CFA Level 2 Free Practice Test

LeCompte violated Requirement 6, Relationships with Subject Companies, by sharing the full research report with NanoMem. Sharing any section of a research report that might communicate the analyst’s proposed recommendation, rating, or price target is prohibited by the Research Objectivity Standards. Sharing historical factual information, on the other hand, is not a violation.
LeCompte shared with UniFlash management only the part of her report on UniFlash that provides factual information.

Nanuk is translated under the current rate method, so its translational exposure is its net asset position. The weakening CAD (see Exhibit 2) will generate a re-measurement loss in Sunjet’s other comprehensive income.
It is the net asset position that is exposed to exchange fluctuations under the current rate method. Per Exhibit 2, the CAD is depreciating vs. the USD so would generate a loss. Candidates may think the CAD is strengthening.
Nanuk’s net monetary liability position would generate a re-measurement gain under the temporal method, but it is the net asset position that is exposed to exchange fluctuations under the current rate method.

. The primary reason for crash risks is related to the fact that carry trades are leveraged: The low-yield currency is borrowed, with proceeds invested in the high-yield currency. The leverage magnifies the effect of losses and gains relative to the investors’ equity base. In low-volatility markets, investors can become complacent and allow positions to grow large in a search for yield. This crowded positioning tends to unwind rapidly when a market shock occurs because many traders try to exit their positions almost simultaneously before the leverage effects wipe out their equity. Stop-loss orders are triggered, and given the market uncertainty, there is a flight to safety that further increases demand for the low-yield currency.
. Another factor that accelerates selling is that traders often have stop-loss orders in place that are triggered when price declines reach a certain level. This can lead to cascades of selling in which position liquidation begets further position liquidation.
. During periods of market turmoil, there is generally a flight to safety into assets and currencies that seem to offer the most protection during times of uncer- tainty—typically low interest rate currencies.

The change in revenue recognition to an earlier point, before the product has been produced or delivered, is an aggressive accounting policy that would lower the company’s quality of earnings.
The change in the warranty expense reflects updated information, and failure to act on it would underestimate earnings.
The stock grants are expensed over the estimated service life of the employees, in this case the 3 years till it vests, and does not distort the quality of earnings.

. Betta has taken the correct approach in using actual coupon bonds for Bay Corp and estimating implied zero-coupon bonds. Because the bonds rank equally, there is no need to adjust for differences in priority in case of default. In practice, bond prices will be affected by liquidity, and investors expect additional spread or a liquidity premium to compensate for less liquid corporate bonds relative to sovereign bonds.
because there is a need to convert coupon bonds to implied zero-coupon bonds to infer the spread.
because no adjustment is necessary for differences in priority since all the bonds in this case rank equally.