate therefore is a decrease in the £(200)
liability
Alternative calculation=change in rate×taxation difference ‐5%×4,000 £(200)

Q173‐4 The following information is available about a company: （2012‐mock83）
(all figures in $ thousands) 2011 2010
Deferred tax assets 200 160
Deferred tax liabilities (450) (360)
Net deferred tax liabilities (250) (200)

Earnings before taxes 4,000 3,800
Income taxes at the statutory rate 1,200 1,140
Current income tax expense 1,000 900

The company’s 2011 income tax expense (in thousands) is closest to:
A. $1,000.
B. $1,050.
C. $1,250.

Solution: Solution: B. Income tax expense reported on the income statement = Income tax
payable + Net changes in the deferred tax assets and deferred tax liabilities. The change in the
net deferred tax liability is a $50 increase (indicating that the income tax expense is $50 in excess
of the income tax payable [or current income tax expense] and representing an increase in the
expense). Therefore, the income tax expense = 1,000 + 50 = 1,050.

Q174‐4 A company purchased equipment for $50,000 on 1 January 2009. It is depreciating the
equipment over a period of 10 years on a straight‐line basis for accounting purposes, but
for tax purposes, it is using the declining balance method at a rate of 20%. Given a tax
rate of 30%, the deferred tax liability as at the end of 2011 is closest to: （2012mock84）
A. $420.
B. $2,820.
C. $6,720.

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Solution：B
The deferred tax liability is equal to the tax rate times the difference between the carrying
amount of the asset and the tax base.
Value for accounting purposes after 3 years: 50,000 – [3 x (50,000 ÷ 10)]= $35,000
Value for tax purposes:
Carrying amount = Start of year balance × (1 – 0.20)
After three years: 50,000 × 0.8 × 0.8 × 0.8 = 25,600
Difference between accounting and tax values 9,400
Deferred tax liability @ 30%: 30% × 9,400 = 2,820

Q175‐4 An analyst is analyzing two companies in the same industry and believes that they have
similar strategies regarding the use of property, plant, and equipment (PP&E). He also
thinks that the PP&E assets of the two companies are roughly of the same age and have
the same expected useful lives remaining. Company A uses the LIFO method of
inventory valuation, and Company B uses the FIFO method. The following additional
information is available from the companies’ financial statements: （2012mock84）
$ millions
Company A Company B
Current assets 5,800 6,300
Inventory LIFO reserve 1,100 N/A
Current liabilities 4,300 4,200
Gross PP&E 2,500 3,000
Accumulated depreciation 1,250 1,200
Depreciation expense 125 120
In the analyst’s opinion, which of the following conclusions is most appropriate?
Compared with Company A, Company B:
A. is more liquid.
B. has a higher quality of earnings.
C. uses more aggressive accounting estimates related to PP&E.

Solution: C.
Company A Company B
Current ratio as reported (CA ÷ CL) 1.35 1.50
Current ratio adjusted to FIFO for Company A
(5,800 + 1,100) ÷ 4,300 1.60
Co A is more liquid
Net PPE 1,250 1,800
Estimated average remaining useful life
(Net PPE ÷ Depreciation expense) 10 years 15 years

The analyst believes the two companies’ PP&E are of the same age; however, the useful life
remaining for Company B’s assets is 15 years compared with 10 for Company A, implying B is
using a longer useful life or more aggressive accounting policies.
257

The more aggressive PP&E estimates combined with the use of FIFO indicate that Company B has
a lower quality of earnings, not higher. The adjusted current ratio for Company A (adjusted to
include the LIFO reserve to convert the balance sheet to FIFO for comparison) is higher than the
current ratio for B, indicating that A is more liquid.

Q176‐4 Analysts should treat deferred tax liabilities that are expected to reverse as:（2012 原版
书后 Reading30）
A. equity.
B. liabilities.
C. neither liabilities nor equity.

Solution：B.
If the liability is expected to reverse (and thus require a cash tax payment) the deferred tax
represents a future liability.

Q177‐4 When both the timing and amount of tax payments are uncertain, analysts should treat
deferred tax liabilities as:
A. equity.
B. liabilities.
C. neither liabilities nor equity.

Solution: C.
The deferred tax liability should be excluded from both debt and equity when both the amounts
and timing of tax payments resulting from the reversals of temporary differences are uncertain.

Q178‐4 ★★When certain expenditures result in tax credits that directly reduce taxes, the
company will most likely record:
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.

Solution: C.
Tax credits that directly reduce taxes are a permanent difference, and permanent differences do
not give rise to deferred tax.

Q179‐4 ★★When accounting standards require an asset to be expensed immediately but tax
rules require the item to be capitalized and amortized, the company will most likely
record:
A. a deferred tax asset.
B. a deferred tax liability.
C. no deferred tax asset or liability.

Solution: A.
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The capitalization will result in an asset with a positive tax base and zero carrying value. The
amortization means the difference is temporary. Because there is a temporary difference on an
asset resulting in a higher tax base than carrying value, a deferred tax asset is created.

Q180‐4 ★★Zimt AG presents its financial statements in accordance with U.S. GAAP. In 2007,
Zimt discloses a valuation allowance of $1,101 against total deferred tax assets of
$19,201. In 2006, Zimt disclosed a valuation allowance of $1,325 against total deferred
tax assets of $17,325. The change in the valuation allowance most likely indicates that
Zimt's:
A. deferred tax liabilities were reduced in 2007.
B. expectations of future earning power has increased.
C. expectations of future earning power has decreased.

Solution: B.
The valuation allowance is taken against deferred tax assets to represent uncertainty that future
taxable income will be sufficient to fully utilize the assets. By decreasing the allowance, Zimt is
signaling greater likelihood that future earnings will be offset by the deferred tax asset.
Deferred Tax 的理解：
R95‐4 DTA 和 DTL 的理解：凡是产生 deferred tax 都是由于会计处理和税务处理的暂时性差
异（Temporal difference）引起的，比如折旧、计提准备金、保修费等;
R96‐4 ★Revenue/Expense approach：Profit Before Tax > Taxable Income，就产生 DT expense
(DTL)；PBT < T.I 就产生 DT benefit (DTA)；
R97‐4 ★Asset/Liability approach（asset tax base）：
¾ （Asset）Asset tax base = deductible asset in the future (from the taxing)
¾ （Asset）Accounting base = Carrying value of asset (from the accounting)
=BV‐accumulated depreciation‐impairment
¾ Accounting base < tax base asset, treat as DTA
¾ Accounting base > tax base asset, treat as DTL（会计多记资产，必须增加负债）
R98‐4 ★Asset/Liability approach（asset tax base）：
¾ (Liability) Liability tax base = carrying value of the liability ‐ any amounts that will be
deductible on the tax return in the future 或者 carrying value ‐ any amounts of the
revenue that will not be taxable in the future
¾ (Liability) Accounting base= carrying value of the liability
¾ (Liability) Accounting base‐ Liability tax base＝be deductible on the tax return in the
future 或者 not be taxable in the future
¾ Accounting base < tax base liability, treat as DTL
¾ Accounting base > tax base liability, treat as DTA（会计多记负债，必须增加资产）
¾ Tax credit is permenant difference which will not affet tax expense.

R99‐4 ★计算由于税率改变引起的 income tax expense 变化
¾ New‐DTL = Old‐DTL / Old‐Rate New‐Rate
¾ Income tax expense = tax payable + △DTL ‐ △DTA
¾ Tax rate ↑ DTL↑ DTA↑
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¾ Tax rate↓ DTL↓ DTA↓
R100‐4 一般在题目中，dep.形成 DTL；impairment，warranty 确认为 DTA
R101‐4 U.S. GAAP business combination 时确认的 goodwill 不在报表上确认递延税
R102‐4 U.S. GAAP vs. IFRS（相对重要的几个部分）
IFRS U.S. GAAP
将所得税资产和所得税负债与 FAS109 要求，Tax payable 在 B/S
Tax payable 其他资产和负债分开列报；中确认为流动负债
Classification of DTA Always non‐current (Net) non‐current /current

or DTL
Tax rate for measuring Use enacted or substantively Use enacted tax rate
DTL or DTA enacted tax rate.
Recognize the probable portion. Recognize in full and then reduce
Recognition of
by a valuation allowance, for the
deferred tax assets
non‐probable portion.
DTA valuation Reverse is allowed Reverse is prohibited

R103‐4 ■Valuation allowance for DTA:
¾ 当由于企业经营状况恶化，从而可能导致 DTA 未来无法回转时，要确认 Valuation
allowance.
¾ Increaseing the valuation allowance can decrease DTA, increase income tax expense
and decrease net income. The net DTA can be reversed by decreasing valuation
allowance, resulting in higher earing.
R104‐4 ■在分析时，当分析师认为 DTL 不会回转时，DTL 全额视为 equity；会反转时，现
值作为负债，剩余部分计入到 Equity，再计算 D/E。

33‐4 Revaluation of Long‐lived Assets
Q181‐4 ★A company, which prepares its financial statements in accordance with IFRS uses the
revaluation model to value land. At the end of the current year the land value of the
land has increased and will be adjusted on the balance sheet. Which of the following
statements is most accurate? In the current period the revaluation of the land will:
A. increase return on sales.
B. increase return on assets.
C. decrease the debt to equity ratio.

Solution: C
The increase in the value of the land bypasses the income statement and goes directly to a
revaluation surplus account in equity. Equity increases thereby decreasing the debt to equity
ratio.

34‐4 Derecognition of debt
Q182‐4 ★★Oil Exploration LLC paid $45,000 in printing, legal fees, commissions, and other
costs associated with its recent bond issue. It is most likely to record these costs on its
260
financial statements as:
A. an asset under U.S. GAAP and reduction of the carrying value of the debt under IFRS.
B. a liability under U.S. GAAP and reduction of the carrying value of the debt under IFRS.
C. a cash outflow from investing activities under both U.S. GAAP and IFRS.

Solution: A.
Under U.S. GAAP, expenses incurred when issuing bonds are generally recorded as an asset and
amortized to the related expense (legal, etc.) over the life of the bonds. Under IFRS, they are
included in the measurement of the liability. The related cash flows are financing activities.

Q183‐4 The following information is available from a company’s 2011 financial statements:
（2012‐mock83）

Note 6: Employee costs
(in thousands) 2011 2010
Wages and salaries $21,000 $18,500
Share‐based payment costs 600 425
Defined contribution pension plan 1,525 1,462
Retirement benefit obligations (note 17) 728 620
Other employee costs 3,233 3,080
Total employee costs $27,086 $24,087

Note 17: Retirement benefit obligations
Amounts recognized in the income statement for the year
(in thousands) 2011 2010
Current service cost $ 692 $ 588
Interest cost on pension obligation 80 65
Expected return on plan assets (50) (45)
Past service costs recognized in the year 6 12
Total income statement charge $ 728 $ 620

The pension expense (in thousands) reported in 2011 is closest to:
A. $1,525.
B. $2,217.
C. $2,253.

Solution：C
The pension expense would be the sum of the expense for the defined contribution plan and the
defined benefit plan (retirement benefit obligation): 1,525 + 728 = 2,253.

Q184‐4 On 1 January 2009, a company that prepares its financial statements according to IFRS
issued bonds with the following features: （2012‐mock83）
• Face value £20,000,000
• Term 5 years
261
• Coupon rate 6% paid annually on December 31
• Market rate at issue 4%

The company did not elect to carry the bonds at fair value. In December 2011 the market rate on
similar bonds had increased to 5% and the company decided to buy back (retire) the bonds after
the coupon payment on December 31. As a result, the gain on retirement reported on the 2011
statement of income is closest to:
A. £340,410.
B. £371,882.
C. £382,556.

Solution：C
Gain = Book value of debt – Market both at time of retirement, calculations
value below
20,754,438 – 20,371,882 =
382,556

The market value of debt at retirement can be determined by discounting the future cash flows
at the current market rate (5%) using a financial calculator:
FV = 20,000,000; i = 5%; PMT = 1,200,000; N = 2; Compute PV = 20,371,882
The book value after the third interest payment (two payments remaining) can be found either
using a financial calculator and the market rate at the time of issue (4%) or an amortization table
(shown below).
FV = 20,000,000; i = 4%; PMT = 1,200,000; N = 2; Compute PV = 20,754,438.

R105‐4 Early repayment of Bond：
9 Under U.S. GAAP：any remaining unamortized bond issuance costs must be written off and
included in the gain or loss calculation. Writing off the cost of issuing the bond will reduce a
gain or increase a loss.
9 under IFRS ：No write‐off is necessary
9 gain or loss from redeeming debt：is reported in the income statement, usually as a part of
continuing operations, and additional information is disclosed separately.
9 Redeeming debt： is usually not a part of the firm's day‐to‐day operations; thus, analysts
often eliminate the gain or loss from the income statement for analysis and forecasting.
9 When presenting the cash flow statement using the indirect method, any gain (loss) is
subtracted from (added to) net income in calculating cash flow from operations. The
redemption price is reported as an outflow from financing activities.
R106‐4 Issuance cost of bond
9 Issuance cost of debt includes printing, legal fees directly related to the issuance of bond
9 Under IFRS, the amout of issuance cost is deducted from the total proeeds of bond
issuance, and recalculate the effective interest rate.
9 Under GAAP, the amount of issuance cost is recorded as long‐term unamortized, which will
be amortized during the period of maturity.
262

35‐4 Off‐balance sheet financing
Q185‐4 ★★The following information is taken from a company’s annual report (all figures in
millions):
Total assets $250
Total debt 150
Total equity 100
Net income 25
“During the year the Company entered into a 20‐year take‐or‐pay contract that requires us to
purchase a minimum of $0.750 of hydro‐electrical power annually, starting next year.”
“The Company’s average cost of long‐term borrowing is 7%.”
If an analyst were to include the take‐or‐pay contract in his analysis, the company’s
debt‐to‐equity ratio and return‐on‐assets, respectively, will be closest to:

debt‐to‐equity ratio return‐on‐assets
A. 1.58 10.0%.
B. 1.65 9.4%.
C. 1.65 10.0%.

Solution: B
The total sum of the payments should be added to both liabilities and assets.
[150 + 20(.75)]
the revised debt ‐ to ‐ equity = = 1.65
100

25
the revised ROA = = 9.4%
250 + 20(.75)

Q186‐4 ★Assume U.S. GAAP applies unless otherwise noted. Charles McKinmon, CFA is
analyzing the financial statements of Computers On Credit, Inc. (COC). COC has sold $60
million of accounts receivable for proceeds of $50 million, and McKimmon wishes to
treat the transaction as collateralized borrowing. McKimmon’s financial statement
adjustments will most likely include adding
A. $50 million to accounts receivable.
B. $50 million to cash flows from financing activity.
C. $50 million to cash flows from operating activity

Solution: B
McKinnon should add $60 million to accounts receivable, reduce cash from operating activities
by $50 million, and increase cash from financing activities by $50 million.

Q187‐4 ★A retail company that leases the majority of its space has total assets of $4,500 million
and total long‐term debt of $2,125 million bearing an average interest rate of 10 percent.
Note 8 to the 2010 financial statements contains the following information about the
263
company's leases:
Note 8: Operating leases
Year Millions
2011 $140
2012 140
2013 140
2014 140
2015 140
2016 and thereafter 1,260
Total $1,960
After adjustment for the off‐balance sheet financing, the debt‐to‐total‐assets ratio for the
company is closest to:

A. 58%
B. 62%
C. 72%
Solution: A
The present value of the operating leases should be added to both the total debt and the total
assets. To estimate the present value it is appropriate to estimate the number of years of lease
payments reflected in the 2016 and thereafter figure. Based on the constant expense shown in
the first 5 years, there are 9 (1,260/140) more payments for a total of 14 payments.
N=14, I/Y=10, PMT=140, FV=0, CPT(PV)=1031.34
Adjusted debt to total assets=(2,125+1,031)/(4,500+1,031)=57%

Q188‐4 A company has announced that it is going to distribute a group of long‐lived assets to its
owners in a spin‐off. The most appropriate way to account for the assets until the
distribution occurs is to classify them as: （2012‐mock83）
A. held for sale with no depreciation taken.
B. held for use until disposal with no deprecation taken.
C. held for use until disposal with depreciation continuing to be taken.

Solution：C
Long‐lived assets that will be disposed of other than by sale, such as a spin‐off, an exchange for
other assets, or abandonment, are classified as held for use until disposal and continue to be
depreciated until that time.

Off‐balance Sheet 的理解：
R107‐4 ★Take‐or‐pay contracts 调整：Should add the PV of minimum future commitments to
both property and debt.
R108‐4 Sales of receivable 调整：当 A/R 还没有收回时，A/R 和 current liability 增加，CFO 降
低
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R109‐4 卖 A/R 的 gain 或者是 loss 是要移走的，loss 会使得 EBIT 变大在没有摊销之前，和

discount bond 的道理是相通的

36‐4 Ratio 理解和运用
Q189‐4 ★A company reports that to maintain good relations with its suppliers, it has entered
into a financing arrangement with a bank whereby it will periodically have the bank pay
its suppliers the amounts owed and it will then repay the bank in the following period.
The motivation for the company’s behavior is most likely to:
A. improve its current ratio.
B. improve its relations with its suppliers.
C. manage the timing of operating cash flows.

Solution: C
The company can choose when to enter into the short‐term borrowing with the bank and
reclassify its accounts payable into short‐term financing. It will likely do so when cash flows are
seasonally strong, thereby reducing operating cash flows but increasing financing cash flows. On
repayment, the cash outflow is treated as a financing activity (loan repayment) instead of an
operating cash flow. The result is that the company can manipulate the timing of reported cash
flows since the timing and extent of vendor financing is at management’s discretion.

Q190‐4 ★When analyzing a company that prepares its financial statements according to U.S.
GAAP, calculating the price/tangible book value ratio instead of the price/book value
ratio is most appropriate if it:
A. grows primarily through acquisitions.
B. develops its patents and processes internally.
C. invests a substantial amount in new capital assets.

Solution: A
A company growing primarily through acquision will usually record large amount of goodwill,
which is intangible asset.

Q191‐4 ★A company which prepares its financial statements in accordance with IFRS incurred
and capitalized €2 million of development costs during the year. These costs were fully
deductible immediately for tax purposes, but the company is depreciating them over
two years for financial reporting purposes. The company has a long history of
profitability which is expected to continue. Which is the most appropriate way for an
analyst to incorporate the differential tax treatment in his analysis? He should include it
in:
A. liabilities when calculating the company’s current ratio.
B. equity when calculating the company’s return on equity ratio.
C. liabilities when calculating the company’s debt‐to‐equity ratio.

Solution: A
265
The different treatment for tax purposes and financial reporting purposes is a temporary
difference and would create a deferred tax liability. Deferred tax liabilities should be classified as
debt if they are expected to reverse with subsequent tax payments. The long history of
profitability implies that the company will likely be paying taxes in the following years and hence
an analyst could reasonably expect the temporary difference to reverse. Under IFRS all deferred
tax liabilities are non‐current and therefore do not affect the current ratio.

Q192‐4 Assume U.S. GAAP applies unless otherwise noted.
To gain insight into what portion of the company’s assets is liquid, an analyst wills most
likely use:
A. The cash ratio.
B. The current ratio.
C. Common‐size balance sheets.

Solution: C
A common‐size balance sheet expresses all balance sheet accounts as a percentage of total
assets.

information about a company and the industry:
Liquidity measure Company Industry
Quick ratio 0.7 1.3
Current ratio 1.1 1.7
Days sales outstanding 38.5 29.3
Days payables outstanding 27.6 22.0
Based only on the data above, the measure that should most concern the analyst regarding the
company's working capital management is the:
A. Quick ratio.
B. Day’s sales outstanding.
C. Day’s payables outstanding.

Solution: B
The company’s days sales outstanding is considerably higher than the industry’s, which means
the company is slower in collecting its receivables than the average firm. This is a concern
because the longer receivables are outstanding, the greater the probability they will not be
collected and will have to be charged off, thereby adversely affecting earnings.

Q194‐4 ★Assume U.S. GAAP applies unless otherwise noted. An analyst has gathered the
following data about Geneva Group Inc. and the health care industry in which it
operates:
266
Geneva Group Industry Averages as a percent of
($ millions) sales
Revenues 5,000 100%
Cost of goods sold 2,100 45%
Operating expenses 1,750 32%
Profit margin 475 9.5%
Which of the following conclusions can the analyst reasonably make? Compared with the
Industry, Geneva:
A. spends less on non‐operating costs and income taxes.
B. has a lower gross profit margin than the industry and spends more on its operating costs.
C. is better at controlling product costs, but less effective at controlling operating costs.

Solution: C
The gross profit for Geneva = 5,000 ‐ 2,100 = 2,900 or gross profit margin = 58%. The gross profit
for the industry is 1‐45% = 55%. Therefore, Geneva’s cost of goods sold, or product costs, are
lower; they must control them better. Operating costs are $1,750 / 5000 = 35% for Geneva and
32% for the industry; hence they are not as effective at controlling their operating costs as the
industry.

Q195‐4 As a result of a change in strategy to selling differentiated products at premium prices, a
company's gross margin ratio increased by 5 percentage points (i.e., from 35 percent to
40 percent). The most likely effect on the company's operating margin ratio as a result of
the changes in strategy would be an increase; （MOCK79‐67）
A. equal to 5%
B. less than 5%
C. greater than 5%

Solution: B
A strategy of selling differentiated products at premium prices usually requires additional
advertising or research and development to support the differentiating features; therefore, the
effect on operating profit is normally less than the effect on gross profit margin.

Q196‐4 Brown Corporation had average days of sales outstanding of 19 days in the most recent
fiscal year. Brown wants to improve its credit policies and collection practices and
decrease its collection period in the next fiscal year to match the industry average of 15
days. Credit sales in the most recent fiscal year were $300 million, and Brown expects
credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal of
decreasing the collection period, the change in the average accounts receivable balance
that must occur is closest to:（2012 原版书后重点题）
A. +$0.41 million.
B. —$0.41 million.
C. —$1.22 million.

267
Solution：A.
The average accounts receivable balances (actual and desired) must be calculated to determine
the desired change. The average accounts receivable balance can be calculated as an average
clay's credit sales times the DSO. For the most recent fiscal year, the average accounts receivable
balance is $15.62 million [‐‐= ($300,000,000/365) X 19]. The desired average accounts receivable
balance for the next fiscal year is $16.03 million (= ($390,000,000/365) X 15). This is an increase
of $0.41 million (= 16.03 million ‐ 15.62 million). An alternative approach is to calculate the
turnover and divide sales by turnover to determine the average accounts receivable balance.
Turnover equals 365 divided by DSO. Turnover is 19.21 (= 365/19) for the most recent fiscal year
and is targeted to be 24.33 (= 365/15) for the next fiscal year. The average accounts receivable
balances are $15.62 million (= $300,000,000/19.21), and $16.03 million (‐‐= $390,000,000/24.33).
The change is an increase in receivables of $0.41 million.

Q197‐4 Income statements for two companies (A and B) and the common‐sized income
statement for the industry are provided below: （2012‐mock85）
All$ figures in ’000s Company A Company B Industry
Sales $10,500 $8,250 100.0%
Cost of goods sold 6,353 5,239 62.8%
Selling, general, and 2,625 2,021 24.8%
administrative expenses
Interest expense 840 536 7.0%
Pretax earnings 683 454 5.4%
Taxes 205 145 1.7%
Net earnings $478 $309 3.7%
The best conclusion an analyst can make is:
A. Company B’s interest rate is lower than the industry average.
B. both companies’ tax rates are higher than the industry average.
C. Company A earns a higher gross margin than both Company B and the industry.

Correct answer: C
Common‐sized analysis of the income statements shows that Company A has a lower percentage
cost of goods sold and hence a higher gross margin than the industry.
Co A Co B Industry Co A Co B
Sales $10,500 $8,250 100.0% 100% 100%
Cost of goods sold 6,353 5,239 62.8% 60.5% 63.5%
Gross margin 37.2% 39.5% 36.5%
Company A earns a higher gross margin than both Company B and the industry.

Pretax earnings 683 454 5.4% 6.5% 5.5%
Taxes 205 145 1.7% 2.0% 1.8%
Tax rate = taxes ÷ 32% 30% 32%
The tax rates for the companies are not higher than the industry.

268
The interest rate is not a function of sales and cannot be analyzed on a common sized income
statement .
Tax rates are determined based on taxes ÷ pretax earnings, not as a percentage of sales (as
shown in common sized analysis)

Q198‐4 Selected information for a company and the common size data for its industry are
provided below. （2012‐mock83）

Company Common Size Industry
(£) Data (% of sales)
EBIT 76,000 28.0
Pretax profit 66,400 19.6
Net income 44,500 13.1
Sales 400,000 100.0
Total assets 524,488 140.0
Total equity 296,488 74.0
ROE 15.0% 17.7%

Which of the following is most likely a contributor to the company’s inferior ROE compared to
that of the industry? The company’s:

A. tax burden ratio.
B. interest burden ratio.
C. financial leverage ratio.

Solution：C
Calculation Company Industry
Tax burden ratio Net Inc/EBT 44,500/66,400 = 0.67 13.1/19.6 = 0.67
Financial leverage Total assets/Equity 524,488/296,488 = 1.77 140/74 = 1.89
Interest burden EBT/EBIT 66,400/76,000 = 0.87 19.6/28.0 = 0.70
ratio
The company has a lower financial leverage ratio relative to the industry, which is one of the
causes of the company’s lower relative ROE performance. The tax burden ratio is the same as
the industry and the interest burden ratio is higher, which would increase ROE.
EBT: Pretax profit (earnings before tax) Net Inc: Net income

Q199‐4 An analyst has calculated the following ratios for a company: （2012‐mock83）
Operating Profit Margin 17.5%
Net Profit Margin 11.7%
Total Asset Turnover 0.89 times
Return on Assets 10.4%
Financial Leverage 1.46
Debt to Equity 0.46

269
The company’s return on equity (ROE) is closest to:
A. 4.8%.
B. 15.2%.
C. 22.7%.

Solution：B
Using DuPont analysis, there are two ways to calculate ROE from the information provided:

ROE = Net profit margin × Asset turnover × Financial leverage 11.7 × 0.89 × 1.46 15.2
ROE = ROA × Financial leverage 10.4 × 1.46 15.2

Given the following information about a company: （2012mock84）

(€ millions) 2011 2010
Short‐term borrowings 2,240 5,400
Current portion of long‐term interest bearing debt 2,000 1,200
Long‐term interest bearing debt 12,000 9,000
Total shareholders’ equity 23,250 21,175
EBIT 3,850 3,800
Interest payments 855 837
Operating lease payments 800 800

Q200‐4 What is the most appropriate conclusion an analyst can make about the solvency of the
company? Solvency has:
A. improved because the debt‐to‐equity ratio decreased.
B. deteriorated because the debt‐to‐equity ratio increased.
C. improved because the fixed charge coverage ratio increased.

Solution: A.
The debt–equity ratio decreased, thereby improving solvency; the fixed charge ratio remained
the same.

2011 2010 Comments
Debt‐to‐equity ratio 2,240+2,000+12,0002 5,400+1,200+9,00021,175 Ratio decreased:
(Total debt ÷ Equity) 3,250 = 74% Company has less
= 70% financial risk;
more solvent
Fixed charge 3,850+800855+800 = 3,80+800837+800 = 2.81 No change in FCC
coverage ratio = 2.81 ratio
EBIT + Lease pmts
Interest pmts + Lease
pmts

270
Q201‐4 To gain insight into what portion of the company’s assets is liquid, an analyst will most
likely use: （2012mock84）
A. the cash ratio.
B. the current ratio.
C. common‐size balance sheets.

Solution：C
A common‐size balance sheet expresses all balance sheet accounts as a percentage of total
assets and provides insight into what portion of a company’s assets is liquid. In contrast, cash and
current ratios measure liquidity relative to current liabilities, not relative to total assets.

Ratio 的理解：
R110‐4 Common‐sized
¾ Common‐sized I/S ratios ‐‐‐‐ item in the income statement account / revenues ( net
sales)
¾ Common‐sized B/S ratios ‐‐‐‐ item in the balance sheet account / total assets
¾ Common‐sized CF/S ratio ‐‐‐‐
9 item in the CF statement account / revenues
9 OR CF outflow / total outflows OR CF inflow / total inflows
¾ Common‐size 一般有横向比较（公司间），纵向比较（年份间），体现公司的 trend
R111‐4 其它的 Ratio 掌握公式的核心含义；常考的有 current ratio, quick ratio, cash ratio, A/R
turnover, A/P turnover, inventory turnover, cash conversion cycle, asset turnover,
operating margin, net profit margin, ROE, D/E, interest coverage…
R112‐4 一般关于 ratio 的考题会和 inventory，long‐term asset，capitalization & expensing；lease
等等之间联系起来，由于会计方法引起的 ratio 的变化，一定要理解其中的原理

37‐4 Credit analysis 的理解
Q202‐4 ★Assume U.S. GAAP applies unless otherwise noted. Which of the following would be
the most useful to an analyst trying to assess the credit worthiness of a company?
A. Return measures related to net income.
B. Return measures related to operating cash flow.
C. Information related to the scale and diversity of a company's operations.

Solution: B
Credit analysis is concerned with a company’s debt-paying ability. As returns to
creditors are normally paid in cash, the company’s ability to generate cash internally
is the most important factor in credit analysis.
Credit Analysis 掌握理解：
R113‐4 Credit analysis is based on many ratios, such as interest coverage ratio, return on capital,
and D/E.
¾ 另外 EBITDA 也是一个很重要的数据，与 EBITDA 有关的一些 ratio 都可以做 credit
analysis
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R114‐4 ★indicators of a firms’ creditworthiness
¾ Scale and diversification: more different product lines and greater geographic
diversification are better credit risks.
¾ Operational efficiency: high operating efficiency is associated with better debt
ratings.
¾ Margin stability: stability of margin indicates a higher probability of repayment.
¾ Use of financial leverage: Firm with greater earnings in relation to their debt and in
relation to their interest expense are better credit risks.

38‐4 Cash Flow Manipulations
Q203‐4 Assume U.S. GAAP applies unless otherwise noted. Which of the following transactions
is least likely to increase a company’s reported cash from operations?
A. Securitizing accounts receivable.
B. Delaying payments made to suppliers.
C. Using short‐term debt to reduce an existing account payable.

Solution: C
A 选项是 A/R 证券化并没有 recourse 的情况，那么 A/R 将会降低，CFO 上升；B 选项是延长
付 A/P 的时间，那么相对 A/P 是增加，CFO 上升；C 选项是用 short‐term debt 去 reduce an
existing account payable，那么 A/P 是减少，那么 CFO 减少。直观来讲，只要看一个主体是
不是付现金流，对于 A，提前收回现金流了，CFO 增加；对于 B，不付钱给供应商，CFO 上
升；对于 C，用融资的方式，将供应商的钱还了，CFO 减少

Q204‐4 An analyst has made three observations in his worksheets about a company that he is
reviewing. Which of the observations most likely reduces the quality of earnings of the
company? The company: （2012mock84）
A. reported for the first time an asset titled “Deferred customer acquisition costs.”
B. has reduced its estimate of the expected useful life of computer equipment from 8 years to
5 years.
C. entered into long‐term leases for its manufacturing equipment instead of purchasing it and
recorded the leases as capital leases.

Solution：A
An asset such as “deferred acquisition costs” could indicate the company is deferring current
period expenses to future periods, which is a warning sign and an indication of lower quality
earnings.

掌握会计操纵：
R115‐4 ★四种现金流操纵的方式，并了解其对于 CF/S 的影响：
¾ Stretching accounting payable: delay pmt → CFO↑
¾ Financing accounts payable: manage timing of CFO
¾ Securitizing accounts receivable: sale A/R → CFO↑
¾ Repurchasing stock to offset dilution: option exercise → CFF↑; repurchase → CFO↑& CFF↓
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R116‐4 Incentives that might induce a company management to over‐report or underreport
earnings
¾ overstate net income
¾ understating net income
¾ manage balance sheet
R117‐4 ★Fraud triangle
¾ incentive/pressure: the motive to commit fraud
¾ opportunity: the firm has a weak internal control system
¾ attitudes/rationalization: the mindset that fraud is justified Common accounting warning
sign and methods of detecting
R118‐4 ★掌握几种财务警示信号及如何发现它们
¾ Aggressive revenue recognition
¾ Different growth rates of CFO and earnings
¾ Abnormal sales growth as compared to the economy, industry, or peers
¾ Abnormal inventory growth as compared to sales grow
¾ Boosting revenue with non‐operating income and nonrecurring gains
¾ Delaying expense recognition
¾ Abnormal use of operating leases by lessees
¾ Hiding expenses by classifying them as extraordinary or nonrecurring

39‐4 U.S. GAAP vs. IFRS
Q205‐4 ★Assume U.S. GAAP applies unless otherwise noted. Where are the unrealized gains
and losses arising from changes in the market value of available‐for‐sale securities
reported under U.S. GAAP and IFRS? They are reported in:
U.S. GAAP IFRS
A. equity Equity
B. equity income statement
C. income statement Equity

Solution: A
Under both U.S. GAAP and IFRS, the unrealized gains and losses arising from carrying available
for sale securities at market value are reported in equity as part of accumulated other
comprehensive income.

Q206‐4 ★The following information is available about a manufacturing company:
$ million
Cost of ending inventory computed using FIFO 4.3
Net realizable value 4.1
Current replacement cost 3.8
Compared to U.S. GAAP, the company's gross profit ($ millions) computed under
International Financial Reporting Standards (IFRS) is most likely:(MOCK79‐63)
A. the same
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B. 0.3 lower
C. 0.3 higher

Solution: C
Under IFRS, the inventory would be written down to its net realizable value ($4.1 million)
whereas, under U.S. GAAP, market is defined as current replacement cost and hence would be
written down to its current replacement cost ($3.8). The smaller write‐down under IFRS will
reduce the amount charged to the cost of goods sold, as compared to U.S. GAAP, and result in a
higher gross profit of $0.3 million.

R119‐4 ★详细对比——增值资料（国际与美国准则对比）
特别注意：HTM、AFS、TS 的处理；关于固定资产和存货的 reversal of revaluation；递延税
的确认；convertible bond 的拆分；存货方法的使用；收入确认原则；利息和股利收付的现
金流确认
40‐4 综合
Q207‐4 ★★Assume U.S. GAAP applies unless otherwise noted. Lazlo Ltd, a European‐based
telecommunications provider, follows IFRS. GAAP and capitalizes new product
development costs. During 2007 they spent €25 million on new product development
and reported an amortization expense related to a prior year’s new product
development of €10 million. Other Information related to 2007 is as follows:
in € millions
Net income 225
Average assets 1,875
Cash flow from operations 290
An analyst would like to compare Lazlo with a U.S.‐based telecommunications provider and has
decided to adjust their financial statements to U.S. GAAP. Under U.S. GAAP, and ignoring tax
effects, the return on assets (ROA) and cash flow from operations (CFO) for Lazlo would be
closest to (millions):
ROA CFO
A. 10.7% €265
B. 10.7% €275
C. 11.2% €265

Solution: C
If all development costs had been expensed, net income would be reduced by the amount spent,
and increased by the amortization of the previously capitalized amounts: 225 ‐ 25 + 10 = 210
million. ROA= 210 / 1,875 = 11.2%. (注意：average asset 需要 adjustment 的, 应该减去资产的
增加部分). CFO would be lower by the amount spent on development 290 ‐ 25 = 265 million.
Note: The amortization of previous development costs is a non‐cash expense so does not affect
cash flow.
Q208‐4 ★★On 1 January 2010, Elegant Fragrances Company issues £1,000,000 face value,
five‐year bonds with annual interest payments of £55,000 to be paid each 31 December.
The market interest rate is 6.0 percent. Using the effective interest rate method of
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'amortisation, Elegant Fragrances is most likely to record:
A. an interest expense of £55,000 on its 2010 income statement.
B. a liability of 082,674 on the 31 December 2010 balance sheet.
C. a £58,736 cash outflow from operating activity on the 2010 statement of cash flows.
Solution: B.
The bonds will be issued at a discount because the market interest rate is higher than the stated
rate. Discounting the future payments to their present value indicates that at the time of issue,
the company will record £978,938 as both a liability and a cash inflow from financing activities.
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5‐Corporate Finance
1‐5 Capital Project
Q1‐5 ★A large corporation accepts a project which generates no revenue and has a negative
net present value. The project is most likely classified in which of the following
categories?
A. Replacement project
B. New product or service
C. Regulatory or environmental project

Solution: C
Regulatory, safety, and environmental projects are often mandated by governmental agencies.
They may generate no revenue and might not be undertaken by a company maximizing its own
private interests. For example, a corporation may be required to install equipment to meet a
regulatory standard, and the cost of satisfying the standard is born by the corporation. In this
case, the corporation selects the lowest cost alternative that meets the requirement, i.e., the
alternative with the least negative net present value.

R1‐5 掌握以下几种 Capital Projects：
¾ Replacement decision to maintain the business: equipment breaks down or wears out.
¾ Replacement decision for cost reduction purpose: purchase more efficient equipment
instead of the old one
¾ ★Expansion projects for existing product: increase the size of business
¾ ★Expansion projects for new product or new services
¾ Mandatory investment: regulatory, safety, and environmental project (NPV<0)
¾ Other projects: such as CEO buying a new aircraft
R2‐5 ★The capital budgeting process involves five key principles:
1. Decisions are based on the incremental cash flows.
2. CF are base on the opportunity costs.
3. The timing of the CF is important.
4. CFs are analyzed on an after‐tax basis.
5. Don’t consider financing cost specific to the project when estimating incremental CFs.
6. Suck cost: costs that cannot be avoided even if the project is not undertaken, such as
consulting fee.
7. Externality: the effects of acceptance of a project may have on other firm CFs

2‐5 Opportunity Cost 的理解
Q2‐5 ★Which of the following is least likely classified as an opportunity cost?
A. The cash flows generated by an old machine that is to be replaced
B. The cash savings related to adopting a new production process
C. The market value of vacant land used for a distribution center

Solution: B
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The cash savings related to adopting a new production process is an incremental cash flow, not
an opportunity cost.

R3‐5 R1‐5 Opportunity Cost 掌握概念
¾ 概念：Opportunity costs are cash flows that a firm will lose by undertaking the project
under analysis. It is actually the CFs that are generated by undertaking the second best
alternative.
¾ 理解：Opportunity cost 在做 capital budgeting 的时候被视为增量现金流

3‐5 Incremental Cash Flow 的理解
Q3‐5 With regard to capital budgeting, an appropriate estimate of the incremental cash flows
from a project is least likely to include:
A. Cannibalization.
B. Interest costs.
C. Opportunity costs.

Solution: B
Capital budgeting decisions are based on incremental after‐tax cash flows discounted at the
opportunity cost of funds and cannibalization. Financing costs are ignored because both the cost
of debt and the cost of other capital are captured in the discount rate.

R1‐5 Incremental Cash Flow 掌握概念及理解
1) 概念：cash flow 应该是差额，该差额是由于不同 decision 造成的。
2) 理解:需要考虑在增量现金流时，需要考虑 opportunity costs 和 externality （比如：negative
externality: cannibalization）；不需要考虑的是 sunk cost 和 finance cost（interest costs）
4‐5 指标计算 IRR, DPB
Q4‐5 An analyst determined the following cash flows for a capital project:
Year 0 1 2 3 4 5
Cash flow (€) ‐100 35 30 40 30 20
The required rate of return for the project is 13%. The internal rate of return (IRR) and the
discounted payback period for the project, respectively, are closest to:
IRR period Discounted payback
A. 15.85% 2.75
B. 17.89% 2.75
C. 17.89% 3.97

Solution: C
Using a calculator, the IRR is 17.89%. The discounted payback period is the number of years (and
fractional part of a year) that it takes to recover the initial investment in terms of discounted
future cash flows discounted at the project’s required rate of return. The discounted cash flows
for the first four years are: €30.97, €23.44, €27.72, and €18.40. The cumulative sum through year
three is €82.13. The portion of year four required to recover the initial investment is €17.87 /
€18.40 = 0.97. Therefore, the discounted payback period is 3.97 years.
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R2‐5 NPV, IRR, PI, DBP 掌握计算及理解：

Q5‐5 ★★An investment has an outlay of 100 and after‐tax cash flows of 40 annually for four
years. A project enhancement increases the outlay by 15 and the annual after‐tax cash
flows by 5. As a result, the vertical intercept of the NPV profile of the enhanced project
shifts: （原版书R36‐11）
A. up and the horizontal intercept shifts left.
B. up and the horizontal intercept shifts right.
C. down and the horizontal intercept shifts left.

A is correct. The vertical intercept changes from 60 to 65 (NPV when cost of capital is 0%), and
the horizontal intercept (IRK, when NPV equals zero) changes from 21.86 percent to 20.68
percent.

Q6‐5 ★★Consider the two projects below. The cash flows as well as the NPV and IRR for the
two projects are given. For both projects, the required rate of return is 10 percent.
Cash Flow
Year 0 1 2 3 4 NPV IRR (%)
Project 1 —100 36 36 36 36 14.12 16.37
Project 2 —100 0 0 0 175 19.53 15.02

What discount rate would result in the same NPV for both projects? （原版书 R36‐13）
A. A rate between 0.00 percent and 10.00 percent.
B. A rate between 10.00 percent and 15.02 percent.
C. A rate between 15.02 percent and 16.37 percent.

B is correct. For these projects, a discount rate of 13.16 percent would yield the same NPV for
both (an NPV of 6.73).

Q7‐5 ★★Wilson Flannery is concerned that this project has multiple IRRs.
Year 0 1 2 3
Cash flows —50 100 0 —50

How many discount rates produce a zero NPV for this project? （原版书 R36‐14）
A. One, a discount rate of 0 percent.
B. Two, discount rates of 0 percent and 32 percent.
C. Two, discount rates of 0 percent and 62 percent.

C is correct.
Discount rates of 0 percent and approximately 61.8 percent both give a zero NPV.
Rate 0% 20% 40% 60% 61.8% 80% 100%

NPV 0.00 4.40 3.21 0.29 0.00 —3.02 —6.25

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¾ 计算：NPV, IRR, PI, DPB 的计算必须要掌握，PB 的计算比较简单，但是也需要掌握，
考到机率不比其它几个大。
¾ NPV: sum of the present value of expected CFs
n
CFt
¾ NPV = ∑
t =0 (1 + k) t
¾ NPV>0, increase the firm value, accept the project; NPV<0 decrease the firm value, do not
accept the project.
¾ IRR: the discount rate that makes NPV equal to zero.
¾ IRR> the required rate of return, accept the project; IRR<the required rate of return, reject
the project.
¾ ★Payback period: the number of years it takes to recover the initial cost. (undiscounted
cash flow), liquidity but not profitability.
¾ Discounted payback period: use the discounted cash flow to calculate the payback period.
It fails to consider the cash flows after the pay back period and ignores the profit.
R3‐5 Crossover rate
An NPV profile plots a project's NPV as a function of the discount rate, and it intersects the
horizontal axis (NPV = 0) at its IRR. If two NPV profiles intersect at some discount rate, that is the
crossover rate, and different projects are preferred at discount rates higher and lower than the
crossover rate.
R4‐5 Profitability Index (PI):
PV of the future CFs NPV

PI = = 1+
CF0 CF0
PI>1, accept the project; PI<1, reject the project.
¾ WACC 可以用于 NPV 计算的折现率，但是有 2 个假设条件。一般来说，公司的风险和
项目的风险是肯定不一样的，如果没有这 2 个假设条件，就不能用 WACC 折现 CF 计
算 NPV。如果公司的风险小于项目的风险，就会使得 NPV 的结果被高估；反之，则
低估。
¾ ★重点理解：
¾ NPV 方法假设以折现率再投资，IRR 方法假设以 IRR 再投资
¾ NPV 优点：体现 project 的规模；股东利益最大化；收益用 currency amount 的方式表现
出来；NPV 缺点：不反应收益率
¾ IRR 优点：体现收益率；IRR 缺点：由于不正常的现金流分布（比如正负相间的现金流），
会引起没有 IRR 和多个 IRR；
¾ ★NPV profile:
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¾ 请大家熟记这张图里的 IRR，crossover rate, 考试中有可能出现基于这张图的题目。

5‐5 NPV & IRR 理解
Q8‐5 ★Two mutually exclusive projects have conventional cash flows, but one project has a
larger NPV while the other has a higher IRR. Which of the following is least likely
responsible for this conflict?
A. Reinvestment rate assumption
B. Size of the projects' initial investments
C. Risk of the projects as reflected in the required rate of return

Solution: C
Conflicting decision rules based on the NPV and IRR methods are related to the reinvestment
rate assumption, the timing of the cash flows, or the scale of the projects. Differing required
rates of return are not related to conflicting NPV and IRR decisions.

