CFA Institute CFA-Level-II Exam Dumps

Michael Thomas, CFA, is a fixed-income portfolio manager for TFC Investments. As part of his portfolio strategy for the Prosperity Fund, Thomas searches for companies that he expects to be upgraded or downgraded. Those potential upgrades he finds are added to the portfolio or if already in the portfolio are increased in proportion to other holdings before the upgrade takes place. Potential downgrades are sold from the portfolio before the downgrade takes place. Thomas is evaluating his portfolio's current holdings which include several bonds issued by companies in the oil and gas exploration and refining industries. Year-end rating updates are expected to occur in a few days and Thomas is preparing to adjust his portfolio based on expected changes in credit ratings. He has assembled the following annual data on four of the oil and gas stocks in the portfolio:

Exhibit: 1

Thomas has been discussing his fixed-income strategies with a fellow portfolio manager, Shawna Reese. Reese has indicated that while his initial approach is good, the overall credit analysis strategy could be improved and has made the following suggestions to Thomas for both the Prosperity Fund and other fixed-income funds he manages:

* The current methodology does not consider special issues related to high-yield debt which makes up approximately 5% of the Prosperity Fund. Because most high-yield issuers have such a heavy dependence on short-term debt financing, analysis of the firm's debt structure will be extremely important to determine the priority of claims on the firm's assets as well as what source(s) of funds will be used to repay the principal. In addition, the corporate structure of high-yield issuers must be examined to determine the issuer's access to cash flows generated by its subsidiaries. A simple analysis of the parent's financial ratios will not reveal complicated corporate structures and indebtedness of subsidiaries that may restrict the issuer's ability to obtain the cash flows necessary to service its debt.

* The current methodology as applied to the Municipal Opportunities Fund does not include the necessary specialized analysis for municipal securities. Among other items, tax-backed munis must be scrutinized as to the issuer's ability to maintain balanced budgets as well as to ensure that the issue has first priority of claims to revenue from public works projects. Revenue-backed munis require an assessment of the sufficiency of rate covenants to cover expenses and debt servicing of the underlying project as well as the ability for other government entities to access the revenues generated by the enterprise before they are passed on to revenue bondholders.

As part of his portfolio analysis, Thomas also examines yield volatility. Thomas makes the following statements:

Statement 1: Implied yield volatility estimates are based on the assumptions that the option pricing model is correct and that volatility is constant.

Statement 2: Yield volatility has been observed to follow patterns over time that can be modeled and used to forecast future volatility.

He concludes his analysis by comparing the swap rate curve to a government bond yield curve as a benchmark.

Which of the following statements regarding the choice between government bond yield curves and swap rate curves as benchmark yields is most likely correct?

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Barton Wilson, a junior analyst, is a new hire at a money center bank. He has been assigned to help Juanita Chevas, CFA, in the currency trading department. Together, Wilson and Chevas are working on the development of new trading software designed to detect profitable opportunities in the foreign exchange market. Obviously, they are interested in risk-free arbitrage opportunities. However, they have also been instructed to investigate the possibility of longer-term currency exposures that are not necessarily risk-free. To test the logic of their new software, Wilson gathers the following market data:

* Spot JPY/USD exchange rate = 120.

* Spot EUR/USD exchange rate = 0.7224.

* U .S . risk-free interest rate = 7%.

* Eurozone risk-free rate = 9.08%.

* Japanese risk-free rate = 3.88%.

* Yield curves in all three currencies are flat.

In addition to in-house currency transactions, the new software program is also intended to provide insight into currency exposure and hedging needs for the bank's major customers. These customers typically include large multinational firms. Essentially, the bank wants to provide consulting services to its clients concerning which currency exposures offer the greatest possibility of appreciation. In this process, the bank will rely on deviations from international parity conditions as an indicator of long-term currency movements.

Wilson obtains the following data from the econometrics department:

* JPY/USD spot rate one year ago =116.

* EUR/USD spot rate one year ago = 0.7200.

* Anticipated and historical U .S . annual inflation = 3%.

* Anticipated and historical Japanese annual inflation = 0%.

* Anticipated and historical Eurozone annual inflation = 5%.

One of the bank's major customers has significant portions of its business in Japan, and the Eurozone and has long exposure to both currencies. The customer has traditionally hedged all currency risk. However, the customer's new risk manager has decided to leave some currency exposure unhedged in an attempt to profit from long-term currency exposure.

Based on the assumption that international parity conditions will hold in the long run, should the JPY and Euro currency exposures of the bank's major customer be left unhedged?

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Stanley Bostwick, CFA, is a business services industry analyst with Mortonworld Financial. Currently, his attention is focused on the 2008 financial statements of Global Oilfield Supply, particularly the footnote disclosures related to the company's employee benefit plans. Bostwick would like to adjust the financial statements to reflect the actual economic status of the pension plans and analyze the effect on the reported results of changes in assumptions the company used to estimate the projected benefit obligation (PBO) and net pension cost. But first, Bostwick must familiarize himself with the differences in the accounting for defined contribution and defined benefit pension plans.

