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CFA Institute CFA-Level-II Exam Questions

Exam Name: CFA Level II Chartered Financial Analyst
Exam Code: CFA-Level-II
Related Certification(s): CFA Institute CFA Level II Certification
Certification Provider: CFA Institute
Actual Exam Duration: 180 Minutes
Number of CFA-Level-II practice questions in our database: 715 (updated: Nov. 18, 2024)
Expected CFA-Level-II Exam Topics, as suggested by CFA Institute :
  • Topic 1: Equity Valuation
  • Topic 2: Financial Reporting and Analysis
  • Topic 3: Ethical and Professional Standards .
Disscuss CFA Institute CFA-Level-II Topics, Questions or Ask Anything Related

Omega

5 days ago
I passed! The CFA Level II exam had a tough question on Equity Investments. It asked about the impact of a stock split on the price-to-earnings ratio. I wasn't confident in my answer, but Pass4Success practice questions were a great help.
upvoted 0 times
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Roy

9 days ago
Couldn't believe how well Pass4Success prepared me for CFA Level II. Passed with flying colors!
upvoted 0 times
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Billye

19 days ago
I made it through the CFA Level II exam! There was a challenging question in Quantitative Methods about the application of the Monte Carlo simulation in portfolio risk assessment. I was a bit unsure, but the practice questions from Pass4Success were invaluable.
upvoted 0 times
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Sherell

1 months ago
I passed the CFA Level II exam! One question that caught me off guard was about Corporate Issuers. It asked how changes in capital structure could affect the weighted average cost of capital (WACC). I wasn't sure, but Pass4Success practice questions helped me prepare well.
upvoted 0 times
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Michel

1 months ago
Overall, the CFA Level II exam was challenging but rewarding. The key is to practice applying concepts to real-world scenarios. Stay focused, manage your time well, and you can succeed. Best of luck to future candidates!
upvoted 0 times
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Leslie

1 months ago
CFA Level II was tough, but Pass4Success made prep a breeze. Passed on my first try!
upvoted 0 times
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Linette

2 months ago
Wow, I did it! The CFA Level II exam is behind me. There was a tricky question on Alternative Investments that asked about the valuation of a private equity investment using the discounted cash flow method. I was uncertain, but the practice questions from Pass4Success really made a difference.
upvoted 0 times
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Wade

2 months ago
The exam was challenging, but I'm thrilled to have passed! Thanks again to Pass4Success for the excellent preparation materials. They really made a difference!
upvoted 0 times
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Cletus

2 months ago
I can't believe I passed the CFA Level II exam! One question that really stumped me was about the yield curve in the Fixed Income section. It asked how a flattening yield curve would impact bond prices, and I wasn't entirely sure of my answer. Thankfully, the Pass4Success practice questions were a huge help.
upvoted 0 times
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Floyd

2 months ago
Just passed CFA Level II! Thanks Pass4Success for the spot-on practice questions. Saved me so much time.
upvoted 0 times
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Graciela

4 months ago
The Financial Reporting and Analysis section of the CFA Level II exam was tough, but with the help of Pass4Success practice questions, I was able to navigate through it successfully. I had to analyze financial statements and make adjustments for different accounting principles. One question that I remember was about how to calculate the return on assets ratio and interpret its implications for a company's performance. It was a tricky question, but I managed to answer it correctly and pass the exam.
upvoted 0 times
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Georgene

5 months ago
Just passed CFA Level II! Watch out for complex questions on duration and convexity in fixed income. Understand how changes in interest rates affect bond prices and portfolio risk. Pass4Success's practice questions were spot-on and really helped me prepare efficiently. Thanks!
upvoted 0 times
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Isreal

5 months ago
I passed the CFA Level II exam with the help of Pass4Success practice questions. The exam was challenging, especially the Equity Valuation section. I had to really focus on understanding different valuation methods and applying them to various scenarios. One question that stood out to me was about calculating the intrinsic value of a company using the dividend discount model. I wasn't completely sure of my answer, but I trusted my knowledge and ended up passing the exam.
upvoted 0 times
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Free CFA Institute CFA-Level-II Exam Actual Questions