Q9‐5 Erin Chou is reviewing a profitable investment project that has a conventional cash flow
pattern. If the cash flows for the project, initial outlay, and future after‐tax cash flows all
double, Chou would predict that the IRR would
A. increase and the NPV would increase.
B. stay the same and the NPV would increase.
C. stay the same and the NPV would stay the same.

Solution：B.
The IRR would stay the same because both the initial outlay and the after‐tax cash flows double,
so that the return on each dollar invested remains the same. All of the cash flows and their
present values double. The difference between total present value of the future cash flows and
the initial outlay (the NPV) also doubles.

Q10‐5 With regard to net present value (NPV) profiles, the point at which a profile crosses the
horizontal axis is best described as:
A. the point at which two projects have the same NPV.
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B. the sum of the undiscounted cash flows from a project.
C. a project’s internal rate of return when the project’s NPV is equal to zero.

Solution C.
The horizontal axis represents an NPV of zero. By definition, the project’s IRR equals an NW of
zero.
R5‐5 NPV, IRR 掌握两个指标的矛盾及理解：
¾ 理解：十分熟悉 NPV, IRR 的优缺点
¾ NPV Advantage:
9 Size effect
9 Shows the amount of gains as currency amount
9 The NPV of project increases the value of shareholders instead of creditors.
9 Realistic discount rate – opportunity cost of funds
¾ IRR Advantage: Reflect the profitability of the project
¾ IRR Disadvantage
9 Assume the reinvestment rate is IRR
9 No IRR & multiple IRR (unconventional CFs)
R6‐5 ★矛盾：出发点是 IRR 自身存在缺点
¾ 原因：1)different project’s size; 2)different timing of CF; 3)reinvestment rate assumption
different;
¾ 决策：当 IRR 与 NPV 发生矛盾时，managers 选用 NPV
¾ Criteria preference: European countries prefer PB over NPV and IRR; larger public companies
prefer NPV&IRR; managers with higher education level prefer NPV&IRR.
6‐5 Evaluation of a Capital Project 的理解
Q11‐5 Howard Quarries has recently opened a limestone quarry at a location outside their
traditional service area. As limestone is a major ingredient in concrete, if the quarry is
successful, Howard plans to build a ready‐mix concrete plant at the same location. The
investment in the concrete plant is best described as:
A. an externality
B. project sequencing
C. an example of investment synergy
Solution: B
Project sequencing occurs when the investment in one project creates the option to invest in
future projects.
R7‐5 ★Evaluation of a Capital Project 掌握一些概念的解释：
¾ Independent Projects：Accepting or rejecting one project does not affect the decision of
other projects.独立项目未必互斥
¾ Mutually Exclusive: Only one of several potential projects can be chosen.互斥项目一定
不独立
¾ Project Sequencing: Some projects must be undertaken in a certain order, so that
investing in a project today creates the opportunity to invest in other projects in the
future.
¾ Capital Rationing：Many firms have constraints on the amount of capital they can raise
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7‐5 WACC 计算

Q12‐5 An analyst gathered the following Information about the capital structure and
before‐tax component costs for a company. The company’s marginal tax rate is 40%.
Capital component Book Value (000) Market Value(000) Component cost
Debt $100 $80 8%
Preferred stock $20 $20 10%
Common stock $100 $200 12%
The company’s weighted average cost of capital (WACC) is closest to:
A. 8.55%.
B. 9.95%.
C. 10.00%.

Solution: B
As the target capital weights are not given, you can use market value weights to compute the
WACC. The market value weights for debt, preferred stock and equity are 0.2667, 0.0667, and
0.6667 respectively.
WACC=Wd rd (1 ‐t) + Wp rp + Wce rce
= 0.2667 8%(1 ‐ 0.4) + 0.0667 10% + 0.6667 12% = 9.95%

Q13‐5 An analyst is estimating the cost of capital for her firm. She has estimated the before‐tax
costs of the current sources of capital to be 8% for debt and 9% for equity. If the firm’s
marginal tax rate is 40%, the costs of debt and equity she should use in her calculation
are closest to:
A. 4.8% for debt and 5.4% for equity.
B. 4.8% for debt and 9.0% for equity.
C. 8.0% for debt and 5.4% for equity.

Solution: B
The cost of debt is adjusted to reflect the tax advantages debt possesses: 8.0% x (1 ‐ 0.4) = 4.8%.
Equity does not have a tax advantage. Therefore, the cost of equity is not adjusted for taxes.

Q14‐5 ★Frank Merlo, a researcher analyst, gathered the following data in order to estimate
the cost of capital of a drug company:
Cost of 6‐month T‐bills 2.6%
Cost of 10‐year treasury bonds 4%
Cost of 10‐year corporate bonds 6.8%
Beta 1.6
Market risk premium 7%
Bond risk premium 5.7%
Target D/E ratio 1.7
Marginal tax rate 34%
The company’s cost of capital estimated closest to:
A. 11.85 %.
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B. 10.82 %.
C. 10.36 %.

Solution: B
1.7
wd = = 63%,
1.7 + 1
we = 1- 63% = 37%,
k s = rf + b × rp = 4% + 1.6 × 7% = 15.2%
WACC = wd kd (1- t ) + ws ks = 63% × (6.8 + 5.7)% × (1- 34%) + 37% × 15.2% = 10.82%
★Notes: should use the risk‐free rate with comparable period, that is, the maturity of riskfree
rate equals to the duration of CF.

Q15‐5 Rhonaldinho Inc., a Brasil‐based listed company with great reserve of nickel ores, is
declaring its target capital structure of 40% debt and 60% capital. However, as it has few
financing sources, it is estimating that it cannot maintain this target by taking on more
projects. The actual target structure is as follows:
Carrying value Market value Before‐tax cost
Debt 48 million 78 million 8%
Equity 72 million 52 million 15%
As the company’s tax rate is 40%, the cost of capital of the company is closest to:
A. 10%.
B. 9%.
C. 7%.

Solution: B
You should use the market value of debt and equity to calculate the percentage of debt and
equity in the capital structure. And then use the WACC formula to calculate the WACC.

R8‐5 ★WACC 掌握核心公式计算的要素：
Q16‐5 ★★Fran McClure of Alba Advisers is estimating the cost of capital of Frontier
Corporation as part of her valuation analysis of Frontier. McClure will be using this
estimate, along with projected cash flows from Frontier's new projects, to estimate the
effect of these new projects on the value of Frontier. McClure has gathered the
following information on Frontier Corporation:
Current Forecasted for
Year ($) Next Year ($)
Book value of debt 50 50
Market value of debt 62 63
Book value of shareholders' equity 55 58
Market value of shareholders' equity 210 220

The weights that McClure should apply in estimating Frontier's cost of capital for debt and equity
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are, respectively: （原版书 R37‐9）

A. rug = 0.200; we = 0.800.
B. rut = 0.185; we = 0.815.
C. wd =‐ 0.223; we = 0.777.

C is correct.
wd = $63/($220 + 63) = 0.223
we = $220/($220 + 63) = 0.777

1) 公式：WACC=Wd rd (1 ‐t) + Wp rp + Wce rce
2) 要素一：税盾——Cost of Debt 需要乘以(1 ‐t)
3) 要素二：Weighted
¾ 首选是用公司的 target capital structure；
¾ 再选用 market value（如此题）；
¾ 如果都没有提供，就用公司管理层所提供的公司 optimal capital structure trend
¾ 这些条件都不满足的时候，用同行业的平均 capital structure 作为参考

8‐5 Cost of Debt 计算
Q17‐5 ★Waynesboro Industries is considering issuing a 10‐year, option‐free, semiannual
coupon bond with a 9% coupon rate. The bond is expected to sell at 95% of par value. If
the company’s marginal tax rate is 30%, then the after‐tax cost of debt is closest to:
A. 6.30%.
B. 6.86%.
C. 9.00%.

Solution: B
Using a financial calculator: N = 20, PMT = 45, PV = ‐ 950, FV = 1000; solve for %I/Y= 4.90%. The
annual yield is twice the semiannual yield = 4.90% 2 = 9.80%. The after‐tax cost of debt =
annual yield (1 ‐ t) = 9.80% (1 ‐ 0.30) = 6.86%.

R9‐5 用 YTM 的方式计算 Cost of Debt：
Q18‐5 ★★Dot.Com has determined that it could issue $1,000 face value bonds with an 8
percent coupon paid semi‐annually and a five‐year maturity at $900 per bond. If
Dot.Com's marginal tax rate is 38 percent, its after‐tax cost of debt is closest to: （原版
书R37‐4）
A. 6.2 percent.
B. 6.4 percent.
C. 6.6 percent.

C is correct. FV = $1,000; PMT = $40; N = 10; PV = $900
Solve for i. The six‐month yield, i, is 5.3149% YTM = 5.3149% x 2 = 10.62985%
rd (1 — t) = 10.62985%(1 — 0.38) = 6.5905%

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一般出题的方式给定一个 bond，让考生计算一个 yield。

¾ 注意一：计算 yield 的时候，看清楚题目是如何分期的（一般是半年付息一次）。
¾ 注意二：PV 和 FV（PMT）现金流的方向相反，所以一定有一个在计算器上需要按“‐”键。
¾ 注意三：如果承租人采用融资租赁，那么需要确认一部分负债，也需要考虑在 cost of debt
里面。

9‐5 ★计算 Cost of Equity：
Q19‐5 An analyst gathered the following information about a manufacturing company:
• Expected cash dividends one year from today $6.00
• Expected growth rate 7%
• Common stock (current market price) $72.00
• Company tax rate 34%
The company’s after‐tax cost of retained earnings is closest to:
D
kre = 1 + g
P0
$6.00
= + 0.07 = 15.33%
$72.00

Q20‐5 Which of the following is the least appropriate to discount cash flows of a project?
A. Marginal cost
B. Sunk cost
C. Opportunity cost

Solution: B
Marginal cost and opportunity cost can be used as the discount rate of calculating a project’s
NPV.

Q21‐5 ★★Using the dividend discount model, what is the cost of equity capital for Zeller
Mining if the company will pay a dividend of C$2.30 next year, has a payout ratio of 30
percent, a return on equity (ROE) of 15 percent, and a stock price of C$45? （原版书
R37‐3）
A. 9.61 percent.
B. 10.50 percent.
C. 15.61 percent.

C is correct. First calculate the growth rate using the sustainable growth calculation, and then
calculate the cost of equity using the rearranged dividend discount model:
g = (1 —Dividend payout ratio) (Return on equity) = (1 —0.30) (15%) = 10.5%
re = (D1 / P0) + g = ($2.30 / $45) + 10.50% = 15.61%

Q22‐5 ★★An analyst gathered the following information about a company and the market:

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Current market price per share of common stock 28.00
Most recent dividend per share paid on common stock (D0) $2.00
Expected dividend payout rate 40%
Expected return on equity (ROE) 15%
Beta for the common stock 1.3
Expected rate of return on the market portfolio 13%
Risk‐free rate of return 4%

Using the discounted cash flow (DCF) approach, the cost of retained earnings for the company is
closest to: （原版书 R37‐24）
A. 15.7%.
B. 16.1%.
C. 16.8%.

C is correct. The expected return is the sum of the expected dividend yield plus expected growth.
The expected growth is (1 ‐ 0.4)15% = 9%. The expected dividend yield is 52.18/528 28 =7.8%.
The sum is 16.8%.

Q23‐5 ★★The DuPont system allows us to break down the return on equity into: （原版书
R41‐8）
A. return on assets and the financial leverage ratio.
B. profit margin, the tax retention ratio, and inventory turnover.
C. gross profit margin, total asset turnover, and the debt–to–equity ratio.

A is correct.
⎛ Net income Revenues ⎞ Total asets

Return on equity= ⎜ × ⎟×
⎝ Revenues Total asets ⎠ Shareholders' equity

Total asets
Return on equity=Return on assets ×
Shareholders' equity
R10‐5 ★计算 Cost of Equity：

计算 Cost of Equity 的方法有 3 种，分别是 DDM (GGM）；CAPM 和 Bond yield plus risk premium
1) DDM
¾ 注意一：dividend 在题目中的表述，看清楚是 current (D0)还是 expected (D1)，公式是 kre
= D1/ P0 + g，所以题目表述的是 D0，就需要用 D0(1+g)先算出 D1
¾ 注意二：这个公式有一个假设，即公司有 stable dividend policy，并且 without issuing
additional common stock，这样 g=(1‐D/EPS)ROE
¾ 注意三：D1/ P0 叫做 forward annual dividend yield
2) Bond yield plus risk premium：这个 premium 指的是 cost of equity 与 this company’s cost of
debt 之间的区别
3) 如果有 flotation costs，在计算 NPV 时以 CFA 协会的观点认为应该作为 initial CF，不需
要在分母上进行调整。
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10‐5 Cost of Preferred stock 计算
Q24‐5 ■A company is planning a new issue of $100 par preferred stock with a 12% dividend.
The preferred stock can be sold for $95 per share and the company must pay flotation
costs of 5% of the market price. Assuming a marginal tax rate of 40%, the after‐tax cost
of the preferred stock is closest to:

A. 8.0%.
B. 12.6%.
C. 13.3%.

Solution: B
The component cost of preferred stock is calculated as: (100 × 0.12) / ﹝95 × (0.95)﹞= 0.133 or
13.3%.
Note that preferred stock is not tax advantaged.

R11‐5 ★计算 Cost of Equity：
1) 计算 Cost of preferred stock 比较简单，就等于 D/P
2) ■如果有 flotation costs，就需要在分母 P 上进行衡量，P 需要乘以（1‐flotation costs）;
但是，如果 capital budgeting, Floatation cost should be considered as an initial outpayment
3) preferred stock 没有 tax advantaged.

11‐5 非上市公司 β 的计算（用于 CAPM 模型）
Q25‐5 ■Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA,
an analyst for a pension plan managing a global large‐cap fund internally. Sandell is
concerned about one of the fund’s larger holdings, auto parts manufacturer Kruspa AB
Kruspa currently operates in 80 countries, with the previous year’s global revenues at
€5.6 billion. Recently, Kruspa’s CFO announced plans for expansion into China. Sandell
worries that this expansion will change the company’s risk profile and wonders if he
should recommend a sale of the position. For the new project, D/E=80/20
Additional information:
Equity risk premium, Sweden 4.82%
Risk‐free rate of interest, Sweden 4.25%
Industry debt‐to‐equity ratio 0.3
Market value of Krista’s debt €900 million
Market value of Kruspa’s equity €2.4 billion
Kruspa’s equity beta 1.3
Kruspa’s before‐tax cost of debt 9.25%
China credit A2 country risk premium 1.88%
Corporate tax rate 37.5%
Sandell would like to use the asset beta of Kruspa as a base in his calculations. The China
project’s weighted average cost of capital (WACC) calculated using the equity beta without and
with the country risk premium is, respectively,
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A. 9% and 10%
B. 10% and 9.03%
C. 9.03% and 10.42%

Solution: C
Asset β = Un‐levered β= 1.3/(1+[(1—0.375)(€900/€2400)] = 1.053 for prior to China project.
Projectβ= 1.053 { 1+ [(1 — 0.375) (€80/€20)] = 1.053 {3.5} = 3.686 for China project.
Cost of equity without the country risk premium: re =0.0425 + 3.686 (0.0482) = 22.02%
Cost of equity with the country risk premium: re = 0.0425 + 3.686 (0.0482 + 0.0188) = 28.95%
Weighted average cost of capital without the country risk premium:
WACC = [0.80 (0.0925) (1 — 0.375) + [0.20 (0.2202)] = 0.04625 + 0.04404 = 9.03%
Weighted average cost of capital with the country risk premium:
WACC = [0.80 (0.0925) (1 — 0.375) + [0.20 (0.2895)] = 0.04625 + 0.0579 = 10.42%

Q26‐5 The following information is available for a firm.
Market Risk Premium 7.0%
Risk‐free Rate 2.0%
Comparable Firm Return 10.4%
Comparable Firm Debt‐to‐Equity Ratio 1.0
Comparable Firm Tax Rate 40.0%
The firm’s unlevered beta is closest to:
A. 0.75.
B. 1.05.
C. 1.20.

Solution: A
Find the comparable firm’s beta: (10.4% ‐ 2.0%) ÷ 7.0% = 1.20.
Un‐lever the comparable firm’s beta: βLcomparable ÷ (1 + (1 – tax rate) x debt‐to‐equity
ratio) = 1.20 ÷ (1 + (1 – 40%) x 1.0) =0.75.

Q27‐5 ★★An analyst gathered the following information about the capital markets in the U.S.
and in Paragon, a developing country.

Selected Market Information (%)
Yield on U.S. 10‐year Treasury bond 4.5
Yield on Paragon 10‐year government bond 10.5
Annualized standard deviation of Paragon stock index 35.0
Annualized standard deviation of Paragon dollar
denominated government bond 25.0

Based on the analyst's data, the estimated country equity premium for Paragon is closest to: （原
版书 R37‐27）
A. 4.29%.
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B. 6.00%.
C. 8.40%.

C is correct. The country equity premium can be estimated as the sovereign yield spread times
the volatility of the country's stock market relative to its bond market. Paragon's equity premium
is (10.5% — 4.5%) X (35%/25%) =‐ 6% x 1.4 = 8.40%.

R12‐5 掌握 β 的概念及其计算：
1) project’s β is a measure of its systematic or market risk.
2) For nonpublic company, using pure‐play method to find β.
3) ★步骤
¾ 在行业内找一家与此非上市公司(X)在经营风险上相似的上市公司(Y)，此公司 equity β
已知
¾ 用公式计算出上市公司(Y)的 assetβ, 这是去公司杠杆化的过程。
⎛ ⎞
⎜ 1 ⎟
β asset = β equity ⎜ ⎟
⎜ 1 + (1 − t ) D ⎟
⎜ ⎟
⎝ E⎠
¾ 用计算出上市公司(Y)的 assetβ，用被估值的非上市公司的的资本结构，重新杠杆化 β。
就得到非上市公司的 β。
⎛ D ⎞
β equity = β asset × ⎜1 + (1 − t ) ⎟
⎝ E⎠
¾ 注意以上两个公式的形式是相同的，，只是注意在不同公司的时候，用不同公司的 D/E

ratio；如去杠杆化上市公司(Y)就用 Y 公司的 D/E ratio。
4) 最后通过 CAPM 模型来估算非上市公司的 cost of equity.
5) ★Country risk premium (CRP):
¾ It is used to estimate the cost of equity in developing countries.
¾ k ce = R f + β [E(R MKT ) - R F + CRP]
Annualized standard deviation of equity index of

¾ developing country
CRP = Sovereign yield spread × ( )
Annualized standard deviation of sovereign bond market
in terms of the developed market currency
Sovereign spread= difference between the yields of government bonds in the developing country
and Treasury bonds of similar maturities.
12‐5 MCC 的理解
Q28‐5 ★Which of the following statements regarding the weighted average cost of capital and
the marginal cost of capital is TRUE?

A. The marginal cost of capital is likely to fall as the company raises additional capital due to
economies of scale in financing
B. The breakeven point where a firm runs out of retained earnings and must raise outside
equity capital typically results in a decrease in the marginal cost of capital schedule
C. The optimal capital budget occurs when the weighted average cost of capital is equal to the
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marginal cost of capital

Solution: C
When the WACC is greater (or lower) than the marginal cost of capital, the company should
increase (decrease) the investing capital.

Q29‐5 ★A company’s optimal capital budget is best described as the amount of new capital
required to undertake all projects with an internal rate of return greater than the:
A. Marginal cost of capital.
B. Cost of new debt capital.
C. Weighted average cost of capital.
Solution: A
The optimal capital budget is the amount of new capital required to undertake all investment
projects with an IRR greater than the marginal cost of capital.
R13‐5 MCC，WACC 和 optimal capital structure，optimal capital budgeting：
¾ 首先当公司 R/E 不够用于发展的时候，有两种方式增加 capital，一个是 debt，一个
是 equity。我们都知道发债具有税盾作用，所以公司一开始都采用发债，rd 和 re 都
是增加的，但是由于借债的成本低且有税盾作用，所以 MCC 先下降后上升，下降的
原因是 debt 和 equity 的 trade‐off，也就是 balance。（不是由于 economies of scale）
¾ ★optimal capital structure：首先 WACC 是最小，而且此刻 MCC=WACC，就会达到最
优资本结构
Cost
MCC
WACC
Optimal capital
Structure
New capital raise

Cost
IOS MCC
Optimal capital
Budget
New capital raise

¾ ★IOS 是资金的需求曲线，是企业将所有的投资项目按 IRR 从大向小排，就形成了
需求；而 MCC 是资金的供给曲线，一般来讲，融资越多，成本越高。企业在选择时，
肯定时选 IRR>MCC 的项目，最后当当 MCC 和 investment opportunity schedule 的交
点，就形成了 optimal capital budgeting。

290
Q30‐5 ★An analyst gathered the following information about a company:
Target (optimal)capital structure:
Long‐term debt 50%
Preferred stock 10%
Common equity 40%
After‐tax component costs:
Long‐term debt 6%
Preferred stock 10%
Retained earnings 14%
New common stock 15%
Expected total earnings (net income) for the year in millions $120
Target dividend payout ratio 70%

If the company raises $100 million in new capital, the company’s marginal cost of capital is
closest to:
A. 9.6%
B. 10.0%
C. 14.0%

Solution: B
0.56%+0.110%+0.415%=10%. We should first decide whether or not new issue of common stock
is required when the retention of R/E is less than the common stock computed according to the
target capital structure. If new issue, we use the cost of capital of new issue; if not, we the cost
of capital of Retained earnings.

Q31‐5 ★An analyst gathered the following information about a company:
Target (optimal)capital structure:
Long‐term debt 50%
Preferred stock 10%
Common equity 40%
After‐tax component costs:
Long‐term debt 6%
Preferred stock 10%
Retained earnings 14%
New common stock 15%
Expected total earnings (net income) for the year in millions $120

Target dividend payout ratio 45%

If the company raises $150 million in new capital, the company marginal cost of capital is
closest to:
A. 9.6%
B. 10.0%
C. 14.0%
291

Solution: A
Given the company dividend payout ratio, the amount of the expected addition to retained
earning is $120m×(1‐45%) = $66 million; the amount of new capital that could be raised without
issuing new common stock is $66 / 0.4 = $165 million. But $150 million is less than the break
point for retained earnings, the component cost of equity is the cost of retained earnings.

The marginal cost of capital for the company is 9.6 percent:
(0.5×6%) + (0.1×10%) + (0.4×14%)
Notes: from another point of view, we only have to compare the R/E with new capital from
Equity.

Q32‐5 Freitag Company currently has assets on its balance sheet that are financed with 60%
equity and 40% debt. The company can issue debt at the yield of 8% when the value of
the debt doesn’t exceed 1 million. If larger amounts of debt are issued by the company,
the yield of the debt will be 9%.Calculate the break points for the company.
A. 1 million
B. 1.67 million
C. 2.5 million

Solution: C
When the value of the debt exceeds 1 million, the yield of the bonds issued changed. So the
break point for the company occurs when 40% of the whole capital exceeds 1 million. Break
point = 1million/40% = 2.5million.

R1‐5 MCC 的概念，公式及和 cost 之间的关系：

¾ 概念：MCC is the cost of the last new dollar of capital a firm raises.
¾ Q30 和 Q31 两道题非常相似，但是实际里面的条件改变后，会使得答案完全不同。
¾ 一道题目是公司的 R/E 不足以支持公司投资规模的扩大，所以要 issue common stock；
¾ 但是第二题是说公司的 R/E 可以支持公司投资规模的扩大，所以只需要用 R/E 的 cost
就可以。
amount of capital at which the component's cost of capital changes

¾ Break point =
weight of the component in the capital structure

13‐5 Operating Leverage & Financial Leverage
Q33‐5 Degree of operating leverage is best described as a measure of the sensitivity of:
A. net earnings to changes in sales.
B. fixed operating costs to changes in variable costs.
C. operating earnings to changes in the number of units produced and sold.

292
Solutions: C. The degree of operating leverage is the elasticity of operating earnings with respect
to the number of units produced and sold. As an elasticity, the degree of operating leverage
measures the sensitivity of operating earnings to a change in the number of units produced and
sold.

Q34‐5 ★Consider two companies that operate in the same line of business and have the same
degree of operating leverage: the Basic Company and the Grundlegend Company. The
Basic Company and the Grundlegend Company have, respectively, no debt and 50
percent debt in their capital structure. Which of the following statements is most
accurate? Compared to the Basic Company, the Grundlegend Company has:
A. a lower sensitivity of net income to changes in unit sales.
B. the same sensitivity of operating income to changes in unit sales.
C. the same sensitivity of net income to changes in operating income.

Solutions: B
Grundlegend's degree of operating leverage is the same as Basic Company's, whereas
Grundlegend's degree of total leverage and degree of financial leverage are higher.

14‐5 Breakeven Points
Q35‐5 ★Alavanca is evaluating the risk of two companies in the machinery industry: The
Gearing Company and Hebelkraft, Inc. Alavanca used the latest fiscal year's financial
statements and interviews with managers of the respective companies to gather the
following information:
The Gearing Company Hebelkraft, Inc.
Number of units produced and sold 1 million 1. 5 million
Sales price per unit $200 $200
Variable cost per unit $120 $100
Fixed operating cost $40 million $90 million
Fixed financing expense $20 million $20 million
Based on this information, the breakeven points for The Gearing Company and Hebelkraft, Inc.
are:
A. 0.75 million and 1.1 million units, respectively.
B. 1 million and 1.5 million units, respectively.
C. 1.5 million and 0.75 million units, respectively.

Solutions: A
For The Gearing Company
F + C $40million + $20million
QBE = = = 750,000
P ‐V $200 ‐ $120
ForHebelkraft , Inc.,
F + C $90million + $20million
QBE = = = 1,100,000
P ‐V $200 ‐ $100
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Q36‐5 ★★Myundia Motors now sells 1 million units at Y3,529 per unit. Fixed operating costs
are Y1,290 million and variable operating costs are Y1,500 per unit. If the company pays
Y410 million in interest, the levels of sales at the operating breakeven and breakeven
points are, respectively: （原版书R38‐6）
A. ￥1,500,000,000 and ￥2,257,612,900.
B. ￥2,243,671,760 and ￥2,956,776,737.
C. ￥2,975,148,800 and ￥3,529,000,000.

B is correct
￥1290 million
Operating breakeven units = =635,781.173 units
(￥3， 529-￥1,500)
Operating breakewn sales =￥3，529 × 635,781.173 units=￥2 ,243,671,760

￥1290 million+￥410 million
Total breakeven= = 837,851.1582 units
￥3， 529-￥1,500
Breakeven sales=￥3，529 × 837,851.1582 units=￥2,956,776,737
R2‐5 BusinessRrisk & Financial Risk
¾ Sales risk: uncertainty with respect to the price and quantity of goods and services;
Operating risk is attributed to the use of fixed costs in operations; Financial risk is associated
with the use of debt.
R3‐5 ★Leverage
¾ Leverage is associated with the use of fixed costs.注意：financial expenses 也包括在 fixed
costs 里，要区分 operating 和 financial。
¾ Degree of operating leverage: Δ% EBIT / Δ% units sold
Q( P − V )
DOL =
Q( P − V ) − F
¾ Degree of financial leverage: Δ% net income / Δ% EBIT
Q( P − V ) − F
DFL =
Q( P − V ) − F − C
¾ Degree of total leverage: Δ% net income / Δ% units sold
Q( P − V )
DTL = DOL × DFL =
Q( P − V ) − F − C
R4‐5 ★Breakeven point & Operating breakeven point
¾ Breakeven point: point at which revenue equals costs; Operating breakeven point: point at
which revenue equals operating costs
F +C
QBE = (break‐point)
P −V
F
QOBE = (operating break‐point)
P −V
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15‐5 Cash Dividends & Stock Dividends
Q37‐5 The payment of a 10 percent stock dividend by a company will result in an increase in
that company's:
A. current ratio.
B. financial leverage.
C. contributed capital.

Solutions: C
A stock dividend is accounted for as a transfer of retained earnings to contributed capital.

16‐5 Stock Split
Q38‐5 In a recent presentation, Doug Pearce made two statements about dividends:
Statement 1: "A stock dividend will increase share price, all other things being equal."
Statement 2: "One practical concern with a stock split is that it will reduce the company's
price‐to‐earnings ratio."
Are Pearce's two statements about the effects of the stock dividend and stock split correct?

A. No for both statements.
B. Yes for Statement 1 and no for Statement 2.
C. No for Statement 1 and yes for Statement 2.

Solutions: A. Both statements are incorrect. A stock dividend will decrease the price per share,
all other things being equal. A stock split will reduce the price and earnings per share
proportionately, leaving the price‐to‐earnings ratio the same.

17‐5 Payment Chronology
Q39‐5 ★Mary Young intends to take a position in Megasoft Industries once Megasoft begins
paying dividends. A dividend of C$4 is payable by Megasoft on 2 December The
ex‐dividend date for the dividend is 10 November, and the holder‐of‐record date is 12
November. What is the last possible date for Young to purchase her shares if she wants
to receive the dividend?
A. 9 November.
B. 10 November.
C. 12 November.

Solutions: A
To receive the dividend, one must purchase before the ex‐dividend date.

18‐5 Share Repurchase
Q40‐5 A company has 1 million shares outstanding and earnings are £2 million. The company
decides to use £10 million in idle cash to repurchase shares in the open market. The
company's shares are trading at £50 per share. If the company uses the entire £10
million of idle cash to repurchase shares at the market price, the company's earnings
295
per share will be closest to:
A. £2.00.
B. £2.30.
C. £2.50.

Solutions: C
At the current market price, the company can repurchase 200,000 shares (110 million/150 =
200,000 shares). The company would have 800,000 shares outstanding after the repurchase (1
million shares —200,000 shares = 800,000 shares). EPS before the buyback is £2.00 (12 million/1
million shares = £2.00). Total earnings after the buyback are the same because the company
uses idle (nonearning) cash to purchase the shares, but the number of shares outstanding is
reduced to 800,000. EPS increases to £2.50 (£2 million/800,000 shares = £2.50).

Q41‐5 ★★Crozet Corporation plans to borrow just enough money to repurchase 100,000
shares. The following information relates to the share repurchase:
Shares outstanding before buyback 3.1 million
Earnings per share before buyback $4.00
Share price at time of buyback $50
After‐tax cost of borrowing 6%
Crozet's earnings per share after the buyback will be closest to: （原版书 R39‐11）
A. $4.03.
B. $4.10.
C. $4.23.

A is correct.
Total earnings before buyback: 54.00 X 3,100,000 shares = $12,400,000
Total amount of borrowing: $50 X 100,000 shares = $5,000,000
After‐tax cost of borrowing the amount of funds needed:
$5,000,000 X 0.06 = $300,000
Number of shares outstanding after buyback: 3,100,000 — 100,000 = 3,000,000
EPS after buyback: ($12,400,000 — $300,000)/3,000,000 shares = $4.03
The P/E before the buyback is $50/$4 = 12.5; thus, the E/P is 8 percent. The after‐tax cost of debt
is 6 percent; therefore, EPS will increase.

Q42‐5 ★★An analyst gathered the following information about a company:
Number of shares outstanding 10 million
Earnings per share $2.00
P/E 20
Book value per share $30
If the company repurchases 1 million shares at the prevailing market price, the resulting book
value per share will he closest to: （原版书 R39‐13）
A. 26.
B. 27.
C. 29.
296

C is correct.
The prevailing market price is $2.00(20) =‐ $40.00 per share; thus, the buyback would reduce
equity by S40 million. Book value of equity before the buyback is $300 million. Book value of
equity after the buyback would be $300 million — $40 million = $260 million. The number of
shares outstanding after the buyback would be 9 million. Thus, book value per share after the
buyback would be $260 million/9 million = $28.89.

R5‐5 Cash Dividend
Common Share Cash Dividend

• Dividend Payout Ratio=
Net Income Available to Common Shares
¾ 关于 Stock Dividends，记住重要结论，P/E 不变，market value of shareholders’wealth
不变
¾ Stock Dividends 改变 Equity 的构成关系，Stock Split 不改变 Equity 各部分的值，但等
比例改变每股值。Equity 在两种情况下都不变。
¾ ★Cronology
Declaratio Holder‐of‐ Ex‐Dividen Payment

n Date Record d Date Dte
Date

Ex‐Dividend date is usually one or two business days after Holder‐of‐Record Date.
R6‐5 ★注意 EPS 提高的条件
¾ In external financing, EPS will increase if earnings yield > after‐tax borrowing cost
¾ In internal financing, EPS will increase if there is no project with positive NPV.

19‐5 Money Market Yield 的计算
Q43‐5 The cash manager for Wicker Enterprises is investigating the purchase of a banker’s
acceptance (BA). The $1,000,000 face value BA has 150 days to maturity and is quoted
at 4.05% on a discount‐basis yield. If Wicker’s marginal tax rate is 25%, then the money
market yield on the BA is closest to:
A. 3.09%.
B. 3.13%.
C. 4.12%.

Solution: C
Discount‐Basis Yield=(F‐P)/F (360/t), and we known F and t, so we can calculate the purchase
price.
Purchase price = face value ‐ [face value discount‐basis yield (days to maturity / 360)]
= $1,000,000 ‐ [$1,000,000 0.0405 (150 / 360)] = $983,125
Money market yield =(F‐P)/P (360/t)= 4.12%

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R7‐5 Money market yield 及 Discount basis yield，Bond equivalent yield 掌握公式：

F - P 360
discount basis yield = ( )( )
F t
F ‐ P 360 360 F - P 365 365
Rmm = ( )( ) = HPR × ( ) BEY = ( )( ) = HPR × ( )
P t t P t t
R8‐5 ★补充：如何知道短期是 cash surplus，可以投资还是 shortage the cash，需要融资，
那就要做现金流的管理和预测。
Short‐term Medium‐term Long‐term
Data frequency Daily/weekly for 4‐6 Montyly for one year Annually for 3‐5years
weeks
Format Receipt and Receipts and Projected financial
disbursements disbursements statements
Techniques Simple projections Projection models Statistical models
and averages
Accuracy Very high Moderate Lowest
Reliability Very high Fairly high Not as high
Uses Daily cash Planning financial Long‐range financial

management transactions position
20‐5 Trade Discounts
Q44‐5 ★A company is offered trade credit terms of 2/10, net 45. The implicit cost of failing to
take the discount and instead paying the account in 45 days is closest to:
A. 21.28%.
B. 23.10%.
C. 23.45%.
Solution: C
The cost of trade credit if paid on day = (1 + 2 / 98) -1 = 23.45%.

365/ 35

Q45‐5 ★★A company increasing its credit terms for customers from 1/10, net 30 to 1/10, net
60 will most likely experience: （原版书R40‐5）
A. an increase in cash on hand.
B. a higher level of uncollectible accounts.
C. an increase in the average collection period.
C is correct. A higher level of uncollectible accounts may occur, but a longer average collection
period will certainly occur.

R9‐5 Trade discounts cost 计算：
实际上表现的 Effective annualized return 的概念。比如：2/20 net 60，在第二十天时候的成本
是多少？
365
40
⎛ 2% ⎞ 40
0.98 × (1 + EAR) 365
= 1 ⎜1 + ⎟ -1 = EAR
⎝ 1- 2% ⎠

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21‐5 Computing the Effective Costs of ST Borrowing
Q46‐5 ★You are asked to select one of the following choices as the best offer for borrowing
$5,000,000 for one month:
¾ Drawing down on a line of credit at 6.5 percent with a 1/2 percent commitment fee on the
full amount. Notes: One‐twelfth of the cost of the commitment fee (which gives an option to
borrow any time during the year) is allocated to the first month.
¾ A banker’s acceptance at 6.75 percent, an all‐inclusive rate.（注：是折扣率）
¾ Commercial paper at 6.15% （注：这是折扣率）with a dealer’s commission of 1/8 percent
and a backup line cost of 1/4 percent, both of which would be assessed on the $5 million of
commercial paper issued.（后两个费用的收取是根据最后的面值来确定）

Solution:
Line of credit cost：
int erest + commitment fee
Line cos t = × 12
usable loan amount
(0.065 × $5, 000, 000 ×1/12) + (0.005 × $5, 000, 000 × 1/12)
= ×12 = 0.07
$5, 000, 000

Banker’s acceptance cost:
int erest
BA cos t = × 12
net proceeds
0.0675 × $5, 000, 000 × 1/12
= × 12 = 0.0679
$5, 000, 000 - (0.0675 × $5, 000, 000 × 1/12)

Commercial paper cost (quoted as nominal rate at a discount):
int erest + dealer ' s commissions + back - up cos ts
CP cos t = × 12
net proceeds
(0.0615 × $5, 000, 000 × 1/12) + ((1/ 8)% × $5, 000, 000 × 1/12) + ((1/ 4)% × $5, 000, 000 × 1/12)
= × 12
$5, 000, 000 - (0.0615 × $5, 000, 000 × 1/ 12)
= 0.0656

公式是这样的：
¾ 如果是 line of credit，这个成本就是
int erest + commitment fee
Cost = × 12
loan amount
¾ 如果是 banker’s acceptance，这个成本就是
int erest
Cost = × 12
net proceeds
¾ 如果 commercial paper 有 dealer’s fee 和有 backup fee，这个成本就是
int erest + dealer ' s commissions + back - up cos ts
Cost = × 12
Loan amount - int erest

其中 total amount of loan you received 叫做 net proceeds
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注：所有的计算方法中，分子上是费用（利息费用，交易费用，Back‐up 费用），分母是融
资总金额（借到钱）。这个内容在 2010 年 12 月考试中出现过，请大家注意。

Q47‐5 PAC Inc., an automobile manufacturer, is planning to be financed by 1 million euro for 1
year. A consultant recommended the following three means of short‐term financing:
‐ A credit line with an interest rate of 3% and a commitment fee of a quarter percent
‐ A banker’s acceptance with an interest rate of 3.25% all inclusive
‐ Commercial paper with an interest rate of 3% and a dealer’s commission of 1/4 percent
Which of the means will the company choose because of the low cost?
A. Credit line
B. Banker’s acceptance
C. Commercial paper

Solution: A
Cost of credit line = (Interest + Commitment fee) / Principal = (3 + 0.25)% 1000000 / 1000000 =
3.25%
Cost of bankers acceptance
= Discount / (Princiapal ‐ Discount) = 3.25% 1000000 / (1000000 ‐ 3.25% 1000000) = 3.3592%
Cost of commercial paper = (Interest + Commission fees) / (Principal‐Interest) = (3 + 0.25)%
1000000 / (1000000 ‐3% 1000000) = 3.35%

Q48‐5 Based on a need to borrow $2 million for one month, which of the following alternatives
has the least expensive effective annual cost?
A. A banker's acceptance with an all‐inclusive annual rate of 6.1%
B. A credit line at 6.0% annually with a 0.5% annual commitment fee
C. Commercial paper at 5.9% annually with a dealer's commission of $3,000 (or 0.15%) and a
backup line cost of $4,000 (or 0.20%)

Solution: A
BA: [(16.1% /12) /(1‐6.1%/12)]12=6.1312%
Credit Line: 6.5%
CP: (5.9% /12+0.15% /12+0.2% /12) /(1‐5.9%/12)]12=6.3102%

22‐5 Short‐term Investment Strategies
Q49‐5 As part of working capital management, the short‐term investment strategy that has the
highest degree of risk for an entity and requires very accurate and reliable forecasts of
cash flows is:
A. a matching strategy.
B. a laddering strategy.
C. a mismatching strategy.

Solution: C
A mismatching strategy is the riskiest strategy and requires accurate and reliable cash forecasts.
A matching strategy is the more conservative active strategy (in comparison to a mismatching
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strategy). A laddering strategy falls somewhere between a matching strategy and a passive
strategy.

Q50‐5 ★Other factors held constant, the reduction of a company’s average accounts payables
due to suppliers offering less trade credit will most likely:
A. reduce the operating cycle.
B. increase the operating cycle.
C. not affect the operating cycle.

Solution: C
Payables are not part of the operating cycle calculation. Operating cash cycle includes inventory
and accounts receivable.

Q51‐5 ★★Given the following financial statement data, calculate the net operating cycle for
this company.
In Millions ($)
Credit sales 40,000
Cost of goods sold 30,000
Accounts receivable 3,000
Inventory–Beginning balance 1,500
Inventory–Ending balance 2,000
Accounts payable 4,000
The net operating cycle of this company is closest to: （原版书 R40‐3）
A. 3.8 days.
B. 24.3 days.
C. 51.7 days.

A is correct. Number of days of inventory = $2,000/ ($30,000/365) = 24.333 days
Number of days of receivables = $3,000/(S40,000/365) = 27.375 days
Operating cycle = 24.333 + 27.375 days = 51.708 days
Purchases = $30,000 + $2,000–$1,500 = $30,500
Number of days of payables = $4,000/ ($30,500/365) = 47.869 days
The net operating cycle is 51.708–47.869 = 3.839 days

Q52‐5 ★★William Jones is evaluating three possible means of borrowing $1 million for one
month:
▶ Drawing down on a line of credit at 7.2 percent with a 1/2 percent commitment fee on the full
amount with no compensating balances.
▶ A banker's acceptance at 7.1 percent, an all–inclusive rate.
▶ Commercial paper at 6.9 percent with a dealer's commission of 1/4 percent and a backup line
cost of 1/3 percent, both of which would be assessed on the $1 million of commercial paper
issued.
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Which of these forms of borrowing results in the lowest cost of credit? （原版书 R40‐7）

A. Line of credit.
B. Banker's acceptance.
C. Commercial paper.

B is correct.
Interest + Commitment fee
Line cost= ×12
Net Proceeds
(0.072 × $1,000,000 × 1/12) + (0.005 × $1,000,000 × 1/12)
= × 12
$1, 000, 000

$6, 000 + 416.67
= × 12=0.077
$1,000,000
Interest
Banker's acceptance cost= × 12
Net proceeds
0.071× $1,000,000 × 1/12
= ×12
$1,000,000-(0.071× $1,000,000 × 1/12)
$5,916, 67
= × 12 = 0.0714
$994, 083.33
R10‐5 了解 Working Capital 的管理采用哪个策略比较保守，哪个策略比较激进

¾ ★Passive strategy is characterized by one or two decision rule for making daily
investment; place top priority on safety and liquidity; less aggresive
¾ Active strategy:
¾ matching: more conservative than mismatching strategy; 常常和 passive strategy
一起使用
¾ mismatching: riskier than matching strategy
¾ laddering strategies: entails scheduling maturities on a systematic basis within the
investment portfolio such that investments are spread out equally over the term of
the ladder; 介于 matching strategy 和 passive strategy 之间
¾ Short‐term IPS: 投资品种一般包含信用等级比较高的或者是国债

23‐5 Pro‐Forma Financial Statement
Q53‐5 ★Assume U.S. GAAP applies unless otherwise noted.
Km Lee, CFA, is trying to forecast net income for Robinson’s Ltd, a chain of retail furniture
outlets. He has prepared the following common sized data from their recent annual report and
has estimated sales for 2008 using a forecasting model his firm developed for consumer goods.
2008 forecast 2007 actual 2006 actual
Sales $ millions 2,250 2,150.1 1,990.1
Sales as % of sales 100.00% 100.00%
Cost of goods sold 45.00% 45.00%
Operating expenses 40.00% 40.00%
Interest expense 3.72% 4.02%
Restructuring expense 0% 7.2%
Pre‐tax margin 11.28% 3.78%
Taxes (35%) 3.95% 1.32%
Net income 7.33% 2.46%
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The capital structure of the company has not changed. The projected net income (In
$ millions) for 2008 is closest to:
A. 162.8.
B. 164.9.
C. 167.4.

