CFA Level 2 Free Practice Test

. 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.

. Annisquam is correct with regards to his comments on calibrating a binomial interest rate tree. because his comments are correct. because his comments are correct.

Research Objectivity Requirement 5, Research Analyst Compensation, rec- ommends that analysts’ compensation be based on the accuracy of recommendations over time. In addition, compensation should not be directly linked to investment banking or other finance activities, which it is not in this case. LeCompte’s bonus is based on the group’s overall performance and is not specific to the research support she provides to various divisions.
The Research Objectivity Standards recommend that analysts’ compensation be based on the accuracy of recommendations over time.

. Neither model depends on current economic conditions. Credit scores do not explicitly depend on current economic conditions. Credit ratings do not explicitly depend on the business cycle, which, in turn, is affected by current economic conditions.
because the statement is correct. because the statement is correct.

Initial market reaction is an important barometer for the value investors place on the gains from merging as well as an indication of future returns.
A spin-off does not generate cash for the parent company.
The more of the merger that is paid for by stock, the more that the risks and benefits of realizing these synergies (assuming they really exist) will be passed on to the target shareholders—hence a lower benefit will result if more stock is used.