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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: Mar. 27, 2025)
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

Nickolas

18 days ago
Pass4Success's CFA Level II questions were spot on. Passed the exam with confidence!
upvoted 0 times
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Cyndy

2 months ago
Aced CFA Level II! Pass4Success's exam-like questions were crucial for my quick preparation.
upvoted 0 times
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Josphine

2 months ago
I passed the CFA Level II exam! One question in the Ethical and Professional Standards section asked about the appropriate action to take when encountering a conflict of interest. I was a bit unsure, but the practice questions from Pass4Success were a great help.
upvoted 0 times
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Bong

3 months ago
CFA Level II success! Pass4Success's relevant questions were a game-changer in my short prep time.
upvoted 0 times
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Mabel

3 months ago
I did it! I passed the CFA Level II exam. There was a difficult question on Economics that asked about the effects of an expansionary fiscal policy on interest rates and inflation. I wasn't certain of my answer, but Pass4Success practice questions made a big difference.
upvoted 0 times
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Sanda

4 months ago
Pass4Success nailed it with their CFA Level II materials. Exam felt familiar thanks to their questions.
upvoted 0 times
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Dyan

4 months ago
I can't believe I passed the CFA Level II exam! One question in the Derivatives section asked about the pricing of a European call option using the Black-Scholes model. I was unsure, but the practice questions from Pass4Success were incredibly helpful.
upvoted 0 times
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Omega

4 months 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

4 months 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

5 months 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

5 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

5 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

5 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

6 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

6 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

6 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

7 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

8 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

9 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

9 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 Mar. 27, 2025 (see below)

Question #1

Erich Reichmann, CFA, is a fixed-income portfolio manager with Global Investment Management. A recent increase in interest rate volatility has caused Reichmann and his assistant, Mel O'Shea, to begin investigating methods of hedging interest rate risk in his fixed income portfolio.

Reichmann would like to hedge the interest rate risk of one of his bonds, a floating-rate bond (indexed to LIBOR). O'Shea recommends taking a short position in a Eurodollar futures contract because the Eurodollar contract is a more effective hedging instrument than a Treasury bill futures contract.

Reichmann is also analyzing the possibility of using interest rate caps and floors, as well as interest rate options and options on fixed income securities, to hedge the interest rate risk of his overall portfolio.

Reichmann uses a binomial interest rate model to value 1-year and 2-year 6% floors on 1-year LIBOR, both based on $30 million principal value with annual payments. He values the 1-year floor at $90,000 and the 2-year floor at $285,000.

Reichmann has also heard about using interest rate collars to hedge interest rate risk, but is unsure how to construct a collar.

Finally, Reichmann is interested in using swaptions to hedge certain investments. He evaluates the following comments about swaptions.

* If a firm anticipates floating rate exposure from issuing floating rate bonds at some future date, a payer swaption would lock in a fixed rate and provide floating-rate payments for the loan. It would be exercised if the yield curve shifted down.

* Swaptions can be used to speculate on changes in interest rates. The investor would buy a receiver swaption if he expects rates to fall.

Based on the results from Reichmann's binomial interest rate model, the value of a 2-year, $30 million European put option on LIBOR with a floor strike of 6% is closest to:

Reveal Solution Hide Solution
Correct Answer: B

The value of the 2-year floor is equal 10 the value of a comparable 1-year European put option (a 1-ycar 'floorlet') plus the value of a comparable 2-year put option (a 2-year 'floorlet'). A 1-year floorlet with an annual payoff is the same as a 1-year put option on annual LIBOR. Therefore the value of the 2-ycar put option is equal to the value of the 2-year floor less the value of the 1 -year put option: $285,000 - $90,000 = $ 195,000. (Study Session 17, LOS 62.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."

Evaluate Norris's comments regarding the convenience yield on the equity index futures contract and the differences between a forward and a futures contract with the same terms.

Reveal Solution Hide Solution
Correct Answer: C

Norris is incorrect regarding the convenience yield. The price of an index futures contract is reduced by cash flows from the underlying asset, but the reduction comes from the future value of the cash flows, not from an implied cost for retaining the use of the underlying asset. The comment regarding the difference between the futures and forward contracts is also incorrect. In a flat (constant) interest rate environment (indicated in the first paragraph of the item set), there Is no difference in the prices of futures or forward contracts. The part of the comment relating to credit risk is correct. Since the forward contracts are not marked to market each day, the value is not reset to zero each day and credit risk is higher since large losses are allowed to accumulate. Thus, the credit risk would increase if forwards were used instead of futures. (Study Session 16, LOS 59.c,d)


Question #3

Paul Durham, CFA, is a senior manager in the structured bond department within Newton Capital Partners (NCP), an investment banking firm located in the United States. Durham has just returned from an international marketing campaign for NCP's latest structured note offering, a series of equity linked fixed-income securities or ELFS. The bonds will offer a 4.5% coupon paid annually along with the annual return on the S&P 500 Index and will have a maturity of five years. The total face value of the ELFS series is expected to be $200 million.

Susan Jacobs, a fixed-income portfolio manager and principal with Smith & Associates, has decided to include $10 million worth of ELFS in her fixed-income portfolio. At the end of the first year, however, the S&P 500 Index value is 1,054, significantly lower than the initial value of 1,112 set by NCP at the time of the ELFS offering. Jacobs is concerned that the four remaining years of the ELFS life could have similar results and is considering her alternatives to offset the equity exposure of the ELFS position without selling the bonds, Jacobs decides to offset her portfolio's exposure to the ELFS by entering into an equity swap contract. The LIBOR term structure is shown below in Exhibit 1.