Solution: C
The cost of goods sold and operating expenses are relatively constant over the two‐year period
and averages of them can reasonably be used to forecast 2008. Interest expense is declining as a
percent of sales, implying it is a fixed cost. Conversion into dollars for each year shows what
interest expense has been (2007 = $80; 2006 = $80) and that would be a reasonable projected
amount to use. The restructuring charge should not be included as it is a non‐recurring item. The
tax rate, 35%, is given.

Sales $2,250.00
COGS (45%) ‐1,012.50
Operating expenses (40%) ‐900.00
Interest expense 80.00
Pretax margin $257.50
Tax (35%) ‐90.10
Net income $167.40

Q54‐5 ★★Which item is most likely to be evaluated as a percentage of debt within a
sales–driven pro forma analysis? （原版书R41‐3）
A. Interest expense.
B. Current liabilities.
C. Cost of goods sold.

A is correct. Interest expense is most frequently forecasted as a percentage of long–term debt
when constructing a pro forma income statement since the amount of interest expense is a
function of the amount of debt and the interest rate on such debt.

R11‐5 Pro‐Forma Financial Statement 掌握基本概念掌握：
1) 概念：一切 pro‐forma financial statement 的思路都是从 sales 出发
2) sales driven：一般问哪些不是 sales driven 的项目，不是 sales driven 的项目一般有 int.
exp
3) ★得到 pro‐forma financial statement 的步骤
¾ Estimate the relation between changes in sales and the changes in sales‐driven income
statement and balance sheet items → Sales growth rate(一般根据 10 年的历史数据进行回
归)
¾ Estimate the future tax rate, interest rates on debt (not sales‐driven), lease payments, etc.
¾ Forecast sales for the period of interest.
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¾ Estimate fixed operating costs and fixed financial costs.
¾ Integrate these estimates into pro forma financial statements for the period of interest.
4) 将来可能会根据情况做一些调整，如果调整 debt，那么随之 int. exp, tax, NI, equity 都会
有调整，并且 int. exp 是按照 total debt 的比例进行调整的。
5) Surplus:
¾ the difference between the projected growth in assets and the projected growth in
liabilities and stockholder's equity.
¾ Can be assume to be used pay down long‐term debt or proportionally reduce both common
stock and long‐term debt.

24‐5 Corporate Governance
Q55‐5 An investment fund, AFC Investments (AFC), owns 8% of the outstanding voting shares
of a public company. There are several larger voting blocks of shares such that AFC is
not assured of being able to elect representation on the Board of directors. The
shareholder voting right that would be most beneficial in allowing AFC to ensure their
interests are represented on the Board is:
A. Proxy voting.
B. Cumulative voting.
C. Confidential voting.

Solution: B
Cumulative voting allows shareholders to cast the cumulative number of votes allotted to their
shares for one or a limited number of Board nominees, thus increasing the likelihood that their
interests are represented on the Board.

Q56‐5 ★ Which of the following conditions represents the best practice of corporate
governance?
A. The company prevents shareholder to trade the company’s shares prior to the annual
meetings.
B. The company requires shareholders’ attendance to cast votes.
C. The company permits confidential and cumulative voting.

Solution: C
Requirement of shareholders’ attendance to cast votes is a mechanism to prevent proxy voting.
Prevention of proxy will weaken shareholder’s rights. Preventions of shareholders to trade the
company’s shares prior to the annual meetings, is called share blocking, which can also weaken
shareholder’s rights.

Q57‐5 Which of the standard of behaviors is least likely to represent shareholder’s interest?
A. All board members serving on the audit committee are independent from management.
B. The conflicts between the external auditor and the firm should be resolved in a manner to
favor the internal management efficiency.
C. The audit committee has authority to reject any proposed non‐audit engagement with the
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external audit firm.

Solution: B
The conflicts between the external auditor and the firm should be resolved in a manner to favor
the shareholders’ interest.

Q58‐5 ■Cummulative voting is best described as:
A. a mechanism for suppressing hostile takeovers.
B. a means of offsetting the negative consequences of super‐voting rights shares.
C. enhancing the likelihood that shareowners' interests are represented on the Board.

Solution: C.
Cumulative voting enhances the likelihood that shareowner interests are represented on the
Board.

Q59‐5 Regarding corporate governance, which of the following most likely would be a reason
for concern when evaluating a board member's qualifications? The board member:
A. has served on the board for 14 years.
B. is a college professor and a certified public accountant.
C. has formerly served on the boards of several successful companies.

Solution: A
Members who serve on the board for a long time (more than ten years) may become too closely
aligned with management to be considered independent.

Q60‐5 Which of the following is least likely classified as a takeover defense?
A. Greenmail
B. Cumulative voting
C. Golden parachutes

Solution: B
The ability to use cumulative voting enables shareowners to vote in a manner that enhances the
likelihood that their interests are represented on the board. It is a valuable shareowner right.
R12‐5 Corporate Governance 掌握概念：
¾ 如何定义有效的 board：独立董事独立，独立董事懂事（最主要明白独立的概念）
¾ 3 个委员会分别的责任
¾ 审计委员会特别注意：与内审部门要无缝沟通
¾ 薪酬委员会不要忘记除了正常的薪酬之外，还考虑 stock compensation
¾ 提名委员会除了提名以外，还对 board 和 management 的 performance 定期评估
¾ 了解 frequency of board elections: annual elections & staggered multiple‐year terms 的特
点
¾ board ‐‐‐ independence
¾ A majority of the board of directors is comprised of independent members;
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¾ The board meets regularly outside the presence of management;
¾ Board members are not closely aligned with a firm supplier, customer, share‐option plan
or pension adviser;
¾ board ‐‐‐ qualification
¾ Regularly attend meetings;
¾ Are committed to shareholders;
¾ Have other board experience;
¾ Have served on board for more than 10 years;
¾ Voting rules
¾ Confidential Voting：保密，can encourage unbiased voting
¾ Cumulative Voting:是一个好的公司治理
¾ Voting for other corporate Changes: 公司发生重大事件后，shareholders 需要进行投票
¾ Vote blocking：to prevents investors who wish to vote their shares from trading their
shares during prior to the annual meeting
R13‐5 Notes：
¾ 一般题目是给定场景，让考生分析，不会纯考概念。类似于 ethics
¾ 注意几个关键词：independence，experience，compensation，resources（有几个专业的
committee）external consultants。
¾ Corporate governance 部分内容繁琐，但是必考，要认真看。
Takeover Defenses: include golden parachutes ( rich severance packages for top mangers who
lose their jobs as a result of a takeover), poison pills (对现有股东低价发行股票，稀释恶意收
购）， and greenmail（允许被收购公司过一定时间高价买回股票）

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6‐Equity
1‐6 Function of financial system
Q1‐6 ★Which of the following is not a function of the financial system?
A. To regulate arbitrageurs' profits (excess returns).
B. To help the economy achieve allocational efficiency.
C. Value‐weighted Index

Solution: A
Regulation of arbitrageurs' profits is not a function of the financial system. The financial system
facilitates the allocation of capital to the best uses and the purposes for which people use the
financial system, including borrowing money.

R1‐6 ★金融市场的三种主要功能：
9 Fulfill different entities’ requirements
9 Determine interest rates
9 Allocate capital to its most efficient uses
R2‐6 ★Achievement of Purposes in the Financial System
9 Saving
9 Borrowing
9 Issuing equity
9 Risk management
9 Exchanging assets
9 Utilizing information

2‐6 Information‐motivated trader
Q2‐6 ★Akihiko Takabe has designed a sophisticated forecasting model, which predicts the
movements in the overall stock market, in the hope of earning a return in excess of a fair
return for the risk involved. He uses the predictions of the model to decide whether to
buy, hold, or sell the shares of an index fund that aims to replicate the movements of
the stock market. Takabe would best be characterized as a(n):
A. hedger.
B. investor.
C. information‐motivated trader.

Solution: C
Takabe is best characterized as an information‐motivated trader. Takabe believes that his model
provides him superior information about the movements in the stock market and his motive for
trading is to profit from this information.

Q3‐6 The main risk faced by an individual who enters into a forward contract to buy the S&P
500 Index is that:
A. the market may rise.
B. the market may fall.
307
C. market volatility may rise.

Solutions: B
If the market falls, the buyer of a forward contract could pay more for the index, as determined
by the price that was contracted for at the inception of the contract, than the index is worth
when the contract matures

R3‐6 Terminology of market
¾ Classification of financial assets
9 Financial assets
9 Real assets
9 Equity: public securities & private securities.
9 Derivative contracts
¾ Money markets: markets for debt securities with maturities of one year or less.
¾ Capital markets: markets for long‐term debt securities and equity securities without specific
maturity date.
¾ Broker: help their clients buy and sell securities by finding counterparties to trades in a cost
efficient manner.
¾ Investment banks: help corporations sell securities to investors.
¾ ★Exchanges: provide a venue where trades can meet and sometimes act as brokers by
providing electronic order matching.
¾ Alternative trading systems: serve the same trading function as exchanges but have no
regulatory function.
¾ ★Information‐motivated traders：
9 Those trade to profit from using the information from model

3‐6 Classification of assets and markets
Q4‐6 An investor primarily invests in stocks of publicly traded companies. The investor wants
to increase the diversification of his portfolio. A friend has recommended investing in
real estate properties. The purchase of real estate would best be characterized as a
transaction in the:
A. derivative investment market.
B. traditional investment market.
C. alternative investment market.

Solution: C
The purchase of real estate properties is a transaction in the alternative investment market.

R4‐6 Classification of assets and markets
¾ Financial Assets ：
9 Security: Debt securities,equity securities , public securities, private securities
9 Derivative contracts：Finance derivative contracts, physical derivative contracts
9 Currency
308
¾ Real Assets :
9 Commodity
9 Real Estate
R5‐6 Securities
¾ Fixed income securities: typically refer to debt securities that are promises to repay
borrowed money in the future.
¾ ★Equity securities
9 Common stock
9 Preferred stock
9 Warrants
¾ ★Pooled investment vehicles
9 Mutual funds: can purchase shares, either from the fund or in the secondary
market.
9 Exchange‐traded funds and exchange‐traded notes:
9 Asset‐backed securities
9 Hedge fund: organized as limited partnership, often use leverage
R6‐6 ★Real assets
¾ Are real estate, equipment, and machinery.
¾ Often provides income, tax advantages, and diversification benefits. However, they often
entail substantial management costs, they usually require the investor to do substantial due
diligence before investing. They are illiquid because their specialization may result in a
limited pool of investors for a particular real asset.
¾ Rather than buying real assets directly, an investor may choose to buy them indirectly
through an investment such as a real estate investment trust (REIT) or master limited
partnership (MLP).

Q5‐6 Jason Schmidt works for a hedge fund and he specializes in finding profit opportunities
that are the result of inefficiencies in the market for convertible bonds—bonds that can
be converted into a predetermined amount of a company's common stock. Schmidt tries
to find convertibles that are priced inefficiently relative to the underlying stock. The
trading strategy involves the simultaneous purchase of the convertible bond and the
short sale of the underlying common stock. The above process could best be described
as:
A. hedging.
B. arbitrage.
C. securitization.

Solution: B
The process can best be described as arbitrage because it involves buying and selling instruments,
whose values are closely related, at different prices in different markets.

Q6‐6 ★Which of the following is not a function of the financial system?
A. To regulate arbitrageurs' profits (excess returns).
309
B. To help the economy achieve allocational efficiency.
C. To facilitate borrowing by businesses to fund current operations.

Solution: A
Regulation of arbitrageurs' profits is not a function of the financial system. The financial system
facilitates the allocation of capital to the best uses and the purposes for which people use the
financial system, including borrowing money.
R7‐6 ★Brokers and Dealers
¾ Brokers: Help their clients buy and sell securities by finding counterparties to trade in a cost
efficient manner.
¾ Dealers: Facilitate trading by buying for or selling from their own inventory. Dealers provide
liquidity in the market and profit primarily from the spread (difference) between the price at
which they will buy (bid price) and the price at which they will sell (ask price) the security or
other asset.
R8‐6 Securitizers
¾ Pool large amounts of securities or other assets and then sell interests in the pool to other
investors.
¾ A firm may set up a special purpose vehicle (SPV) or special purpose entity (SPE) to buy firm
assets, which removes them from the firm's balance sheet and may increase their value by
removing the risk that financial trouble at the firm will give other investors a claim to the
assets' cash flows.
R9‐6 ★Arbitrageurs
¾ In its pure (riskless) form, arbitrage refers to buying an asset in one market and reselling it in
another at a higher price.
¾ In markets with good information, pure arbitrage is rare because traders will favor the
markets with the best prices.
¾ Creating similar positions using different assets is referred to as replication.
¾ Hedgers: use short position in one asset to hedge an existing risk from a long position in
another asset that has returns that are strongly correlated with the returns of the asset
shorted.
R10‐6 ★Clearinghouses and Custodians
¾ Clearinghouses act as intermediaries between buyers and sellers in financial markets and
provide:
• Escrow services (transferring cash and assets to the respective parties).
• Guarantees of contract completion.
• Assurance that margin traders have adequate capital.
• Limits on the aggregate net order quantity (buy orders minus sell orders) of members.

Q7‐6 ★A market has the following limit orders standing on its book for a particular stock:

310
Bid Size Limit Price Offer Size Limit Price

Buyer Seller
(# of shares) ($) (# of shares) ($)
1 500 18.50 1 200 20.20
2 300 18.90 2 300 20.35
3 400 19.20 3 400 20.50
4 200 20.10 4 100 20.65
5 100 20.15 5 200 20.70
If a trader submits an immediate‐or‐cancel limit buy order for 700 shares at a price of
$20.50, the most likely average price the trader would pay is:
A. $20.35.
B. $20.50.
C. $20.58.

Solution: A
The limit buy order will be filled first with the most aggressively priced limit sell order and will
be followed by filling with the higher priced limit sell orders that are needed up to and
including the limit buy price until the order is filled.
Average price = [(200 x $20.20) + (300 x $20.35) + (200 x $20.50)] / 700 = $20.35

Q8‐6 ★Caroline Rogers believes the price of Gamma Corp. stock will go down in the near
future. She has decided to sell short 200 shares of Gamma Corp. at the current market
price of €47. The initial margin requirement is 40%. Which of the following is an
appropriate statement regarding the margin requirement that Rogers is subject to on
this short sale?
A. She will need to contribute €3,760 as margin.
B. She will need to contribute €5,640 as margin.
C. She will only need to leave the proceeds from the short sale as deposit and does not need
to contribute any additional funds.

Solution: C

Q9‐6 ★ You have placed a sell market‐on‐open order—a market order that would
automatically be submitted at the market's open tomorrow and would fill at the market
price. Your instruction, to sell the shares at the market open, is a(n):
A. execution instruction.
B. validity instruction.
C. clearing instruction.
Solution: B
An instruction regarding when to fill an order is considered a validity instruction.

Q10‐6 ★A market has the following limit orders standing on its book for a particular stock. The
bid and ask sizes are number of shares in hundreds.

311
Bid Size Limit Price (€) Offer Size

5 9.73
12 9.81
4 9.84
6 9.95
10.02 5
10.10 12
10.14 8
What is the market?
A. 9.73 bid, offered at 10.14.
B. 9.81 bid, offered at 10.10.
C. 9.95 bid, offered at 10.02.

Solution: C
Simply find the information in the panel.

Q11‐6 A hedge fund holds its excess cash in 90‐day commercial paper and negotiable
certificates of deposit. The cash management policy of the hedge fund is best described
as using:
A. capital market instruments.
B. money market instruments.
C. intermediate‐term debt instruments.

Solution: B
The 90‐day commercial paper and negotiable certificates of deposit are money market
instruments.

Q12‐6 ★★An online brokerage firm has set the minimum margin requirement at 55 percent.
What is the maximum leverage ratio associated with a position financed by this
minimum margin requirement? （原版书 R47‐19）
A. 1.55.
B. 1.82.
C. 2.22.

B is correct.
The maximum leverage ratio is 1.82 = 100% position + 55% equity. The maximum leverage ratio
associated with a position financed by the minimum margin requirement is one divided by the
minimum margin requirement.

Q13‐6 ★★A trader has purchased 200 shares of a non‐dividend‐paying firm on margin at a
price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these
shares at $60 per share. Ignoring the interest paid on the borrowed amount and the
transaction costs, what was the return to the trader during the six‐month period? （原
版书 R47‐20）
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A. 20 percent.
B. 33.33 percent.
C. 50 percent.

C is correct.
The return is 50 percent. If the position had been unleveraged, the return would be 20% = (60 —
50)/50. Because of leverage, the return is 50% = 2.5 X 20%.
Another way to look at this problem is that the equity contributed by the trader (the minimum
margin requirement) is 40% = 100% ± 2.5. The trader contributed $20 = 40% of $50 per share.
The gain is $10 per share, resulting in a return of 50% =10/20.

Q14‐6 ★★Jim White has sold short 100 shares of Super Stores at a price of $42 per share. He
has also simultaneously placed a "good‐till‐cancelled, stop 50, limit 55 buy" order.
Assume that if the stop condition specified by White is satisfied and the order becomes
valid, it will get executed. Excluding transaction costs, what is the maximum possible loss
that White can have? （原版书 R47‐28）
A. $800.
B. $1,300.
C. Unlimited.

B is correct. The maximum possible loss is $1,300. If the stock price crosses $50, the stop buy
order will become valid and will get executed at a maximum limit price of $55. The maximum
loss per share is $13 = $55 — $42, or $1,300 for 100 shares.

Q15‐6 ★★You own shares of a company that are currently trading at $30 a share. Your
technical analysis of the shares indicates a support level of $27.50. That is, if the price of
the shares is going down, it is more likely to stay above this level rather than fall below it.
If the price does fall below this level, however, you believe that the price may continue
to decline. You have no immediate intent to sell the shares but are concerned about the
possibility of a huge loss if the share price declines below the support level. Which of
the following types of orders could von place to most appropriately address your
concern? （原版书 R47‐29）
A. Short sell order.
B. Good‐till‐cancelled stop sell order.
C. Good‐till‐cancelled stop buy order.

B is correct.
The most appropriate order is a good‐till‐cancelled stop sell order. This order will be acted on if
the stock price declines below a specified price (in this case, $27.50). This order is sometimes
referred to as a good‐till‐cancelled stop loss sell order. You are generally bullish about the stock,
as indicated by no immediate intent to sell, and would expect a loss on short selling the stock. A
stop buy order is placed to buy a stock when the stock is going up.

Q16‐6 A trader buys 500 shares of a stock on margin at $36 a share using an initial leverage
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ratio of 1.66. The maintenance margin requirement the position is 30%. The stock price
at which the margin call occurs is closest to:
A. $20.57.
B. $25.20.
C. $30.86.

Correct answer A
Initial equity (%) in the margin transaction = 1/ Leverage ratio = 1 / 1.66 = 0.60;
Initial equity per share at the time of purchase = $36×0.60 = $21.60;
Price at which margin call occurs. Equity per share / Price per share = Maintenance margin %
= ($21.60 + P ‐ $36) / P = 0.30; 0.7P = $14.40; P = $20.57.
R11‐6 ★Leveraged Positions
¾ The use of borrowed funds to purchase an asset results in a leveraged position and the
investor is said to be using leverage.
¾ The interest rate paid on the funds is the call money rate, which is generally higher than the
government bill rate. The call money rate is lower for larger investors with better collateral.
¾ Lower risk in an investor's portfolio will often result in the broker lending more funds.
¾ The additional risk from the use of borrowed funds is referred to as risk from financial
leverage.
¾ Initial margin: the percentage of funds that is required by regulations to be provide in the
trade.
¾ Maintenance margin: the investor's required minimum equity position in the account, below
which the investor will be required to liquidate the position or bring the account back to its
maintenance margin.(注意，期货要求注入至 initial margin）
R12‐6 The leverage ratio: The value of the asset divided by the value of rite equity position.
R13‐6 ★Bid‐ask price
¾ The bid price is the price at which a dealer will buy a security. The highest price is the best.
The ask or offer price is the price at which a dealer will sell a security. The lowest price is the
best.
¾ The difference between the bid and ask prices is referred to as the bid‐ask spread and is the
source of a dealer's compensation.
¾ More liquid securities have market quotations with bid‐ask spreads that are lower
R14‐6 Take the market and make the market：
¾ Traders who post bids and offers are said to make a market, while those who trade with
them at posted prices are said to take the market.
R15‐6 ★Three kinds of orders
¾ Execution instructions that specify how to trade
¾ Validity instructions that specify when the order can be filled,
¾ Clearing instructions that specify how to settle the trade.
R16‐6 ★Execution Instructions
¾ A market order instructs the broker to execute the trade immediately at the best possible
price.
¾ A limit order places a minimum execution price on sell orders and a maximum execution
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price on buy orders.
¾ A limit buy order above the best ask, or a limit sell order below the best bid, is said to be
marketable or aggressively priced. If the limit price is between the best bid and the best ask,
a limit order is said to be making a new market or inside the market. Limit orders waiting to
execute are called standing limit orders.
¾ A buy order with a limit price below the best bid, or a sell order with a limit price above the
best ask, is said to be behind the market.
¾ A limit buy order with a price considerably lower than the best bid, or a limit sell order with
a price significantly higher than the best ask, is said to be far from the market.
¾ All‐or‐nothing orders execute only if the whole order can be filled.
¾ Hidden orders are those for which only the broker or exchange knows the trade size. Traders
can also specify display size, where some of the trade is visible to the market, but the rest is
not. These are also referred to as iceberg orders because part of most of the order is hidden
from view.
R17‐6 ★Validity Instructions
¾ Immediate or cancel orders are cancelled unless they can be filled immediately. They are
also known as fill or kill orders. Good‐on‐close orders are only filled at the end of the trading
day. If they are market orders, they are referred to as market‐on‐close orders. These are
often used by mutual funds because their portfolios are valued using closing prices. There
are also good‐on‐open orders.
R18‐6 Stop orders
¾ Stop orders are those that are not executed unless the stop price has been met.
¾ ★A stop‐buy is entered with at stop (trigger) above the current market price.
9 A trader with a short position could attempt to limit losses from an increasing
stock price with a stop‐buy order.
9 It is often said that "you don't get paid for being right until the market agrees with
you." With this in mind, an investor who believes a stock is undervalued, but does
not wish to own it until there are signs that market participants are being
convinced.
9 Note that stop orders reinforce market momentum.
R19‐6 ★Clearing instructions
¾ Retail trades are typically cleared and settled by the broker, whereas institutional trades may
be settled by a custodian or another broker.
¾ In a short sale, the broker must confirm that the security can be borrowed and in the latter,
that the security can be delivered.

Q17‐6 A British company listed on the Alternative Investment Market of the London Stock
Exchange, announced the sale of 6,686,665 shares to a small group of qualified
investors at £0.025 per share. Which of the following best de.scribes this sale?
A. Shelf registration.
B. Private placement.
C. Initial public offering.

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Solution: B
This sale is a private placement. As the company is already publicly traded, the share sale is
clearly not an initial public offering. The sale also does not involve a shelf registration because
the company is not selling shares to the public on a piecemeal basis.

Q18‐6 If an investor estimates that the market is declining and wants to purchase a stock at a
price below 70 dollars. The current price is 74 dollars. Which order should he place?
A. Market order
B. Limit order
C. Stop order
Solution: B
The investor should execute a limit buy order. A limit buy typically has a limit below the current
price. In this case, the limit is 70 dollars, which is below the current price of 74 dollars.

R20‐6 ★Characteristics of a good market:
9 Timely and accurate information
9 Liquidity( marketability, price continuity, depth )
9 Internal efficiency (low transaction cost)
9 Informational efficiency.
R21‐6 Primary capital markets：Refer to the sale of newly issued of securities.
R22‐6 Secondary financial markets：where securities trade after their initial issuance.
R23‐6 Public offering
¾ underwritten offering：the investment bank agrees to purchase the entire issue at a price
that is negotiated between the issuer and bank.包销
¾ best efforts：the bank is not obligated to buy the unsold portion.承销
¾ ★conflict of interest for investment bank：they should set the price high to raise the most
funds for the issuer. But, as underwriters, they would prefer that the price be set low
enough that the whole issue sells.
R24‐6 Primary Market
¾ Price placement
¾ Shelf registration
¾ A dividend reinvestment
¾ Rights offering
R25‐6 Importance of the secondary market
¾ They provide liquidity and price/value information.
¾ Liquid markets are those in which a security can be sold quickly without incurring a discount
from the current price.
R26‐6 ★Call markets and continuous market
¾ In call markets, the stock is only traded at specific times. All trades, bids, and asks are
declared, and then one negotiated price is set that clear the market for the stock.
¾ In continuous markets, trades occur at any time the market is open. The price is set by either
auction process or by dealer bid‐ask quotes.
R27‐6 Quote‐Driven Markets：Traders transact with dealers (market makers) who post bid and
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ask prices.
R28‐6 Order‐Driven Markets：In order‐driven markets, orders are executed using trading rules
R29‐6 brokered markets：Brokers find the counterparty in order to execute a trade.
R30‐6 Market information：
¾ pre‐trade transparent: Investors can obtain pre‐trade information regarding quotes and
orders.
¾ post‐trade transparent: Investors can obtain post‐trade information regarding completed
trade prices and sizes.

4‐6 Short Sale
Q19‐6 ★Which of the following is the least accurate statement about the short sale of stocks?

A. The short seller must pay any dividends due to the lender of shares.
B. Short sales involve time limits for returning the shares borrowed to the lender.
C. A short sale can be made only on an uptick or a zero uptick trade if the previous trade was
an uptick trade.

Solution: B
Short sales have no time limits. However, if the lender of shares decides to sell them, the broker
must find another investor willing to lend the shares.

Q20‐6 ★You decide to sell short 100 shares of Charlotte Horse Farms when it is selling at its
yearly high of 56. Your broker tells you that your margin requirement is 45% and that the
commission on the purchase is $155. While you are short the stock, Charlotte pays a
$2.50 per share dividend. At the end of one year, you buy 100 shares of Charlotte at 45
to close out your position and are charged a commission of $145. What is your rate of
return on the investment?
A. 20.56%
B. 22.65%
C. 18.56%

Solution A
¾ Profit on a short sale = Begin value — Ending value — Dividends— Trans. costs — Interest
9 Beginning value of investment = $56.00100 shares=$5,600 (Sold under a short sale
arrangement)
9 Ending value of investment = $45.00 100=$4,500
9 Transaction costs= $155 + $145 =$300.00
9 Dividends = $2.50100 shares =$250.00
9 Profit= $5,600 — $4,500 — $250 — $300= $550.00
¾ Your investment = Margin requirement + Commission = (0.45$5,600) + $155= $2,520 +
$155= $2,675
¾ The rate of return on your investment of $2,675 =$550.00 / $2,675 = 20.56%

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Short Sale 掌握概念及过程：
R31‐6 Short sale 的作用，掌握过程.
1) Simultaneously borrows and sells securities through a broker
2) ★Must return the securities at the request of the lender or when the short sale is closed
out
3) Must keep a portion of the proceeds of the short sale on deposit with the broker
R32‐6 计算 short sale 的收益率

5‐6 Margin Transaction
Q21‐6 ■Caroline Rogers believes the price of Gamma Corp. stock will go down in the near
price of €47. The initial margin requirement is 40 percent. Which of the following is an
this short sale?

Solutions: C
She will need to contribute €3,760 as margin. In view of the possibility of a loss, if the stock price
goes up, she will need to contribute €3,760 = 40% of €9,400 as the initial margin. Rogers will
need to leave the proceeds from the short sale (€9,400 = 200 X €47) on deposit.

Q22‐6 An investor opens a margin account with an initial deposit of $5,000. He then purchases
200 shares of PRK stock at $46 in his margin account, which has a margin maintenance
requirement of 25 percent, Ignoring commissions and interest, the minimum price that
PRK stock can fall to before the investor receives a margin call is closest to:
A. $20.00.
B. $28.00.
C. $33.33.

Solution: B
Determine the price (P) that is equal to 25%:
(200P ‐ 4200) / 200P = 0.25 → P= $28.00

Q23‐6 ★An investor purchased 5,000 stocks at 57 dollars on margin. The initial margin he
deposited to his broker is 40%. The broker will make a margin call when the margin
account is less than 25%. The price that will cause a margin call is closest to:
A. 30.0
B. 45.6
C. 23.0

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Solution: B
1- initial m arg in 1- 40%
Trigger price = P0 ( ) = 57( ) = 45.6
1- ma int enance m arg in 1- 25%

Q24‐6 Consider the following limit order book for a stock. The bid and ask sizes are number of
shares in hundreds.
Bid Size Limit Price (¥) Offer Size
3 122.80
8 123.00
4 123.35
123.80 7
124.10 6
124.50 7
A new buy limit order is placed for 300 shares at ¥123.40. This limit order is said to:
A. Take the market.
B. Make the market.
C. Make a new market.

Solutions: C
This order is said to make a new market. The new buy order is at ¥123.40, which is better than
the current best bid of ¥123.35. Therefore, the buy order is making a new market. Had the new
order been at ¥123.35, it would be said to make the market. Because the new buy limit order is
at a price less than the best offer of ¥123.80, it will not immediately execute and is not taking the
market.

R33‐6 Margin Transaction 掌握概念及计算：
1) 概念：margin transactions involve buying securities with borrowed money.
1- IM
2) 计算：Trigger price (margin of long position) = P0 ( )
1- MM
IM=Initial Margin MM=Maintenance Margin

6‐6 Stop Loss Sell
Q25‐6 Which of the following is least likely to be associated with long position in stock?
A. market order
B. stop loss buy
C. stop loss sell

Solution: B
Stop loss buy order contains a specific price. If the stock price drops to this level, your broker will
place a sell market order.

7‐6 Call Markets
Q26‐6 A security market in which all the bids and asks for a stock are gathered to arrive at a
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single price that satisfies most of the orders is best described as a
A. Call market.
B. Dealer market.
C. Primary market.

Solution: A
A security market in which all the bids and asks for a stock are aimed to arrive at a single price
that satisfies most of the orders is a call market.

Q27‐6 ★Consider an order‐driven system that allows hidden orders. The following four sell
orders on a particular stock are currently in the system's limit order book. Based on the
commonly used order precedence hierarchy, which of these orders will have precedence
over others?

Order Time of Arrival Limit Price (€) Special Instruction (If Any)
(HH:MM:SS)
I 9:52:01 20.33
II 9:52:08 20.29 Hidden order
III 9:53:04 20.29
IV 9:53:49 20.29
A. Order I (time of arrival of 9:52:01).
B. Order II (time of arrival of 9:52:08).
C. Order III (time of arrival of 9:53:04).

Solutions: C
Order III (time of arrival of 9:53:04) has precedence. In the order precedence hierarchy the first
rule is price priority. Based on this rule, sell orders II, III, and IV get precedence over order I. The
next rule is display precedence at a given price. Because order II is a hidden order, orders III and
IV get precedence. Finally, order III gets precedence over order IV based on time priority at same
price and same display status.

Q28‐6 ★★Zhenhu Li has submitted an immediate‐or‐cancel buy order for 500 shares of a
company at a limit price of CNY 74.25. There are two sell limit orders standing in that
stock's order book at that time. One is for 300 shares at a limit price of CNY 74.30 and
the other is for 400 shares at a limit price of CNY 71.35. How many shares in Li's order
would get cancelled? （原版书 R47‐34）
A. None (the order would remain open but unfilled).
B. 200 (300 shares would get filled).
C. 500 (there would he no fill).

C is correct.
The order for 500 shares would get cancelled; there would be no fill. Li is willing to buy at CNY
74.25 or less but the minimum offer price in the book is CNY 74.30; therefore, no part of the
320
order would be filled. Because Li's order is immediate‐or‐cancel, it would be cancelled.

Q29‐6 ★★A market has the following limit orders standing on its book for a particular stock:

Buyer Bid Size Limit Price Offer Size
(Number of Shares) (f) (Number of Shares) Seller
Keith 1,000 19.70
Paul 200 19.84
Ann 400 19.89
Mary 300 20.02
20.03 800 Jack
20.11 1,100 Margaret
20.16 400 Jeff

Ian submits a day order to sell 1,000 shares, limit £19.83. Assuming that no more buy orders are
submitted on that day after Ian submits his order, what would be Ian's average trade price? （原
版书 R47‐35）
A. £19.70.
B. £19.92.
C. £20.05.

B is correct.
Ian's average trade price is:
300 × 20.02 + 400 ×19.89 + 200 × 19.84
19.92=
300 + 400 + 200
Ian's sell order first fills with the most aggressively priced buy order, which is Mary's order for
300 shares at £20.02. Ian still has 700 shares for sale. The next most aggressively priced buy
order is Ann's order for 400 shares at £19.89. This order is filled. Ian still has 300 shares for sale.
The next most aggressively priced buy order is Paul's order for 200 shares at £19.84. A third trade
takes place. Ian still has 100 shares for sale.
The next buy order is Keith's order for 1,000 shares at £19.70. However, this price is below Ian's
limit price of £19.83. Therefore, no more trade is possible.

Call Markets 掌握概念：
R34‐6 Call market & Continuous markets 的异同
Call Markets Continuous Markets
At specific times At any time when market is open
All bids and asks are gathered and The price is determined either by an auction
then a negotiated price is produced process or through a dealer bid‐ask process.

R35‐6 Call markets & continuous markets（重点）
¾ In call markets, the stock is only traded at specific times. All trades, bids, and asks are
declared, and then one negotiated price is set that clears the market for the stock. This
321
method is used in smaller markets and to set opening prices and prices after trading
halts on major exchanges
¾ In continuous markers, traders occur at any time the market is open. The price is set by
either the auction process or by dealer bid‐ask quotes
R36‐6 Exchanged markets, OTC market, third market(listed stock traded in OTC by dealer),
fourth market (electronic trade)

R37‐6 ★Quote‐driven and order‐driven
¾ Quote‐driven: dealer market, price‐driven market, or OTC markets
¾ Order‐driven: Order matching rules: price priority> no hidden order and earliest arrived
order; Trade pricing rules: uniform pricing rule, discriminatory pricing rule
R38‐6 了解 Well‐functioning financial system 的特征

8‐6 security market index 的定义
Q30‐6 A security market index represents the:
A. risk of a security market.
B. security market as a whole.
C. security market, market segment, or asset class.

Solution: C
A security market index represents the value of a given security market, market segment, or
asset class.

Q31‐6 ★Security market indices are:
A. constructed and managed like a portfolio of securities.
B. simple interchangeable tools for measuring the returns of different asset classes.
C. valued on a regular basis using the actual market prices of the constituent securities.

Solutions: A
Security market indices are constructed and managed like a portfolio of securities.

Q32‐6 One month after inception, the price return version and total return version of a single
index (consisting of identical securities and weights) will be equal if:
A. market prices have not changed.
B. capital gains are offset by capital losses.
C. the securities do not pay dividends or interest.

Solutions: C
The difference between a price return index and a total return index consisting of identical
securities and weights is the income generated over time by the underlying securities. If the
securities in the index do not generate income, both indices will be identical in value.

Q33‐6 When creating a security market index, the target market:
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A. determines the investment universe.
B. is usually a broadly defined asset class.
C. determines the number of securities to be included in the index.

Solutions: A
The target market determines the investment universe and the securities available for inclusion
in the index.

Q34‐6 ★★One month after inception, the price return version and total return version of a
single index (consisting of identical securities and weights) will be equal if: （原版书
R48‐4）
A. market prices have not changed.
B. capital gains are offset by capital losses.
C. the securities do not pay dividends or interest.

C is correct.
The difference between a price return index and a total return index consisting of identical
securities and weights is the income generated over time by the underlying securities. If the
securities in the index do not generate income, both indices will be identical in value.

R39‐6 A security market index is used to represent the performance of an asset class, security
market, or segment of a market.

9‐6 区分 Price‐weighted Index, Market‐weighted Index, Unweighted Index
Q35‐6 ★Hari Raju, CEO of Securities Tracking Associates (STA), is thinking of devising a new
index for the Indian stock market. He does not, however, like an index that requires
adjustment for stock splits. Given this preference, Raju would be least likely to develop
which of the following types of Indexes?
A. Un‐weighted Index
B. Price‐weighted Index
C. Value‐weighted Index

Solution: B
A price‐weighted index, such as the Dow Jones Industrial Average, is computed by summing up
the prices of individual stocks and dividing by a divisor that is adjusted for stock splits such that
the index value is the same before and after the split.

Q36‐6 An ETF analyst collected data of an index comprising three stocks as follows:
December 31 2009 January 1 2009
Price Stocks Price Stocks
Hymalaya 65 600,000 30 1,000,000
Blanc 42 3,000,000 50 3,000,000
Kirimazaro 40 5,000,000 96 2,500,000
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The base of the index on January 1 2009 is 137, the market value weighted index is closest to:
A. 157.
B. 87.
C. 119.

Solution: C
The base market capitalization is
30 × 1,000,000+50 × 3,000,000+96 × 2,500,000=420,000,000
65 × 600, 000 + 42 × 3, 000, 000 + 40 × 5, 000, 000
Index = ×137 = 86.9% *137 ≈ 119
30 × 3, 000, 000 + 50 × 3, 000, 000 + 96 × 2,500, 000

Q37‐6 ★Which kind of stock index will be most likely affected by a large‐cap stock?
A. Nikkei 225 Dow Jones index
B. CAC 40 index
C. Value Line Index

Solution: B
Nikkei 225 Dow Jones index is price‐weighted index.
Value Line Index is geometric‐weighted index.
CAC 40 index is market‐value weighted index. Only market‐value weighted index is affected by
large‐cap stocks.

Q38‐6 ★Which of the following statements is most accurate with respect to rebalancing and
reconstitution of security market indices?
A. Equal weighted indices require frequent rebalancing.
B. Turnover within an index results from a reconstitution but not from rebalancing.
C. A price‐weighted index requires rebalancing more than a market‐capitalization‐
weighted index.

Solution: A
After an equal weighted index is constructed and the prices of constituent securities change, the
index is no longer equally weighted. Therefore, maintaining equal weights requires frequent
adjustments (rebalancing) to the index.

Q39‐6 The data for four stocks in an index are as follows:
Shares % Shares in Beginning of End of Period Dividends Per

Stock Outstanding Market Float Period Price Price Share
A 5,000 90 40 45 1.00

B 2,000 100 68 60 0.50
C 6,000 70 60 70 1.50
D 4,000 40 20 24 0.80
Assuming the beginning value of the float‐adjusted market‐capitalization‐weighted equity index
is 100, the ending value is closest to:
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A. 109.1.
B. 110.9.
C. 111.3.

Solution: A
In float‐adjusted market‐capitalization weighting, the weight on each constituent security is
determined by adjusting its market capitalization for its market float. Per computations shown
below, the ending value of the index so computed equals 109.1. (654,900 ÷ 600,000)
Stock Shares % Shares in Shares in Beginning Beg. Float End of Ending Float
Outstanding Market Index of Period Adj. Market Period Adj. Market
Float Price ($) Cap ($) Price Cap ($)
(1) (2) (1) x (2) = (3) (4) (3) x (4) =(5) (6) (3) x (6)
A 5,000 90 4,500 40 180,000 45 202,500
B 2,000 100 2,000 68 136,000 60 120,000
C 6,000 70 4,200 60 252,000 70 294,000
D 4,000 40 1,600 20 32,000 24 38,400
Total 600,000 654,900
Index Value 100 109.1

Q40‐6 ★The index weighting that results in portfolio weights shifting away from securities that
have increased in relative value toward securities that have fallen in relative value
whenever the portfolio is rebalanced is most accurately described as:（MOCK79‐85）
A. equal weighting
B. fundamental weighting
C. float‐adjusted market‐capitalization weighting.

Solution: B
Fundamentally weighted indices generally will have a contrarian "effect" in that the portfolio
weights will shift away from securities that have increased in relative value and toward securities
that have fallen in relative value whenever the portfolio is rebalanced.

Q41‐6 ★ ★ An analyst gathers the following information for an equal‐weighted index
comprised of assets Able, Baker, and Charlie:

Beginning of End of Period Total
Security Period Price (€) Price (€) Dividends (€)
Able 10.00 12.00 0.75
Baker 20.00 19.00 1.00
Charlie 30.00 30.00 2.00

The total return of the index is: （原版书 R48‐7）
A. 5.0%.
B. 7.9%.
C. 11.4%.
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C is correct.
The total return of an index is calculated on the basis of the change in price of the underlying
securities plus the sum of income received or the sum of the weighted total returns of each
security. The total return of Able is 27.5 percent; of Baker is 0 percent; and of Charlie is 6.7
percent:

Able: (12 — 10 + 0.75)/10 = 27.5%
Baker: (19 — 20 + 1)/20 = 0%
Charlie: (30 — 30 + 2)/30 = 6.7%
An equal‐weighted index applies the same weight (1/3) to each security's return; therefore, the
total return = 1/3 X (27.5% + 0% + 6.7%) = 11.4%.

Q42‐6 ★★An analyst gathers the following information for a price‐weighted index comprised
of securities ABC, DEF, and GHI:
Beginning of End of Period Total
Security Period Price (€) Price (€) Dividends (€)
ABC 25.00 27.00 1.00
DEF 35.00 25.00 1.50
GHI 15.00 16.00 1.00

The price return of the index is: （原版书 R48‐8）
A. —4.6%.
B. —9.3%.
C. —13.9%.

B is correct.
The price return of the price‐weighted index is the percentage change in price of the index: (68
— 75)/75 = —9.33%.

Beginning of End of Period
Security Period Price (f) Price (f)
ABC 25.00 27.00
DEF 35.00 25.00
GHI 15.00 16.00
TOTAL 75.00 68.00

Q43‐6 ★★★An analyst gathers the following information for a market‐capitalization¬
weighted index comprised of securities MNO, QRS, and XYZ:

Beginning of End of Period Dividends Shares
Security Period Price (￥) Price (￥) Per Share (￥) Outstanding
MNO 2,500 2,700 100 5,000
QRS 3,500 2,500 150 7,500
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XYZ 1,500 1,600 100 10,000

The total return of the index is: （原版书 R48‐10）
A. 1.04 %.
B. —5.35 %.
C. —10.23 %.

B is correct.
The total return of the market‐capitalization‐weighted index is calculated below:

Beginning of End of Total Total
Security Period Value (V) Period Value (V) Period Value (V) Return (%)
MNO 12,500,000 13,500,000 500,000 12.00
QRS 26,250,000 18,750,000 1,125,000 —24.29
XYZ 15,000,000 16,000,000 1,000,000 13.33
Total 53,750,000 48,250,000 2,625,000 —5.35

Q44‐6 ★★★An analyst gathers the following data for an equally‐weighted index:

Beginning of Period End of Period
Security Price (￥) Shares Price (￥) Shares
A 20.00 300 22.00 300
B 50.00 300 48.00 300
C 26.00 2,000 30.00 2,000

The return on the index over the period is: （原版书 R48‐14）
A. 4.2%.
B. 6.8%.
C. 7.1%.

C is correct.
With an equal‐weighted index, the same amount is invested in each security. Assuming $1,000 is
invested in each of the three stocks, the index value is $3,000 at the beginning of the period and
the following number of shares is purchased for each stock:
Security A: 50 shares
Security B: 20 shares
Security C: 38.46 shares
Using the prices at the beginning of the period for each security, the index value at the end of
the period is $3,213.8: ($22 X 50) + ($48 X 20) +(S30 X 38.46). The price return is $3,213.8 /
$3,000 ‐ 1 = 7.1%

Q45‐6 ★ ★ ★ If the price return of an equal‐weighted index exceeds that of a
market¬capitalization‐ weighted index comprised of the same securities, the most likely
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explanation is: （原版书 R48‐16）

A. stock splits.
B. dividend distributions.
C. outperformance of small‐market‐capitalization stocks.

C is correct.
The main source of return differences arises from outperformance of small‐cap securities or
underperformance of large‐cap securities. In an equal‐weighted index, securities that constitute
the largest fraction of the market are underrepresented and securities that constitute only a
small fraction of the market are overrepresented. Thus, higher equal‐weighted index returns will
occur if the smaller‐cap equities outperform the larger‐cap equities.