Note: Premium Questions for CFA-Level-II were last updated On Nov. 18, 2024 (see below)

Question #1

Stan Loper is unfamiliar with the Black-Scholes-Merton (BSM) option pricing model and plans to use a two-period binomial model to value some call options. The stock of Arbor Industries pays no dividends and currently trades for $45. The up-move factor for the stock is 1.15, and the risk-free rate is 4%. He is considering buying two-period European style options on Arbor Industries with a strike price of S40. The delta of these options over the first period is 0.83.

Loper is curious about the effect of time on the value of the calls in the binomial model, so he also calculates the value of a one-period European style call option with a strike price of 40.

Loper is also interested in using the BSM model to price European and American call and put options. He is concerned, however, whether the assumptions necessary to derive the model are realistic. The assumptions he is particularly concerned about are:

* The volatility of the option value is known and constant.

* Stock prices are lognormally distributed.

* The continuous risk-free rate is known and constant.

Loper would also like to value options on Rapid Repair, Inc., common stock, but Rapid pays dividends, so Loper is uncertain what the effect will be on the value of the options. Loper uses the two-period model to value long positions in the Rapid Repair call and put options without accounting for the fact that Rapid Repair pays common dividends.

The value of the one-period European style call option is closest to:

Reveal Solution Hide Solution
Correct Answer: B

The payoff is zero for a down-move and 11.75 for an up-move. Since the probability of

an up-move is 0.607 the present value is

(Study Session 17, LOS60.b)


Question #2

Michelle Norris, CFA, manages assets for individual investors in the United States as well as in other countries. Norris limits the scope of her practice to equity securities traded on U .S . stock exchanges. Her partner, John Witkowski, handles any requests for international securities. Recently, one of Norris's wealthiest clients suffered a substantial decline in the value of his international portfolio. Worried that his U .S . allocation might suffer the same fate, he has asked Norris to implement a hedge on his portfolio. Norris has agreed to her client's request and is currently in the process of evaluating several futures contracts. Her primary interest is in a futures contract on a broad equity index that will expire 240 days from today. The closing price as of yesterday, January 17, for the equity index was 1,050. The expected dividends from the index yield 2% (continuously compounded annual rate). The effective annual risk-free rate is 4.0811%, and the term structure is flat. Norris decides that this equity index futures contract is the appropriate hedge for her client's portfolio and enters into the contract.

Upon entering into the contract, Norris makes the following comment to her client:

"You should note that since we have taken a short position in the futures contract, the price we will receive for selling the equity index in 240 days will be reduced by the convenience yield associated with having a long position in the underlying asset. If there were no cash flows associated with the underlying asset, the price would be higher. Additionally, you should note that if we had entered into a forward contract with the same terms, the contract price would most likely have been lower but we would have increased the credit risk exposure of the portfolio."

Sixty days after entering into the futures contract, the equity index reached a level of 1,015. The futures contract that Norris purchased is now trading on the Chicago Mercantile Exchange for a price of 1,035. Interest rates have not changed. After performing some calculations, Norris calls her client to let him know of an arbitrage opportunity related to his futures position. Over the phone, Norris makes the following comments to her client:

"We have an excellent opportunity to earn a riskless profit by engaging in arbitrage using the equity index, risk-free assets, and futures contracts. My recommended strategy is as follows: We should sell the equity index short, buy the futures contract, and pay any dividends occurring over the life of the contract. By pursuing this strategy, we can generate profits for your portfolio without incurring any risk."

