Free CFA Level I Practice Questions

The coupon rate is the stated annual interest rate expressed as a percentage of the bond's par (face) value. It determines the fixed periodic coupon payments. Choice A describes the current yield (annual coupon / market price), not the coupon rate. Choice B describes the yield to maturity (YTM), which accounts for all future cash flows and any difference between the purchase price and par.

A natural monopoly exists when the minimum efficient scale of production is so large relative to market demand that one firm can serve the entire market at a lower average total cost than multiple firms. This typically occurs in industries with very high fixed costs and low marginal costs, such as utilities. Choice B describes a legal or government-granted monopoly (e.g., patent protection), which is a different source of monopoly power. Choice C describes predatory pricing, an anticompetitive practice, not the structural cost conditions that define a natural monopoly.

For simple linear regression: SSE = SST - SSR = 450 - 360 = 90. df_regression = 1 (one independent variable); df_residual = n - 2 = 25 - 2 = 23. MSR = SSR / df_regression = 360 / 1 = 360. MSE = SSE / df_residual = 90 / 23 = 3.913. F = MSR / MSE = 360 / 3.913 = 92.0. Choice B (96.00) results from using df_residual = n - 1 = 24 instead of n - 2 = 23: MSE = 90/24 = 3.75, F = 360/3.75 = 96.0. This error occurs when the analyst forgets that one degree of freedom is lost for the intercept and one for the slope, using only n - 1. Choice C (80.00) results from using df_residual = 25 - 3 = 22 by mistake (perhaps thinking a two-variable regression): MSE = 90/22 = 4.09, F = 360/4.09 = 88; or from using MSE = 90/20 = 4.5 for F = 360/4.5 = 80.