Q46‐6 Compared to its market‐value‐weighted counterpart, a fundamentally weighted index
will least likely have a:
A. value tilt.
B. contrarian “effect.”
C. momentum “effect.”

C is correct.
Momentum “effect” is a characteristic of a market‐value‐weighted index, not a fundamentally
weighted index.

Price‐weighted Index, Market‐weighted Index, Unweighted Index Fundamental Weighting 掌握
概念及公式：
R40‐6 概念：理解 the use of securities market indexes.
R41‐6 计算：
sum of stock prices
¾ price - weighted index =
number of stocks in index adjusted for splits
Assumption: purchasing an equal number of shares of each stock in the index.
total market value of the stocks on date X

¾ value - weighted index =
total market value of the stocks on base date
Assumption: making a proportionate market value investments in each stock.
¾ ★Unweighted index assumes that the index portfolio makes and maintains an equal dollar
investment in each stock in the index.
¾ ★Fundamental Weighting indices generally will have a contrarian style and value‐tilt
¾ Assumption: Investing the same dollar in each stock in the index.
R42‐6 难点：股票分割时，价格权重指数不会变化，所以要调整因子
R43‐6 Bias：各个 index 应用时的 bias
¾ Price‐weighted bias places a downward bias on the index because large successful firms
tend to split their stocks more often than low growth stocks and will weight within the index
simply by splitting their stock. （Dow Jones Industrial Average)受高价格股票价格变动影响
大。
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¾ Value‐weighted bias is that firms with greater market capitalization have a greater impact
on the index than do firms with lower market capitalization.受高市值股票价格变动影响
大。
¾ Unweighted bias places a downward bias in the index by the use of the geometric mean
rather than the arithmetic mean.
R44‐6 Rebalancing and Reconstitution
¾ ★Rebalancing: Adjuste the weights of securities in a portfolio to their target weights after
price changes have affected the weights. Equal‐weighted requires more frequency to adjust
¾ Reconstitution: Periodically adding and deleting securities that make up an index

10‐6 Uses of security market indices
Q47‐6 Security market indices are used as:
A. measures of investment returns.
B. proxies to measure unsystematic risk.
C. proxies for specific asset classes in asset allocation models.

Solution: C
Security market indices play a critical role as proxies for asset classes in asset allocation models.

Q48‐6 Which of the following index weighting methods requires an adjustment to the divisor
after a stock split?
A. Price weighting.
B. Fundamental weighting.
C. Market‐capitalization weighting.

Solutions: A
In the price weighting method, the divisor must be adjusted so the index value immediately after
the split is the same as the index value immediately prior to the split.

Q49‐6 ★★★Which of the following index weighting methods is most likely subject to a value
tilt? （原版书 R48‐18）
A. Equal weighting.
B. Fundamental weighting.

B is correct.
Fundamental weighting leads to indices that have a value tilt.

Q50‐6 ★★ Which of the following index weighting methods requires the most frequent
rebalancing？（原版书 R48‐20）
A. Price weighting.
B. Equal weighting.
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B is correct.
Changing market prices will cause weights that were initially equal to become unequal, thus
requiring rebalancing.

Q51‐6 ★ If the price return of an equal‐weighted index exceeds that of a market‐
capitalization‐weighted index comprised of the same securities, the most likely
explanation is:
A. stock splits.
B. dividend distributions.
C. outperformance of small‐market‐capitalization stocks.

Solutions: C
The main source of return differences arises from outperformance of small‐cap securities or
underperformance of large‐cap securities. In an equal‐weighted index, securities that constitute
the largest fraction of the market are underrepresented and securities that constitute only a
small fraction of the market are overrepresented. Thus, higher equal‐weighted index returns will
occur if the smaller‐cap equities outperform the larger‐cap equities.

Q52‐6 Which of the following statements regarding sector indices is most accurate? Sector
indices:
A. track different economic sectors and cannot be aggregated to represent the equivalent of a
broad market index.
B. provide a means to determine whether an active investment manager is more successful at
stock selection or sector allocation.
C. apply a universally agreed upon sector classification system to identify the constituent
securities of specific economic sectors, such as consumer goods, energy, finance, health
care.

Solution: B
Sector indices provide a means to determine whether a portfolio manager is more successful at
stock selection or sector allocation.

Q53‐6 ★Which of the following is an example of a style index? An index based on:
A. geography.
B. economic sector.
C. market capitalization.

Solutions: C
Style indices represent groups of securities classified according to market capitalization, value,
growth, or a combination of these characteristics.

Q54‐6 ★An aggregate fixed‐income index:
A. comprises corporate and asset‐backed securities.
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B. represents the market of government‐issued securities.
C. can be subdivided by market or economic sector to create more narrowly defined indices.

Solution: C
An aggregate fixed‐income index can be subdivided by market sector (government, government
agency, collateralized, corporate), style (maturity, credit quality), economic sector, or some other
characteristic to create more narrowly defined indices.

Q55‐6 ★Uses of market indices do not include serving as a:
A. measure of systematic risk.
B. basis for new investment products.
C. benchmark for evaluating portfolio performance.

Solutions: A
Security market indices are used as proxies for measuring market or systematic risk, not as
measures of systematic risk.

Q56‐6 ★★ Fixed‐income indices arc least likely constructed on the basis of: （原版书 R48‐28）
A. maturity.
B. type of issuer.
C. coupon frequency.

C is correct.
Coupon frequency is not a dimension on which fixed‐income indices are based.

Q57‐6 ★★ A unique feature of hedge fund indices is that they: （原版书 R48‐32）
A. are frequently equal weighted.
B. are determined by the constituents of the index.
C. reflect the value of private rather than public investments.

B is correct.
Hedge funds are not required to report their performance to any party other than their investors.
Therefore, each hedge fund decides to which database(s) it will report its performance. Thus, for
a hedge fund index, constituents determine the index rather than index providers determining
the constituents.

Q58‐6 Which of the following is least likely to be directly reflected in the returns on a
commodity index?
A. Roll yield
B. Changes in the spot prices of underlying commodities
C. Changes in the futures prices of commodities in the index

B is correct.
Commodity index returns reflect the changes in future prices and the roll yield. Changes in the
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underlying commodity spot prices are not reflected in a commodity index.
R45‐6 Security market indexes have several uses
¾ Reflection of market sentiment
¾ Benchmark of manager performance
¾ Measure of market return and risk
¾ Measure of beta and risk‐adjusted return
¾ Model portfolio for index funds
R46‐6 Characteristics of Equity Indexes 注意掌握不同组合的构成
¾ Broad market index：涵盖市场总市值的 90%以上。
¾ Multi‐market index：由多个国家的指数构成。
¾ Multi‐market index with fundamental weighting：由多个国家的指数构成，同时考虑了基
本面因素（比如 GDP）
¾ Sector Index：用于衡量行业的回报
¾ Style index：用于衡量市场资本成长型战略、价值型战略的回报
R47‐6 ★Several issues with the construction of fixed income indexes
¾ Large universe of securities：
¾ Dealer markets and infrequent trading
R48‐6 ★Alternative Investment Indexes：
¾ Commodity indexes：Represent futures contracts on commodities such as grains, livestock,
metals, and energy.
¾ Weighting method：Some use equal weighting, others weight commodities by their global
production values, and others use fixed weights that the index provider determines. As a
result, different indexes have significantly different commodity exposures and risk and
return characteristics.
¾ Real estate indexes: appraisal value
¾ Hedge Fund Indexes：Most hedge fund indexes equally weight the returns of the hedge
funds included in the index.

11‐6 EMH
Q59‐6 In an efficient market, the change in a company's share price is most likely the result of
A. insiders' private information.
B. the previous day's change in stock price.
C. new information coming into the market.

Solutions: C
Today's price change is independent of the one from yesterday, and in an efficient market,
investors will react to new, independent information as it is made public.

Q60‐6 Which of the following inferences concerning market efficiency most accurate?
A. Fully exploitable over and under‐reactions often occur in efficient markets.
B. Market pricing anomalies and behavioral biases are contrary to the existence of market
efficiency.
C. If a market is semi‐strong form efficient neither technicians nor fundamental analysts can
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expect to consistently earn abnormal returns.

Correct answer: C
If securities markets are semi‐strong form efficient, active trading to exploit price patterns or
public information is not likely to generate abnormal returns. Thus, both technical and
fundamental analyses become futile exercises.

Q61‐6 If markets are efficient, the difference between the intrinsic value and market value of a
company's security is:
A. negative.
B. zero.
C. positive.

Solutions: B
A security's intrinsic value and market value should be equal when markets are efficient

Q62‐6 ★Which of following below will a technical analysis most likely adhere to?
Weak EMH Strong EMH
A. No No
B. Yes No
C. No Yes

Solution: A
Technical analysis doesn’t hold weak EMH and Strong EMH.

Q63‐6 ★A financial analyst utilizing his analytical expertise and up‐to‐date information buys a
company’s stock. His close friends, who lack information or expertise, imitate the
financial analyst’s action and buy the stock. Which of the following statements
concerning this behavioral bias is most accurate?
A. It improves market efficiency.
B. It is identical to representativeness.
C. It is inconsistent with rational behavior.

Solution: A
This behavioral bias is an example of an information cascade wherein the transmission of
information is from those participants who act first and whose decisions influence the decisions
of others. The behavior of informed traders acting first and uninformed traders imitating the
informed traders is consistent with rationality. The imitation trading by the uninformed traders
helps the market incorporate relevant information and improves market efficiency.

Q64‐6 ★Which of the following market anomalies is inconsistent with weak‐form market
efficiency?
A. Earnings surprise.
B. Momentum pattern.
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C. Closed‐end fund discount.

Solutions: B
Trading based on historical momentum indicates that price patterns exist and can be exploited
by using historical price information. A momentum trading strategy that produces abnormal
returns contradicts the weak form of the efficient market hypothesis, which states that investors
cannot earn abnormal returns on the basis of past trends in prices.

Q65‐6 ★Kaylee Sumners, Level 1 CFA candidate, has just finished reviewing flash cards for the
reading on the efficient market hypothesis (EMH). Confused by the different tests for
the different forms of the EMH, she outlines the information (of which four summary
points appear below) from memory. It appears that Sumners should review the material
because three of the points are incorrect. Which of her summary points is CORRECT?
A. Statistical and trading rule tests support the weak‐form of the EMH.
B. Early tests of the semi‐strong form used the equation: Return Abnormal = ReturnActual ‐ (RMarket
× BetaStock).
C. The superior historical performance of exchange specialists and corporate insiders rejects
the semi‐strong form of the EMH.

Solution: A
These two tests support the weak‐form EMH contention that securities prices reflect all
historical market information and those mechanical trading rules do not result in superior
returns.
The other statements are false. Later tests of the semi‐strong form EMH used the equation:
Return Abnormal = ReturnActual – (RMarket × BetaStock). Early tests omitted beta, using the formula:
Return Abnormal = ReturnActual – RMarket. The superior historical performance of exchange specialists
and corporate insiders rejects the strong form of the EMH. Cross‐sectional tests such as the
price‐earnings ratio, neglected firms tests, and book value to market value tests reject the
semi‐strong form of the EMH. These tests show that certain stocks have high realized returns
(for example, low P/E stocks and high book value to market value stocks).

Q66‐6 With respect to efficient market theory, when a market allows short selling, the
efficiency of the market is most likely to:
A. increase.
B. decrease.
C. remain the same.

Solution: A
According to the theory, reducing the restrictions on trading will allow for more arbitrage trading,
thereby promoting more efficient pricing. Although regulators argue that short selling
exaggerates downward price movements, empirical research indicates that short selling is helpful
in price discovery.

Q67‐6 With respect to rational and irrational investment decisions, the efficient market
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hypothesis requires:
A. only that the market is rational.
B. that all investors make rational decisions.
C. that some investors make irrational decisions.

Solutions: A
The efficient market hypothesis and asset‐pricing models only require that the market is rational.
Behavioral finance is used to explain some of the market anomalies as irrational decisions.

Q68‐6 ★★ If markets are semi‐strong‐form efficient, then passive portfolio management
strategies are most likely to: （原版书 R49‐13）
A. earn abnormal returns.
B. outperform active trading strategies.
C. underperform active trading strategies.

B is correct.
Costs associated with active trading strategies would be difficult to recover; thus, such active
trading strategies would have difficulty outperforming passive strategies on a consistent
after‐cost basis.

Q69‐6 ★★If a market is semi‐strong‐form efficient, the risk‐adjusted returns of a passively
managed portfolio relative to an actively managed portfolio are most likely: （原版书
R49‐14）
A. lower.
B. higher.
C. the same.

B is correct.
In a semi‐strong‐form efficient wile!, passive portfolio strategies should outperform active

Q70‐6 ★★Which of the following is least likely to explain the January effect anomaly? （原版
书 R49‐20）
A. Tax‐loss selling.
B. Release of new information in January.
C. Window dressing of portfolio holdings.

B is correct.
The excess returns in January are not attributed to any new information or news; however,
research has found that part of the seasonal pattern can be explained by tax‐loss selling and
portfolio window dressing.

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R49‐6 EMH 掌握概念：

¾ Efficient market: security price adjust rapidly to infusion of new information, and therefore
current security prices fully reflect all available information.
R50‐6 factors affect the degree of market efficiency.
¾ Number of market participants analyze and value securities, each is independent of others
¾ Availability of information: new information regarding securities comes to the market in
random fashion, and the timing of one announcement is generally of others.
¾ Impediments to trading.
¾ Transaction and information costs. After deducting costs, there are no risk‐adjusted return
R51‐6 区分 strong‐form EMH & semi‐strong form EMH & weak‐form EMH 定义
¾ Strong‐form EMH states that stock prices fully reflect all information from public and private
sources.
¾ Semi‐strong form EMH states that stock prices fully reflect all publicly available information.
If markets are semi‐strong‐form efficient, then passive portfolio management strategies are
most likely to outperform active trading strategies.
¾ Weak‐form EMH states that stock prices fully reflect all currently available security market
information.
R52‐6 ★检验（包含 6 anomalies）
1) Tests for Weak‐Form EMH (success)
¾ Statistical Tests of Independence
9 Auto correlation tests
9 Runs tests
¾ Tests of Trading Rules
2) Tests for semi‐strong form EMH
¾ Time‐series tests (fail)
¾ Cross‐sectional tests (fail)
¾ Event studies(success)
3) Tests for strong‐form EMH
¾ Corporate Insider Trading (1970s 以前 fail， 1980s 以后成功)
¾ Stock Exchange Specialists(fail)
¾ Security Analysts (success)
R53‐6 如果 EMH 成立哪种分析无效。
¾ Weak‐form: 技术分析无效
¾ Semi‐strong form: 基本面分析无效
¾ Strong form: 全部无效，不可能打败市场

12‐6 Abnormal Return
Q71‐6 ★The most accurate characterization of the nature of abnormal returns relating to an
anomaly and a source of unreliability of an anomaly, respectively, are:
Nature of Abnormal Returns Source of Unreliability of An Anomaly
A. Persistent Behavioral bias
B. Persistent Survivorship bias
C. Momentary Behavioral bias
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Soltution: B
The persistent realization of abnormal returns is referred to as an anomaly and survivorship bias
is a source of unreliability of an anomaly.

Abnormal Return 掌握概念:
R54‐6 ★Anomalies in Time‐Series Data
¾ Calendar anomalies: During the first five days of January, stock returns, especially for small
firms, are significantly higher than they are the rest of the year.The turn‐of‐the‐month effect
(stock returns are higher in the days surrounding month end), the day‐of‐the‐week effect
(average Monday returns are negative), the weekend effect (positive Friday returns are
followed by negative Monday returns), and the holiday effect (pre‐holiday returns are
higher).
¾ Overreaction and momentum anomalies: The overreaction effect refers to the finding that
firms with poor stock returns over the previous three or five years (losers) and then have
better subsequent returns. This pattern has been attributed to investor overreaction to both
unexpected good news and unexpected bad news. This pattern is also present for bonds
and in some international markets. Momentum effects have also been found where high
short‐term returns are followed by continued high returns. This pattern is present in some
international markets as well.
R55‐6 ★Anomalies in Cross‐Sectional Data
¾ The size effect: Small‐cap stocks outperform large‐cap stocks. This effect could not be
confirmed in later studies, suggesting that either investors had traded on, and thereby
eliminated, this anomaly or that the initial finding was simply a random result for the time
period examined.
¾ ★ The value effect: Value stocks [those with lower priceto‐earnings (P/E), lower
market‐to‐book (M/B), and higher dividend yields] have outperformed growth stocks (those
with higher P/E, higher M/B, and lower dividend yields). This violates the semi‐strong form
of market efficiency because the information necessary to classify stocks as value or growth
is publicly available. However, some researchers attribute the value effect to greater risk of
value stocks that is not captured in the risk adjustment procedure used in the studies.
R56‐6 ★Other Anomalies
¾ Closed‐end investment funds: The shares of closed‐end investment funds trade at prices
that sometimes deviate from the net asset value (NAV) of the fund shares. Various
explanations have been put forth to explain this anomaly, including management fees, taxes
on future capital gains, and share illiquidity. However, transactions costs would eliminate
any profits from exploiting the unexplained portion of closed‐end fund discounts.
¾ Earnings announcements: An earnings surprise is that portion of announced earnings that
was not expected by the market. Positive earnings surprises (earnings higher than expected)
precede periods of positive risk‐adjusted post‐announcement stock returns. The anomaly is
that the adjustment process does not occur entirely on the announcement day. Investors
could exploit this anomaly by buying positive earnings surprise firms and selling negative
earnings surprise firms.
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¾ Initial public offerings: IPOs are typically underpriced, with the offer price below the market
price once trading begins.
¾ Economic fundamentals: Research has found that stock returns are related to known
economic fundamentals such as dividend yields, stock volatility, and interest rates.
R57‐6 Implications for Investors
¾ The majority of the evidence suggests that reported anomalies are not violations of market
efficiency but are due to the methodologies used in the tests of market efficiency.
Furthermore, both underreaction and overreaction have been found in the markets,
meaning that prices are efficient on average. Other explanations for the evidence of
anomalies are that they are transient relations, too small to profit from, or simply reflect
returns to risk that the researchers have failed to account for.
¾ The bottom line for investors is that portfolio management based on previously identified
anomalies will likely be unprofitable. Investment management based solely on anomalies
has no sound economic basis.

13‐6 Behavioral Finance

Q72‐6 ★Like traditional finance models, the behavioral theory of loss aversion assumes that
investors dislike risk; however, the dislike of risk in behavioral theory is assumed to be:
A. leptokurtic.
B. symmetrical.
C. asymmetrical.

Solutions: C
Behavioral theories of loss aversion allow for the possibility that the dislike for risk is not
symmetrical, which allows for loss aversion to explain observed overreaction in markets such
that investors dislike losses more than they like comparable gains.

Q73‐6 According to behavioral finance, observed overreaction in securities markets most likely
occurs due to
A. loss aversion
B. gambler's fallacy.
C. disposition effect.

Solution: A
According to loss aversion related arguments in behavioral theories, investors dislike• losses
more that they like comparable gains. Thus, such a behavioral bias can explain observed
overreaction in markets.

R58‐6 ★Behavioral finance:
¾ Traditional finance models, including efficient markets, are based on an assumption that the
market as a whole acts rationally, although some individual investors may not.
¾ ★Loss aversion: Investors dislike losses more than they like gains of an equal amount.
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Dislike of losses may explain investor overreaction. However, investor underreaction is just
as common as overreaction, and loss aversion does not explain underreaction.
¾ Investors sometimes overestimate their ability to value securities. If there is a prevalence of
investor overconfidence, securities will be mispriced. However, it appears that this
mispricing may be hard to predict. Overconfidence in their estimates also causes investors to
hold portfolios that are not well diversified, increasing their portfolio risk but not overall
market risk.
¾ Other behavioral biases that have been identified include:
9 Representativeness: Investors assume good companies or good markets are good
investments.
9 Gambler's fallacy: Recent results affect investor estimates of future probabilities.
9 Mental accounting: Investors classify different investments into separate mental
accounts instead of viewing them as a total portfolio.
9 Conservatism: Investors react slowly to changes.
9 Disposition effect: Investors are willing to realize gains but unwilling to realize losses.
9 Narrow framing：Investors view events in isolation.
¾ One explanation for the evidence of the slow adjustment of security prices to new
information is the concept of information cascades. This refers to the idea that uninformed
traders, when faced with unclear information, watch the actions of informed traders to
make their decisions. Recall the earnings surprise anomaly, in which prices were slow to
adjust to earnings surprises. Information cascades can explain this occurrence.
¾ Behavioral finance can account for how securities prices can deviate from their rational
levels and be biased estimates of intrinsic value.

Q74‐6 The type of equity voting right that grants one vote for each share of equity owned is
referred to as:
A. proxy voting.
B. statutory voting.
C. cumulative voting.

Solutions: B
Statutory voting is the type of equity voting right that grants one vote per share owned.

Q75‐6 ★All of the following are characteristics of preference shares except:
A. They are either callable or putable.
B. They generally do not have voting rights.
C. They do not share in the operating performance of the company.

Solutions: A
Preference shares do not have to be either callable or putable.

Q76‐6 ★When investing in unsponsored depository receipts, the voting rights to the shares in
the trust belong to:
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A. the depository bank.
B. the investors in the depository receipts.
C. the issuer of the shares held in the trust

Solutions: A
In an unsponsored DR, the depository bank owns the voting rights to the shares. The bank
purchases the shares, places them into a trust, and then sells shares in the trust‐not the
underlying shares‐in other markets.

Q77‐6 If a U.S.‐based investor purchases a euro‐denominated ETF and the euro subsequently
depreciates in value relative to the dollar, the investor will have a total return that is:
A. lower than the ETF's total return.
B. higher than the ETF's total return.
C. the same as the ETF's total return.

Solutions: A
The depreciated value of the euro will create an additional loss in the form of currency return
that is lower than the ETF’s return.

Q78‐6 ★★Researchers have found that value stocks have consistently outperformed growth
stocks. An investor wishing to exploit the value effect should purchase the stock of
companies with above‐average: （原版书 R49‐23）
A. dividend yields.
B. inarket‐to‐book ratios.
C. price‐to‐earnings ratios.

A is correct. Higher than average dividend yield is a characteristic of a value stock, along with low
price‐to‐earnings and low market‐to‐book ratios. Growth stocks are characterized by low
dividend yields and high price‐to‐earnings and high market‐to‐book ratios.

R59‐6 ★Characteristics of various types of equity securities
¾ Common shares：
¾ Putable common shares：股东有权按照预定价格卖回给公司
¾ Callable commmon shares: 公司有权按照预定价格回购股票
¾ Preference shares：fixed periodic payments do not have voting rights
¾ Cumulative preference：当期未获得的优先股股利可以累积到下期
¾ Convertible preference shares：可以转为 Common shares
R60‐6 ★characteristics of private equity
¾ Less liquidity because no public market for the shares exists.
¾ Share price is negotiated between the firm and its investors, not determined in a market.
¾ More limited firm financial disclosure because there is no government or exchange
requirement to do so.
¾ Lower reporting costs because of less onerous reporting requirements.
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¾ Potentially weaker corporate governance because of reduced reporting requirements and
less public scrutiny.
¾ Greater ability to focus on long‐term prospects because there is no public pressure for
short‐term results.
¾ Potentially greater return for investors, once the firm goes public.
R61‐6 Three main types of private equity investments
¾ Venture capital: The capital provided to firms early in their life cycles to fund their
development and growth. Venture capital financing at various stages of a firm's
development is referred to as seed or start‐up, early stage, or mezzanine financing.
¾ In a leveraged buyout (LBO), investors buy all of a firm's equity using debt financing
(leverage). If the buyers are the firm's current management, the LBO is referred to as a
management buyout (MBO). Firms in LBOs usually have cash flow that is adequate to
service the issued debt, or have undervalued assets that can be sold to pay down the debt
over time.
¾ In a private investment in public equity (PIPE), a public firm that needs capital quickly sells
private equity to investors. The firm may have growth opportunities, be in distress, or have
large amounts of debt. The investors can often buy the stock at a sizeable discount to its
market price.
R62‐6 Methods for investing in non‐domestic equity
¾ Direct investing in the securities of foreign companies. Some obstacles to direct foreign
investment are that: currency illiquid, be less strict, must be familiar with the regulations
and procedures of each market in which they invest.
¾ ★Depository receipts (DRs) represent ownership in a foreign firm and are traded in the
markets of other countries in local market currencies. A bank deposits shares of the foreign
firm and then issues receipts representing ownership of a specific number of the foreign
shares. The value of the DR is affected by exchange rate changes, as well as firm
fundamentals, economic events.
¾ Global depository receipts (GDRs) are issued outside the U.S. and the issuer's home
country. Most GDRs are traded on the London and Luxembourg exchanges.
¾ ★American depository receipts (ADRs) are denominated in U.S. dollars and trade in the
United States. The security on which the ADR is based is the American depository share
(ADS), Which trades in the firm's domestic market. Some ADRs allow firms to raise capital in
the U.S. or use the shares to acquire other firms. Most require U.S. Securities and Exchange
Commission (SEC) registration, but some are privately placed (Rule 144A or Regulation S
receipts).
R63‐6 The returns on equity investments: price changes, dividend payments, and, in the case of
equities denominated in a foreign currency, gains or losses from changes in exchange
rates.

14‐6 Herfindahl Index
Q79‐6 ★Two Industries, A and B, have the following values for N‐firm concentration ratio and
Herfindahl Index:

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Industry 3‐Firm Concentration Herfindahl Index

A 40% 0.095
B 75% 0.1938
Given this, which of the following statements is most accurate?
A. Firms in Industry A would have a greater coordination than firms in Industry B.
B. Industry A has a larger number of equivalent firms than Industry B.
C. Product differentiation strategy would be more appropriate for firms in Industry B than for
firms in Industry A.

Solution: B
The equivalent” number of firms is the reciprocal of Heffindahl Index and it is 10.5 for Industry A
and 5.2 for Industry B.

Q80‐6 The row Firms Fri the Internet search engine industry have the following market shares:
Company Market Share
Gigloo 50%
Ohooho 25%
MySearch 15%
Foxnet 10%
The Herfindahl Index arid the Equivalent Number of firms in this Industry, respectively, are
closest to:
Herfindahl Index Equivalent Number of Firms
A. 0.345 4.00
B. 0.345 2.90
C. 0.478 2.09

Solution: B
Heffindahl index = 0.52 + 0.252 +0.152 + 0.12 = 0.25 + 0.0625 + 0.0225 + 0.01 = 0.345
Equivalent number of firm = 1 / 0.345 = 2.8986 ≈2.90

R64‐6 Herfindahl Index 掌握概念和计算：
概念： There are two measurements for industry concentration analysis: N firms’ concentration
ratio & Herfindahl index.
计算： H = M 1 + M 2 + " + M n
2 2 2
应用：
1. An H below 0.1 indicates an un‐concentrated industry;
2. An H of 0.1 to 0.18 indicates a moderately‐concentrated industry;
3. An H above 0.18 indicates a highly‐concentrated industry.

15‐6 Indexes
Q81‐6 Which of the following most accurately describes the computation of nearly all bond
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market indexes, U.S. and global?
A. Model priced
B. Trader priced
C. Market priced

Solution: B
11 out of the 12 major bond indexes are trader priced and only one index (Ryan Treasury) is
market priced. 参照其他易考点中 Indexes 部分。

Q82‐6 Which of the following statements is most accurate in describing a company's book
value?
A. Book value increases when a company retains its net income.
B. Book value is usually equal to the company's market value.
C. The ultimate goal of management is to maximize book value.

Solutions: A
A company's book value increases when a company retains its net income.

Q83‐6 ★★★Jason Williams purchased 500 shares of a company at $32 per share. The stock
was bought on 75 percent margin. One month later, Williams had to pay interest on the
amount borrowed at a rate of 2 percent per month. At that time, Williams received a
dividend of $0.50 per share. Immediately after that he sold the shares at $28 per share.
He paid commissions of $10 on the purchase and $10 on the sale of the stock. What was
the rate of return on this investment for the one‐month period? （原版书 R47‐21）
A. –12.5 percent.
B. –15.1 percent.
C. –50.1 percent.

B is correct. The return is ‐15.4 percent.
Total cost of the purchase = $16,000 = 500 X $32
Equity invested = $12,000 = 0.75 X $16,000
Amount borrowed =‐ $4,000 = 16,000 ‐ 12,000
Interest paid at month end = $80 = 0.02 X $4,000
Dividend received at month end = $250 = 500 X $0.50
Proceeds on stock sale = $1.4,000 = 500 X 528
Total commissions paid = $20 = $10 + $10
Net gain/loss = ‐$1,850 = ‐16,000 ‐ 80 + 250 + 14,000‐ 20
Initial investment including commission on purchase = $12,010
Return = ‐ 15.1% =‐$1,850 / $12,010

Q84‐6 ★★★Caroline Rogers believes the price of Gamma Corp. stock will go down in the near
price of €47. The initial margin requirement is 40 percent. Which of the following is an
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this short sale? （原版书 R47‐22）


A is correct. She will need to contribute €3,760 as margin. In view of the possibility of a loss, if
the stock price goes up, she will need to contribute €3,760 = 40% of €9,400 as the initial margin.
Rogers will need to leave the proceeds from the short sale (€9,400 = 200 X €47) on deposit.

R65‐6 Market Value and Book Value
¾ The book value of equity: Is the value of the firm’s assets on the balance sheet minus its
liabilities.
¾ The market value of equity: Is the total value of a firm’s outstanding equity shares based on
market prices and reflects the expectations of investors about the firm’s future
performance.
R66‐6 Return on Equity:
¾ A key ratio used to determine management efficiency is the accounting return on equity,
usually referred to simply as the return on equity (ROE).
NI t NI t
ROEt = =
average BV ( BVt + BVt −1 ) / 2
NI t
ROEt =
BVt −1
¾ The first method is more appropriate when it is the industry convention or when book value
is volatile. The latter method is more appropriate when examining ROE for a number of
years or when book value is stable.
¾ Higher ROE is generally viewed as a positive for a firm, but the reason for an increase should
be examined. For example, if book value is decreasing more rapidly than net income, ROE,
will increase. This is not, however, a positive for the firm. A firm can also issue debt to
repurchase equity, thereby decreasing the book value of equity. This would increase the
ROE but also make the firm's shares riskier due to the increased financial leverage (debt).
R67‐6 ★The uses of industry analysis
¾ It provides a framework for understanding the firm.
¾ Understanding a firm's business environment can provide insight about the firm's potential
growth, competition, and risks.
¾ In an active management strategy, industry analysis can identify industries that are
undervalued or overvalued in order to weight them appropriately. Some investors engage in
industry rotation, which is overweighting or underweighting industries based on the
current phase of the business cycle.
¾ In performance attribution analysis, the sources of portfolio return are determined relative
to a benchmark. The industry representation within a portfolio is often a significant
component of attribution analysis.
R68‐6 ★methods of classification system
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¾ products and services：Systems that are grouped by products and services usually use a
firm's principal business activity (the largest source of sales or earnings) to classify firms.
¾ Firms can also be classified by their sensitivity to business cycles. This system has two main
classifications: cyclical and non‐cyclical firms.
¾ Statistical methods, such as cluster analysis, can also be used. This method groups firms that
historically have had highly correlated returns. The groups (i.e., industries) formed will then
have lower returns correlations between groups.
R69‐6 ★Commercial Classifications
¾ Basic materials and processing firms：Building materials, Chemicals, Paper and forest
products, Containers and packaging, Metals, minerals, and mining
¾ Consumer discretionary firms：Automotive, Apparel, Hotels and restaurants
¾ Consumer staples firms：Food, Beverage, Tobacco, Personal care products
¾ Energy firms
¾ Financial services firms：real estate .etc
¾ Health care
¾ Industrial and producer durables firms
¾ Technology firms
¾ Telecommunications firms

16‐6 Company & Its Stock
Q85‐6 Calculate the 2009 return on equity (ROE) of a stable company using the following data:

Total sales £2,500,000
Net income £2,000,000
Beginning of year total assets £50,000,000
Beginning of year total liabilities £35,000,000
Number of shares outstanding at the end of 2009 1,000,000
Price per share at the end of 2009 £20
A. 10.0%.
B. 13.3%.
C. 16.7%.

Solutions: B
A company's ROE is calculated as (NIt/BVEt‐1). For 2009, the BVEt‐1 is equal to the beginning total
assets minus the beginning total liabilities, which equals &50,000,000 ‐ f 35,000,000 =
£15,000,000. Therefore, ROE200=9 £2,000,000/£ 15,000,000= 13.3%.

Q86‐6 Holding all other factors constant, which of the following situations will most likely lead
to an increase in a company's return on equity?
A. The market price of the company's shares increases.
B. Net income increases at a slower rate than shareholders' equity.
C. The company issues debt to repurchase outstanding shares of equity.

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Solutions: C
A company's ROE will increase if it issues debt to repurchase outstanding shares of equity

Q87‐6 Chenchells India Trading Co. (CITC), an importer‐exporter of specialty goods and
garments, has operations In Asia, Europe, and North America. Marc Twinsing, CFA, a
balanced fund manager, is considering adding CITC’s stock to his portfolio and he has
compiled the following Information:
CITC Industry Average
Weighted Average Cost of Capital (WACC) 14% 12%
Return on Assets (ROA) 20% 15%
Dividend Yield 0% 1.2%
Consensus Estimate of Stock’s Value $53 N/A
Current Price of CITC’s Stock $50 N/A
Based on his analysis Twinsings would most likely make conclusions about the company and its
stock, respectively, would be:
That CITC company is a: That CITC’s stock is a:
A. growth company growth stock
B. growth company speculative stock
C. speculative company growth stock

Solution: A
CITC is a growth company because its spread between ROA and WACC is larger than the industry
average and its dividend yield is 0% compared with the industry average of 1.2%. CITC’s stock is a
growth stock considering its under‐valuation. A speculative stock, on the other hand, would be
overvalued.

Q88‐6 ★A company that is sensitive to the business cycle would most likely:
A. not have growth opportunities.
B. experience below‐average fluctuation in demand
C. sell products that the customer can purchase at a later date if necessary.

Solutions: C
Customers' flexibility as to when they purchase the product makes the product more sensitive to
the business cycle.

Q89‐6 Which of the following factors would most likely be a limitation of applying
business‐cycle analysis to global industry analysis?
A. Some industries are relatively insensitive to the business cycle.
B. Correlations of security returns between different world markets are relatively low.
C. One region or country of the world may experience recession while another region
experiences expansion.

Solutions: C
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Varying conditions of recession or expansion around the world would affect the comparisons of
companies with sales in different regions of the world.

Q90‐6 ★With regard to forming a company's peer group, which of the following statements is
not correct?
A. Comments from the management of the company about competitors are generally not
used when selecting the peer group.
B. The higher the proportion of revenue and operating profit of the peer company derived
from business activities similar to the subject company, the more meaningful the
comparison.
C. Comparing the company's performance measures with those for a potential peer‐group
company is of limited value when the companies are exposed to different stages of the
business cycle.

Solutions: A
Because it is a fake statement. Reviewing the annual report to find management's discussion
about the competitive environment and specific competitors is a suggested step in the process
of constructing a peer group.

Industry classification systems
R70‐6 Commercial classification:
9 Basic materials and processing firms(produce building materials, chemicals, paper and
forest products, container and packaging, and metals, mineral, and mining)
9 Customer discretionary firm are cyclical and sell goods and services in industries such as
automotive, apparel, hotels and restaurants.
9 Consumer staples firms are less cyclical and sell goods and services in industries such as
food, beverage, tobacco, and personal care products.
9 Energy firms
9 Financial services firms
9 Health care
9 Industrial and producer durables firms produce capital goods for commercial services
industries. ( heavy machinery and equipment, aerospace, defense transportation,
commercial services and supplies).
9 Technological firms.
An analyst should not assume that two firms in the same narrowest industry classification can be
compared with each other for fundamental analysis and valuation. Instead, the analyst should
construct peer groups.
R71‐6 Growth
1) Growth companies: earn higher returns than WACC; sales and earnings grow faster than
similar risk firm and the overall economy; have low dividend‐payout ratios
2) Growth stocks: with a higher rate of return than similar risk stocks; usually undervalued
3) 注意：可能由于投资者过于乐观而使得增长型公司的股票价格已经被高估，及时公司
利润仍在增长，该股票就不是增长型股票；相反，一个普通公司的股票，只要市场价
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格低于内在价值，就可以认为是增长型股票。
R72‐6 ★Defensive
1) Defensive company: earnings are insensitive to downturns in the economy; have low
business risk and moderate financial risk.主要看公司的盈利增长和整体经济增长的相关
性，如果相关性不高，盈利增长很稳定，就是防守型公司。
2) Defensive stock: the stock’s rate of return do not decline or decline less than the market;
have a small positive or negative beta.主要看股票的价格和市场指数的相关性，如果相关
性不高，股价增长很稳定，就是防守型股票。
R73‐6 Cyclical
1) Cyclical company: sales and earnings are heavily influenced by the aggregate business
activity; have high business risk and financial risk 主要看公司的盈利增长和整体经济增长
的相关性，如果相关性很高，就是周期性公司。
2) Cyclical stock: have high betas; the company of the cyclical stock are more volatile than the
overall market 主要看股票的价格和市场指数的相关性，如果相关性很高，就是周期性
股票。
R74‐6 Speculative
1) Speculative company: the company’s assets involve risk but that also has the potential to
generate very large earnings; 通常主营业务很不稳定。
2) Speculative stock: usually overpriced, leading to a high probability of low or negative rate of
return; 虽然股价已经被高估，但仍有可能进一步上涨。
R75‐6 ★Growth vs. value stock
1) Growth stock: a stock of the company that is experiencing rapid growth and sales and
earnings; have high P/E and P/B ratios.
2) Value stock: undervalued for reasons other than earnings growth potential; usually has low
P/E and P/B ratios.

Q91‐6 Which of the following statements about peer groups is most accurate?
A. Constructing a peer group for a company follows a standardized process.
B. Commercial industry classification systems often provide a starting point for constructing a
peer group.
C. A peer group is generally composed of all the companies in the most narrowly defined
category used by the commercial industry classification system.

Solutions: B
Constructing a peer group is a subjective process, and a logical starting point is to begin with a
commercially available classification system. This system will identify a group of companies that
may have properties comparable to the business activity of interest.

Q92‐6 ★In which of the following life‐cycle phases are price wars most likely to be absent?
A. Mature.
B. Decline.
C. Growth.

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Solutions: C
The growth phase is not likely to experience price wars because expanding industry demand
provides companies the opportunity to grow even without increasing market share. When
industry growth is stagnant, companies may only be able to grow by increasing market share,
e.g., by engaging in price competition.

Q93‐6 ★★When graphically depicting the life‐cycle model for an industry as a curve, the
variables on the axes are: （原版书 R51‐21）
A. price and time.
B. demand and time.
C. demand and stage of the life cycle.

B is correct.
The industry life‐cycle model shows how demand evolves through time as an industry passes
from the embryonic stage through the stage of decline.

R76‐6 ★peer group 及相关概念：
¾ A peer group is a set of similar companies an analyst will use for valuation comparisons.
¾ To form a peer group, an analyst will often start by identifying companies in the same
industry classification, using the commercial classification providers previously described.
¾ The following are steps an analyst would use to form a peer group:
9 Use commercial classification providers to determine which firms are in the same industry.
9 Examine firms' annual reports to see if they identify key competitors.
9 Examine competitors' annual reports to see if other competitors are named.
9 Use industry trade publications to identify competitors.
9 Confirm that comparable firms have similar sources of sales and earnings, have similar
sources of demand, and are in similar geographic markets
9 Adjust financial statements of non‐financial companies for any financing subsidiary data
they include
R77‐6 Illustrate demographic, governmental, social, and technological influences on industry
growth, profitability, and risk.
¾ Macroeconomic factors can be cyclical or structural (longer‐term) trends, most notably
economic output as measured by GDP or some other measure. Interest rates，Credit
availability，Inflation.
¾ Technology can change an industry dramatically through the introduction of new or
improved products.
¾ Demographic factors include age distribution and population size, as well as other changes
in the composition of the population. As a large segment of the population reaches their
twenties, residential construction, furniture, and related industries see increased demand.
An aging of the overall population can mean significant growth for the health care industry
and developers of retirement communities.
¾ Governments have an important and widespread effect on businesses through various
channels, including taxes and regulation. The level of tax rates certainly affects industries,
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but analysts should also be aware of the differential taxation applied to some goods.
¾ Social influences relate to how people work, play, spend their money, and conduct their
lives; these factors can have a large impact on industries.
R78‐6 ★Industry Life Cycle
¾ In the embryonic stage, the industry has just started：Slow growth, High price, Large
investment required, High risk of failure
¾ In the growth stage, industry growth is rapid：Rapid growth, Limited competitive pressures,
Falling prices, Increasing profitability,
¾ In the shakeout stage, industry growth and profitability are slowing due to strong
competition: Growth has slowed, Intense competition, Increasing industry overcapacity,
Declining profitability, Increased cost cutting, Increased failures.
¾ In the mature stage, there is little industry growth and firms begin to consolidate：Slow
growth, Consolidation, High barriers to entry, Stable pricing, Superior firms gain market
share.
¾ In the decline stage, industry growth is negative: Negative growth, Declining prices,
Consolidation.
¾ Growth firms should be reinvesting in operations in an attempt to increase product
offerings, increase economies of scale, and build brand loyalty.
¾ Mature firms focus on cost efficiency because demand is largely from replacement. They
find few opportunities to introduce, new products. These firms should typically pay out cash
to investors as dividends.

Q94‐6 ★Which of the following industry characteristics is generally least likely to produce high
returns on capital?
A. High barriers to entry.
B. High degree of concentration.
C. Short lead time to build new plants.

Solutions: C
With short lead times, industry capacity can be rapidly increased to satisfy demand, but it may
also lead to overcapacity, and lower profits.

Q95‐6 Which of the following is not one of Porter's five forces?
A. Intensity of rivalry.
B. Bargaining power of suppliers.
C. Threat of government intervention.

Solutions: C
Although the threat of government intervention may be considered an element of some of
Porter's five forces, it is not one of the listed forces.

Q96‐6 An industry with high barriers to entry and weak pricing power most likely has:

350
A. high barriers to exit.
B. stable market shares.
C. significant numbers of issued patents.

Solutions: C
An industry that has high barriers to entry generally requires substantial physical capital and/or
financial investment. With weak pricing power in the industry finding a buyer for excess capacity
(i.e., to exit the industry) may be difficult.

Q97‐6 With respect to competitive strategy, a company with a successful cost leadership
strategy is most likely characterized by:

A. a low cost of capital.
B. reduced market share.
C. the ability to offer products at higher prices than competitors.

Solutions: A
Companies with low cost strategies must be able to invest in productivity‐improving equipment
and finance that investment at a low cost of capital. Market share and pricing depend on
whether the strategy is pursued defensively or offensively.

Q98‐6 ★ ★ Which of the following industries is most likely to be characterized as
concentrated with strong pricing power? （原版书 R51‐27）
A. Asset management.
B. Alcoholic beverages.
C. Household and personal products.

B is correct.
As displayed in Exhibit 4, the alcoholic beverage industry is concentrated and possesses strong
pricing power.

Q99‐6 ★★Which of the following industries is most likely to be considered to have the lowest
barriers to entry? （原版书 R51‐28）
A. Oil services.
B. Confections and candy.
C. Branded pharmaceuticals.

A is correct.
The oil services industry has medium barriers to entry because a company with a high level of
technological innovation could obtain a niche market in a specific area of expertise.

Q100‐6 An analyst finds that a company she is following has initiated the process of selling
unproductive land representing 5% of its total assets and using the proceeds to buy back
its common shares. Holding other factors constant these actions by the company will
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most likely result in a:
A. higher return on equity.
B. higher operating margin.
C. lower sustainable growth.