Sixty days after the inception of the futures contract on the equity index, Norris has suggested an arbitrage strategy. Evaluate the appropriateness of the strategy. The strategy is:

Reveal Solution Hide Solution
Correct Answer: B

First, calculate the continuously compounded risk-free rate as ln( 1.040811) = 4% and then calculate the theoretically correct futures price as follows:

Then, compare the theoretical price to the observed market price: 1.035 - 1,025 = 10. The futures contract is overpriced. To take advantage of the arbitrage opportunity, the investor should sell the (overpriced) futures contract and buy the underlying asset (the equity index) using borrowed funds. Norris has suggested the opposite. (Study Session 16, LOS 59.f)


Question #3

Charles Mabry manages a portfolio of equity investments heavily concentrated in the biotech industry. He just returned from an annual meeting among leading biotech analysts in San Francisco. Mabry and other industry experts agree that the latest industry volatility is a result of questionable product safety testing methodologies. While no firms in the industry have escaped the public attention brought on by the questionable safety testing, one company in particular is expected to receive further attention---Biological Instruments Corporation (BIC), one of several long biotech positions in Mabry's portfolio. Several regulatory agencies as well as public interest groups have heavily criticized the rigor of BIC's product safety testing.

In an effort to manage the risk associated with BIC, Mabry has decided to allocate a portion of his portfolio to options on BIC's common stock. After surveying the derivatives market, Mabry has identified the following European options on BIC common stock:

Mabry wants to hedge the large BIC equity position in his portfolio, which closed yesterday (June 1) at $42 per share. Since Mabry is relatively inexperienced with utilizing derivatives in his portfolios, Mabry enlists the help of an analyst from another firm, James Grimell.

Mabry and Grimell arrange a meeting in Boston where Mabry discusses his expectations regarding the future returns of BIC's equity. Mabry expects BIC equity to make a recovery from the intense market scrutiny but wants to provide his portfolio with a hedge in case BIC has a negative surprise. Grimell makes the following suggestion:

"If you want to avoid selling the BIC position and are willing to earn only the risk-free rate of return, you should sell calls and buy puts on BIC stock with the same market premium. Alternatively, you could buy put options to manage the risk of your portfolio. I recommend waiting until the vega on the options rises, making them less attractive and cheaper to purchase."

If the premium on Put D on November 1 is $3.18, which of the following has most likely occurred?

Reveal Solution Hide Solution
Correct Answer: B

The premium on Put D has risen from $2.31 to $3.18 and there is srill time left until expiration. Therefore, the increase in value must have come from either a decrease in stock price, an increase in volatility, or both of these events. Choice A would be correct if the option was at expiration and the $3.18 represented only intrinsic value. Since we are not yet at the expiration date, the stock price must be above $26.82. A negative earnings surprise would most likely cause a drop in the market price of the stock. Since there is no indication of the exact amount of the drop in price, the premium observed is a possibility. A decrease in BIG volatility would reduce the put premium, not increase it. (Study Session 17, LOS 60.d)


Question #4

Rock Torrey, an analyst for International Retailers Incorporated (IRI), has been asked to evaluate the firm's swap transactions in general, as well as a 2-year fixed for fixed currency swap involving the U .S . dollar and the Mexican peso in particular. The dollar is Torrey's domestic currency, and the exchange rate as of June 1,2009, was $0.0893 per peso. The swap calls for annua! payments and exchange of notional principal at the beginning and end of the swap term and has a notional principal of $100 million. The counterparty to the swap is GHS Bank, a large full-service bank in Mexico.

The current term structure of interest rates for both countries is given in the following table:

Torrey believes the swap will help his firm effectively mitigate its foreign currency exposure in Mexico, which sterns mainly from shopping centers in high-end resorts located along the eastern coastline. Having made this conclusion, Torrey begins writing his report for the management of IRI. In addition to the terms of the swap, Torrey includes the following information in the report:

* Implicit in the currency swap under consideration is a swap spread of 75 basis points over 2-year U .S . Treasury securities. This represents a 10 basis point narrowing of the spread as compared to this time last year. Thus, we can assume that the credit risk of the global credit market has decreased. Unfortunately, the decline provides no insight into the credit risk of the individual currency swap with GHS Bank, which could have increased.