After hearing of her plan, one of the other partners with Smith & Associates, Jonathan Widby, feels it is necessary to meet with Jacobs regarding her proposed strategy. Mr. Widby makes the following comments during the meeting:

"You should also know that I am quite bullish on the stock market for the near future. Therefore, as an alternative strategy, I recommend that you establish a long position in a 1 x 3 payer swaption. This strategy would allow you to wait and see how the market performs next year but will give you the ability to enter into a 2-year swap with terms that can be established today should the market have another down year.

If, however, you choose to proceed with your strategy, know that credit risk for an equity swap is greatest toward the end of the swap's life. Thus, analysts tracking your portfolio will not be happy with the added credit risk (hat your portfolio will be exposed to as the swap nears the end of its tenor. You should think about what credit derivatives you can use to manage this risk when the time comes."

To offset any credit risk associated with the equity swap, Widby recommends using an index trade strategy by entering into a credit default swap (CDS) as a protection buyer. Widby's strategy would involve purchasing credit protection on an index comprising largely the same issuers (companies) included in the equity index underlying the swap. Widby suggests the CDS should have a maturity equal to that of the swap to provide maximum credit protection.

Evaluate, in light of the appropriate equity swap strategy for Jacobs's portfolio, Mr. Widby's comments regarding the credit risk and use of swaptions in Jacobs's portfolio.

Reveal Solution Hide Solution
Correct Answer: C

Credit risk in a swap is generally highest in rhe middle of the swap. At the end of the swap there are few potential payments left and the probability of either party defaulting on their commitment is relatively low. Therefore, Widby's first comment is incorrect. It Jacobs wants to delay establishing a swap position, a swaption would potentially be an appropriate investment. However, Jacobs should buy a receiver swaption, not a payer swaption. In a payer swaption, Jacobs would pay the fixed-rate and receive the equity index return. The swap underlying a payer swaption would not offset Jacobs's current position. (Study Session 17, LOS 6l.f,i)


Question #4

James Walker is the Chief Financial Officer for Lothar Corporation, a U .S . mining company that specializes in worldwide exploration for and excavation of precious metals. Lothar Corporation generally tries to maintain a debt-to-capital ratio of approximately 45% and has successfully done so for the past seven years. Due to the time lag between the discovery of an extractable vein of metal and the eventual sale of the excavated material, the company frequently must issue short-term debt to fund its operations. Issuing these one to six month notes sometimes pushes Lothar's debt to capital ratio above their long-term target, but the cash provided from the short-term financing is necessary to complete the majority of the company's mining projects.

Walker has estimated that extraction of silver deposits in southern Australia has eight months until project completion. However, funding for the project will run out in approximately six months. In order to cover the funding gap. Walker will have to issue short-term notes with a principal value of $1,275,000 at an unknown future interest rate. To mitigate the interest rate uncertainty, Walker has decided to enter into a forward rate agreement (FRA) based on LIBOR which currently has a term structure as shown in Exhibit 1.

Three months after establishing the position in the forward rate agreement, LIBOR interest rates have shifted causing the value of Lothar's FRA . position to change as well. The new LIBOR term structure is shown in Exhibit 2.

While Walker is estimating the change in the value of the original FRA position, he receives a memo from the Chief Operating Officer of Lochar Corporation, Maria Steiner, informing him of a major delay in one of the company's South African mining projects. In the memo, Stciner states the following: "As usual, the project delay will require a short-term loan to cover funding shortage that will accompany the extra time until project completion. I have estimated that in 210 days, we will require a 90-day project loan in the amount of $2,350,000.1 would like you to establish another FRA position, this time with a contract rate of 6.95%."

Which of the following is least likely a reason Walker has chosen to use forward contracts instead of futures contracts?

Reveal Solution Hide Solution
Correct Answer: A

The customizable nature of forward contracts makes them less equipped for offsetting transactions. In order to create an offsetting transaction, a counterparty must be found that is willing to accept the exact terms of the existing forward contract. This is an unlikely occurrence. Futures on the other hand are standardized and creating an offsetting transaction is simple since the clearinghouse is the counterparty to all transactions and is continually making a market for all futures contracts. (Study Session 16, LOS 59.c)


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."

Evaluate Norris's comments regarding the convenience yield on the equity index futures contract and the differences between a forward and a futures contract with the same terms.

Reveal Solution Hide Solution
Correct Answer: C

Norris is incorrect regarding the convenience yield. The price of an index futures contract is reduced by cash flows from the underlying asset, but the reduction comes from the future value of the cash flows, not from an implied cost for retaining the use of the underlying asset. The comment regarding the difference between the futures and forward contracts is also incorrect. In a flat (constant) interest rate environment (indicated in the first paragraph of the item set), there Is no difference in the prices of futures or forward contracts. The part of the comment relating to credit risk is correct. Since the forward contracts are not marked to market each day, the value is not reset to zero each day and credit risk is higher since large losses are allowed to accumulate. Thus, the credit risk would increase if forwards were used instead of futures. (Study Session 16, LOS 59.c,d)



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