Correct answer: A
Selling unproductive land and using the proceeds from the sale to buy back shares reduces the
total assets. Holding sales constant, the decrease in assets would improve the asset turnover.
Buying back shares increases the firm’s financial leverage. Both the increase in asset turnover
and financial leverage will lead to a higher return on equity.

R79‐6 ★Industry Concentration
¾ High industry concentration does not guarantee pricing power
¾ Absolute market share may not matter as much as a firm's market share relative to its
competitors.
¾ If industry products are undifferentiated and commodity‐like, then consumers will switch to
the lowest‐priced producer.
¾ If the industry is capital intensive, and therefore costly to enter or exit, overcapacity can
result in intense price competition.
R80‐6 ★Ease of Entry
¾ In industries with low barriers to entry, firms have little pricing power.
¾ Capital, intellectual property, and customer base should be considered to assess the ease of
entry.
¾ Examine the composition of the industry over time. If the same firms dominate the industry
today as ten years ago, entry is probably difficult.
¾ High barriers to entry do not necessarily mean firm pricing power is high( overcapacity)
¾ Low barriers to entry do not ensure success for new entrants.
R81‐6 ★Capacity
¾ Undercapacity, a situation in which demand exceeds supply at current prices, results in
pricing power.
¾ Capacity is fixed in the short run and variable in the long run.
¾ However, producers may overshoot the optimal industry capacity, especially in cyclical
markets.
¾ Capacity is not necessarily physical. For example, an increase in demand for insurance can
be more easily and quickly met than an increase in demand for a product requiring physical
capacity, such as electricity or refined petroleum products.
¾ If capacity is physical and specialized, overcapacity can exist for an extended period if
producers expand too much over the course of a business cycle.
R82‐6 Market Share Stability
¾ Whether firms' market shares in an industry have been stable over time.
¾ Market shares that are highly variable likely indicate a highly competitive industry in which
firms have little pricing power.
¾ Switching costs, such as the time and expense of learning to use a competitor's product,
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tend to be higher for specialized or differentiated products.

R83‐6 Principles of strategy analysis of an industry
¾ Industries differ markedly in profitability because of differences in economic fundamentals,
industry structure, and degree of competition.
¾ ★The degree of economic profits depends in part on pricing power
¾ Rivalry among existing competitors：Rivalry increases when many firms of relatively equal
size compete within an industry. Slow growth leads to competition as firms fight for market
share, and high fixed costs lead to price decreases as firms try to operate at full capacity.
Industries with products that are undifferentiated or have barriers (are costly) to exit tend
to have high levels of competition.
¾ Threat of new entrants：Industries that have significant barriers to entry (e.g., large capital
outlays for facilities) will find it easier to maintain premium pricing.
¾ Threat of substitute products：Substitute products limit the profit potential of an industry
because they limit the prices firms can charge by increasing the elasticity of demand.
¾ Bargaining power of buyers：Buyers' ability to bargain for lower prices or higher quality
influences industry profitability. Bargaining by governments and ever‐larger health care
providers have put downward pressure even on patented drugs
¾ Bargaining power of suppliers：Suppliers' ability to raise prices or limit supply influences
industry profitability. Suppliers are more powerful if there are just a few of them and their
products are scarce.
¾ Summary（重要，请仔细阅读）
9 Higher barriers to entry reduce competition.
9 Greater concentration (a small number of firms control a large part of the market) reduces
competition, whereas market fragmentation (a large number of firms, each with a small
market share) increases competition.
9 Unused capacity in an industry, especially if prolonged, results in intense price competition.
9 Stability in market share reduces competition. For example, loyalty of a firm's customers
tends to stabilize market share and profits.
9 More price sensitivity in customer buying decisions results in greater competition.
9 Greater maturity of an industry results in slowing growth.
A company analysis should include the following elements:
9 Firm overview, including information on operations, governance, and strengths and
weakness.
9 Industry characteristics.
9 Product demand.
9 Product costs.
9 Pricing environment.
9 Financial ratios, with comparisons to other firms and over time.
9 Projected financial statements and firm valuation.

17‐6 DDM
Q101‐6 An analyst collected the following data about a listed company:
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Earnings per share 20
Dividend declared 3
Return on assets 6%
Debt/Equity ratio 1.4
Net profit margin 12%
The constant growth rate of dividends is closest to:
A. 2%
B. 12%
C. 20%

Solution: B
From debt/equity ratio we can calculate the Asset/Equity ratio=2.4.
ROE= ROA × Financial Leverage = 6% × 2.4 = 14.4%
g= ROE × retention ratio = ROE × (1‐ payout ratio) = 14.4% × (1‐3/20) = 12.24%

Q102‐6 ★Geo Telecommunications Inc. is a fast growing company with a double‐digit growth
rate that is expected to continue for three more years. In his pursuit of valuing the
company’s stock, Dimiter Nenkov, a free‐lance equity analyst, has compiled the following
data about the company:
Current years free cash flow to equity €20 million
Growth rate in free cash flow during the next three years 30% in years 1 and 2
20% in year 3
Growth rate in free cash flow for year 4 and beyond 8%
Weighted average cost of capital 12%
Cost of equity capital 15%
Number of outstanding shares 50 million
Based on the above information, Nenkov’s best estimate of the value per share for Geo
Telecommunications would be closest to:
A. €9.72.
B. €10.13.
C. € 17.17.

Solution: A
Time Period FCFE PVIF @15% Present Value
1 201.3=26 0.869 €22.61
2
2 201.3 =33.8 0.7561 €25.56
2
3 201.3 1.2=40.56 0.6575 €26.67
4&Beyond V3=（40.561.08）/(0.15 – 0.08)=625.78 0.6575 €411.46
Value of Equity €486.30
Value per share = Value of Equity / # of outstanding shares €9.72

Q103‐6 ★An investor uses the data below and the constant growth model to evaluate a
company's common stock. To estimate growth, she uses the average value of the:
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1. dividend growth rate over the period 2004‐2009 and
2. sustainable growth rate for the year 2009
Year EPS DPS ROE
2009 $3.20 $1.92 12%
2008 $3.60 $1.85 17%
2007 $2.44 $1.74 13%
2006 $2.08 $1.62 15%
2005 $2.76 $1.35 11%
2004 $2.25 $1.25 ‐ 9%
If her requited return is 15 percent, the stock's estimated value is closest to:
A. $23.71
B. $25.31
C. $30.14

Solution: B
Dividend growth rate over the period 2004‐2009= 1.25x(1+g)5=1.92; g=8.96%=9% Sustainable
growth rate for the year 2009;
retention rate= (1‐Dividend payout ratio)=[1‐(1.92/3.20)]=0.40
g= bxROE; g=0.40x12%=4.8%
Average of the two approaches=(9+4.8)/2=‐‐6.90%
V0=D1/(r‐g)=($1.92x1.069)/(0.15‐0.069)=32.05/0.081=$25.31

Q104‐6 ★The following data pertains to a margin purchase of a stock by an investor.
Stock's purchase price $50/share
Sale price $55/share
Shares purchased 500
Margin 45%
Call money rate 6%
Dividend $1.80/share
Transaction commission on purchase $0.05/share
Transaction commission on sale $0.05/share
If the stock is sold exactly one year after the purchase, the total return on the investor's
investment is closest to:
A. 14%
B. 19%
C. 22%

Solution: C
Proceeds on sale: $55x500 $27,500
Payoff loan: $55x500x0.55 ‐$13,750
Margin interest paid: $13,750x0.06 ‐$825
Dividend received: $1.80x500 +$900
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Sales commission paid: $0.05x500 ‐$25
Remaining equity $13,800
Initial investment (including commission): $11,275
($50x500x0.45)+($0.05x500)
Return on the initial investment: 22.4%
($13,800‐$11,275)/$11,275

Q105‐6 An investor evaluating a company's common stock for investment has gathered the
following data.
Current year's earnings per share $2.50
Dividend payout ratio 60%
Dividend growth rate expected during Year 1 and 2 25%
Dividend growth rate expected after Year 2 5%
Investors' requited rate of return 12%
The value per shore of this common stock is closest to:
A. $28.57
B. $31.57
C. $38.70

Solution: B
Current year's dividend per share =$2.50x0.6=$1.50
V=1.50(1.25)/1.12+1.50(1.25)2/1.122+1.50(1.25)2(1.05)/(0.12‐0.05)}/1.122 = $1.67+$1.87+ 28.03
=$31.57

Q106‐6 ★★The best model to use when valuing a voting dividend‐paying company that is just
entering We growth phase is most likely the: （原版书 R52‐19）
A. Gordon growth model.
B. two‐stage dividend discount model.
C. three‐stage dividend discount model.

C is correct.
The Gordon growth model is best suited to valuing mature companies. The two‐stage model is
best for companies that are transitioning from a growth stage to a mature stage. The three‐stage
model is appropriate for young companies just entering the growth phase.

R84‐6 DDM 掌握计算：
1. The general DDM
D1 D2 D3 D
value = 1
+ 2
+ 3
+…+
(1 + ke ) (1 + ke ) (1 + ke ) (1 + ke )
2. Multiple‐year holding period DDM
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D1 D2 P2
value = 1
+ 2
+
(1 + ke ) (1 + ke ) (1 + ke ) 2
¾ The constant growth DDM
D0 (1 + g c ) D1
PV0 = = (GGM)
ke - g c ke - g c
¾ Dividends grow at a constant rate g, 通过公式的变形，求 k 和 g 的关系。
D1
ke = + gc
PV 0
3. ★Sustainable growth (g)=(1‐dividend payout ratio)×ROE
¾ Assumption:
1) The firm expects to pay a dividend, D, in one year.
2) Dividends will grow at a constant rate, g, forever.
3) The growth rate(g) is less than the required rate(r)
¾ Limitations:
1) Very sensitive to estimates of r and g
2) Difficult with non‐dividend stocks
3) Difficult with unpredictable growth patterns(use multi‐stage model)
R85‐6 Free cash flow to equity model:
A. FCFE=net income+depreciation‐increase in working capital‐fixed capital investment
(FCInv)‐debt principle repayments+new borrowing.
B. FCFE= CFO‐FCInv+net borrowing
C. The required return for equity is calculated using CAPM model.

18‐6 P/E Ratio
Q107‐6 At the beginning of the year, a company’s book value per share is 8.5$, and its return on
equity is 12%; at the end of the year, the company’s book value per share is 12.5$, and
its return on equity is 15%. The stock price is 37.5. What is the company’s P/E ratio?
A. 35.6
B. 36.76
C. 22.22

Solution: C
37.5 / [12.5 (15% + 12%) / 2] = 22.22

Q108‐6 ★An investor gathers the following data. To estimate the stock's justified forward P/E,
the investor prefers to use:
y the earnings growth rate rather than the dividends growth rate and
y the average of the payout ratios over the relevant period, in this case 2006‐2009,
rather the most recent payout ratio.
Year EPS DPS ROE
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2009 $3.20 $1.92 12%

2008 $3.60 $1.80 17%
2007 $2.44 $1.71 13%
2006 $2.50 $1.60 15%
The yield on 10‐year T‐notes is 3 percent and the current equity risk premium is 6.5 percent.
If beta is 1.3, then the stock's justified forward P/E is closest to:
A. 12.
B. 16.
C. 21.

Solution: A
Earnings growth rate over the period 2006‐2009=2.05x(1+g)3=3.2; g=8.6%
Average payout ratio=(0.60+0.50+0.70+0.64)/4=0.61
Required rate of return on share i= Current expected risk‐free rate of return+ Betax[Market
(equity) risk premium]=3%+1.3(6.5%)=11.5%
P / E1 =p/(r‐g) =0.61/(0.115‐0.086)=0.61/0.029=21.0

Q109‐6 Which of the following is incorrect about the normalized earning?
A. using average historical earning because of business cycle
B. using average historical earning because of corporate size
C. using average ROE because of corporate size

Solution: B
To address the volatility of earnings resulting from the business cycle fluctuation, analyst use
average historical earnings or use average ROE as a proper indicator. As for the average ROE
method (average ROEcurrent book value per share), the recent book value reflects more
accurately the effect on EPS of growth or shrinkage in the company’s size.

Q110‐6 A price earnings ratio that is derived from the Gordon growth model is inversely related
to the:
A. growth rate.
B. dividend payout ratio.
C. required rate of return.

Solutions: C
The justified forward P/E is calculated as follows:
D1
P0 E
= 1
E1 r − g
P/E is inversely related to the required rate of return, r, and directly related to the growth rate, g
and the dividend payout ratio, D/E.
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Q111‐6 An analyst makes the following statement: "Use of P/E and other multiples for analysis is
not effective because the multiples are based on historical data and because not all
companies have positive accounting earnings." The analyst's statement is most likely:
A. inaccurate with respect to both historical data and earnings.
B. accurate with respect to historical data and inaccurate with respect to earnings.
C. inaccurate with respect to historical data and accurate with respect to earnings.

Solutions: A
The statement is inaccurate in both respects. Although multiples can be calculated from
historical data, forecasted values can be used as well. For companies without accounting
earnings, several other multiples can be used. These multiples are often specific to a company's
industry or sector and include price to‐sales and price to cash flow.

Q112‐6 An investor gathers the following data to estimate the intrinsic value of a company’s
stock using the justified forward P/E approach.
Next year’s earnings per share $3.00
Return on equity 12.5%
Dividend payout ratio 60%
Required return on shares 10%
The intrinsic value per share is closest to:
A. $36.
B. $48.
C. $72.

Correct answer A
Dividend growth rate = (1 ‐ Payout ratio) × ROE = 0.4 ×12.5 = 5%;
Justified forward P/E: P0 / E1 = p/ (r — g);
Where p is the payout ratio = 0.60 / (0.10 — 0.05) = 12×
intrinsic value:P0 = P/E1 × E1 = 12 × $3 = $36
P/E Ratio 计算：
R86‐6 区分 Trailing P/E (P0 / E0)，Leading P/E (P0 / E1)和 Normalized EPS。
market price per share

¾ trailing P / E =
EPS over previous 12 months

¾ leading P / E =
forecast EPS over next 12 month
¾ Justified P/E(使用 DDM 模型演算而来的 P/E):
D1 / E1 1- b
Leading P/E P0 /E1 = = P0 /E1 =
r -g r -g
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D1 / E1 (1 − b)(1 + g )
Trailing P/E P0 /E1 = =
k -g r−g
¾ P0 PR(= D1 / E1 ) ,以及不同的 k 和 g 的组合对其大小影响

=
E1 k-g
R87‐6 required rate of return 所包含的三个因素：RFRreal，IP，RP。
¾ k=required rate of return=(1+RFRreal)(1+IP)(1+RP)‐1
¾ k= required rate of return(approximate)≈RFRreal+IP+RP
¾ g=(RR)(ROE)
R88‐6 ★adjustment earnings(due to cyclical earnings): normalized earnings
¾ Historical average EPS
9 Normal EPS is calculated as average EPS over the most recent full cycle.
9 The method does not account for changes in the business's size however.
¾ normalized earnings=average ROEBV0, for considering the scale of stock per share, much
better if the repurchase or stock dividend etc.
¾ By using recent book value per share, reflects more accurately the effect on EPS of growht
or shrinkage in the company's size.
¾ For that reason, the method of average ROE is sometimes preferred.

19‐6 Price Multiples
Q113‐6 ★Strongsville Fabricators Inc. uses the FIFO method or inventory valuation. Assuming a
rising costs environment and other factors held constant, Strongsville’s price‐to‐earning
and price‐to‐book multiples relative to those for another company that uses the LIFO
method or inventory valuation would be:
Price‐to‐earnings Multiple Price‐to‐book Multiple
A. overstated overstated
B. overstated understated
C. understated understated

Solution: C
In a rising costs environment, FIFO would result in higher earnings, higher ending inventory, as
well as higher book value of equity. Thus, both P/E and P/BV tend to be understated relative to a
comparable firm that uses LIFO method.

Q114‐6 ★The stocks of a bank are trading for 78 euros currently. An analyst lists the following
data:
Shares currently outstanding 1,000,000
Contributed capital 42,000,000
Additional paid‐in capital 135,000,000
Treasury stocks (50,000) 14,000,000
Ending retained earnings 21,000,000
The price/book value ratio is closest to:
A. 0.37
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B. 0.42
C. 0.18

Solution: B
P/B ratio = book value of equity / number of shares outstanding
= (42,000,000 + 135,000,000 + 21,000,000‐14,000,000) / 1,000,000=184, 78 / 184 = 0.42

Q115‐6 ★The latest annual report of Waterford Crossing Inc. contains the following data:
Common stock $0.50 par value — Issued (2,000,000 shares) $1,000,000
Additional paid‐in‐capital $10,000,000
Retained earnings $4,000,000
Treasury stock (500,000 shares) $5,000,000
Current price per share $15
The company’s ending inventories based on LIFO are valued at $500,000 and a footnote to
financial statements reports inventories valued using FIFO basis would be $600,000. The
company’s tax rate is 30%. The un‐adjusted and adjusted price‐to‐book values of Waterford
Crossing, respectively, are closest to:
Unadjusted P/BV Adjusted P/BV
A. $1.88 $1.94
B. $2.25 $2.10
C. $2.25 $2.42

Solution: B
Unadjusted Price‐to‐book Value Ratio Adjusted Price‐to‐book Value Ratio
BV per share = Inventory adj.: ($6 m ‐ $5 m) x 0.7 =$0.7 m;
$lm+$10m+$4m‐$5m=$10m/1.5mil.=$6.67. Adj. BV per hare=$lm+$10m+$4m‐$5m+
$0.7m=$10.7 m / 1.5 m =$7.13.
Price‐to‐book value =$15 / $6.67 =2.25 Adj. Price‐to‐book value =$15 / $7.13 =2.10

Q116‐6 An analyst has prepared a table of the average trailing twelve‐month price‐to‐earning
(P/E), price‐to‐cash flow (P/CF), and price‐to‐sales (P/S) for the Tanaka Corporation for
the years 2005 to 2008.

Year P/E P/CF P/S
2005 4.9 5.4 1.2
2006 6.1 8.6 1.5
2007 8.3 7.3 1.9
2008 9.2 7.9 2.3
As of the date of the valuation in 2009, the trailing twelve‐month P/E, P/CF, and P/S are,
respectively, 9.2, 8.0, and 2.5. Based on the information provided, the analyst may
reasonably conclude that Tanaka shares are most likely:
A. overvalued.
B. undervalued.
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C. fairly valued.

Solutions: A
Tanaka shares are most likely overvalued. As the table below shows: all the 2009 multiples are
currently above their 2005‐2008 averages.
Year P/E P/CF P/S
2005 4.9 5.4 1.2
2006 6.1 8.6 1.5
2007 8.3 7.3 1.9
2008 9.2 7.9 2.3
Average 7.1 7.3 1.7

Q117‐6 Enterprise value is most often determined as market capitalization of common equity
and preferred stock minus the value of cash equivalents plus the:
A. book value of debt.
B. market value of debt.
C. market value of long‐term debt.

Solutions: B
The market value of debt must be calculated and taken out of the enterprise value. Enterprise
value, sometimes known as the cost of a takeover, is the cost of the purchase of the company,
which would include the assumption of the company's debts at market value.

Q118‐6 An investor who wants to estimate the enterprise value multiple (EV/EBITDA) of a
company has gathered the following data:
Market value of debt $10million
Market capitalization $45million
Cash and short‐term investments $2.5million
EBITDA $15million
Firm’s marginal tax rate 40%
The company’s EV/EBITDA multiple is closest to:
A. 2.5.
B. 3.5.
C. 5.8.

Correct answer: B
Enterprise Value (EV) = Market capitalization + MV of debt + MV of preferred stock ‐ cash &
short‐term investments
EV = 45 + 10 ‐2.5 = 52.5; EV/EBITDA = 52.5 / 15 = 3.5

Q119‐6 A company’s series B, 8% preferred stock with a par value of $50 pays quarterly
dividends. Its current market value is $35. The shares are retractable (at par) with the
retraction date set for three years from today. Similarly rated preferred issues have an
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estimated nominal required rate of return of 12%. Analysts expect a sustainable growth
rate of 4% for the company’s earnings. The intrinsic value estimate of a share of this
preferred issue is closest to:
A. $33.33.
B. $45.02.
C. $52.00.

Correct answer: B
Because the current market value is well below the retraction price, retraction is likely and the
preferred share will be priced on the basis of retraction feature.
Quarterly dividend = ($50×0.08) /4 = $1 a share;
Quarterly required return = 12% / 4 = 3%;
V0= [$1/1.03 + 1/1.032 + 1/1.033 + ... + 1/1.0311 + 1/1.0312+ 50/1.0312] = $45.02
Using a financial calculator:
PMT = $1, N = 12; FV = $50; I = 3%; Compute PV = $45.02

Price Multiples 掌握概念及计算：
R89‐6 比较各价格乘数 P/E，P/BV，P/S，P/CF:
P/E =
EPS
market value of equity market price per share
P / BV = =
book value of equity book value per share

P/ S= =
total sales sales per share

P / CF = =
cash flow cash flow per share
注：CF = net income + depreciation+ amortization

adjusted CFO = CFO + [(net cash interest outflow)* (1- tax rate)]
cash flow = CF,adjusted CFO, FCFE, or EBITDA
R90‐6 应用：The security with the lower multiple is relatively undervalued compared to the
other one or its industry’s mean or median. 以及各 price multiple 的优缺点，适用行
业。
¾ P/E ratio is popular in the investment community
¾ Darwbacks of using the P/E ratio
1) Earnings can be negative
2) The volatile,transitory portion of earnings makes the interpretation of P/E difficult for
analysts
¾ P/B ratio can typically be used when P/E cannot and is more stable than P/E.P/B is an
appropriate measure in finance, investment, insurance, and banking firms.
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¾ ★Adjustment BV: report tangible book value per share, which is subtracting reported
intangible assets from common shareholders’ equity. The intangible assets include goodwill
(not really an asset) and patent (not separable). Certain adjustment may be appropriate for
comparability, such as the off‐balance sheet assets and liabilities, and the accounting rule.)
¾ Advantages of P/B
9 BV almost always>0
9 BV is more stable than EPS
9 Measure NAV per share, more fit for valuing companies composed chiefly of liquid assets,
such as finance institutions.
¾ Justified P/B: P/B=(ROE‐g)/(r‐g)
¾ Drawbacks of using the P/B ratio
1) P/BV ratios do not recognize the value of nonphysical assets such as human capital.
2) Inflation and technological change can cause the book and market value of assets to differ
significantly.
¾ ★P/S is meaningful even for distressed firms which BV can be negative. And sales/revenue
is not easy to manipulate.P/S is popular in mature or cyclical industries and start‐up
companies.
¾ P/S
¾ Advantages:
9 Meaningful even for distressed firms
9 Sales revenue not easily manipulated
9 Not as volatile as P/E ratios.
9 Useful in valuing mature, cyclical, and start‐up firms without record of earnings.
9 Differences in P/S may be related to differences in long‐run average returns.
¾ Disadvantages:
9 High sales do not imply high profits and cash flows.
9 Does not capture cost structure difference.
9 Revenue recognition practices still distort sales.
¾ ★P/CF
Advantages:
9 Cash flow is less subjected to manipulate than EPS.
9 More stable than P/E
9 Fit for differences in accounting conservatism between companies.
Disadvantages:
9 Difficult to estimate true CFO
9 FCFE is better but is more volatile and more frequently negative.
¾ ★EV/EBITDA
Enterprise value: it measures total company value, not only equity.
EV= market value of common stock+market value of preferred equity+market value of
debt+minority interest‐cash and investments.

Q120‐6 ★An analyst gathers the following information about a company:

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Balance Sheet
Assets Liabilities and Shareholders’ Equity
Cash $ 5,000 Accounts payable $ 10,000
Accounts receivable 15,000 Notes payable 15,000
Inventory 25,000 Long‐term debt 40,000
Net fixed assets 80,000 Common shareholders’ equity 60,000
Total assets $125,000 Total liabilities and equity $125,000
Additional Information
Number of outstanding shares 7,000
Market value of long‐term debt $45,000
Market value of accounts receivable and inventory 90% of reported values
Net fixed assets 120% of reported value
Accounts payable and notes payable Same as the reported value
Using asset‐based valuation approach, the estimated value per share is closest to:
A. $ 9.57.
B. $10.29.
C. $11.00.

Correct answer A
Market value of assets $5,000 + $40,000(0.90) + $80,000(1.20) $137,000
Market value of liabilities 10,000 + $15,000 + $45,000 $70,000
Estimated value per share ($137,000 ‐ $70,000) / 7,000 shares $9.57/share

Q121‐6 Which of the following is most likely a reason for using asset‐based valuation?
A. The analyst is valuing a privately held company.
B. The company has a relatively high level of intangible assets.
C. The market values of assets and liabilities are different from the balance sheet values.

Solutions: A
Asset‐based valuations are most often used when an analyst is valuing private enterprises. Both
B and C are considerations in asset‐based valuation but are more likely to be reasons to avoid
that valuation model rather than reasons to use it.

Q122‐6 An analyst collects the following data on the return on equity (ROE) and the payout ratio
for two companies, M and N. Using a required return of 12.4% for both companies, she
computes the justified forward P/E ratios, which are also given below.
Company Return on equity (%) Payout ratio (%) Justified forward P/E
M 12.0 30 7.5
N 14.0 40 10.0

If Company M increases its dividend payout ratio to 40% and Company N decreases its dividend
payout ratio to 30%, which of the following will most likely occur? The justified P/E ratio of:

A. both companies would increase.
B. both companies would decrease.
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C. Company M would increase but that of Company N would decrease.

A is correct. Dividend growth rate = (1 – Payout ratio) × ROE;
Justified forward P/E: P0/E1 = p/(r – g).
Using the new payout ratios, the justified forward P/Es, calculated below, of both firms would
increase.
Company M:
New dividend growth rate = (1 – 0.4) x 12% = 7.2%;
New Justified forward P/E = 0.4/(0.124 – 0.072) = 7.7x.
Company N:
New dividend growth rate = (1 – 0.3) x 14% = 9.8%;
New Justified forward P/E = 0.3/(0.124 – 0.098) = 11.5x.
R91‐6 ★Asset‐based valuation
¾ Equity value is the market or fair value of assets minus the market or fair value of liabilities.
¾ Applying asset‐based models is especially problematic for a firm that has a large amount of
intangible assets, on or off the balance sheet.
¾ Asset‐based model valuations are most reliable when the firm has: primarily tangible
short‐term assets, assets with ready market values, The firm will cease to operate and is
being liquidated.
¾ Asset‐based models are often used to value private companies
R92‐6 Compare the advantages and disadvantages of each category of valuation model.
Advantages of discounted cash flow models:
9 They are based on the fundamental concept o discounted present value and are well
grounded in finance theory.
9 They are wide accepted in the analyst community.
Disadvantages of discounted cash flow models:
9 Their input must be estimated.
9 Value estimates are very sensitive to input values.
★Advantages of comparable valuation using price multiples:
9 Evidence that some price multiples are useful for predicting stock returns.
9 Price multiples are widely used by analysts.
9 Price multiples are readily available.
9 They can be used in time series and cross‐sectional comparisons.
9 EV/EBITDA multiples are useful when comparing firm values independent of capital
structure or when earning are negative and the P/E ratio cannot be used.
★Disadvantages of comparable valuation using price multiples:
9 Lagging price multiples reflect the past.
9 Price multiples for cyclic firms may be greatly affected by economic conditions at a given
point in time.
9 A stock may appear overvalued by the comparable method but undervalued by a
fundamental method, or vice versa.
9 Different accounting methods can result in price multiples that are not comparable across
firms, especially internationally.
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9 A negative denominator in a price multiple results in a meaningless ratio. The P/E ratio is
especially susceptible to this problem.
★ Advantages of price multiple valuations on fundamentals:
9 They are based on theoretically sound valuation models.
9 They correspond to widely accepted value metrics.
★Disadvantages price multiple valuations based on fundamentals:
9 Price multiples based on fundamentals will be very sensitive to the inputs(especially the k‐g
denominator)
★Advantages of asset‐based models:
9 They can provide floor value.
9 They are most reliable when the firm has primarily tangible short‐term assets, assets with
ready market values, or when the firm is being liquidated.
9 They are increasing useful for valuing public firms that report fair values
★Disadvantages of asset‐based models:
9 Market values are often difficult to obtain.
9 Market values are usually different than book values.
9 They are inaccurate when a firm has a high proportion of intangible assets or future cash
flows not reflected in asset values.
9 Assets can not be difficult to value during periods of hyperinflation.

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7‐Fixed Income
1‐7 Embedded Options
Q1‐7 Inverse floaters are issues whose coupon rate moves in the opposite direction from the
reference rate. An analyst is reviewing a corporate bond with the following coupon
structure:
Coupon rate = 40% ‐ 2 × (10 ‐ year Treasury rate)
This corporate bond is most appropriately classified as a(n):
A. step‐up note.
B. inverse floater.
C. deferred coupon bond.

Solutions: B
The coupon formula for an inverse floater is:
Coupon rate = K ‐ I. × (Reference rate)
where K and L are values specified in the prospectus. The coupon rate is inversely related to the
reference rate.

Q2‐7 Which of the following is not an embedded option that benefits the bondholder?
A. A floor on a floater.
B. A conversion privilege.
C. An accelerated sinking fund provision.

Solutions: C
An accelerated sinking fund provision is an example of an option that benefits the bond issuer.

Q3‐7 ★Which of the following is not an embedded option that benefits the bondholder? （原
版书 R53‐15）
A. A floor on a floater.
B. A conversion privilege.
C. An accelerated sinking fund provision.

Solutions: C
An accelerated sinking fund provision is an example of an option that benefits the bond issuer.

Q4‐7 Sinking funds are most likely to:
A. reduce credit risk (default risk).
B. never allow issuers to retire more than the sinking fund requirement.
C. always reduce the outstanding balance of the bond issue to zero prior to maturity.

Solutions: A
Sinking funds are designed to reduce default risk (the crisis‐at‐maturity). If present in the
indenture, sinking funds must be met. They are not optional. Some sinking funds allow for
accelerated sinking funds provisions. Some sinking funds pay only part of the outstanding
balance, leaving a balloon payment at maturity.
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Q5‐7 If interest rates are expected to decline, an investor can earn a higher coupon interest
rate by purchasing a (n):
A. callable bond
B. inverse floater
C. floater with a cap

Solution: B
Inverse floaters have a coupon formula such that the coupon rate increases when the reference
rate decreases and decreases when reference rate increases. The coupon rate moves in the
opposite direction from the change in the reference rate.

Q6‐7 All else being equal, an increase in expected yield volatility is most likely to result in an
increase in the price of a/an:
A. Putable bond.
B. Callable bond.
C. Option‐free bond.

Solution: A
Putable bond’s price=option‐free bond’s price plus put option’s price
Callable bond’s price= option‐free bond’s minus call option’s price
An increase in interest rate volatility will increase in the price of both put and call option which in
turn will Increase in price of put option bond and decrease in price of long option bond

Q7‐7 ★An excerpt from the prospectus of a $200 million issue by Becton, Dickinson and
Company for the 7.15% Notes due October 1, 2009 states:
Optional Redemption We may, at our option, redeem all or any part of the notes. If we
choose to do so, we will mail a notice of redemption to you not less than 30 days and
not more than 60 days before this redemption occurs. The redemption price will be
equal to the greater of: 1) 100% of the principal amount of the notes to be redeemed;
and 2) the sum of the present values of the Remaining Scheduled Payments on the notes,
discounted to the redemption date on a semiannual basis, assuming a 360‐day year
consisting of twelve 30‐day months, at the Treasury Rate plus 15 basis points. （原版书
R53‐4）
A. What type of call provision is this?
B. What is the purpose of this type of call provision?

Solutions:
A. This provision is a make‐whole redemption provision (also called a yield maintenance
premium provision).
B. A make‐whole premium provision provides a formula for determining the redemption price,
called the make‐whole redemption price. The purpose of the provision is to protect the yield of
those investors who purchased the issue at its original offering.

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Q8‐7 ★Explain why a callable bond's price would be expected to decline less than an
otherwise comparable option‐free bond when interest rates rise. （原版书 R54‐2）

Solutions:
The price of a callable bond can be expressed as follows:
Price of callable bond = Price of option‐free bond
－Price of embedded call option
An increase in interest rates will reduce the price of the option‐free bond. However, to partially
offset that price decline of the option‐free bond, the price of the embedded call option will
decrease. This is because as interest rates rise the value of the embedded call option to the
issuer is worth less. Since a lower price for the embedded call option is subtracted from the
lower price of the option‐free bond, the price of the callable bond does not fall as much as that
of an option‐free bond.

Q9‐7 Which of the following is least likely a type of collateral for asset‐backed securities?
A. Credit cards.
B. Home equity.
C. Negotiable CDs.

Solutions: C
Negotiable CDs are a financial asset issued by a bank and are not collateralized. Both credit card
receivables and home equity loans are types of collateral used to support asset‐backed
securities.

Q10‐7 For a 10‐year floating‐rate security, if market interest rates change by 1 percent, the
change in the value of the security will most likely be:
A. zero
B. related to the security's coupon reset frequency.
C. Similar to an otherwise identical fixed‐rate security.

Solution: B
The interest rate sensitivity of a floating‐rate security comes primarily from the time remaining
until its next coupon reset.

Q11‐7 A. Short‐term investors such as money market mutual funds invest in floating‐rate
securities having maturities greater than 1 year. Suppose that the coupon rate is reset
everyday. Why is the interest rate risk small for such issues?
B. Why would it be improper to say that a floating‐rate security whose coupon rate
resets every day has no interest rate risk? （原版书 R54‐3）

Solution:
A. A floating‐rate security's exposure to interest rate risk is affected by the time to the next reset
date. The shorter the time, the less likely the issue will offer a below‐market interest raft until
the next reset date. So, a daily reset will not expose the investor of this floater to interest rate
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risk due to this factor. However, there is interest rate risk, which we will see in part B.
B. The reason there is still interest, rate risk with a daily reset floating ‐rate security is that the
margin required by the market may change. And, if there is a cap on the floater, there is cap risk.

Q12‐7 ★★An analyst made the following statement: "We expect interest rates to be very
volatile for the foreseeable future. I think we should buy floating‐rate securities because
they have less interest rate risk than fixed‐rate securities and the price will always reset
to par value." Is the analyst's statement most likely correct with respect to: （原版书
R54‐25）
relative interest rate risk? price reset?
A. No No
B. No Yes
C. Yes No
Solution: C
Floating rate securities generally have less interest rate risk than fixed coupon rate securities.
Reasons that the security might not reset to par include a change in the required margin that
investors demand (spread) or the security may have a cap on the floating interest rate.
Embedded Options 掌握概念及定性判断：
R1‐7 一些概念：
¾ Negative covenants: prohibitions on the borrower.
¾ Affirmative covenants: actions that the borrower promises to perform. 一般牵扯到 ratio，
都是 affiemative 的内容。
¾ Set‐up notes: it has coupon rates that increases over time at a specific rate.
¾ Deferred‐coupon bonds: 早期不负息，到了期末一次性付息（pay a lump sum at the end of
period）。
¾ Inverse floater, for example : coupon rate= 12%‐reference rate
¾ Inflation‐indexed bonds, for example : coupon rate= 3%+annual change in CPI
¾ Full price (dirty price) = clean price+ accrued interest.
R2‐7 概念：各种 embedded options
¾ Granted to issuers
1) The right to call the issue
2) The right of the underlying borrowers in a pool of loans to prepay principal above the
scheduled principal payment
3) Sink fund provision: 要求发行者必须以一定的速度偿还本金。
4) The accelerated sinking fund provision: allows the issuer the choice of retiring more than
the amount of bonds specified in the sinking fund requirement.
5) The cap on a floater：浮动利息债券，的利息上限利息
¾ Granted to bondholders
1) Conversion privilege
2) The right to put the issue
3) Floor on a floater：浮动债券利息的利息下限。
R3‐7 callable, putable Æ相对于 pure bond 来说 duration 变小 interest rate risk 下降; 但同
时，reinvestment risk 上升
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2‐7 Risk
Q13‐7 Compared with an otherwise identical amortizing security, a zero‐coupon bond will most
likely have:
A. less interest rate risk and more reinvestment risk
B. less reinvestment risk and more interest rate risk
C. the same reinvestment risk and less interest rate risk.

Solution: B
An amortizing security receives periodic payments of both interest and principal that must be
reinvested; therefore, it is exposed to reinvestment risk. A zero‐coupon bond has no
reinvestment risk since no cash flows are received that must be reinvested before maturity. As
zero‐coupon bonds do not have periodic cash flows, they have the highest interest rate risk for a
given maturity and a given change in market yields.

Q14‐7 An analyst made the following statement: "We should purchase Treasury notes because
they are risk‐free. Default risk is essentially non‐existent." Is the analyst's statement
correct with respect to:
risk‐free? default risk?
A. No No
B. No Yes
C. Yes No

Solutions: B
For practical purposes, the default risk on Treasury securities considered zero; however, other
risks associated in investing in Treasury securities include interest rate risk, yield risk,
reinvestment risk, inflation risk, and event risk.

Q15‐7 ★For the investor in a callable bond, what are the two forms of reinvestment risk? （原
版书 R54‐10）

Solution:
The first form of reinvestment risk is due to the likelihood the proceeds from the called issue will
be reinvested at a lower interest rate. The second form of reinvestment risk is the typical risk
faced by an investor when purchasing a bond with a coupon. It is necessary to reinvest all the
coupon payments at the computed yield in order to realize the yield at the time the bond is
purchased.

Q16‐7 ★What are the risks associated with investing in a bankers acceptance? （原版书
R55‐21）

Solution：
Investing in bankers acceptances exposes the investor to the risk that neither the borrower nor
the accepting bank will be able to pay the principal due at the maturity date; that is, the investor
faces credit risk. On the surface, Were is liquidity risk because there are few dealers who make a
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market in bankers acceptances. However, investors typically purchase bankers acceptances with
the intent of holding them to maturity. Consequently, in practice, liquidity risk is not a concern to
such investors.

Q17‐7 ★ A. Why is the default rate alone not an adequate measure of the potential
performance of corporate bonds?
B. One study of default rates for speculative grade corporate bonds has found that
one‐third of all such issues default. Other studies have found that the default rate is
between 2.15% and 2.4% for speculative grade corporate bonds. Why is there such a
difference in these findings for speculative grade corporate bonds?
C. Comment on the following statement: "Most studies have found that recovery rates
are less than 15% of the trading price at the time of default and the recovery rate does
not vary with the level of seniority." （原版书 R55‐18）

Solution：
A. The performance of corporate bonds will depend not only on the default rate, but the
recovery rate as well as the spread over Treasury securities.
B. The reason for the discrepancy is that these studies are measuring defaults over different
periods. Studies that find that one‐third default look at cumulative default rates over a period of
time. The 2.15% to 2.4% figure is an annual default rate.
C. The comment is wrong for two reasons. First, studies have found that the recovery rate is
about 38% of the trading price at the time of default. Second, studies have found that the higher
the level of seniority, the greater the recovery rate.

3‐7 理解并区别 Risks
Q18‐7 A U.S. investor who purchases an option‐free bond with a 7% coupon rate, maturing in
20 years, and issued by a U.S.‐based company is most likely exposed to:
A. Sovereign risk and credit risk.
B. Event risk and interest rate risk.
C. Interest risk and exchange‐rate risk.

Solution: B
The investor faces event risk in a corporate bond and interest rate risk in a long dated, fixed
coupon rate bond.
R4‐7 Risk associated with investing in bonds
¾ Interest rate risk: 市场利率上扬带来债券价格下跌的风险，用 duration 衡量，注意：只
适用于收益率曲线的平行移动。
¾ Yield curve risk: 收益率曲线非平行移动带来的风险。
¾ Prepayment&call risk:由债券提前偿付带来的再投资风险。
¾ Reinvestment risk: 市场利率下跌，到手现金流只能以较低利率投资的风险。
¾ Credit risk: 借款人的信用风险。包括 credit spred risk 和 down grade risk。
¾ Liquidity risk: 债券必须折价出售，带来损失的风险
¾ Inflation risk: 购买力被通胀侵蚀的风险。
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¾ Exchange rate risk：投资外国货币计价的债券由于外币贬值带来的损失。
¾ Volatility risk：波动性变动导致期权价值变动的风险，波动性上升期权价值上升，波动
性下降期权价值下降。
¾ Even risk：事件、灾害的风险。
¾ Sovereign risk：政治环境变动带来的风险。

4‐7 TIPS
Q19‐7 ★Suppose a portfolio manager purchases $1 million of par value of a Treasury inflation
protection security. The real rate (determined at the auction) is 3.2%.（原版书 R55‐4）
A. Assume that at the end of the first six months the CPI‐U is 3.6% (annual rate). Compute
the i) inflation adjustment to principal at the end of the first six months, ii) the
inflation‐adjusted principal at the end of the first six months, and iii) the coupon payment
made to the investor at the end of the first six months.
B. Assume that at the end of the second six months the CPI‐U is 4.0% (annual rate).
Compute the i) inflation adjustment to principal at the end of the second six months, ii)
the inflation‐adjusted principal at the end of the second six months, and iii) the coupon
payment made to the investor at the end of the second six months.

Solution: B
A. Since the inflation rate (as measured by the CPI‐U) is 3.6%, the semiannual inflation rate for
adjusting the principal is 1.8%.
i. The inflation adjustment to the principal is
$1,000,000 x 0.018 = $18,000
ii. The inflation‐adjusted principal is
$1,000,000 + Inflation adjustment to the principal
=$1,000,000 + $18,000 = $1,018,000
iii. The coupon payment is equal to
Inflation‐adjusted principal X (Real rate/2)
= $1,018,000 x (0.032/2) = $16,288.00

B. Since the inflation rate is 4.0%, the semiannual inflation rate for adjusting the principal is 2.0%.
i. The inflation adjustment to the principal is $1,018,000 X 0.02 = $20,360
ii. The inflation‐Austed principal is
$1,018,000 + Inflation adjustment to the principal
= $1,018,000 + $20,360 = $1,038,360
iii. The coupon payment is equal to
Inflation‐adjusted principal X (Real rate/2)
= 51,038,360 X (0.032/2) =‐ 516,613.76

Q20‐7 On January 1 of the year, an investor purchases $100,000 in par value of a new Treasury
Inflation Protection Security (TIPS) issue that has a 2.5% coupon rate. The annual rate of
inflation over the first six months of the year is 4.0% and the annual rate of inflation for
the second six months of the year is 3.0%. The amount of coupon interest paid to the
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investor after the second six months of the year is closest to:
A. $1,275.
B. $1,294.
C. $1,339.

Solution: B
The inflation‐adjusted principal after the second six month period is $100,000 × (1.02) × (1.015)
= $103,530 and $103,530 × (2.5%/2) = $1,294.

Q21‐7 A level payment, fixed‐rate, fully amortizing mortgage loan for $220,000 is obtained with
a term of 15 years, a mortgage rate of 6.0% with monthly compounding, and a monthly
payment of $1,856.49. Assuming that the borrower does not prepay or default, the
principal that is repaid during the first 3 months is closest to:
A. $660.
B. $2,281.
C. $3,667.

Solution: B
According to the table below showing the remaining principal balance after 3 monthly
payments.
Beginning Mortgage Principal Ending Balance
Month Balance Payment Interest Repayment
1 220,000.00 1,856.49 1,100.00 756.49 219,243.51
2 219,243.51 1,856.49 1,096.22 760.27 218,483.24
3 218,483.24 1,856.49 1,092.42 764.07 217,719.17

5‐7 ABS
Q22‐7 Regarding asset‐backed securities, which of the following statements is the most
appropriate?
A. A special purpose vehicle is a subsidiary of the company which disposes its assets.
B. Once the assets are securitized, the company owns no longer the assets.
C. The company will take advantage of a credit enhancement as long as the cost of
enhancement exceeds the reduction of the financing cost.

Solution: B
If securitized, the company will no longer hold the asset.