* In order to decrease the counterparty default risk on the currency swap, we will need to utilize credit derivatives between the beginning and midpoint of the swap's life when this particular risk is at its highest. This is a significantly different strategy than we normally use with interest rate swaps. For interest rate swaps, counterparty default risk peaks at the middle of the swap's life, at which point we utilize credit derivative CQuntermeasures to offset the risk.

* Because currency swaps almost always include netting agreements and interest rate swaps can be structured to include mark-to-market agreements, we can significantly reduce the credit risk of these swap instruments by negotiating swap contracts that include these respective features. When negotiating these features is not possible, credit risk can be reduced by using off-market swaps that do not require an initial payment from IRI.

Six months have passed (180 days) since Torrey issued his report to IRI's management team, and the current exchange rate is now $0,085 per peso. The new term structure of interest rates is as follows:

Determine whether the excerpt from Torrey's report regarding the timing of peak credit risk is correct with regard to currency swaps and interest rate swaps.

Reveal Solution Hide Solution
Correct Answer: B

The assumption is that the credit risk is low at the beginning of the swap because each counterparty accepted the creditworthiness of the other in order to initiate the transaction. By the middle of the swap's life, payments are coming due and credit risk increases. In interest rate swaps, the credit risk would then decline as the remaining payments were made towards the end of the swap's life. For currency swaps, however, with the exchange of notional principal, the final payment keeps credit risk high through the end of the swap life, causing it to peak between the middle and the end of the swap's life. (Study Session 17, LOS 6l.i)


Question #5

Michelle Norris, CFA, manages assets for individual investors in the United States as well as in other countries. Norris limits the scope of her practice to equity securities traded on U .S . stock exchanges. Her partner, John Witkowski, handles any requests for international securities. Recently, one of Norris's wealthiest clients suffered a substantial decline in the value of his international portfolio. Worried that his U .S . allocation might suffer the same fate, he has asked Norris to implement a hedge on his portfolio. Norris has agreed to her client's request and is currently in the process of evaluating several futures contracts. Her primary interest is in a futures contract on a broad equity index that will expire 240 days from today. The closing price as of yesterday, January 17, for the equity index was 1,050. The expected dividends from the index yield 2% (continuously compounded annual rate). The effective annual risk-free rate is 4.0811%, and the term structure is flat. Norris decides that this equity index futures contract is the appropriate hedge for her client's portfolio and enters into the contract.

Upon entering into the contract, Norris makes the following comment to her client:

"You should note that since we have taken a short position in the futures contract, the price we will receive for selling the equity index in 240 days will be reduced by the convenience yield associated with having a long position in the underlying asset. If there were no cash flows associated with the underlying asset, the price would be higher. Additionally, you should note that if we had entered into a forward contract with the same terms, the contract price would most likely have been lower but we would have increased the credit risk exposure of the portfolio."

Sixty days after entering into the futures contract, the equity index reached a level of 1,015. The futures contract that Norris purchased is now trading on the Chicago Mercantile Exchange for a price of 1,035. Interest rates have not changed. After performing some calculations, Norris calls her client to let him know of an arbitrage opportunity related to his futures position. Over the phone, Norris makes the following comments to her client:

"We have an excellent opportunity to earn a riskless profit by engaging in arbitrage using the equity index, risk-free assets, and futures contracts. My recommended strategy is as follows: We should sell the equity index short, buy the futures contract, and pay any dividends occurring over the life of the contract. By pursuing this strategy, we can generate profits for your portfolio without incurring any risk."

Determine the price of the futures contract on the equity index as of the inception date, January 18.

Reveal Solution Hide Solution
Correct Answer: A

The futures price can be calculated by growing the spot price at the difference between the continuously compounded risk-free rate and the divedend yield as a continuously compounded rate. The continuously compounded risk-free rate is ln (l.040811) = 4%, so the futures price for a 240-day future is:

(Study Session 16, LOS 59.b)



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