Global Oilfield's financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). Excerpts from the company's annual report are shown in the following exhibits.

As compared to Global Oilfield's reported pension expense, economic pension expense for the year ended 2008 is:

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General Investments is considering the purchase of a significant stake in Pacific Computer Components (PCC). Although PCC has stable production output, the company is located in a developing country with an uncertain economic environment. Since the monetary environment is particularly worrisome. General has decided to approach the valuation of PCC from a free cash flow model using real growth rates. In real rate analysis, General uses a modified build-up method for calculating the required real return, specifically:

required real return = country real rate + industry adjustment +

company adjustment

Elias Sando, CFA, an analyst with General, estimates the following information for PCC:

Domestic inflation rate = 8.738%

Nominal growth rate = 12.000%

Real country return = 3.000%

Industry adjustmen = 3.000%

Company adjustment = 2.000%

Additionally, Exhibit 1 reports information from PCC's financial statements for the year just ended (stated in LC).

PCC generally maintains relatively constant proportions of equity and debt financing and is expected to do so going forward.

Sando has gathered information on earnings before interest, taxes, depreciation, and amortization (EBITDA) and is contemplating its direct use in another cash flow approach aimed at valuing PCC. Consider the following two statements regarding EBITDA:

Statement 1: EBITDA is not a good proxy for free cash flow to the firm (FCFF) because it does not incorporate the importance of the depreciation tax shield nor does it reflect the investment in working capital or in fixed capital.

Statement 2: EBITDA is also a poor proxy for FCFE.

Are the statements concerning EBITDA correct or incorrect?

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Theresa Ponder and Rod Owens are analysts for a multinational investment bank, Datko Bank, based in Canada. Datko's clients have been advised to diversify globally, due to a decrease in expected long-term growth for North American economies.

As part of her analysis of global stocks, Ponder uses the domestic CAPM and the international CAPM to value stocks. She makes the following statements regarding the extension of the domestic capital asset pricing model (CAPM);

Statement 1: To extend the domestic CAPM to international asset pricing using the extended CAPM, one must make two additional assumptions. First, that global investors have identical consumption baskets and second, that interest rate parity holds throughout the world.

Statement 2: The extended CAPM assumes that exchange rate changes are predictable so that there is no real exchange rate risk.

As the primary analyst for European securities, Owens analyzes the stocks in the countries of Catonia and Arbutia. Catonia and Arbutia arc not currently members of the European Union, but have a timetable for joining by the end of the decade.

To evaluate Caionian stocks, he uses the international CAPM. Owens mentions that a foreign currency risk premium must be added in this model, and that the risk premium depends on various parity conditions. He finds that the foreign exchange expectation relation and interest rate parity hold between Canada and Catonia. The interest rate in Canada is 2%, and the interest rate in Catonia is 5%.

One of the companies Owens follows in Arbutia is Diversified Metal Finishers. Diversified produces customized sheet metal applications for manufacturers throughout the world. The firm enjoys a competitive advantage because Arbutia is a commodity-rich country which allows Diversified to source its inputs locally. Owens has found that when the Arbutian currency changes by 10%, the value of the Diversified stock generally changes by 6%.

Ponder is also analyzing stocks in the nations of Bisharov and Dineva. She is estimating the expected return using the international CAPM (ICAPM) for Ivanova Metals, located in Dineva. The data for Canada, Dineva, and lvanova are shown in the following. The foreign currency is denoted as the local currency (LC).

Canadian risk-free rate 2.00%

Dineva risk-free rate 8.00%

World market risk premium 6.00%

Dineva index beta to world market index 1.40

Dineva local market risk premium 7.50%

Ivanova beta to local index 1.30

Foreign currency risk premium 3.00%

Dineva sensitivity of LC stock returns to LC 0.70

Owens examines Ponder's analysis and makes the following statements:

Statement 1: To protect the growing economy and prevent capital flight, the Bisharov government taxes foreign investors at higher rates and has placed limits on currency convertibility. In Dineva, the government has taken a more hands-off approach and does not regulate .foreign investment. If the world were to consist entirely of countries like Bisharov, then the ICAPM cannot be applied.

Statement 2; Furthermore, inflation is often a concern in emerging market countries. To measure an exchange rate between Canada and an emerging market currency that is adjusted for inflation, a real exchange rate should be calculated. Assuming no change in the real exchange rate, the change in an emerging market's asset values in domestic currency will just reflect the emerging market's asset returns in local currency and the difference between inflation rates in the domestic and foreign countries.

What is the expected return using the ICAPM for Ivanova in Ponder's analysis?

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