6‐7 CMO
Q23‐7 The spread between the yields on a Ginnie Mae passthrough security and a comparable
Treasury security is best explained by:
A. credit risk.
B. prepayment risk.
C. reinvestment risk.

375
Solution: B
Mortgage‐backed securities expose an investor to prepayment risk.

Q24‐7 ★★Each of the option‐free bonds listed below has a par value of $1,000: （原版书
R57‐20）
Bond 1 Bond 2
Time to maturity 10 years 10 years
Annual coupon rate 5.0% 7.0%
Discount rate today 6.5% 6.5%

Which of the following statements about the two bonds is most accurate? If the discount rate for
each of the bonds remains at 6.5 percent for ten years, the passage of time will result in a
decrease in value for:
A. Bond 1 only.
B. Bond 2 only.
C. both of the bonds.

B is correct.
Bond 1 is currently selling at a discount to par and Bond 2 is selling at a premium to par. If the
discount rate does not change for either bond, Bond 1 will increase in price and Bond 2 will
decrease in price because all bonds are expected to mature at par value.
R5‐7 Sovereign bonds: bonds issued by a country's central government.
9 Treasure securities: T‐bills (zero coupon bonds, with maturities less than 1 year),
T‐notes (maturities of 2,3,5, and 10 years. T‐bonds (20 and 30 years), TIPS (par value
begins at $ 1000, and is adjusted semiannually for changes in the CPI).
R6‐7 On‐the‐run issues are most recently auctioned Treasury issues; Off‐the‐run issues are
older issues that have been replaced by a more recently auctioned issues.
9 Treasure strips: coupon strips (strips created from coupon payments) and principal
strips (bonds and notes with the coupons stripped off).
¾ Agency bonds: 政府机构发行债券。（Ginnie Mae, Freddie Mae, and Fannie Mae)
¾ Debenture: 没有抵押品的债券。
¾ Mortgage‐backed securities (MBS): 使用购房抵押贷款做抵押发行的债券。
¾ Asset‐backed‐securities (ABS): 使用除购房抵押贷款以外的贷款（如购车贷款/信用卡贷
款/小企业贷款等），做抵押，发行的债券。
¾ Municipal bonds: 地方政府发行的债券。一般是免税的。Tax‐backed bonds, 也叫 general
obligation ( 用政府税收作抵押的债券，分为 limited general GO, unlimited GO,
double‐barreled bonds, and appropriation‐backed obligations). Revenue bonds (某项工程
收入担保的债券，例如高速公路）。Revenue bond 风险要高于 tax‐backed bond。
¾ Insured bonds: 由第三方担保的债券。
¾ Prefunded bonds: 由一定数额的 Treasury securities 作担保的债券。
¾ Structure Notes: bond+derivatives.
¾ CD: 定期存款。 Banker Acceptance：银行承兑。
¾ Collaterallized debt obligation: 用其他金融产品抵押，发行的债券
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R7‐7 Credit enhancement(信用增强）:
9 Third‐party guarantee.
9 Letters of credit
9 Bond insurance.
R8‐7 SPV: a separate legal entity to which a corporation transfers the financial assets for an
ABS issue. SPV 的目的是增强企业发行债券的信用评级，降低融资成本。
R9‐7 CMO 掌握概念以及比较：
¾ 概念：created from mortgage passthrough securities but has different tranches. CMO is
created to redistribute prepayment risk.
¾ 与 Treasury security 相比较：prepayment risk 更高
¾ 与 MBS 相比较：total prepayment risk 一样，只是对其重新分配，不同的 tranche 的
prepayment risk 不一样
¾ Striped mortgage‐backed securities: either the principle (PO) or interest portions (IO )of a
mortgage passthrough security. 当提前还款发生时，IO 收到的后续现金流将减少，PO
则提前收到更多的现金流。

7‐7 Term Structure 的三种理论（纯预期、流动性偏好、市场分割）
Q25‐7 According to the Liquidity Preference Theory, is the term structure of interest rates most
likely related to:
Expectations about Interest rate risk?
future rates?
A. No Yes
B. Yes No
C. Yes Yes

Solution: C
The Liquidity Preference Theory asserts that market participants want to be compensated for the
interest rate risk associated with holding long‐term bonds. The longer the maturity, the greater
the price volatility when interest rates change and investors want to be compensated for this risk.
According to the Liquidity Preference Theory, the term structure of interest rates is determined
by expectations about future rates and a yield premium for interest rate risk. As interest rate risk
increases with maturity, the Liquidity Preference Theory asserts that the yield premium increases
with maturity.

Q26‐7 Can an inverted (i.e., downward sloping) yield curve occur with the three theories of the
term structure of interest rates? (Pure expectations theory, liquidity preference theory,
and market segmentation theory.)
A. Yes.
B. All except pure expectations.
C. All except liquidity preference.

Solutions: A
An inverted yield curve can occur under all three of the theories.
377

Q27‐7 According to the market segmentation theory, an upward sloping yield curve is most
likely due to:
A. Investor expectations that short‐term interest rates will rise in the future.
B. Different levels of supply and demand for short‐term and long‐term funds.
C. An increasing yield premium required by investors for bearing interest rate risk.

Solution: B
The market segmentation theory asserts that the supply and demand for funds determine the
interest rates for each maturity sector.

R10‐7 比较 Term Structure 的三种理论：
¾ The pure expectations theory argues that the rates at longer maturities depend on
expectation of future short term rates. So the liquidity preference theory adds an increasing
term premium to all yield curve point.
¾ According to the Liquidity Preference Theory, the term structure of interest rates is
determined by expectations about future rates and a yield premium for interest rate risk.
¾ The market segmentation theory asserts that the supply and demand for funds determine
the interest rates for each maturity sector.
¾ 三种理论都是可以产生任何形状的 yield curve.
R11‐7 Spot rate& forward rate.
¾ 掌握 spot rate 和 forward rate 的计算，要知道，spot rate 是从当期算起，forward rate
是从未来时期算起。
¾ If spot rate curve is upward sloping, forward rate>spot rate> par yield rate
R12‐7 Credit spread: decline during an expanding economy; credit spreads widen during
recession.
R13‐7 LIBOR: 理解 LIBOR 的定义，它是以美元为基准的利率，是单利是借款利率。
8‐7 Bond Price
Q28‐7 An 8% coupon bond with a par value of $100 matures in 6 years and is selling at $95.51
with a yield of 9%. Exactly one year ago, this bond sold at a price of $90.26 with a yield
of 10%. The bond pays annual interest. The change in price attributable to the change in
maturity is closest to:
A. $1.03.
B. $4.22.
C. $5.25.

Solution: A
The price of the bond one year ago was $90.26 at a yield of 10%.
The price of the bond today assuming a yield of 10% is
N=6, I/Y=10, PMT=8, FV=100, CPT PV=‐91.29
The change in price attributable to moving to maturity = $91.29 ‐‐$90.26 = $1.03

Q29‐7 A bond with 14 years to maturity and a coupon rate of 6.375 percent has a
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yield‐to‐maturity (YTM) of 4.5 percent. Assuming the bond's YTM remains constant, the
bond's value as it approaches maturity will most likely:
A. increase.
B. decrease.
C. remain constant.

Solutions: B
The bond is selling at a premium (coupon rate >YTM). As it approaches maturity, the bond's
value will decrease towards par value

R14‐7 特别注意：计算的时候保持其他要素不变，仅改变影响因素，便可求得由该因素变
化引起的价格变化。同理，如果例题中所求的不是到期期限变化（从 7 年到 6 年）
对价格影响而是到期收益率变化（从 10%到 9%）对价格的影响，则假设不变的不再
是到期收益率（10%）是到期期限（6 年）。求得：
N=6, I/Y=9, PMT=8, FV=100, CPT PV=‐95.51
N=6, I/Y=10, PMT=8, FV=100, CPT PV=‐91.29
用 95.51‐91.29=4.22 .即为 change in price attributable to the change in yield

9‐7 Yield Ratio 和 Taxable‐equivalent Yield
Q30‐7 A U.S. investor has purchased a tax‐exempt 5‐year municipal bond at a yield of 3.86%,
which is 100 basis points less than the yield on a 5‐year option‐free U.S. Treasury. If the
investor’s marginal tax rate is 32%, then the taxable‐equivalent yield and the yield ratio
are closest to:
Taxable Equivalent Yield Yield Ratio
A. 2.62 0.79
B. 5.68 0.79
C. 5.68 1.26

Solution: B
Taxable equivalent yield = (tax‐exempt yield) / (1 ‐ marginal tax rate) =3.86 / (1 ‐ 0.32) = 5.68%
Yield ratio = (yield on tax‐exempt bond) / (yield of US Treasury) =3.86 / (3.86 + 100bp) = 3.86 /
4.86 = 0.79.

Q31‐7 A futures trader takes a long position of 10 contracts. The initial margin requirement is
$10 per contact and the maintenance margin requirement is $7 per contract. She
deposits the required initial margin on the trade date. On Day 3, her margin account
balance is $40. What is the variation margin on Day 4?
A. $30
B. $60
C. $100
Solution: C
The tax‐equivalent yield= tax‐exempt yield/ (1‐marginal tax rate) =5.20%(1‐0.335)=7.82%
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Yield ratio 和 Taxable‐equivalent yield 掌握计算：
R15‐7 Yield ratio 计算：yield ratio = subject bond yield / benchmark bond yield
¾ 如果两个 yields 中有一个是国债的，那么：
Yield ratio = (yield on tax‐exempt bond) / (yield of US Treasury)
Absolute yield spread = yield on the higher‐yield bond – yield bond on the lower‐yield bond
¾ Relative yield spread = absolute yield spread/ yield on the benchmark bond
R16‐7 taxable‐equivalent yield 计算：
Taxable equivalent yield = (tax‐exempt yield) / (1 ‐ marginal tax rate)

10‐7 BEY
Q32‐7 An annual‐pay bond has a yield to maturity of 5.00%. The bond‐equivalent yield of the
annual‐pay bond is closest to:
A. 4.94%.
B. 5.00%.
C. 5.06%.

Solution: A
The bond‐equivalent yield of an annual‐pay bond = 2[(1+ yield on annual‐pay bond) 0.5 – 1] =
2[(1+0.05)0.5 – 1] = 0.0494 = 4.94%

BEY 掌握概念，计算以及与其他 yields 的换算：
R17‐7 概念：semiannual‐pay YTM (2 the semiannual discount rate)
R18‐7 计算并比较 BEY，EAY，monthly CFY: is used for mortgage‐backed securities and other
amortizing asset‐backed securities that have monthly cash flows.
¾ BEY = [(1+monthly CFY)6‐1]2 = [(1+EAY)1/2‐1]2
¾ t
PV = FV *(1- rBD * )
360
¾ t
FV = PV *(1 + rMM * )
360
¾ FV
HPY = HPR = -1
PV
t t
¾ FV = (1 + EAR ) 360 * PV 1 + HRY = (1 + EAR ) 360
¾
t
BEY 2* 365 P1 - P0 + D1
1 + HRY = (1 + ) HPR =
2 P0
¾ rBD
rMM =
t
1- * rBD
360

11‐7 Repo Rate
Q33‐7 If an institutional investor wants to borrow money for 30 days to finance a bond
purchase, which of these is most likely to be the lowest loan rate available?
380
A. Term repo rate
B. Call money rate
C. Broker loan rate

Solution: A
For institutional investors the term repo rate is less than the cost of bank financing (i.e., broker
loan rate or call money rate.)

掌握 Collateralized Loan 的概念及其两种方式
R19‐7 Margin Buying Arrangement:
¾ Borrowing funds from a broker or a bank to purchase securities (collateral: the securities
themselves).
¾ The margin amount is regulated by the Federal Reserve.
R20‐7 Repurchase (repo) Agreement
¾ An institution sells a security with a commitment to buy it back at a later date at a specified
price.
¾ Most bond‐dealer financing is achieved through repurchase agreements rather than through
margin loans.
¾ Repurchase agreements are not regulated by the Federal Reserve.
¾ Collateral position of the lender in a repo is better in the event of bankruptcy of the dealer.
(liquidity)

12‐7 Nominal Spread、Z‐Spread 和 OAS
Q34‐7 The difference between nominal spread and zero‐volatility spread will most likely be
greater for a:
A. zero coupon Treasury security
B. U.S. Treasury security with short maturity in a flat yield curve environment
C. mortgage‐backed security in a steep upward‐sloping yield curve environment

Solution: C
The difference between the Z‐spread and the nominal spread is greater for issues in which the
principal is repaid over time rather than only at maturity. In addition, the difference between the
Z‐spread and the nominal spread is greater in a steep yield curve environment.

Q35‐7 Assume the Treasury spot‐rate yield curve is upwoard sloping. Compared to the nominal
yield spread between a Treasury bond and an option‐free corporate bond of similar
maturity, the Z‐spread will be:
A. Greater than the nominal spread
B. Less than the nominal spread
C. equal to the nominal spread

Solution: A
The Z‐spread will be greater than nominal spread when the spot yield curve is upward sloping.
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Q36‐7 The option adjusted spread (OAS) is best described as the:
A. Z‐spread minus the option cost.
B. Z‐spread plus the cost of the option.
C. effect of changes in interest rates on the value of the security

Solution: A
The Z‐spread is the sum of the OAS and the option cost.

Q37‐7 ★★With respect to bond yield spreads, is the term structure of spot rates considered
when determining the: （原版书 R58‐31）
nominal yield spread? zero‐volatility yield spread?
A. No No
B. No Yes
C. Yes No

B is correct.
One of the drawbacks of the nominal yield spread measure is that the term structure of spot
rates is ignored. The zero‐volatility yield spread takes the term structure into account by using
the entire yield curve to determine the spread over the life of the issue; the nominal yield spread
uses only one point on the curve.

Q38‐7 ★★If the Treasury par yield curve is upward sloping, will the short‐term forward‐rate
curve always lie above the Treasury: （原版书 R58‐32）
par yield curve? theoretical spot curve?
A. No Yes
B. Yes No
C. Yes Yes

C is correct.
Forward rates are always greater than par or spot rates if the par yield curve is upward sloping.
Conversely, forward rates are always less than par or spot rates if the par yield curve is
downward sloping.

Q39‐7 ★★Consider the following statements about callable bonds:
Statement 1: "Given a callable bond's price and relative to a given spot rate curve, more
than one zero‐volatility spread (Z‐spread) might exist depending on the outcomes of the
specific model used to generate the zero‐volatility spread."
Statement 2: "Given a callable bond's price and relative to a given spot late curse, more
than one option‐adjusted spread (OAS) might exist depending on the outcomes of the
specific model used to generate the option‐adjusted spread."
Are the statements most likely correct or incorrect? （原版书 R58‐36）
A. Both statements are correct.
B. Statement 1 is incorrect, but Statement 2 is correct.
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C. Statement 1 is correct, but Statement 2 is incorrect.

B is correct.
OAS is model dependent, the Z‐spread is not.

R21‐7 比较 Nominal Spread 和 Z‐Spread：
¾ Nominal spread 是债券 YTM 和 T‐security 的利率之差。
1) Nominal spread 没有考虑利率的期限结构，Z‐spread 考虑了利率的期限结构。
2) 收益率曲线越陡峭，本金越多，时间越长，Nominal Spread 和 Z‐Spread 差距越大。
3) 当收益率曲线是平的时候，N‐spread 与 Z‐spread 是相等的。
4) 当收益率曲线向上倾斜时，Z‐spread 大于 N‐spread；当收益率曲线向下倾斜时，Z‐spread
小于 N‐spread
5) 债券的本金越早收回（可以是因为提前还款或者赎回），两者差异越大。
¾ For a given positively sloped yield curve, an amortizing security, such as an MBS, will have a
greater difference between its Z‐spread and nominal spread than a coupon bond will.
R22‐7 Z‐spread 和 OAS 的概念和比较：
¾ OAS 是对除了 option risk 以外的风险的补偿，主要是对信用风险和流动性风险的补偿。
¾ 根据 Z‐spread 和 OAS 来判断 embedded option：
¾ OAS = Z‐spread‐option cost in percent
callable bond: Z‐spread > OAS 也就是说 you require more yield on the callable bond;
putable bond: Z‐spread < OAS 也就是说 you require less yield on the putable bond than for an
option‐free bond.

13‐7 Spot rate 和 Forward Rate
Q40‐7 Dimitry Kha, CFA, examines the following information:
Period Years Spot rate (BEY%) Forward rate (BEY%)
1 0.5 4.10% 4.10%
2 1.0 4.35% 4.60%
3 1.5 4.50%
The 6‐month forward rate 1 year from now is closest to:
A. 4.70%.
B. 4.75%.
C. 4.80%.

Solution: C
To determine the 6‐month forward rate in one year, divide the 1.5 year spot rate by the 1 year
spot rate:
4.50% 3
(1 + )
2 -1 = 2.40%, or 4.80% BEY
4.35% 2
(1 + )
2

Q41‐7 An analyst has gathered the following information provided in the table below:
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Period Years Treasury Spot Rate (%) Credit Spread (%)

1 1 3.00 0.20
2 2 3.50 0.30
3 3 4.00 0.40
4 4 4.50 0.50
5 5 5.00 0.60
Based on the information provided in the table, the current market price of a $1,000 par value,
option‐free, 0% coupon corporate bond maturing in 5 years is closest to:
A. $758.70.
B. $781.20.
C. $804.44.

Solution: A
Interest rate is 5.6% = 5% + 0.6%. The semiannual interest rate is 2.8%. The price of the bond,
using semiannual discounting is:
$1000
= $758.70
1.02810

Spot Rate 和 Forward Rate 计算能出现的所有考法：
R23‐7 了解 forward rate 的表示方法，如 nfm 是指 m 年后开始的 n 期远期利率
R24‐7 根据 spot rate 计算 forward rate：（1 + mS0）m (1 + nfm）n = (1 + m+nS0) m+n
R25‐7 利用 spot rate 和 forward rate 对债券进行估值（arbitrage‐free bond valuation）
CF1 CF2 CFn

bond value = + +…
(1 + s1 ) (1 + s2 ) 2 (1 + sn ) n

14‐7 Callable Bond 和 Putable Bond
Q42‐7 All else equal, an increase in expected yield volatility is most likely to result in an
increase in the price of a (n):
A. putable bond
B. callable bond
C. option‐free bond selling at a discount to par

Solution: A
An increase in expected yield volatility increases the price of the embedded put option. The price
of a putable bond will increase because the price of the putable bond is equal to an option‐free
bond plus the put option.

Q43‐7 ★★ At yield levels that are close to the bond's coupon rate, is the price of an
option‐free bond higher than the price of an otherwise identical: （原版书 R59‐20）
callable bond? putable bond?
A. No No
B. No Yes
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C. Yes No

Solution: C
When yield levels are relatively low, the price of a comparable callable bond will be lower than
the price of the option‐free bond because the likelihood of a call is substantial. The putable bond
will trade at a higher price because of the put option.

Q44‐7 ★★Consider the following statements about bond price volatility.
Statement 1: "If interest rates increase dramatically, callable bonds can exhibit negative
convexity."
Statement 2: "The higher the level of interest rates, the lower the price volatility of a bond to
changes in interest rates."
A. Both statements are incorrect.

Solution: B
Callable bonds can exhibit negative convexity at low interest rates. Bond prices are less
responsive to changes in interest rates at high levels of interest rates than they are at low levels
of interest rates.

Q45‐7 ★Consider the following statements about non‐callable bonds.
Statement 1: "For non‐callable bonds, duration provides only a linear approximation of a bond's
price changes as interest rates change."
Statement 2: "Incorporating convexity into the analysis of a non‐callable bond's price changes as
interest rates change always results in higher bond price estimates than derived by using only ‐
the bond's duration. This is true whether interest rates increase or decrease."

Solution: A
Duration is a linear approximation. It is the tangent line to the actual bond pricing curve for a
given starting point (interest rate). The actual pricing curve for an option‐free bond is convex.
Because of convexity, as you move away from the tangency (the starting point), actual prices (i.e.,
those on the actual pricing curve) will always be above the tangent line.

Callable Bond 和 Putable Bond 掌握概念、计算、理解图：
R26‐7 概念：callable bond 是对 issuer 有利，putable bond 是对投资者有利
¾ 计算：yield to call, yield to first call, yield to first par call, yield to put, yield to worst, yield to
refunding
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¾ Yield to refunding: bond is currently callable, and current rate make calling the issue
attractive to the issuer, but where the bond covenants contain provisions giving protection
from refunding until future date.
¾ 理解图：callable bond 在利率较低是显示出负凸性 (negative convexity)，putable bond
在利率较高时价格下降的少一些。
R27‐7 YTM 的 limitation:
¾ The yield to maturity assumes cash flows will be reinvested at the YTM and assumes that
bond will be held until maturity.
R28‐7 掌握 bootstrapping 的方法

15‐7 Duration
Q46‐7 An analyst determines that if Interest rates increase 120 basis points, the price of a bond
would be $89.70, but if Interest rates decrease 120 basis points, the price of that bond
would be $99.30. If the initial price of the bond is $95.40, the approximate percentage
price change for a 100 basis point change in yield is closest to:
A. 2.5%
B. 4.2%.
C. 8.4%.

Solution: B
Price if yields decline ‐ price if yields increase / 2(initial price)(change in yield in decimal) = 99.3
‐89.7 / 2 (95.4)0.0120 = 4.19287.

Q47‐7 Which one of the follow option‐free bond has the biggest interest rate risk?
Coupon rate Maturity
A. 4% 5 years
B. 4% 10 years
C. 10% 10 years

Solution: B
The longer the maturity, the greater the interest rate risk
The lower the coupon rate, the greater the interest rate risk

Q48‐7 The duration of a fixed‐Income portfolio is best interpreted as the:
A. first derivative of the price function for the bonds in the portfolio.
B. percentage change in the portfolio’s value if interest rates change by 100 basis points.
C. weighted average number of years to receive the present value of the portfolio’s cash flows.

Solution: B
Users of this interest rate risk measure are interested in what it tells them about the price
sensitivity of a bond or a portfolio to change in interest rates.

Q49‐7 An investor holds two bonds in her portfolio as follows:
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Bond Market Value ($) Duration

3‐year, 6% coupon 300,521 2.67
10‐year, 5% coupon 567,000 6.41
The portfolio's duration is closest to:
A. 4.54.
B. 5.11.
C. 5.45.

Solutions: B
The portfolio duration is the weighted‐average of the individual bonds in the portfolio and is
calculated as follows:
Total portfolio value = ($300,521 + 567,000) = $867,521.
The weighted average = (300,521 / 867,521) × 2.67 + (567,000 / 867,521) × 6.41 = 5.11.

Q50‐7 From the time of issuance until the bond matures, which of the following bonds is most
likely to exhibit negative convexity?
A. A putable bond.
B. callable bond.
C. an option‐free bond selling at a discount.

Solutions: B
The likelihood of call is much greater at low yield Ievels (relative to the coupon rate) than at high
yield levels. The price appreciation of a callable (prepayable) bond is less than the bond's price
decline when yields change by a large number of basis points. The other two bonds do not have
negative convexity.

Q51‐7 Consider a $100 par value bond with a 7 percent coupon paid annually and 5 years to
maturity. At a discount rate of 6.0 percent, the value of the bond is $104.21. One year
later, the appropriate discount rate has risen to 6.5 percent and the bond's value is
$101.71. What part of this change in value is most likely attributable to the passage of
time?
A. $0.37
B. $0.74
C. $1.76

Solution: B
With 4 years remaining to maturity and a discount rate that is unchanged at 6.0 percent, the
value of the bond would be $103.47 or
N=4, I/Y=6, PMT=7, FV=100, CPT(PV)=103.47

Q52‐7 ★What measure can a portfolio manager use to assess the interest rate risk of a
portfolio to a change in the 5‐year yield? （原版书 R54‐9）

387
Solution:
The approach is rate duration. Specifically, the 5‐year rate duration indicates the approximate
percentage change in the value of the portfolio if the yield on all maturities are unchanged but
the yield for the 5‐vear maturity changes by 100 basis points.

Q53‐7 ★A client is reviewing information about the portfolio. For one of the issues in the
portfolio the client sees the following: （原版书 R59‐7）
Issue Maturity Duration
X 10 years 13

The client has questioned you as to whether or not the reported duration of 13 is correct. The
client's concern is that he has heard that duration is some measure of time for a bond and as
such cannot exceed the maturity of the security. Yet, the duration of Issue X exceeds its maturity.
What explanation do you give to the client?

Solution:
If one interprets duration as some measure of time, it is difficult to understand why a bond will
have a duration greater than its maturity. Duration is the approximate percentage price change
of a bond for a 100 basis point change in interest rates. It is possible to have a security with a
maturity of 10 years and a duration of 13.

Q54‐7 ★★★Suppose that a 7% coupon corporate bond is immediately callable. Also suppose
that if this issuer issued new bonds the coupon rate would be 12%. Why would the
modified duration be a good approximation of the effective duration for this bond? （原
版书 R59‐10）
Solution:
Because the issue's coupon rate is substantially below the prevailing rate at which the issue can
be refunded (500 basis points below), this issue is not likely to be called. Basically, if rates are
shocked up and down, the expected cash flows are not likely to change because the coupon rate
is so far below the market rate. Thus, modified duration‐which assumes that the expected cash
flow will not change when rates are changed‐will be a good approximation for effective duration.

Q55‐7 ★★The duration of an option‐free bond priced at $900 is 8.5. If yields decrease by 150
basis points, the most accurate statement about the actual price of the bond after the
decrease in yields is that the actual price will be: （原版书 R59‐21）
A. equal to $1,014.75.
B. greater than 1,014.75.
C. less than 1,014.75 because the lower level of yields increases the bond's interest rate risk.

Solution:
B The price adjustment for duration can be calculated as follows:
8.5 X (0.015) X 100 = 12.75%.
$900(1.1275) = $1,014.75
This adjusts the price for duration only. Because the bond is option‐free and the change in yield
388
is large, using duration alone underestimates the actual price of the bond because of the effect
of convexity. Once an adjustment is made for convexity, the price would be greater than
$1,014.75.
Duration 的定义和计算：
R29‐7 定义
¾ duration 是未来现金流的按现值加权平均的回流时间
¾ effective duration 计算：duration = (V‐－V+) / 2V0(△y)
¾ Effective duration: 相对于 modified duration，考虑了 option 的影响。
¾ duration 对价格的影响：△P = ‐ effective duration×△y×P
R30‐7 portfolio duration 计算和理解：
¾ portfolio duration = w1D1 + w2D2 + … + wnDn
¾ 权重使用市场价值
¾ 该公式只有在 yield curve 平行移动时才有效，在 yield curve 非平行移动时，要用 key rate
duration（二级内容，一级只要记住这点）
R31‐7 Bond with embedded option and option‐free bond
¾ MD&MC：用于普通债券；ED&EC：用于含权债券
¾ Callable bond 和 putable bond 的 duration 比不含权时都小
¾ 用 duration 计算出来的上涨时价格变化小于真实变化，下跌时变动大于真实变化。
¾ 当利率变动较小时，duration 计算出来的价格变化比较准确。
¾ For a given change in yield, the percentage price increase is greater than the percentage
price decrease.
¾ 对于 Callable 来说，利率下降债券价格涨得少（相对于 Pure bond 来说）；对于 Putable
利率上升价格跌得少（相对来 Pure bond 来说）。
16‐7 Convexity
Q56‐7 An analyst accurately calculates that the price of an option‐free bond with percent
coupon would experience a 12% change if market yields increase 100 basis points. If market
yields decrease 100basis points, the bond’s price would likely:
A. Increase by less than 12%
B. Decrease by less than 12%
C. Increase by more than 12%

Solution: C
Percentage change in price ={ [‐ duration×(△y)]+[convexity×(△y)2]}100
When the bond yield increase, △y >0, the price decreases 12%, now the bond yield decreases,
△y<0, percentage change in price will be greater than the one when yield increases.

Q57‐7 A bond that exhibits negative convexity at low yield levels (relative to the bond's
coupon rate) and positive convexity at high yield levels (relative to the bond's coupon rate)
is most likely a(n):
A. putable bond.
B. callable bond.
C. option‐free bond selling at a discount.

389
Solutions: B
The likelihood of call is much greater at yield levels that are low (relative to the coupon rate)
than at high yield levels. This results in negative convexity at low yield levels.

Q58‐7 ★★★Suppose that you are given the following information about two callable bonds
of the same issuer that can be called immediately: （原版书R59‐8）
Estimated Percentage Change in Price If Interest Rates Change by
—50 Basis Points (%) +50 Basis Points (%)
Bond ABC +2 —5
Bond XYZ +11 —8

You are told that both bonds have about the same maturity and the coupon rate of one bond is
7% and the other 13%. Suppose that the yield curve for this issuer is flat at 8%. Based on this
information, which bond is the lower coupon bond and which is the higher coupon bond?
Explain why.

Solutions:
Bond ABC exhibits negative convexity‐for a 100 basis point change in rates, the gain is less than
the loss; Bond XYZ exhibits positive convexity. A high coupon bond will exhibit negative convexity.
A low coupon bond will exhibit positive convexity. Therefore, bond ABC is probably the high
coupon bond while bond XYZ is probably the low coupon bond.

Q59‐7 ★★Why is information about a bond's duration and convexity adjustment insufficient
to quantify interest rate risk exposure? （原版书R59‐17）

Solutions:
Duration even after adjusting for convexity indicates what the exposure of a bond or bond
portfolio will be if interest rates change. However, to capture fully the interest rate exposure, it is
necessary to know how volatile interest rates are. For example, in comparing duration of
government bonds in different countries, the duration only indicates the sensitivity of the price
to changes in interest rates by a given number of basis points. It does not consider the volatility
of rates. In a country with little volatility in rates but where the government bonds have a high
duration, just looking at duration misleads the investor as to the interest rate risk exposure.

R32‐7 Convexity 的定义，计算以及理解：
¾ 定义：convexity 指利率下降导致的债券价格上升的幅度大于利率上升导致的债券价格
下降的幅度，凸性是对投资者有利的。
¾ convexity 在哪些情况下可能为负：callable bond 在利率低于 coupon rate 时
¾ duration 和 convexity 对价格的影响：ᇞP/P = ‐ D×ᇞy + Convexity×(ᇞy)2
¾ callable bond 在利率低时有负的 convexity
¾ PVBP: dollar change in the price of a bond or portfolio when the yield changes by one basis
point.
¾ Price value of a basis point=duration×0.0001×bond value.
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8‐Derivatives
1‐8 FRA 计算 payment
Q1‐8 An investor goes long an FRA that expires in 30 days for which the underlying is 90‐day
LIBOR for a notional of $10 million. A dealer quotes this Instrument at 4.5%. At
expiration, 60‐day LIBOR is 3.5% and 90‐day LIBOR is 4%. The payment made at
expiration is closet to:
A. $12,376 from the investor to the dealer.
B. $12,376 from the dealer to the investor.
C. $16,570 from the investor to the dealer.

Solution: A
The underlying of an FRA is an interest payment. The investor is long the rate and will benefit if
rates increase. Since rates decreased, the investor must pay the dealer:
(0.04 - 0.045)(90 / 360)
10 × [ ] = $12,376
1 + 0.04(90 / 360)

Q2‐8 1. The treasurer of Company A expects to receive a cash inflow of $15,000,000 in 90
days. The treasurer expects short‐term interest rates to fall during the next 90 days. In
order to hedge against this risk, the treasurer decides to use an FRA that expires in 90
days and is based on 90‐day LIBOR. The FRA is quoted at 5 percent. At expiration, LIBOR
is 4.5 percent. Assume that the notional principal on the contract is $15,000,000.(原版
书 R61‐1)
A. Indicate whether the treasurer should take a long or short position to hedge interest rate
risk.
B. Using the appropriate terminology, identify the type of FRA used here.
C. Calculate the gain or loss to Company A as a consequence of entering the FRA.

Solution
A. Taking a short position will hedge the interest rate risk for Company A. The gain on the
contract will offset the reduced interest rate that can be earned when rates fall.
B. This is a 3 X 6 FRA.
(0.045 - 0.05)(90 / 360)

C 15, 000, 000 × [ ] = −$18,541.41
1 + 0.045(90 / 360)
The negative sign indicates a gain to the short position, which Company A holds.

Q3‐8 Tony Harris is planning to start trading in commodities. He has heard about the use of
futures contracts on commodities and is learning more about them. Which of the
following is Harris least likely to find associated with a futures contract?
A. Existence of counterparty risk.
B. Standardized contractual terms.
C. Payment of an initial margin to enter into a contract.

Solutions: A
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Harris is least likely to find counterparty risk associated with a futures contract. There is limited
counterparty risk in a futures contract because the clearinghouse is on the other side of every
contract.

Q4‐8 Derivative markets serve a number of purposes in global economic systems. Which of
the following is least likely one of these purposes?
A. Reveal prices and volatility of the underlying assets
B. Improve market efficiency by lowering transaction costs
C. Enable companies to more easily practice risk management

Solution: B
Derivative markets improve market efficiency for the underlying assets by increasing market
fairness and competitiveness, not by lowering transaction costs. Lower transaction cost is a
characteristic of derivative markets that is required for them to exist, not a purpose for derivative
markets.

Q5‐8 Assume Sun Microsystems expects to receive €20,000,000 in 90 days. A dealer provides
a quote of $0.875 for a currency forward contract to expire in 90 days. Suppose that at
the end of 90 days, the rate is $0.90. Assume that settlement is in cash. Calculate the
cash flow at expiration if Sun Microsystems enters into a forward contract expiring in 90
days to buy d011ars at $0.875. (原版书 R61‐3)

Solution
The contract is settled in cash, so the settlement would be €20,000,000(0.875 — 0.90) =
—$500,000. This amount would be paid by Sun Microsystems to the dealer. Sun would convert
euros to dollars at the spot rate of $0.90, receiving €20,000,000 X (0.90) = $18,000,000. The net
cash receipt is $17,500,000, which results in an effective rate of $0.875.
R1‐8 衍生品就是现在约定将来的交易。
¾ Futures and forward:
9 Future is standardized and more actively traded in the secondary markets. Future
contracts are backed and regulated by the clearinghouse. Forwards is more
customized.
R2‐8 掌握几种常见的 forward contract：
¾ Equity forward contract: 标的资产是股票。
¾ Forward contracts on bonds: 标的资产是债券。债券远期必须在债券到期之前交割。
¾ Eurodollar deposits: 标的资产是 LIBOR.
¾ Forward rate agreement (FRA)
¾ Currency forward: 标的是汇率，这里请大家注意，USD/Euro, 可以认为欧元是以美元为
标价的东西，或资产。Long 欧元的汇率，相当于 long 欧元的价格。反之亦然。
R3‐8 FRA 掌握概念及公式
¾ 概念：Viewed as a forward contract for the long to get a loan from the short at a specific
future date at a rate fixed in the contract
¾ A 60‐day FRA on 90‐day LIBOR（2×5 FRA）means：Settlement or expiration is 60 days from
392
now and the payment at settlement is based on 90‐day LIBOR 60 days from now.
¾ The general formula for the payment to the long at settlement is:
⎛ t ⎞
( L - FRA) ⎜ ⎟
Payoff of long= NP ×
⎝ 360 ⎠
t
1+ L × ( )
360

2‐8 Future 的 margin 和股票市场中的 margin 有区别
Q6‐8 When receive a margin call, an investor must deposit more money to meet the
___________in the future market, whereas to meet the __________ in the stock
market:
A. Initial margin Initial margin
B. Maintenance margin Maintenance margin
C. Initial margin Maintenance margin
Solution: C
In stock market, additional margin must be deposited to bring the ending balance up to the
Maintenance margin requirement, however, in futures market; additional margin must be
deposited to bring the ending balance up to the initial margin requirement.

Q7‐8 By nature, margin in futures contracts can be most likely regarded as a:
A. A. Loan granted by brokers
B. B. Advance payment to carry out the ultimate settlement
C. C. Deposit of commission for brokers
Solution: B
A margin deposit in futures contract is in fact a guarantee of delivery of the underlying assets.
The change in the amount of margin is a current gain or loss of counterparties of futures
contracts. If a participant has a margin greater than his maintenance margin, he/she can
withdraw the part above the maintenance level to realize the gain.
The loan granted by brokers is used in a purchase in margin of stocks. Commissions are a fee
charged by brokers. It is a transaction cost and has no direct relation with margin.

R4‐8 掌握股票与期货保证金的区别：
Margin in securities markets Margin in futures markets
A percentage of the market value of the asset Performance guarantee
Paid to the seller of the security Deposited by both the long and the short and
paid to clearinghouse
There is interest charged on the borrowed There is no loan involved and, consequently,
amount, the margin loan. no interest charges.
If falls below maintenance margin, Need back up If falls below maintenance margin,
to maintenance margin. Need back up to initial margin.

393
3‐8 Margin 的计算

Q8‐8 An investor establishes a short position in a futures contract on Day 0 when the price per
contract is $100. The investor deposits $5 per contract to meet the initial margin
requirement. The maintenance margin requirement per contract is $3. The Day 1
settlement price that would require the investor deposit additional funds on Day 2 equal
to $4 per contract is closest to:
A. $104.00.
B. $97.00.
C. $103.00.

Solution: A
The investor has a short position and will experience a margin call only if the price increases.
Additional margin must be deposited to bring the ending balance up to the initial margin
requirement. The investor must deposit $4; therefore, the margin balance on Day 1 is ‐$4, which
would result if the price of the contract was $104.

Q9‐8 A wheat producer shorted 100 futures contracts in order to hedge price risk. The current
price is 30 dollars per contract. The initial margin is 6 dollars per contract and the
maintenance margin is 3 dollars. The prices during the following days are as follows:
1st day 35
nd
2 day 26
nd
At the end of the 2 day, the margin the investor has in his deposit is closest to:
A. 1500.
B. 1300.
C. 1000.

Solution: A
At the end of the first day, the price incurred a loss in margin for 5 dollar per contract. The
remaining margin is 1 dollar, less than the maintenance margin of 3 dollars. The producer should
make a variation margin of 5 dollars. The margin at the beginning of the second day is 6 dollars.
At the end of the second day, the price is 26 dollars, based on a marking‐to‐market strategy, the
producer had a gain of 9 dollars (35‐26, not 4 based on 30‐26). The remaining margin is 15
dollars per contract (6+9). The total position in margin is 1500 dollars for 100 contracts.
Q10‐8 The following information relates to a futures market contract:
Initial futures price on Day 0 $100
Initial margin requirement $5
Maintenance margin requirement $3
Settlement price on Day 1 $103
If no funds are withdrawn and margin calls are met at the beginning of the next day, the ending
balance on Day 3 for an investor with a short position of 10 contracts is closest to:
A. $100.
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B. $70.
C. $80.

Solution: A
At the end of Day 1, the balance in the investor’s account would be $20.
At the beginning of Day 2, the investor would be required to deposit $30.

Q11‐8 A trader enters into a short position of 20 futures contracts at an initial futures price of
$85.00. Initial margin, per contract, is $7.50. Maintenance margin, per contract, is $7.00.
Each contract is for one unit of the underlying asset. Over the next three days, the
contract settles at $86.00, $84.25, and $85.50, respectively. Assuming the trader does
not withdraw any funds from his/her margin account during the period, but does post
variation margin sufficient to meet any maintenance margin calls, the balance in the
margin account will be: (原版书 R62‐8)
A. $140.00 at initiation and $150.00 at settlement on Day 3.
B. $150.00 at initiation and $150.00 at settlement on Day 3.
C. $150.00 at initiation and $160.00 at settlement on Day 3.

C is correct. Initial margin is 20 contracts X $7.50 margin per contract = $150. At the end of Day 1,
the short position has lost $20 ( (85 — 86) X 20 contracts) leaving a margin balance of $130.
Because this violates the required maintenance margin of $140, the short must deposit $20
variation margin to bring the margin account back to the initial margin balance of $150. On Day 2,
the short position has a daily gain of $35 ( (86 — 84.25) X 20) bringing the margin account to a
balance of $185. The short position loses $25 on Day 3 ( (84.25 — 85.50) X 20) leaving a margin
balance of $160.

R5‐8 期货保证金的计算：the balance in the investor’s account 永远是存入保证金与帐户
盈亏的总和。

4‐8 Futures Contract
Q12‐8 A futures trader goes long one futures contract at $450. The settlement price one day
before expiration is $500. On expiration day, the futures is trading at $505. The most
likely way the futures trader will lock in her profits on expiration is:
A. takes delivery of the underlying asset and pay $500 to the short.
B. close out the futures position by selling the futures contract at $505.
C. takes delivery of the underlying asset and pays the expiration settlement price to the short.

Solution: B
To lock in profits, sell the futures contract at the price of the expiration day.

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R6‐8 Futures contract: 理解记忆 futures contract 的四种结算方式

¾ Delivery of the asset specified in the contract
¾ Cash payment at expiration
¾ Make a close‐out or offsetting trade in the futures market (包括与原对手做交易，和与第三
方做反向交易，但是在和第三方交易中，会有违约风险。）
¾ An exchange for physicals
R7‐8 Treasury bill futures contracts:
¾ base on a $1 million face value 90‐day T‐bill, settled in cash
¾ The price quotes are: 100×(1－annualized discount)
¾ Minimum tick size is 0.5bp, $12.5
R8‐8 Eurodollar futures
¾ base on 90‐day LIBOR, settle in cash
¾ The price quotes are: 100×(1－annualized LIBOR)
¾ Treasure bond futures: based on treasure bond with maturity longer than 15 years.
注意为了防止 long 的一方逼市，有 cheapest to deliver 条款，每种债券有 conversion
factor。
¾ Stock futures: 股指期货。以大盘指数为标的资产的期货。

5‐8 Moneyness, Intrinsic Value, Time Value
Q13‐8 Unless far out‐of‐the‐money or far in‐the‐money, for otherwise identical call options,
the longer the term to expiration, the lower the price for: (原版书 R63‐10)
A. American call options, but not European call options.
B. both European call options and American call options.
C. neither European call options nor American call options.

C is correct.
Although there are exceptions, in general the longer the time to expiration the more valuable is
the option, ceteris paribus. With the exception of the rare case in which [options] are so far
out‐of‐the‐money or in‐the‐money that the additional time is of no value, the longer term
[options] will be worth more. In addition, it is not always true that a longer‐term is beneficial to
the holder of a European put.

Q14‐8 Consider a put option on Deter, Inc., with an exercise price of $45. The current stock
price of Deter is $52. What is the intrinsic value of the put option, and is the put option
at‐the‐money or out‐of‐the‐money?
Intrinsic Value Moneyness
A. $7 At‐the‐money
B. $0 Out‐of‐the‐money
C. $0 At‐the‐money

Solution: B
The option has an intrinsic value of $0, because the stock price is above the exercise price. Put
value is MAX (0, X‐S). Equivalently, the option is out‐of‐the‐money.
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Q15‐8 An investor purchased a European put option. The current price of the underlying stock
is 30 dollars. The exercise price is 40 dollars and the put will expire in 270 days. If the
put was not purchased, the investor could invest the premium in T‐bills with a discount
rate of 3%. The lower bound of put value is closest to:
A. 10 dollars
B. 9 dollars
C. 11 dollars

Solution: B
As a European option cannot be exercised before its maturity date, the lower bound of its
premium is as follows:
Xe‐rt‐S, where
X is the strike price
t is the annualized remaining time
r is the risk‐free rate for this period of time
S is the current stock price
In this question, X=40, t=270/365, r=3%, S=30, lower bound=9
As an American in‐the‐money put option can always be exercised, its lower bound is X‐S.
The higher and lower bounds for options are concluded as follows:
Lower bounds Higher bounds
‐rt
European call S ‐ Xe S
‐rt
American call S ‐ Xe S
‐rt
European put Xe ‐ S Xe‐rt
American put X ‐ S X

Q16‐8 A call option with an exercise price of 65 will expire in 73 days. No cash payments will be
made by the underlying asset over the life of the option. If the underlying asset price is
at 70 and the risk‐free rate of return is 5.0 percent, the lower bounds for an American
call option and a European call option, respectively, are closest to(原版书 R63‐11)
Lower bound for American Lower bound for European
call option call option
A. 5.00 5.63
B. 5.63 5.00
C. 5.63 5.63

C is correct.
Because time remains until expiration and the problem deals with calls, the lower bound of the
European call will exceed the intrinsic value. In concept, one can invest the strike price amount
until it is needed at expiration and earn the risk‐free rate on this amount for that period of time.
The intrinsic value is $5.00; given the available answers, the lower bound for the European call
must be $5.63. This is confirmed by applying the formula Co≥ Max[0, So — X/(1 + r)T]. In this
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problem, the lower bound is the greater of 0 or 70 — 65/ (1.05)02 = 5.63. Note that the value of
the American call cannot be less than the value of the European call.

Q17‐8 A put option with an exercise price of 75 will expire in 73 days. No cash. payments will
be made by the underlying asset over the life of the option. If the underlying asset is at
70 and the risk‐free rate of return is 5.0 percent, the lower bounds for an American put
option and a European put option, respectively, are closest to: (原版书 R63‐12)
Lower bound for American Lower bound for European
put option put option
A. 4.27 4.27
B. 4.27 5.00
C. 5.00 4.27

C is correct.
When valuing European puts that have time left until expiration, the lower bound must reflect
the fact that exercise is delayed until the expiration date. That is, with a European put one can't
recognize the current intrinsic value, but must wait until expiration. This delay in receiving
payment for selling (putting) the stock to the writer has a cost. The lower bound will therefore
be below the intrinsic value (but never negative). This can be confirmed by applying the formula
Po Max[0, X/(1 + r)T So] . In this problem, the lower bound is the greater of 0 or 75/(1.05)02 70 =
4.27. Regarding the American put, as one can recognize the intrinsic value of an American put
immediately if one chooses to, the lower bound of an American put, in the absence of
intervening cash payments on the underlying asset, will simply be equal to the intrinsic value.

Q18‐8 Compare an American call with a strike of 50 which expires in 90 days to an American
call on the same underlying asset which has a strike of 60 and expires in 120 days. The
underlying asset is selling at 55. Consider the following statements:
Statement 1: "The 50 strike call is in‐the‐money and the 60 strike call is out‐of‐the‐money."
Statement 2: "The time value of the 60 strike call, as a proportion of the 60 strike call's premium,
exceeds the time value of the 50 strike call as a proportion of the 50 strike call's premium."
Are the statements most likely correct or incorrect? (原版书 R63‐13)

A is correct.
A call is in‐the‐money when the underlying asset price exceeds the strike price. The entire
premium of the 60 strike call reflects time value; only a part of the 50 strike call's premium is
time value, the rest will be intrinsic value.

Q19‐8 Compare an American call with a strike of 50 which expires in 90 days to an American
call on the same underlying asset which has a strike of 60 and expires in 120 days. The
underlying asset is selling at 55. Consider the following statements:
Statement 1: "The 50 strike call is in‐the‐money and the 60 strike call is out‐of‐the‐money."
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Statement 2: "The time value of the 60 strike call, as a proportion of the 60 strike call's premium,
exceeds the time value of the 50 strike call as a proportion of the 50 strike call's premium."
Are the statements most likely correct or incorrect?（原版书 R63‐13）

A is correct.
A call is in‐the‐money when the underlying asset price exceeds the strike price. The entire
premium of the 60 strike call reflects time value; only a part of the 50 strike call's premium is
time value, the rest will be intrinsic value.

R9‐8 Option 的主要种类：financial option (equity options, interest options, foreign currency
options, bond options, index options), option on futures, commodity option).
R10‐8 Moneyness:
Moneyness Call option Put option
In-the-money S＞X S＜X

At-the-money S=X S=X
Out-of-the-money S＜X S＞X

R11‐8 The Effect of Difference in Time to Expiration

0 T1 T2
American
C 0 ( T 2 ) ≥ C 0 ( T1 )
options P 0 ( T 2 ) ≥ P 0 ( T1 )
X X
C 0 (T 2 ) = m a x [ S t − , 0] ≥ C 0 ( T1 ) = m a x [ S t − , 0]
(1 + r f ) T 2 (1 + r f ) T1
c 0 ( T 2 ) ≥ c 0 ( T1 )
European
options p 0 (T2 ) c a n b e e ith e r
G r e a t e r o r L e s s t h a n p 0 ( T1 )

R12‐8 Intrinsic value and time value
¾ The intrinsic value of an option is the amount that it is in the money, and zero otherwise.
¾ The difference between the value of an option (option premium) and its intrinsic value is
termed its time value. If the option is deeply out of money or deeply in the money, time
value is negligible. Time value is maximized when option is at the money.
¾ option value=intrinsic value + time value
¾ For European put option, time value can be larger than, smaller than or equal to zero; for
others, time value is not less than zero.

399
6‐8 Option Payoff
Q20‐8 A market participant has a view regarding the potential movement of a stock. He sells a
customized over‐the‐counter put option on the stock when the stock is trading at $38.
The put has an exercise price of $36 and the put seller receives $2.25 in premium. The
price of the stock is $35 at expiration. The profit or loss for the put seller at expiration is:
A. ($1.25).
B. $1.00.
C. $1.25..

Solution: C
Profit = max (0, ‐value of put at expiration + premium) = max (0, ‐ (X ‐ 5) + premium) = ‐1 + 2.25
=$1.25

Q21‐8 An investor paid $10 for au option that is currently in‐the‐money $5. If the underlying is
priced at $90, which of the following best describes that option?(原版书 R63‐18)
A. Call option with an exercise price of $80.
B. Put option with an exercise price of $95.
C. Call option with an exercise price of $95.

Solution: B
A put option is in‐the‐money if the stock price is less than the exercise price. The put option with
an exercise price of $95 is in‐the‐money $5. The call option with an exercise price of $80 is
in‐the‐money $10, and the call option with an exercise price of $95 is out‐of‐the‐money $5.

Q22‐8 An investor held 100 stocks, which he purchased for 26 dollars. Estimating that the price
of the stocks would not rise significantly in the near future, he wrote call options for 100
stocks. The information of the call options is listed as follows:
Strike price 30
Call option price per stock 3
The current price of the stocks is 24 dollars. The maximum profit the investor can expect is
closest to
A. 100 dollar.
B. 700 dollars.
C. 7 dollars.

Solution: B
A covered call is position consisting of a short stock and a long call. The investor holding such a
position believes that the stock is likely to rise but cannot rise above a certain level. So he longs
a stock to get the rise potential and shorts a put to get a premium. The profit of the position
consists of two parts: one part is the gain on stocks held and the other is the call premium. The
gain on the stocks is limited to the strike price because buyer of the call will exercise the stock
once the price rise above. As a result, the maximum profit=Strike Profit‐Purchase Price+ Call
Premium. Here the maximum profit = (30 – 26 + 3) 100 = 700 dollars.

400
7‐8 Interest Rate Caps & Floor
Q23‐8 A series or interest rate put options that expire on different dates but have the same
exercise rate is best characterized as a(n):
A. zero‐cost collar.
B. interest rate cap.
C. interest rate floor.

Solution: C
An interest rate floor is a series of put options on an interest rate, with each option expiring at
the date on which the floating loan rate will be reset, and with each option having the same
exercise rate.
Interest rate caps & floor 了解几个主要的概念：
R13‐8 Interest rate caps: put a maximum (upper limit) on the payments on a floating rate loan
and are equivalent to a series of long interest rate calls from the borrower’s perspective.
Each call option is called caplet.
R14‐8 Interest rate floors: put a minimum (lower limit) on the payments on a floating rate loan
and are equivalent to a series of short interest rate puts from the borrower’s
perspective. Each put option is called put option.
R15‐8 Interest rate collar: combines a cap and a floor. A borrower with a floating‐rate loan may
buy a cap for protection against rates above the cap and sell a floor in order to defray
some of the cost of the cap.
R16‐8 Interest rate options vs. FRAs:

Interest Rate Options FRAs

Similarity There is no deliverable asset
They are settled in cash, in an amount based on a notional amount
and the spread between the strike rate and the reference rate.

Interest Rate Options FRAs

Differences Can choose exercise or not Must exercise
Payoffs are made at the end of the Payoffs are made at the
loan period beginning of the loan period

Payoffs need not to discount Payoffs need to discount

8‐8 Interest Rate & Volatility
Q24‐8 The effects on the price of a call option from an Increase in volatility and an Increase in
interest rates are:
Increase in Volatility Increase in Interest Rates
A. Decrease Increase
B. Increase Increase
C. Increase Decrease
401
Solution: B
When volatility increases, the price of options increases. When interest rates increase, call option
prices increase.

R17‐8 影响 call option 价格的因素：
European American American
Factor European call
put call put
Underlying asset price + ‐ + ‐
Strike price ‐ + ‐ +
Time ? ? + +
Risk‐less rate + ‐ + ‐
volatility + + + +

9‐8 Option Value
Q25‐8 A European stock index call option has a strike price of $1160 and a time to expiration of
0.25 years. Given a risk‐free rate of 4 percent, if the underlying index is trading at $1200
and has a multiplier of 1, then the lower bound for the option price is closest to:
A. $28.29.
B. $40.00.
C. $51.32.
Solution: C
The lower bound on a European call is either zero or the underlying asset’s price minus the
present value of the exercise price, whichever is greater.
$1200 ‐ (S1160 / 1.040.25) = $51.32.

Q26‐8 A call with a strike price of $40 is available on a stock currently trading for $35. The call
expires in one year and the risk‐free rate of return is 10%. The lower bound on this call's
value(原版书 R63‐15)
A. is zero.
B. is $5 if the call is American‐style.
C. is $1.36 if the call is European‐style.
A is correct. For an American‐ or European‐style call, the lower bound is the greater of zero or
the difference between the stock price and the present value of the strike price. In this problem,
the difference is 35 minus (40 / 1.10) = negative $1.36. Thus, the lower bound is zero.

Option Min Value Max Value
－
European call Max[0 , St－X/(1+Rf)T t] St
－
American call Max[0 , St－X/(1+Rf)T t] St
－－
European put Max[0 , X/(1+Rf)T t－St] X/(1+Rf)T t
American put Pt ≥ Max[0 , X－St] X
402
10‐8 Put‐call Parity
Q27‐8 A description that will least likely be used to explain put‐call parity is:
A. The prices of calls and puts on an underlying asset must be consistent with each other to
remove arbitrage opportunities.
B. A fiduciary call option strategy and a protective put option strategy for an underlying asset
are equal in value.
C. A put is equivalent to long a call, a long position in the underlying asset, and a long position
in the risk‐free asset.

Solution: C
For P=C+Xe‐rt‐S
A put is equivalent to long a call, a put position in the underlying asset, and a long position in the
risk free asset.

Q28‐8 Unless far out‐of‐the‐money or far in‐the‐money, for otherwise identical call options, the
longer the term to expiration, the lower the price for:
A. American call options, but not European call options.
B. both European call options and American call options.
C. neither European call options nor American call options.

Solutions: C
Although there are exceptions, in general the longer the time to expiration the more valuable is
the option, ceteris paribus. With the exception of the rare case in which [options] are so far
out‐of‐the‐money or in‐the‐money that the additional time is of no value, the longer term
[options] will be worth more. In addition, it is not always true that a longer term is beneficial to
the holder of a European put.

Q29‐8 Assume the probability of bankruptcy for the underlying asset is high. Compared to the
price of an American put option on the same underlying asset, the price of an equivalent
European put option will most likely be:
A. lower.
B. higher.
C. the same because the probability of bankruptcy does not affect pricing.

Solutions: A
In bankruptcy, the price of the bankrupt company's stock falls. In the limit it falls to zero. At a
price of zero, the price cannot go any lower, and it would be advantageous to exercise the
American put at that point in time rather than be forced to wait until the expiration date.
Therefore, the American‐style put is likely to have a higher price than an equivalent
European‐style put.

403
R18‐8 熟练掌握 put‐call parity 公式的各种变形：
S = C - P + X / (1 + RFR)T
P = C - S + X / (1 + RFR)T
C = S + P - X / (1 + RFR)T
X / (1 + RFR)T = S + P - C
9 Note that the options much be European‐style and the puts and calls mush have the same
exercise price for these relations to hold.
9 Fiduciary call: buy riskless bond that pays X at maturity and a call with exercise price X.
9 Protective put: buy security and long put.
R19‐8 Put‐call parity 的作用：
1. 为 option 定价
2. 合成 option。
3. 无风险套利。在无风险套利中，遵循 long 小边，short 大边原则
X
如： C + > S + P ，套利方法是， long security, long put, short call, short bonds.
(1 + RFR)T

11‐8 Swap 的种类理解
Q30‐8 The party making the fixed‐rate payment under a swap contract could also have to make
the variable payment on that contract if the payments are related to a(n):
A. equity swap.
B. currency swap.
C. interest rate swap.

Solution: A
If the value of the index on which the swap is based declines, the resulting negative return would
have to be paid by the party making the fixed‐rate payment. This characteristic is one of the
distinguishing features of equity swaps.

Q31‐8 A 5‐year floating‐rate security was issued on January 1, 2006. The coupon rate formula
was 1‐year LIBOR + 300 bps with a cap of 10% and a floor of 5% and annual reset. The
1‐year LIBOR rate on January 1st of each year of the security’s life is provided in the
following table:
Year 1‐Year LIBOR
2006 3.5%
2007 4.0%
2008 3.0%
2009 2.0%
2010 1.5%
404
During 2010, the payments owed by the issuer were based on a coupon rate closest to:
A. 4.5%.
B. 5.0%.
C. 6.5%.

Solution: B
LIBOR + 300 bps at the reset date equals 1.5% + 3.00% = 4.5%, which is below the floor of 5.00%
so the coupon rate will be equal to the floor.

12‐8 Payments of Swap
Q32‐8 HobbyHorse Syndicate has entered into a "plain‐vanilla" interest rate swap on
$100,000,000 notional principal. HobbyHorse receives a fixed rate of 7.5 percent on
payments that occur every six months. Winnie Investments, a swap broker, negotiates
with another firm, WhoaThere, to take the pay‐fixed side of the swap. The floating rate
payment is based on LIBOR (currently at 6.75 percent). Because of the volatile interest
rate environment, HobbyHorse has created a reserve to cover any cash outlay required
at settlement dates. At the time of the next payment (due in exactly six months), the
reserve balance is $250,000. To fulfill its obligations under the swap, HobbyHorse will
need approximately how much additional cash?
A. $375,000
B. $125,000
C. $0

Solution: C
The net payment formula for the floating rate payer is:
Floating Rate Paymentt = (LIBORt‐1 ‐ Swap Fixed Rate) (# days in term / 360) Notional
Principal
If the result is positive, the floating‐rate payer owes a net payment and if the result is negative,
then the floating‐rate payer receives a net inflow. Note: We are assuming a 360 day year.
Here, Floating Rate Payment = (0.0675 ‐ 0.075) (180 / 360) 100,000,000 = ‐$375,000. Since
the result is negative, HobbyHorse will receive this amount. Thus, HobbyHorse needs $0
additional cash.

Q33‐8 Agrawal Telecom is considering issuing $10,000,000 of 6.75% fixed‐coupon bonds to
finance an expansion. Alternatively, Agrawal could borrow the funds in the Eurodollar
market using a series of six‐month LIBOR contracts. A swap contract matching the
maturity of the 6.75% coupon bonds is available. The swap uses six‐month LIBOR as the
floating‐rate component. Identify the interest rate swap that Agrawal should use to
convert the Eurodollar borrowing to the equivalent of issuing fixed‐income bonds.(原版
书 R64‐10)
A. Agrawal would use a pay‐fixed, receive‐floating interest rate swap.
B. Agrawal would use a pay‐floating, receive‐fixed interest rate swap.
C. Agrawal would use a total return equity payer swaption to evaluate the two borrowing
options.
405

Solution: A
Agrawal would owe floating‐rate interest on the LIBOR loans. The "receive‐floating" part of the
swap would offset those payments, while the "pay‐fixed" side of the swap resembles the
fixed‐coupon payments on the 6.75 percent coupon bonds.

Q34‐8 Determine the upcoming payments on a swap with a notional principal of $5,000,000 in
which the fixed‐rate payer makes semiannual fixed payments of 8% and the
counterparty makes floating‐rate payments at Euribor. The Euribor rate at the last
settlement period was 7.25%.
The fixed‐rate payments are made on the basis of 180 days in the settlement period and
365 days in a year. The floating‐rate payments use a 180/360 day convention. (原版书
R64‐10)
A. The net payment is $16,010 from the fixed‐rate payer to the floating‐rate payer.
B. The net payment is $18,750 from the fixed‐rate payer to the floating‐rate payer.
C. The net payment is $18,750 from the floating‐rate payer to the fixed‐rate payer.

A is correct.
The calculation is $5,000,000 x 0.08 x (180/365) —$5,000,000 x 0.0725 x (180/360) = $16,010.

Q35‐8 A portfolio manager entered into a swap with a dealer. The swap's notional principal is
$100 million, payments are to be made semiannually, and the swap allows netting of
payments. The dealer agrees to pay a fixed annual rate of 4 percent while the asset
manager agrees to pay the return on a stock index. The index value at initiation of the
swap is 280. If the value of the stock index six months after initiation of the swap is 250,
the payment from the dealer to the asset manager would be closest to:
A. $2 million.
B. $9 million.
C. $13 million.

Solutions: C
The loss on the stock index means that the dealer must also pay the negative amount ro the
asset manager in addition to the fixed rate on the notional principal. The amount that the dealer
would pay is approximately $13 million:
($100,000,000) (0.04) / 2 = $2,000,000 for the fixed payment
The negative return on the stock index computed as follows is (250/280) ‐ 1 = ‐0.1071, for a
dollar payment of ‐0.1071(100,000,000j = $10,714.286 for the stock index.
The dealer must pay roughly $2 million plus $11 million.

Q36‐8 A portfolio manager enters into an equity swap with a swap dealer. The portfolio
manager pays the return on the Value index and, in return, receives the return on the
Growth index.
The swap's notional principal is $50 million and the payments will be made semiannually.
The levels of the equity indices are as follows:
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Index Level at Start of Swap Level 6 Months Later
Value Index 5,460 5,350
Growth Index 1,190 1,200
The net payment due after 6 months is closest to:
A. $587,158
B. $1,007,326
C. $1,427,494

Solution: C
The portfolio manager pays the Value Index return, which had a loss, and receives the Growth
Index, which had a gain during the period. Therefore, the portfolio manager will receive a cash
flow from the swap dealer. .
Value Index payment:[(5,350/5,460)‐1} x$50,000,000=$(1,007,326)
Growth Index payment: [(1,200/1,190)‐1]x$50,000,000=$420,168
Net payment to portfolio manager= $420,168‐$(1,007,326)$1,427,494

Q37‐8 A portfolio manager entered into a swap with a dealer. The swap's notional principal is
$100 million, payments are to be made semiannually, and the swap allows netting of
payments. The dealer agrees to pay a fixed annual rate of 4 percent while the asset
manager agrees to pay the return on a stock index. The index value at initiation of the
swap is 280. If the value of the stock index six months after initiation of the swap is 250,
the payment from the dealer to the asset manager would be closest to:(原版书 R64‐12)
A. $2 million.
B. $9 million.
C. $13 million.

Solution: C
The loss on the stock index means that the dealer must also pay the negative amount to the
asset manager in addition to the fixed rate on the notional principal. The amount that the dealer
would pay is approximately $13 million:
($100,000,000) (0.04) / 2 = $2,000,000 for the fixed payment
The negative return on the stock index computed as follows is (250/280) —1 = —0.1071, for a
dollar payment of —0.1071(100,000,000) = $10,714,286 for the stock index.
The dealer must pay roughly $2 million plus $11 million.
R20‐8 Swap 的计算
¾ Plain vanilla interest rate swap: 一方支付浮动利率，另一方支付固定利率，net payment
（在期初确定）, there is no need to exchange notional principal and only the net interest is
payed by the party who owes it.
t
net fixed rate payment = ( swap rate − Lt −1 ) × × NP
¾ 360
¾ 如果这个值为正，fixed payer owes a net payment to the floating‐rate party. The pary of
receipt of positive amount will face credit risk.
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R21‐8 currency swap: 开始和结束交换货币，期间支付 full interest payment（每个期末交货
货币）
R22‐8 equity swap: 一方支付固定或浮动利率，另一方支付股票收益(以股票的收益率作为
浮动利率），net payment（在期末确定）.
R23‐8 Unique features about equity swap:
9 Payments can be floating on both sides.
9 The fixed payer may actually pay more than fixed rate if the equity return is negative over
the period.
9 Equity swap payments are not known until the end of the period, while the interest swap
payments are known and payed at the beginning of the period.
Swaption: an option to enter into a swap. It can also be used to offset a swap.

13‐8 Covered Call 盈亏平衡点
Q38‐8 An Investor purchases a stock at $60 and at the same time, sells a 3‐month call on the
stock. The short call has a strike price of $65 and a premium of $3.60. The risk‐free rate
is 4%. The breakeven underlying stock price at expiration is closest to:
A. $55.85
B. $56.40
C. $60.80

Solution: B
A covered call breakeven price equals the price paid for the stock less the premium received for
the call. Breakeven = (S ‐ c) = (60 ‐ 3.60) = $56.40.

Q39‐8 An investor executes a protective put strategy on ABC stock. At the time of execution,
the price of ABC is $71. A $66 strike put option on ABC with a 2‐month expiration is
trading at $1.45. the protective put strategy breaks even when the price of ABC is closest
to:
A. $67.45
B. $69.55
C. $72.45

Solution: C
To break even, the underlying stock must be at least as high as the amount expended up front to
establish the position. To establish the protective put, the investor would have spent
$71+1.45=72.45

Q40‐8 The recent price per share of Dragon Vacations, Inc. is $50 per share. Calls with exactly
six months left to expiration are available on Dragon with strikes of $45, $50, and $55.
The prices of the calls are $8.75, $6.00, and $4.00, respectively. Assume that each call
contract is for 100 shares of stock and that at initiation of the strategy the investor
purchases 100 shares of Dragon at the current market price. Further assume that the
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investor will dose out the strategy in six months when the options expire, including the
sale of any stock not delivered against exercise of a call, whether the stock price goes up
or goes down. If the closing price of Dragon stock in six months is exactly $60, the profit
to a covered call using the $50 strike call is closest to:(原版书 R65‐7)
A. $400.
B. $600.
C. $1,600.

Solution: B
Buying the stock at $50 and delivering it against the $50 strike call generates a payoff of zero. The
premium is retained by the writer. The net profit is $6.00 per share X 100 shares or $600.

Q41‐8 The recent price per share of Win Big, Inc. is €50 per share. Verna Hillsborough buys 100
shares at €50. To protect against a fallin price, Hillsborough buys one put, covering 100
shares of Win Big, with a strike price of €40. The put premium is €1 per share. If Win Big
closes at €45 per share at the expiration of the put and Hillsborough sells her shares at
€45, Hillsborough's profit from the stay/put is closest to: (原版书 R65‐8)
A. —€1,100.
B. —€600.
C. €900.

Solution: B
The loss on her stock is (€45 — €50) X 100 = — €500. She also paid €100 for the put. The put
expires worthless, making her total loss €600.

R24‐8 盈亏平衡点：covered call 和 protective put 的盈亏平衡点实际上是买卖成本的问题。
R25‐8 covered call= ‐c+S=‐p+X’（short call, long stock)
¾ Value at expiration: VT =ST‐ max (0, ST‐X)
¾ Profit=Profit1+Profit2 = ‐Max [‐c0, ST‐X‐c0] + (ST‐S0) = Min[X‐S0+c0, ST‐ S0+c0]= VT‐S0+ c0
¾ Maximum profit: X‐S0+c0
¾ Maximum loss: S0‐c0
¾ Breakeven underlying price at expiration: S0‐c0
R26‐8 Protective put strategy=p+S=c+X (long call, long stock)
¾ Value at expiration: VT =ST‐ max (0, X ‐ST)
¾ Profit=Profit1+Profit2= Max [‐p0, X‐ST‐p0] + (ST‐S0) =Max [‐(S0‐X+p0), ST‐S0‐p0]= ST ‐S0‐p0
¾ Maximum profit: ∞
¾ Maximum loss: S0‐X+p0
¾ Breakeven underlying price at expiration: S0+p0
Notes：
¾ payoff 不考虑 premium, G/L 要考虑 premium
¾ 此类题应分别考虑 underwriting 的盈亏和 option 的盈亏，然后综合考虑总体的盈亏。
排除法是不错的选择。

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9‐Alternative Investments
1‐9 Managed Futures Fund
Q1‐9 A managed futures fund, which kind does this fund belong to?
A. global hedge fund
B. sector style fund
C. macroeconomic hedge fund

Solution: A
Global macro funds take bets on the direction of a market, a currency, an interest rate, a
commodity, or any macroeconomic variable. These funds tend to be highly leveraged and make
extensive using of derivatives. And there is no such macroeconomics fund in the funds
classification.

Q2‐9 Which kind of securities does a stable value mutual fund most likely hold?
A. Low P/E ratio stocks
B. Long‐term bonds
C. Commodities futures

Solution: A
Low P/E ratio stocks are usually classified as value stocks and have stable market value.
Long‐term bonds have more price volatility because of higher interest rate risk. Mutual funds
don’t invest in commodities futures. It is commodity funds, a kind of hedge funds, that major in
such investments.

Q3‐9 ★A mutual fund with a 2.0 percent sales charge and 0.75 percent annual expense, earns
6.0 percent annually for 4 years. At the end of year 4, the NAV calculation most likely
reflects:
A. a deduction of the sales charge and annual expenses at t=0
B. the compounded return, net of expenses, after deducting the sales charge at t=0
C. the compounded return after deducting the compounded sales charge and annual expenses.

Solution: B
NAV calculation first deducts the sales charge at t=o and then compounds the annual return. The
NAV also reflects the compounded deduction of the annual expenses.

Managed futures fund 掌握概念及公式：
R1‐9 ★Open‐end funds:
¾ Trading – Ready to redeem shares at the closing value on any trading day
¾ Liquidity – Provided by the investment company managing it
¾ Share price = NAV
R2‐9 ★Closed‐end funds:
¾ Trading – Traded (after issuance) in the secondary market through organized exchanges
(e.g., NYSE)
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¾ Liquidity – Determined in the open market
¾ Share price may or may not equal the NAV

Premium
(Close-End Fund)
One-Time Fees Distribution Fee
(Open-End Fund) (Sales Commission)
Redemption Fee
Management Fees (the Largest Components)
Ongoing Annual Fees Administration Expenses
Marketing Fees (12b-1 Fees)

R3‐9 Investment strategies
¾ growth strategy: focus on high price‐to‐earnings stock
¾ value strategy: focus on low price‐to‐earnings stock
¾ sector investment fund: focus on a particular industry
¾ index fund: track an index
¾ global fund: securities from around the world including home country’s securities and keep
portfolio weights similar to world market capitalization weights
¾ international fund: not include the securities from home country
¾ ★Stable value fund: invest in securities such as short‐term fixed income instruments and
guaranteed investment contracts which are guaranteed by the issuing insurance company
and pay principal and a set rate of interest.

2‐9 ETF 的 Advantages
Q4‐9 Which of the following statements is least accurate with respect to the advantages of
open‐end exchange traded funds (ETFs) comparing with Open‐end ETFs:
A. Tend to trade closer to their net asset values than close‐end Index funds.
B. Provide for more immediate reinvestment of dividends than index mutual funds.
C. Provide a more cost‐effective way for large institutions to invest in emerging markets.

Solution: C
Some sector and international ETFs have large bid‐ask spreads and substantial expense ratios
compared with managing portfolios, which may provide a more cost‐efficient alternative to ETFs,
particularly for large institutional investors.

Q5‐9 ★Which of the following statements is least accurate with respect to the advantages of
open‐end exchange traded funds (ETFs)? Open‐end ETFs:
A. Provide for more immediate reinvestment of dividends than do index mutual funds.
B. Provide a more cost‐effective way for large institutions to invest in emerging markets.
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C. Provide lower exposure to capital gains distribution taxes than do traditional mutual funds.

Solution: B
Some sector and international ETFs have large bid‐ask spreads and substantial expense ratios
compared to managed portfolios, which may provide a more cost‐efficient alternative to ETFs,
particularly for large institutional investors.

Q6‐9 In‐kind redemption is a process available to investors participating in:
A. Traditional mutual funds but not exchange traded funds.
B. Exchange traded funds but not traditional mutual funds.
C. Both traditional mutual funds and exchange traded funds.

Solutions: B
A major distinguishing feature of exchange traded funds is the in‐kind redemption process. The
process allow the remaining investors in exchange traded funds to avoid capital gains taxes
because the portfolio does not realize capital gains with in‐kind redemptions. Traditional mutual
funds use in‐cash redemptions that may result in a capital gains tax liability for all participants in
the fund.

Q7‐9 ★One advantage of exchange traded funds relative to open‐end mutual funds is:
A. they trade throughout the day.
B. they offer greater diversification.
C. they have smaller bid‐ask spreads.

Correct answer A
A is correct. Exchange traded funds trade throughout the trading day at market prices that are
updated continuously, rather than only trading once a day at closing market prices, as do the
traditional open‐end mutual funds.

R4‐9 ETF 的 advantages：
¾ Efficient Diversification →A Basket of Securities
¾ Transactional Convenience → Exchange Traded
¾ Better Risk Management → with Futures and Options
¾ Fully Informed Investor → Daily Published List
¾ Very Efficient Operating Expense Ratio
¾ Close to NAV
¾ Decreased Capital Gain Tax Liability
¾ Immediately Reinvested Dividends
R5‐9 Disadvantages:
¾ fewer indices to track
¾ Intraday trading is not significant to those investors with longer time horizons.
¾ Inefficient markets in ETFs with low trading volume.
¾ Larger investors choose to directly invest in an index portfolio.
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3‐9 NOI 计算
Q8‐9 ★An office building with net operating income of $75,000 recently sold for $937,500.
Financial data for a comparable building being sold is presented in the table below.
Annual income or expense
Gross potential rental income $300,000
Estimated vacancy and collection losses 4%
Insurance and taxes $27,000
Utilities $14,000
Repairs and maintenance $21,000
Depreciation $15,000
Interest rate on proposed financing 7%

The estimated value for the building being sold using the income approach is closest to:
A. $2,825,000.
B. $2,975,000.
C. $3,228,500.

Solution: C
Because to arrive at the estimated value of the property, subtract operating expenses from gross
income (300,000 – (4% × 300,000 or 12,000) – 27,000 – 14,000 – 21,000 = 226,000). Then divide
the net operating income by the cap rate, which is derived from the recent transaction (226,000
/ (75,000 / 937,500) = 226,000 / 0.08 = 2,825,000). Note that neither depreciation nor financing
costs are deducted as operating expenses.

Q9‐9 Assume U.S. GAAP applies unless otherwise noted.
An investor has gathered the following data, presented on an annual basis, for an apartment
complex that is being considered for purchase:
Gross potential rental income $180,000
Insurance and taxes $15,000
Utilities $10,000
Repairs and maintenance $18,000
Depreciation $2 1,000
Interest on proposed financing $16,000
The annual net operating Income (NOI) for the apartment complex is closest to:
A. $116,000
B. $121,000
C. $137,000

Solution: C
NOI = $180,000 ‐ $15,000 ‐ $10,000 ‐ $18,000 = $137,000

Q10‐9 An analyst is evaluating an investment in an apartment complex based on the following
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annual data:
Gross rental income $2,100,000
Estimated vacancy and collection expenses 3%
Operating expenses $1,600,00
Depreciation $300,000
Current mortgage rate 5%
Financing percentage 80%
Capitalization rate 12%
Cost of equity 15%
Based on the income approach, the value of the investment is closest to:
A. $1,141,667
B. $3,641,667
C. $6,242,857
Solution: B
Using the income approach:
($2,100,000‐0.03x2,100,000‐$1,600,000)/0.12=$437,000/0.12=$3,641,666.70
The property is appraised based on cash flows and is independent of the financing decision,
R6‐9 Types of real estate investment:
9 Outright ownership: 全款买房
9 Leverage equity position：借一些钱买房
9 Mortgage：贷款抵押买房
9 Aggregation vehicles: 买投资房地产的信托基金。
R7‐9 ★NOI 计算：
¾ 公式：NOI=gross potential income‐vacancy and collection loss rate‐Insurance‐real
estate taxes‐utility expense‐estimated maintenance expense
Appraisal price = NOI/market cap rate (comparable benchmark)
Market cap rate = benchmark NOI/benchmark transaction price
¾ Market cap rate 相当于一个折现率，与 NOI 对应的折现率应该是 k‐g
R8‐9 ★Cost approach: value of land + building replacement cost of construction
¾ advantage: easy to implement
¾ limitations: appraisal is not an easy task; MV differs from construction cost
R9‐9 ★Sales Comparison Approach: MV is estimated relative to a benchmark value, which
may be market price of a similar property or average or median value of similar
properties
¾ disadvantages: the benchmark may be mispriced;
¾ similar properties might not have traded recently
R10‐9 ★The Income Approach
¾ Appraisal price=NOI/Market cap rate
¾ Market cap rate=benchmark NOI/benchmark transaction price
R11‐9 ★The Discounted After‐Tax Cash Flow Approach
¾ ATCF=NOI‐TAX‐ (PRN+INT)=NOI(1‐t)+Dt‐ PRN ‐ INT(1‐t)
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9 TAX=(NOI‐D‐INT)t
¾ ATCF=NOI(1‐t)+D*t‐PRN‐INT(1‐t)
¾ ATCF=NI+Dep‐PRN
¾ Required rate of return by equity is the discount rate.

4‐9 Venture Capital 的 NPV
Q11‐9 ★An analyst estimates that an initial investment of £500,000 in a venture capital project
will pay £6 million at the end of five years if the project succeeds and that’ the probability
the project survives to the end of the fifth year is 25%. The required rate of return for the
project is 19%. The expected net present value of the venture capital investment is closest
to:
A. £4,000.
B. £128,000.
C. £1,125,000.

Solution: B
The probability that the venture will pay £6 million at the end of five years is 25%. The
probability of failure is 75%. The expected NPV if the project succeeds is £2,014,296 using FV =
6,000,000, I =19%, n = 5 for a present value of 2,514,296‐ 500,000 = 2,014,296.
The NPV of the project is 0.25(2,014,296) + 0.75(‐500,000) = 128,574.

Q12‐9 A project that requites an initial investment of €5 million is expected to pay €22 million at
the end of 5 years if it is successful. The probabilities of failure for the project are provided
below:
Year 1 2 3 4 5
Failure probability 0.25 0.20 0.15 0.15 0.15
Assuming the cost of capital for the project is 16 percent, the project's expected net present
value is closest to:
A. ‐€3,157,000.
B. ‐€1,140,000
C. €2,017,000

Solution: B
You calculate the probability of success as (1‐0.25)x(1‐0.20) x(1‐0.15) x(1‐0.15) x(1‐0.15)=0.3685
Then calculate the NPV from success: (22,000/1.165)‐5,000=5,474x0.3685=2.017 Subtracting the
NPV of failure, ‐5,000x(1‐0.3685, or 0.632)=‐3,157. The difference between the NPVs is the
expected NPV of the project: 2,017‐3,157=‐1,140.

R12‐9 Venture Capital 的 NPV 掌握概念及公式：
¾ Stages of VC Investing
9 Seed‐Stage: 刚开始技术研发
9 Early‐Stage [Start‐Up First‐Stage]：完成开发，进行市场推广。
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9 Formative‐Stage：产品开始市场运作。
9 Later‐Stage [Second‐Stage(没有正回报） Third‐Stage（开始有正回报） Mezzanine
(bridge) Financing（找投行上市）]
¾ Investment Characteristics
1. Illiquidity
2. Long‐Term Commitment Required
3. Difficulty in Determining Current Market Values
4. Limited Historical Risk and Return Data
5. Limited Information
6. Entrepreneurial/Management Mismatches
7. Fund Manager Incentive Mismatches
8. Lack of Knowledge of How Many Competitors Exist
9. Vintage Cycle
10. Extensive Operations Analysis and Advice may be Required
R13‐9 Expected NPV = PfNPVf + PsNPVs
¾ 注：成功的概率 Ps 是每期成功概率的乘积，失败的概率 Pf 是 1‐ Ps
¾ NPVf 是‐ initial investment
¾ NPVs 是 PV (payment at time of exit) – initial investment
¾ 计算原理：Estimated as the difference between the original investment amount and the
present value of the estimated payment at exit multiplied by 1minus the probability of
failure for each year of the assumed holding period.

5‐9 Hedge Fund 的 Description 和 Performance
Q13‐9 ★An index provider has created a new investable index that tracks the hedge fund
industry. Any fund that follows a long/short equity strategy can enter the index. The index
provider places new constituents in the index at the end of each year and incorporates the
fund’s track record in the database. Which of the following is not a bias that might distort
the historical performance of the index?
A. Backfilling bias
B. Self‐selection bias
C. Tracking error bias

Solution: C
This is not a bias that is associated with distorting the performance of a hedge fund index.
Tracking error is a risk more commonly associated with mutual funds and ETFs when their
investments deviate significantly from those in the index it is benchmarked against. Hedge funds
in fact pursue absolute returns and may deviate materially from indices.

Q14‐9 ★Do hedge funds typically have a (n):
Focus on relative returns? Option‐like fee structure?
A. No No
B. No Yes
C. Yes No
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Solution: B
Hedge funds focus on absolute returns and place specific bets in the search for positive alphas.
Because the fee structure includes a small base fee plus an incentive fee proportional to profits,
hedge funds have an option‐like fee structure.

Q15‐9 Consider a hedge fund that has an annual fee structure of 1.5 percent base management
fee plus a 15 percent incentive fee applied to profits above the risk‐free rate. If the
risk‐free rate is 5.5 percent, compute the net percentage return for an investor if the gross
return during the year is（原版书 R66‐11）
A. 35%.
B. 5%.
C. —6%.

A. Fee = 1.5% + 15% X (35% ‐ 5.5%) = 1.5% + 4.425% = 5.925% Net return = 35% ‐ 5.925% = 29.1%
B. Because the gross return is less than the risk‐free rate, the incentive fee is zero. The only fee
incurred is the base management fee of 1.5%.
Net return = 5% ‐ 1.5% = 3.5%.
C. Again, the incentive fee is zero.
Net return = ‐6% ‐ 1.5% = ‐7.5%.

Q16‐9 ★★A hedge fund currently has assets of $2 billion. The annual fee structure of this fund
consists of a fixed fee of 1 percent of portfolio assets plus a 20 percent incentive fee. The
fund applies the incentive fee to the gross return each year in excess of the portfolio's
previous high‐water mark, which is the maximum portfolio value since the inception of the
fund. The maximum value the fund has achieved so far since its inception was a little more
than a year ago when its value was $2.1 billion. Compute the fee that the manager would
earn in dollars if the return on the fund this year turns out to be（原版书 R66‐12）
A. 29%.
B. 4.5%.
C. —1.8%.

A. Fixed fee = 1% of $2 billion = $20 million.
If the return is 29%, new value of the fund would be $2 billion X 1.29 = $2.58 billion.
This new value would be $2.58 billion ‐ $2.1 billion = $0.48 billion above the high watermark. So,
the incentive fee = 20% X $0.48 billion = $0.096 billion, or $96 million.
Total fee = $20 million + $96 million = $116 million
B. Fixed fee = 1% of $2 billion = $20 million.
If the return is 4.5%, new value of the fund would be $2 billion X 1.045 = $2.09 billion.
Because this new value is below the high watermark of $2.1 billion, no incentive fee would be
earned.
Total fee = $20 million
C. Fixed fee = 1% of $2 billion = $20 million.
If the return is ‐1.8%, no incentive fee would be earned.
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Total fee = $20 million

R14‐9 Hedge fund 掌握概念及公式：
¾ Search for Absolute Returns
¾ Limited Partnership / LLC / Offshore Corporation
¾ Base Management Fee + Incentive Fee
¾ Classification
9 Long/Short Funds
9 Market‐Neutral Funds：long 与 short 完全对冲，回报与市场不相关。
9 Global Macro Funds：对赌一些大的市场指标。
9 Futures Funds (or Managed Futures Funds)：
9 Emerging‐Market Funds
9 Event‐Driven Funds：对赌一些重大事件。
9 Distressed Securities Funds
9 Risk Arbitrage in Mergers and Acquisitions
R15‐9 Fund of funds investing
¾ Benefits:
9 Retailing and easily accessing
9 Diversification
9 Expertise and diligence of fund manger for fund choosing
¾ Drawbacks:
9 Higher fees(double manage fee)
9 Performance
9 Diversification can reduce return

6‐9 Downward bias of hedge fund
Q17‐9 Hedge funds that contain infrequently traded assets would most likely exhibit a downward
bias with respect to:
A. Measured risk but not correlations with conventional equity investments.
B. Correlations with conventional equity investments but not measured risk.
C. Both measured risk and correlations with conventional equity investments.

Solution: C
The presence of infrequently traded assets leads to smoothed pricing that induces a significant
downward bias to the measured risk of the assets as well as the correlations of returns with
conventional equity and fixed income returns.

R16‐9 ★理解 Downward bias of hedge fund：
1) Self‐Selection Bias: Hedge fund managers will not wish to disclose unimpressive track record
2) Backfilling bias: Only hedge funds with good track records enter the database, creating a
positive bias in past performance in the database.
3) Survivorship Bias (Return & Risk): Hedge fund indexes and database may include only funds
that have survived, which leads to high return and low risk.
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4) Smoothed Pricing: Infrequently Traded Assets; it will induce serial correlation of returns and
a downward bias to the measured risk of the asset.
5) Option‐like Investment Strategies: 即使解决了 smoothed pricing infrequently 问题，还是
不能用 VAR 和 standard deviation 来衡量风险，因为结构是 option‐like 的，不对称的。

7‐9 Commodities 的 Description 和 Performance
Q18‐9 ★ An investor would most likely expect commodities to have correlations with
traditional stock or bond Investments and Inflation that are:
Correlation with traditional stock or bond investments Correlation with inflation
A. Positive Positive
B. Positive Negative
C. Negative Positive

Solution: C
A primary motivation for an investment in commodities, commodity derivatives,
commodity‐linked bonds, and commodity‐linked equity are the diversification benefits provided
due to the negative return correlation with other assets and the positive correlation with
inflation.

Q19‐9 An investor taking a long position in commodity futures while simultaneously investing
in government securities has created a:
A. Commodity‐linked bond
B. Commodity‐linked equity
C. Collateralized commodity futures position

Solution: C
A collateralized commodity future position requires purchasing a commodity future and
purchasing the same amount on government securities. It’s a viable risk‐diversification strategy
because commodity has a negative correlation with stock and bond returns and a positive
correlation with inflation.

R17‐9 Commodities investment 的理解:
¾ Investing in commodities gives an investor exposure to an economy growth.
¾ Swings in commodity prices are likely to be larger than changes in finished goods prices.
¾ A passive investor seeks to diversification benefits through a collateralized futures fund.
¾ An active investor seeks to profit from anticipating moves in commodity prices and is more
likely to use futures.
R18‐9 ★collateralized commodity future:
¾ A collateralized commodity futures position involves investing in the futures along with an
investment in Treasury securities equal to the value of the futures contract.
¾ Returns come from commodity price changes and interest income of the Treasury position.
¾ Motivation for investing in commodity: seek diversification benefits through a collateralized
future fund.
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¾ Motivation for investing in commodity futures: active investor seek to profit from
anticipating moves in commodity price.
¾ Motivation for investing in commodity‐linked securities: investors want to exposure to
commodity price move for either hedging or speculation.

8‐9 Mortgage Real Estate Investment Trusts (REITs)
Q20‐9 A mortgage real estate investment trusts (REITs) offers the investor safety because:
A. all investment properties in the REITs portfolio have an underlying collateral agreement in
the form of a mortgage
B. The portfolio contains only mortgages and loans, which are relatively safe
C. these trusts generate large capital gains when held over long periods of time

Solution: B
Mortgage REITs does not invest in real estate directly. They make real estate loans. A is incorrect
because it implies that the mortgage REITs hold properties. This is not true. Mortgage REITs hold
mortgages secured by properties. Mortgage REITs offer investors relative safety because they
invest only in mortgages and loans which are relatively safe.

R19‐9 REITs 的基本理解：
¾ A type of closed‐end investment company
¾ REITs issue shares that are traded on a stock market, and invest in various types of real
estate.
R20‐9 分类：
¾ Mortgage REITs: invest primarily in mortgage, more akin to a bond investment.
¾ Equity REITs: invest primarily in commercial or residential properties using leverage, more
akin to an investment in leveraged equity real estate.
¾ The shares of REITs trade freely on the stock market, so they are liquid investments, but
their share price can trade at a discount (or premium) to the NAV of the properties in their
portfolio.
¾ ★Commingled fund by large institution: closed‐end; REITs can be closed or open‐end.

9‐9 综合
Q21‐9 An investor wishes to diversify his portfolio and is looking at including non‐equity
investments. Which of the following offer the greatest potential for diversification
benefits?
A. Real estate
B. Domestic bonds
C. Commodity funds

Solution: C
Commodities generally have negative correlations with equities and offer some of the greatest
risk diversification potential.

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此类综合题建立在对各种投资产品熟练掌握的基础上，首先根据题目判断需要产品的特点，
然后根据该特点选出相应的投资产品. Commodity 一般用于分散 equity investment 的风险。

Q22‐9 A long time horizon is typically required for investments in:
A. Distressed securities but not for investments in venture capital.
B. Venture capital but not for investments in distressed securities.
C. Both distressed securities and investments in venture capital.

Solutions: C
The similarities between distressed securities investing and venture capital investing include
illiquidity, a long time horizon, tense investor participation, and the possibility of mispricing.

★补充：Commodity basics
R21‐9 Contango: F>S, dominate by consumer.
Backwardation: F<S, dominate by producer, roll yield>0
R22‐9 Three sources of return for a commodity investment
¾ Collateral yield: when take a position in forwards or futures, a speculator or hedger must
post collateral. If U.S. Treasury bills are deposited as collateral, the collateral yield is simply
the yield on the T‐bills.
¾ Price return: ∆S = S2‐ S1, due to the change in spot price
¾ Roll yield: (F2,T ‐ F1,T) ‐ ∆S

S1 / F1,T S2 / F2,T

● ● ●

1 2 T

R23‐9 ★Commodity index strategy: active strategy
¾ Constituent weight change
¾ The necessity of closing out and re‐establishing long positions to maintain long exposures.
¾ The collateral position is continually reinvested as short‐term debt mature and are replaced.
¾ The return of commodity index: roll yield, collateral yield

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10‐Portfolio
1‐10 Different Types of investors
Q1‐10 In general, which of the following institutions will most likely have a high need for
liquidity and a short investment time horizon?
A. Banks
B. Endowments
C. Defined benefit pension plans

Solution: A
Banks have a short term horizon and high liquidity needs.

Q2‐10 Which of the following types of institutions is most likely to have a long investment time
horizon and a high level of risk tolerance?
A. A bank
B. An endowment
C. An insurance company

Solution: B
Endowments have a long investment time horizon and a high level of risk tolerance (Exhibit 14)

Q3‐10 An investor's transactions in a mutual fund and the fund's returns over a four‐year
period are provided in the table below:
Year
1 2 3 4
New investment at the beginning of the year $2,500.00 $1,500.00 $1,000.00 $0.00
Investment return for the year ‐20% 65% ‐25% 10%
Withdrawal by investor at the end of the year $0.00 ‐$500.00 ‐$500.00 ‐$500.00
Based on these data, the money‐weighted return (or internal rate of return) for the investor is
closest to
A. 2.15%
B. 3.96%
C. 7.50%

Solution: B
Year 1 2 3 4
Starting balance $0.00 $2,000.00 $5,275.00 $4,206.25
New investment at beginning of year $2,500.00 $1,500.00 $1,000.00 $0.00
Net balance at beginning of year $2,500.00 $3,500.00 $6,275.00 $4,206.25
Investment return for the year ‐20% 65% ‐25% 10%
Investment gain (loss) ‐$500.00 $2,275.00 ‐$1,568.7 $420.63
Withdrawal by investor at end of year $0.00 ‐$500.00 ‐￥500.00 $0.00
Balance at end of the year $2,000.00 $5,275.00 $4,206.25 $4,626.88
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The money weighted return is calculated by solving for i in the equation below:
−1500 −500 500 4626.88
2500 = + + +
(1 + i ) (1 + i ) (1 + i ) (1 + i )
1 2 3 4

CF1=‐1500
CF2=‐500
CF3=1000‐500=500
CF4=4,626.88

Q4‐10 Which of the following institutional investors will most likely have the longest time
horizon?(原版书 R43‐5)
A. Defined benefit plan.
B. University endowment.
C. Life insurance company.

Solution:B
Most foundations and endowments are established with the intent of having perpetual lives.
Although defined benefit plans and life insurance companies have portfolios with a long time
horizon, they are not perpetual.

Q5‐10 Which of the following investment products is most likely to trade at their net asset
value per share?(原版书 R43‐12)
A. Exchange traded funds.
B. Open–end mutual funds.
C. Closed–end mutual funds.

Solution:B
Open–end funds trade at their net asset value per share, whereas closed–end funds and
exchange traded funds can trade at a premium or a discount.

Q6‐10 Which of the following financial products is least likely to have a capital gain distribution?
(原版书 R43‐13)
A. Exchange traded funds.
B. Open–end mutual funds.
C. Closed–end mutual funds.

Solution:A
Exchange traded funds do not have capital gain distributions. If an investor sells shares of an ETF
(or open–end mutual fund or closed–end mutual fund), the investor may have a capital gain or
loss on the shares sold; however, the gain (or loss) from the sale is not a distribution.

Q7‐10 Which of the following pooled investments is most likely characterized by a few large
investments? (原版书 R43‐15)
A. Hedge funds.
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B. Buyout funds.
C. Venture capital funds.

Solution:B
Buyout funds or private equity firms make only a few large investments in private companies
with the intent of selling the restructured companies in three to five years. Venture capital funds
also have a short time horizon; however, these funds consist of many small investments in
companies with the expectation that only a few will have a large payoff (and that most will fail).

R1‐10 Characteristics of Different Types of investors：

R2‐10 Mutual funds and other forms of pooled investments
¾ Mutual funds: open‐end fund and closed‐end funds, Money market funds, Bond funds,
Stock funds.
¾ Exchange‐traded funds (ETFs)
¾ Separately managed account 专款理财账户
¾ Hedge funds ： Long/short funds, Equity market‐neutral funds, Event‐driven funds,
Fixed‐income arbitrage, Convertible bond arbitrage funds, Global marcro funds (speculate
on interest rate and currency）
¾ Buyout funds (private equity funds)与管理技能有关
¾ Venture capital funds 与管理技能有关
¾ The key to a DC plan is that the employee accepts the investment risk and is responsible for
ensuring that there are enough funds in the plan to meet his or her needs upon retirement.
R3‐10 Comparison between Mutual funds and hedge funds
¾ an investor investing in an index mutual fund buys the fund shares directly from the fund
and all investments are settled at the net asset value. In the case of an ETF, however,
investors buy the shares from other investors just as if they were buying or selling shares of
stock.
¾ Expenses are lower for ETFs but, unlike mutual funds, investors do incur brokerage costs.
¾ All purchases and redemptions in a mutual fund take place at the same price at the close of
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business. ETFs are constantly traded throughout the business day, and as such each
purchase or sale takes place at the prevailing market price at that time.
¾ For ETF, dividends are paid out to the shareholders, whereas index mutual funds usually
reinvest the dividends. Hence, there is a direct cash flow from the ETF that is not there with
the index mutual fund. Depending on the investor, this cash flow may or may not be
desirable.
¾ the minimum required investment in an ETF is usually smaller. Investors can purchase as
little as one share in an ETF, which is usually not the case with an index mutual fund.
¾ ETFs are often cited as having tax advantages over index mutual funds.
¾ The main disadvantage of an SMA is that the required minimum investment is usually much
higher than is the case with a mutual fund.
¾ Hedge fund strategies generally involve a significant amount of risk, driven in large measure
by the liberal use of leverage and complexity. More recently, it has also involved the
extensive use of derivatives.
¾ A key difference between hedge funds and mutual funds is that the vast majority of hedge
funds are exempt from many of the reporting requirements for the typical public
investment company.

2‐10 Investment Objectivity
Q8‐10 Regarding an individual’s investment policy statement, which of the following is least
appropriate as the investment objective? The portfolio seeks:
A. current income in the form of dividends and interest.
B. 12% annual returns with above‐average market risk.
C. to match the performance and risk characteristics of the S&P 500 Index.

Solution: A
The investment objective must be expressed in terms of both risk and return and current income
from dividends and interest represents only the investor’s return objective. It does not include
any reference to risk tolerance or risk limits as provided in the other alternatives.

Q9‐10 With respect to the formation of portfolios, which of the following statements is most
accurate?（原版书 R43‐3）
A. Portfolios affect risk less than returns.
B. Portfolios affect risk more than returns.
C. Portfolios affect risk and returns equally.

Solution:B
As illustrated in the reading, portfolios reduce risk more than they increase returns.

Q10‐10 The timing of payouts for property and casualty insurers is unpredictable ("lumpy") in
comparison with the timing of payouts for life insurance（原版书 R46‐14）
companies. Therefore, in general, property and casualty insurers have:
A. lower liquidity needs than life insurance companies.
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B. greater liquidity needs than life insurance companies.
C. a higher return objective than life insurance companies.

B is correct.
The unpredictable nature of property and casualty (P&C) claims forces P&C insurers to allocate a
substantial proportion of their investments into liquid, short maturity assets. This need for
liquidity also forces P&C companies to accept investments with relatively low expected returns.
Liquidity is of less concern to life insurance companies given the greater predictability of life
insurance payouts.

R4‐10 Investment objectives：
¾ Risk objective: 1) measures of absolute risk include the variance or standard deviation of
returns and value at risk. 2) relative risk objectives, which relate risk relative to one or more
benchmarks perceived to represent appropriate risk standards. However, for banks, the
return of asset must be higher than that of liability.
¾ return objectives may be stated on an absolute or a relative basis: 1) the client may want to
achieve a particular percentage rate of return, for example, X percent, a nominal rate of
return or be expressed in real (inflation‐adjusted) terms. 2) the return objective can be
stated on a relative basis, for example, relative to a benchmark return; 3) Some institutions
also set their return objective relative to a peer group or universe of managers. This
objective can be problematic
9 when limited information is known about the investment strategies
9 or the returns calculation methodology being used by peers,
9 the impossibility of all institutions being "above average."
9 Furthermore, a good benchmark should be investable

3‐10 Portfolio Management Process
Q11‐10 The final step in the portfolio management process is most likely to include:
A. investment research
B. portfolio construction
C. evaluation of portfolio performance

Solution: C
The final step in the portfolio management process includes evaluating portfolio performance.
Evaluation of investor’s investment knowledge, investment research, and portfolio construction
are part of the first three steps in the process.

Q12‐10 An important reason for constructing an investment policy statement is that it:
A. Minimizes the costs of portfolio construction.
B. Ensures that managers outperform the performance benchmark.
C. Includes a performance benchmark to judge manager performance.

Solution: C
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An investment policy statement identifies a benchmark portfolio that will be used to judge the
performance of the portfolio manager.

Q13‐10 With respect to the portfolio management process, the asset allocation is determined in
the(原版书 R43‐8)
A. planning step.
B. feedback step.
C. execution step.

Solution: C
The client's objectives and constraints are established in the investment policy statement and are
used to determine the client's target asset allocation, which occurs in the execution step of the
portfolio management process.

Q14‐10 Which of the following best describes the underlying rationale for a written investment
policy statement (IPS)?(原版书 R46‐2)
A. A written IPS communicates a plan for trying to achieve investment success.
B. A written IPS provides investment managers with a ready defense against client lawsuits.
C. A written IPS allows investment managers to instruct clients about the proper use and
purpose of investments.

A is correct.
A written IPS is best seen as a communication instrument allowing clients and portfolio
managers to mutually establish investment objectives and constraints.

Q15‐10 The section of the investment policy statement (IPS) that provides information about
how policy may be executed, including investment constraints, is best described as the:
(原版书 R46‐4)
A. Investment Objectives.
B. Investment Guidelines.
C. Statement of Duties and Responsibilities.

B is correct.
The major components of an IPS are listed in Section 2.2 of the reading. Investment Guidelines
are described as the section that provides information about how policy may be executed,
including investment constraints. Statement of Duties and Responsibilities "detail[s] the duties
and responsibilities of the client, the custodian of the client's assets, the investment managers,
and so forth." Investment Objectives is "a section explaining the client's objectives in investing."

Q16‐10 Which of the following is least likely to be placed in the appendices to an investment
policy statement (IPS)? (原版书 R46‐5)
A. Rebalancing Policy.
B. Strategic Asset Allocation.
C. Statement of Duties and Responsibilities.
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C is correct.
The major components of an IPS are listed in Section 2.2 of the reading. Strategic Asset
Allocation (also known as the policy portfolio) and Rebalancing Policy are often included as
appendices to the IPS. The Statement of Duties and Responsibilities, however, is an integral part
of the IPS and is unlikely to be placed in an appendix.

Q17‐10 Returns on asset classes are best described as being a function of: (原版书 R46‐17)
A. the failure of arbitrage.
B. exposure to the idiosyncratic risks of those asset classes.
C. exposure to sets of systematic factors relevant to those asset classes.

C is correct.
Strategic asset allocation depends on several principles. As stated in the reading, "One principle
is that a portfolio's systematic risk accounts for most of its change in value over the long run." A
second principle is that, "the returns to groups of like assets... predictably reflect exposures to
certain sets of systematic factors." This latter principle establishes that returns on asset classes
primarily reflect the systematic risks of the classes.

Q18‐10 In defining asset classes as part of the strategic asset allocation decision, pairwise
correlations within asset classes should generally be: (原版书 R46‐18)
A. equal to correlations among asset classes.
B. lower than correlations among asset classes.
C. higher than correlations among asset classes.

C is correct.
As the reading states, "an asset class should contain homogeneous assets . . . paired correlations
of securities would be high within an asset class, but should be lower versus securities in other
asset classes."

Q19‐10 Tactical asset allocation is best described as: (原版书 R46‐19)
A. attempts to exploit arbitrage possibilities among asset classes.
B. the decision to deliberately deviate from the policy portfolio.
C. selecting asset classes with the desired exposures to sources of systematic risk in an
investment portfolio.

B is correct.
Tactical asset allocation allows actual asset allocation to deviate from that of the strategic asset
allocation (policy portfolio) of the IPS. Tactical asset allocation attempts to take advantage of
temporary dislocations from the market conditions and assumptions that drove the policy
portfolio decision.

Q20‐10 Investing the majority of the portfolio on a passive or low active risk basis while a
minority of the assets is managed aggressively in smaller portfolios is best described as:
428
(原版书 R46‐20)
A. the core–satellite approach.
B. a top–down investment policy.
C. a delta–neutral hedge approach.

A is correct.
The core–satellite approach to constructing portfolios is defined as "investing the majority of the
portfolio on a passive or low active risk basis while a minority of the assets is managed
aggressively in smaller portfolios."

R5‐10 Component of IPS
¾ Introduction, This section describes the client.
¾ Statement of Purpose. This section states the purpose of the IPS.
¾ Statement of Duties and Responsibilities. This section details the duties and responsibilities
of the client, the custodian of the client's assets, and the investment managers.
¾ Procedures. This section explains the steps to take to keep the IPS current and the
procedures to follow to respond to various contingencies.
¾ Investment Objectives. This section explains the client's objectives in investing.
¾ Investment Constraints. This section presents the factors that constrain the client in seeking
to achieve the investment objectives.
¾ Investment Guidelines. This section provides information about how policy should be
executed (e.g., on the permissible use of leverage and derivatives) and on specific types of
assets excluded from investment, if any.
¾ Evaluation and Review. This section provides guidance on obtaining feedback on
investment results.
¾ Appendices: (A) Strategic Asset Allocation (B) Rebalancing Policy. Many investors specify a
strategic asset allocation (SAAJ, also known as the policy portfolio, which is the baseline
allocation of portfolio assets to asset classes in view of the investor's investment objectives
and the investor's policy with respect to rebalancing asset class weights.

Q21‐10 Which of the following constraints would most likely appear in the unique needs and
preferences section of a trusts Investment policy statement? The portfolio is:
A. subject to the prudent‐man standard.
B. subject to income taxes of 40%.
C. prohibited from investing in tobacco companies.

Solution: C
Unique needs and preferences include the prohibition of certain investments. The investment
constraints of liquidity, tax concerns, and legal and regulatory factors adequately address the
portfolio’s other constraints.

Q22‐10 When compared to investors living in a country with high inflation, investors living in a
country with generous state pensions will most likely have allocations to equities and
429
fixed income investments, respectively, that are:
Equities Fixed Income
A. Lower Lower
B. Lower Higher
C. Higher Lower

Solution: C
The need to invest for portfolio growth is higher in inflationary environments and lower in
countries where workers receive generous state pensions.

4‐10 Expected Return and Expected Standard Deviation
Q23‐10 An analyst gathered the following information about a portfolio comprised of two
assets:
Asset Weight % Expected Return E(R) Expected Standard Deviation E(σ)
X 60 11% 5%
Y 40 7% 4%
If the covariance of returns for the two assets equals 0.75, then the expected return and
expected standard deviation of the portfolio are closest to:
Expected Return Expected Standard Deviation
A. 8.6% 4.3%
B. 8.6% 18.7%
C. 9.4% 4.3%

Solution: C
The expected return of the portfolio is the weighted average return of the two assets = 0.60 x 11
+ 0.40 x 7 = 9.4%.
The expected standard deviation of the portfolio is calculated as:
= W12 s12 + W22 s22 + 2WW

1 2 R1,2 s1 s2
= [(0.602 x 0.052) + (0.402 x 0.042) + (2 x 0.60 x 0.40 x 0.75 x 0.05 x 0.04)]0.5
= [0.0009 + 0.000256 + 0.00072]0.5
= [0.001876]0.5 = 0.0433≈ 4.3%

Q24‐10 Which of the following return calculating methods is best for evaluating the annualized
returns of a buy–and–hold strategy of an investor who has made annual deposits to an
account for each of the last five years?(原版书 R44‐4)
A. Geometric mean return.
B. Arithmetic mean return.
C. Money–weighted return.

Solution: A
The geometric mean return compounds the returns instead of the amount invested.
Q25‐10 With respect to trading costs, liquidity is least likely to impact the: (原版书 R44‐15)
430
A. stock price.
B. bid – ask spreads.
C. brokerage commissions.

Solution:C
Brokerage commissions are negotiated with the brokerage firm. A security's liquidity impacts the
operational efficiency of trading costs. Specifically, liquidity impacts the bid–ask spread and can
impact the stock price (if the ability to sell the stock is impaired by the uncertainty associated
with being able to sell the stock).

Q26‐10 Two individual investors with different levels of risk aversion will have optimal portfolios
that are:（原版书 R44‐25）
A. below the capital allocation line.
B. on the capital allocation line.
C. above the capital allocation line.

Solution:B
The CAL represents the set of all feasible investments. Each investor's indifference curve
determines the optimal combination of the risk–free asset and the portfolio of all risky assets,
which must lie on the CAL.

Q27‐10 As the number of assets in an equally–weighted portfolio increases, the contribution of
each individual asset's variance to the volatility of the portfolio:(原版书 R44‐29)
A. increases.
B. decreases.
C. remains the same.

Solution:B
The contribution of each individual asset's variance (or standard deviation) to the portfolio's
volatility decreases as the number of assets in the equally weighted portfolio increases. The
contribution of the co–movement measures between the assets increases (i.e., covariance and
correlation) as the number of assets in the equally weighted portfolio increases. The following
equation for the variance of an equally weighted portfolio illustrates these points:
2
2 s2
N -1 s N -1 2
s =
p + COV = + rs
N N N N

Q28‐10 With respect to an equally–weighted portfolio made up of a large number of assets,
which of the following contributes the most to the volatility of the portfolio? (原版书
R44‐30)
A. Average variance of the individual assets.
B. Standard deviation of the individual assets.
C. Average covariance between all pairs of assets.

431
Solution:C
The co–movement measures between the assets increases (i.e., covariance and correlation) as
the number of assets in the equally weighted portfolio increases. The contribution of each
individual asset's variance (or standard deviation) to the portfolio's volatility decreases as the
number of assets in the equally weighted portfolio increases. The following equation for the
variance of an equally weighted portfolio illustrates these points:
2
2 s2N -1 s N -1 2
s =
p + COV = + rs
N N N N

Q29‐10 The correlation between assets in a two–asset portfolio increases during a market
decline. If there is no change in the proportion of each asset held in the portfolio or the
expected standard deviation of the individual assets, the volatility of the portfolio is
most likely to: (原版书 R44‐31)
A. increase.
B. decrease.
C. remain the same.

Solution:A
Higher correlations will produce less diversification benefits provided that the other components
of the portfolio standard deviation do not change (i.e., the weights and standard deviations of
the individual assets).

Q30‐10 The portfolio of a risk–free asset and a risky asset has a better risk–return trade–off than
investing in only one asset type because the correlation between the risk–free asset and
the risky asset is equal to(原版书 R45‐2)
A. – 1.0.
B. 0.0.
C. 1.0.

Solution B
portfolio of the risk–free asset and a risky asset or a portfolio of risky assets can result in a better
risk–return trade–off than an investment in only one type of an asset, because the risk–free
asset has zero correlation with the risky asset.

Q31‐10 With respect to capital market theory, an investor's optimal portfolio is the combination
of a risk–free asset and a risky asset with the highest: (原版书 R45‐3)
A. expected return.
B. indifference curve.
C. capital allocation line slope.

Solution B
Investors will have different optimal portfolios depending on their indifference curves. The
optimal portfolio for each investor is the one with highest utility; that is, where the CAL is
432
tangent to the individual investor's highest possible indifference curve.

常考计算：
R6‐10 An individual investment:
n
¾ Expected Return E ( R ) = ∑ PR
i =1
i i = P1 R1 + P2 R 2 + L + Pn Rn
n
¾ Variance of Return Var = s =
2
∑ [ R - E ( R)] P
i =1
i
2
i
n
¾ Standard Deviation of Return SD = s = ∑ [ R - E ( R)] P
i =1
i
2
i
R7‐10 A Portfolio:
n
¾ Expected Return E(R)= ∑W R
i=1
i i
n n n
¾ Standard deviation sP = sP2 = ∑ wi2 si2 + ∑∑ wi w j Covi, j
i =1 i =1 j =1
¾ Covariance：Using expectation data
n
Cov1,2 = ∑ Pi [ Ri ,1 - E ( R1 )][Ri ,2 - E ( R2 )]
i =1
¾ Using historical data：
1 n
Cov1,2 = ∑ [ Rt ,1 - R1 ][Rt ,2 - R2 ]
n -1 t =1
s 2 N -1
¾ sP2 = + Cov
N N
Variance of returns for a portfolio of two risky assets:
σ P2 = w1σ 1 + w2σ 2 + 2w1w2σ 1σ 2 ρ12

2 2 2 2
¾
R8‐10 Portfolio and efficient frontier
9 Minimum‐variance portfolio: the portfolio that hae the lowest standard deviation of all
porttfolois with a given expected return are known as minimum‐variance portfolios.
Together they make up the minimum‐variance frontier.
9 Those portfolios that have the greatest expected return for each level of risk make up the
efficient frontier. The portfolio on the efficient frontier that has the least risk is the global
minimum‐variance portfolio.
9 An investor's utility function represents the investor's preferences in terms of risk and
return..
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9 Indifference curve: plots combinations of risk(standard deviation) and expected return
among which an investor is indifferent.
9 CAL: The line of possible portfolio risk and return combinations given the risk‐free rate and
the risk and return of a portfolio of risky assets is referred as capital allocation line.
9 CML: under the assumption of homogeneous expectations, the risk and return combination
given the risk‐free rate and the risk and return of market portfolio of all risky assets is
referred as capital market line.
9 Unsystematic risk: the risk that is eliminated by diversification.
9 Systematic risk: the risk that cannot be eliminated by diversification, which is measured by
beta.
9 Since unsystematic risk can be eliminated through diversification, only systematic risk is
compensated.

5‐10 Markowitz Assumptions
Q32‐10 Markowitz portfolio theory is most accurately described as including an assumption
that:
A. Risk is measured by the range of expected returns.
B. Investors have the ability to borrow or lend at the risk‐free rate of return.
C. Investor utility curves demonstrate diminishing marginal utility of wealth.

Solution: C
MPT assumes investors maximize one‐period expected utility, and their utility curves
demonstrate diminishing marginal utility of wealth.

Q33‐10 Evidence of risk aversion is best illustrated by a risk–return relationship that is:（原版书
R44‐16）
A. negative.
B. neutral.
C. positive.

Solution: C
Historical data over long periods of time indicate that there exists a positive risk–return
relationship, which is a reflection of an investor's risk aversion.

Q34‐10 With respect to risk–averse investors, a risk–free asset will generate a numerical utility
that. is: （原版书 R44‐17）
A. the same for all individuals.
B. positive for risk–averse investors.
C. equal to zero for risk–seeking investors.

Solution:A
A risk–free asset has a variance of zero and is not dependent on whether the investor is risk
neutral, risk seeking or risk averse. That is, given that the utility function of an investment is
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1 2
expressed as U = E(r) – Aσ where A is the measure of risk aversion, then the sign of A is
2
irrelevant if the variance is zero (like that of a risk–free asset).

Q35‐10 With respect to utility theory, the most risk–averse investor will have an indifference
curve with the: （原版书 R44‐18）
A. most convexity.
B. smallest intercept value.
C. greatest slope coefficient.

Solution:C
The most risk–averse investor has the indifference curve with the greatest slope.

R9‐10 The Markowitz assumptions are:
1) Returns distribution: Each investment can be measured by a probability distribution of
expected returns over a given horizon
2) Utility maximization: Investor intends to maximize their expected utility over time horizon
3) Risk is variability: Risk is measured in terms of variance (standard deviation) of expected
returns
4) Risk/return: Investors make their decision based on expected return and the risk
5) Risk aversion: Investors prefer less risk and given the same risks by given the same returns

6‐10 Effective Frontier
Q36‐10 The optimal portfolio on the efficient frontier is likely to be:
A. more risky for investors with flatter utility curves.
B. more risky for investors with steeper utility curves.
C. the same for all investors irrespective of their utility curves.

Solution: A
A less risk‐averse investor’s highest utility, given the low slope of his utility curve, is likely to
touch the efficient frontier at a point that would represent a portfolio with higher risk and more
expected return.

Q37‐10 As an Investor assumes more risk and moves upward on the efficient frontier, the
slope of the efficient frontier curve most likely:
A. Increases and expected return per unit of risk Increases.
B. Increases and expected return per unit of risk decreases.
C. Decreases and expected return per unit of risk decreases.

Solution: C
The efficient frontier is curved. As an investor moves up the curve, risk increases and the slope
decreases. The decreasing slope means that adding equal increments of risk provide diminishing
increments of expected return.
435

Q38‐10 Compared to the efficient frontier of risky assets, the dominant capital allocation line
has higher rates of return for levels of risk greater than the optimal risky portfolio
because of the investor's ability to(原版书 R44‐39)
A. lend at the risk–free rate.
B. borrow at the risk–free rate.
C. purchase the risk–free asset.

Solution:B
The CAL dominates the efficient frontier at all points except for the optimal risky portfolio. The
ability of the investor to purchase additional amounts of the optimal risky portfolio by borrowing
(i.e., buying on margin) at the risk–free rate makes higher rates of return for levels of risk greater
than the optimal risky asset possible.

Q39‐10 With respect to the mean–variance theory, the optimal portfolio is determined by
each individual investor's: (原版书 R44‐40)
A. risk–free rate.
B. borrowing rate.
C. risk preference.

Solution:C
Each individual investor's optimal mix of the risk–free asset and the optimal risky asset is
determined by the investor's risk preference.

7‐10 Systematic Risk and Unsystematic Risk
Q40‐10 In the context of capital market theory and the capital asset pricing model (CAPM),
the average investor is least likely to be compensated for assuming risk that can be:
A. Reduced by diversification,
B. Related to interest rate volatility.
C. Related to changes in macroeconomic variables.

Solution: A
Unsystematic risk (risk that can be diversified away) is not rewarded. Systematic risk is the risk
for which investors are compensated. Systematic risk is that part of total risk that is correlated
with the market and related to changes in macroeconomic variables (such as changes in interest
rate volatility). Standard deviation of returns of the market portfolio is a measurement of
systematic risk

Q41‐10 An unsystematic risk is most likely to be defined as a/an:
A. Undiversifiable risk.
B. Unique risk.
C. Market risk.

Solution: B
436
A systematic risk can also be called un‐diversifiable risk and market risk. An unsystematic risk can
also be called diversifiable risk, unique risk and firm‐specific risk.

Q42‐10 An analyst gathers the following information
Expected Expected Correlation
Security Annual Return Standard Deviation between Security
(%) (%) and the Market
Security 1 11 25 0.6

Market 10 15 1.0

Which security has the least amount of market risk?
A. Security 1.
B. Security 2.
C. Security 3.

B is correct. Security 2 has the lowest beta value;
ρ 2,m × σ 2 0.7 × 20%

0.93 = = compared to Security 1 and 3 with beta values of 1.00 and 1.07,
σm 15%
respectively.

8‐10 Market Portfolio
Q43‐10 An investor’s portfolio point is on the left of the market portfolio point. Which result
he is least likely pursuer?
A. Total return
B. Capital appreciation
C. Capital preservation

Solution: B
Capital preservation is risk‐averse, but capital appreciation is risk aggressive. Total return is
similar to capital appreciation focusing on both capital gains and reinvesting current income.

Q44‐10 A risk–neutral investor is most likely to choose:
A. Investment 1.
B. Investment 2.
C. Investment 3.

Solution:C
Investment 3 has the highest rate of return. Risk is irrelevant to a risk–neutral investor, who
would have a measure of risk aversion equal to 0. Given the utility function, the risk–neutral
investor would obtain the greatest amount of utility from Investment 3.
437

1 2
Q45‐10 If an investor's utility function is expressed as U = E(r) – Aσ and the measure for
2
risk aversion has a value of –2, the risk–seeking investor is most likely to choose:
A. Investment 2.
B. Investment 3.
C. Investment 4.

Solution:C
Investment 4 provides the highest utility value (0.2700) for a risk–seeking investor, who has a
measure of risk aversion equal to –2.

1 2
Q46‐10 If an investor's utility function is expressed as U = E(r) – Aσ and the measure for
2
risk aversion has a value of 2, the risk–averse investor is most likely to choose:
A. Investment 1.
B. Investment 2.
C. Investment 3.

Solution:B
Investment 2 provides the highest utility value (0.1836) for a risk–averse investor who has a
measure of risk aversion equal to 2.

R10‐10 Market portfolio 的含义：
1) Is the tangent point where the CML touches the Markowitz efficient frontier?
2) Consists of every risky assets
3) The weights on each asset are equal to the percentage of the market value of the asset to
the market value of the entire market portfolio.
1 2
U = E (r ) - As
2
4) Where, U is the utility of an investment, E(r) is the expected return, and o‐2 is the variance
of the investment. In the above equation, A is a measure of risk aversion, which is measured
as the marginal reward that an investor requires to accept additional risk.
5) The greater the slope, the higher is the risk aversion of the investor as a greater increment
in return is required to accept a given increase in risk.

9‐10 CML
Q47‐10 An investor whose portfolio is located on the capital market line to the left of the
market portfolio most likely has:
A. Lower unsystematic risk than the market portfolio.
B. Higher unsystematic risk than the market portfolio.
C. Less than 100 percent of his wealth invested in the market portfolio.

438
Solution: C
A portfolio that is on the CML to the left of the market portfolio is a lending portfolio with part of
the investor’s wealth invested in the risk‐free asset (loaned at the risk‐free rate).

Q48‐10 A portfolio on the capital market line with returns greater than the returns on the
market portfolio represents a(n)(原版书 R45‐9)
A. lending portfolio.
B. borrowing portfolio.
C. unachievable portfolio.

B is correct.
As one moves further to the right of point M on the capital market line, an increasing amount of
borrowed money is being invested in the market portfolio. This means that there is negative
investment in the risk–free asset, which is referred to as a leveraged position in the risky
portfolio.

Q49‐10 With respect to the pricing of risk in capital market theory, which of the following
statements is most accurate?( (原版书 R45‐13)
A. All risk is priced.
B. Systematic risk is priced.
C. Nonsystematic risk is priced.

B is correct.
Only systematic risk is priced. Investors do not receive any return for accepting nonsystematic or
diversifiable risk.

R11‐10 CML
1) CML 好于马可维茨有效前沿；
2) CML 斜率越大，单位风险回报越高。

10‐10 SML 曲线
Q50‐10 The following table shows date for the stock of JKU end a market‐index.
Expected return of JKU E(Rjku) 15%
Expected return of market index RM 12%
Risk free rate RFR 5%
Standard deviation of market index returns 0 15%
Covariance coefficient between JKU and market index CovJKUM 0.0225
How is the price of the stock?
A. Overvalued
B. Undervalued
C. Properly valued

Solution: B
439
βJKU= CovJKU,M / σ2M = 0.0225 / 0.152 = 1.0
E(RJKU) = RFR + βJKU × (RM – RFR) = 0.05 + 1 × (0.12 – 0.05) = 0.12The required rate of return of JKU
is 12% and the expected return of JKU is 15%; therefore, JKU is undervalued relative to the
Security Market Line (SML). The risk‐return relationship lies above the SML.

Q51‐10 The risk‐free rate is 6% and the expected market return is 15%. An investor sees a
stock with a beta of 1.2 selling for $25 that will pay a $1 dividend next year. If he
thinks the stock will be selling for $30 at year end, he thinks it is:
A. Overpriced, so buy it.
B. Overpriced, so short it.
C. Under priced, so buy it.

Solution: C
Required rate=6+1.2(15‐6) =16.8%
Return on stock= (30‐25+1)/25=24%
Based on risk, the stock plots above the SML and is under‐priced, so buy it.

Q52‐10 With respect to the security market line, if two risky assets have the same covariance
with the market portfolio but have different estimated rates of return, the most
accurate conclusion is that the two risky assets have:
A. The same amount of systematic risk, and both assets are properly valued.
B. Different amounts of systematic risk, and both assets are properly valued.
C. The same amount of systematic risk, and at least one of the assets is either overvalued or
undervalued.

Solution: C
Beta is the covariance of an asset with the market portfolio divided by the variance of the market
portfolio. The variance of the market portfolio is the same for all assets, so if the covariance with
the market portfolio is the same, the assets must have the same beta (amount of systematic risk),
should plot at the same place on the SML, and have the same required rate of return. If the
estimated rates of return for the two assets are different, at least one of them is not properly
valued and will not plot on the SML.

Q53‐10 With respect to capital market theory, correctly priced individual assets can be plotted
on the:
A. capita] market line.
B. security market line.
C. capital allocation line.

B is correct.
The security market line applies to any security, efficient or not. The CAL and the CML use the
total risk of the asset (or portfolio of assets) rather than its systematic risk, which is the only risk
that is priced.

440
Q54‐10 Analysts who have estimated returns of an asset to be greater than the expected
returns generated by the capital asset pricing model should consider the asset to be:
（原版书 R45‐35）
A. overvalued.
B. undervalued.
C. properly valued.

B is correct.
If the estimated return of an asset is above the SML (the expected return), the asset has a lower
level of risk relative to the amount of expected return and would be a good choice for
investment (i.e., undervalued).

Q55‐10 With respect to capital market theory, which of the following statements best
describes the effect of the homogeneity assumption? Because all investors have the
same economic expectations of future cash Bows for all assets, investors will invest in:
（原版书 R45‐36）
A. the same optimal risky portfolio.
B. the Standard & Poor's 500 Index.
C. assets with the same amount of risk.

A is correct.
The homogeneity assumption refers to all investors having the same economic expectation of
future cash flows. If all investors have the same expectations, then all investors should invest in
the same optimal risky portfolio, therefore implying the existence of only one optimal portfolio
(i.e., the market portfolio)
SML 曲线需掌握的公式和概念：
R12‐10 CML&SML
CML SML
[ E ( Rmkt ) − RFR ] E ( Ri ) = RFR + β i [ E ( Rmkt ) − RFR]

E ( RP ) = RFR + σ P
σ mkt
Systematic risk not being diversified Systematic risk being diversified
包含无风险资产的有效前沿在均衡市场中，所有的证券均在证券市场
线上

Rp − R f
Sharp ratio: the excess returns per unit of total portfolio risk.
σp
Sharp ratio is the slope of the CML, while the slope of the SML is [E(Rmkt‐ RFR)].
R13‐10 Return generate model:
E(Ri)‐Rf=βi1×E(factor1)+βi2×E(factor2)+βi3×E(factor3)+...+βi3×E(factor3)
R14‐10 Expected security returns depend only on systematic risk as measured by beta:
441
E ( Ri ) = R f + bi [ E ( Rmkt ) - R f ]
R15‐10 SML 曲线应用：

¾ Undervalued
Estimated return > Required return from the SML
Investors should buy.
¾ Overestimated
Estimated return < Required return from the SML
Investors should sell.
¾ Properly valued
Estimated return = Required return from the SML
Investors are indifferent between buying or selling
¾ 风险容忍度升高时，风险溢价降低，SML：clockwise rotation。
σM
M 2 = (R p - R f ) − (R M - R f )
σp
Rp - Rf
Treynor measure: It measures the excess returns per unit of systematic risk.
βp
当衡量非分散化组合业绩是，应该考虑总风险，这是，用 M2,比较合适，当衡量分散化组合
业绩时，应该使用 Treynor measure.

11‐10 Beta 的含义
Q56‐10 What is the beta represent in the SML map?
A. unsystematic risk
B. systematic risk
C. market risk

Solution: B
In the SML, beta can be viewed as a standardized measure of systematic risk.

Q57‐10 Beta can be viewed as:

A. a measure of unsystematic risk.
B. covariance of an asset with the market portfolio.
C. correlation coefficient with the market portfolio.

Solution: B
Beta is a standardized measure of risk because it relates this covariance to the variance of the
market portfolio.

Q58‐10 With respect to capital market theory, the average beta of all assets in the market is:
A. less than 1.0.
442
B. equal to 1.0.
C. greater than 1.0.

B is correct.
The average beta of all assets in the market, by definition, is equal to 1.0.

Q59‐10 The slope of the security characteristic line is an asset's:
A. beta.
B. excess return.
C. risk premium.

A is correct.
The security characteristic line is a plot of the excess return of the security on the excess return
of the market. In such a graph, Jensen's alpha is the intercept and the beta is the slope.

Q60‐10 Which of the following performance measures is consistent with the CAPM?(原版书
R45‐32)
A. M–squared.
B. Sharpe ratio.
C. Jensen's alpha.

Q61‐10 Which of the following performance measures does not require the measure to be
compared to another value? (原版书 R45‐33)
A. Sharpe ratio.
B. Treynor ratio.
C. Jensen's alpha.

Q62‐10 Which of the following performance measures is most appropriate for an investor who
is not fully diversified? (原版书 R45‐34)
A. M–squared.
B. Treynor ratio.
C. Jensen's alpha.

Q63‐10 With respect to capital market theory, which of the following assumptions allows for
the existence of the market portfolio? All investors: (原版书 R45‐37)
A. are price takers.
B. have homogeneous expectations.
C. plan for the same, single holding period.

Q64‐10 Portfolio managers who are maximizing risk–adjusted returns will seek to invest less in
securities with: (原版书 R45‐40)
A. lower values for nonsystematic variance.
B. values of nonsystematic variance equal to 0.
C. higher values for nonsystematic variance.
443

C is correct.
Since managers are concerned with maximizing risk–adjusted returns, securities with greater
nonsystematic risk should be given less weight in the portfolio.

R16‐10 M‐squared 的计算

¾ 可以用斜率及截距算出两条直线的方程，将 σM 带入，两式相减得出
sM
M 2 = ( Rp - R f ) - ( RM - R f )
sp
¾ 与 Sharpe Ratio 一起，仅适用于非完全分散化的组合；两者的结论是一致的。不能直接
做判断，仅用于排序。但是，Jensen’s Alpha 和 Treynor ratio 仅用于完全分散化的组合，
Jensen’s Alpha 可以直接做判断。

444

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金程教育 WWW.GFEDU.

2012 年 6 月 CFA 一级百题预测

2‐QUANTITATIVES ................................................................................................................................. 69

3‐ECONOMICS ....................................................................................................................................... 99

4‐FINANCIAL STATEMENT ANALYSIS ................................................................................................... 178

5‐CORPORATE FINANCE ...................................................................................................................... 276

6‐EQUITY ............................................................................................................................................. 307

7‐FIXED INCOME ................................................................................................................................. 368

8‐DERIVATIVES .................................................................................................................................... 391

9‐ALTERNATIVE INVESTMENTS ........................................................................................................... 410

10‐PORTFOLIO ..................................................................................................................................... 422

目必须掌握；最后，Economics 发生了全新变化，且 Notes 对有些专题并未提及，所以，一

网上测试、手机测试和微博’私房菜’、金融城 BBS 答疑等活动，请各位充分利用。如有学术

The process for the enforcement of the Code and Standards:

Investigation Interview the member/candidates

The matter is referred to a End

不能使用；如果是自己观察到的，属于 Mosaic 理论，可以使用。竞争者的分析，

¾ ★ composite definition: a grouping of individual discretionary portfolios

R3‐2 ★EAR calculation: EAR = (1 + periodic rate) − 1

Sharpe ratio = expected return (mean) – risk‐free rate/standard deviation = mean/standard

¾ SFRatio= ⎡⎣ E(R p )-R L ⎤⎦ / σ p

¾ Sharpe ratio 只能用于 Rank，没有实在含义；当小于零时，可能会得到错误的结论。

P(CFA I and FRM ) 30%

R35‐2 Bayes’ Formula 掌握计算：

(n1 - 1) s12 + (n2 - 1) s12

(25 - 1)452 + (18 - 1)602

t= (200 - 185) - (0) = 0.9377

¾ COV(X, X) = E[(X - E(X))(X - E(X))] = σ 2 (X)

¾ Cov(RA ,RB )= ∑∑ P(RA,i ,RB, j )(RA,i - ERA )(RB, j - ERB )

PPizza = 21.79 − 1.43QPizza

PPizza = 24.36 − 1.43QPizza

R11‐3 Tax 的理解:

percent change in quantity demanded

R15‐3 Inelasticity demand & elasticity demand 商品的定价策略，怎样才能使受益最大化

5 Johnson’s consumer surplus

R38‐3 Short‐run & Long‐run Decision Time Frames 的理解

21 $210 $138

MRP MRP MRP

8 150 – 10 × 8 = 70 2 880 576 304

11 150 – 10 × 11 = 40 2 1045 1045 0

短期内：MR=MC，可以 economic profit 或者 economic loss；

1000 1800 10000

Competitive Moderately Uncompetitive Monopoly

Value of current year output at current year prices

nominal GDP in year t

Real aggregate Income Real GDP (y)

Increase in factor Shifts the AD curve Reason

¾ R Nom = R Real + E [ I ] +RP

Easy Easy lower higher higher higher

Tight Easy higher higher lower higher

Easy Tight lower varies higher lower

⎛ forward prmium ⎞ ⎛ F-S ⎞ ⎛ 360 ⎞

R3‐4 Audits of Financial Statements 掌握概念及理解：

R12‐4 Steps in the Financial Statement Analysis Framework — 6 个步骤

EBIT 76,000 28,0

Year Ended 31 December 2009 2010

Q102‐4 The following items are from a company’s cash flow statement. （2012mock84）

Total debt €2,000 €1,900 €1,750

¾ Return on equity = profit margin × asset turnover × financial leverage 3 因素

¾ 注意以上两个公式的形式是相同的，，只是注意在不同公司的时候，用不同公司的 D/E